Heretic at the Gates

Unwinding Freddie and Fannie

2009-06-20T10:09:00.004-05:00

This article in Time makes clear that reforming Fannie and Freddie should be at the heart of any reform proposal, and yet we don't plan on dealing with it till next year. An excerpt:

"What I have seen is that government insurance programs are high-risk," said Lockhart. "It is often difficult in a political environment to calculate or charge an actuarially fair price." It is essentially a moral-hazard argument. Lockhart believes that the government will never be able to accurately price the guarantees that Fannie and Freddie offer mortgage lenders and investors. And as long as the government is offering that insurance too cheap, banks will be encouraged to make loans they shouldn't. And that will lead to more losses for Fannie and Freddie down the road.

Option A: Start unwinding Fannie and Freddie sometime next year, and watch the life get sucked out of the nascent housing recovery.

Option B: Kick the can down the road, and watch the federal government lose its AAA bond rating causing borrowing costs to increase and the now more politically dependent Fed to monetize the debt and destroy the dollar.

I'd go with option A, but I'm thinking the politicians will go with option B.

The big shift

2009-06-16T10:23:00.010-05:00

The latest in California:

California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."

While that's music to my ears in many ways, I wonder just how culpable California is in all this. Or for that matter the auto industry, the financial industry, and the housing industry. What if they are all ultimately caused by a fundamental shift in consumer preferences, i.e. a real business cycle? I think we are all aware of the shift in living patterns that has occured over the last decade or two. Sometime in the mid to late 1990s, the seemingly inexorable pattern of rich folks leaving the city for the suburbs started to reverse.

Understandably, this was not widely predicted, indeed it appears unprecendented at least in the US and Brittain. The car companies, domestic and foreign, lost this bet. Suburban homeowners and the suburban housing industry lost this bet. The financial industry, by facilitating these bets, also lost. States with a disproportionate share of suburban development, i.e. the sun belt states, lost this bet. Ultimately, this may the explain the downfall of the US as a car centric economy. Although non-car centric Europe has suffered just as much in the initial crash and aftermath, it remains to be seen who will emerge stronger.

Addendum: Offsetting this trend to some extent is politics. Many southern states, particularly Texas, are growing despite their car-centric infrastucture, because they have lower taxes and regulation.

Theory of the health care firm

2009-06-11T12:34:00.009-05:00

This article by Atul Gawande on Medicare abuse in McAllen,TX has been discussed elsewhere, and it's no wonder that it has created such a stir, it is very thourough and mostly right on. One excerpt:

The core tenet of the Mayo Clinic is “The needs of the patient come first”—not the convenience of the doctors, not their revenues. The doctors and nurses, and even the janitors, sat in meetings almost weekly, working on ideas to make the service and the care better, not to get more money out of patients. I asked Cortese how the Mayo Clinic made this possible.

“It’s not easy,” he said. But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible.

No one there actually intends to do fewer expensive scans and procedures than is done elsewhere in the country. The aim is to raise quality and to help doctors and other staff members work as a team. But, almost by happenstance, the result has been lower costs. “When doctors put their heads together in a room, when they share expertise, you get more thinking and less testing,” Cortese told me.

Skeptics saw the Mayo model as a local phenomenon that wouldn’t carry beyond the hay fields of northern Minnesota. But in 1986 the Mayo Clinic opened a campus in Florida, one of our most expensive states for health care, and, in 1987, another one in Arizona. It was difficult to recruit staff members who would accept a salary and the Mayo’s collaborative way of practicing. Leaders were working against the dominant medical culture and incentives. The expansion sites took at least a decade to get properly established. But eventually they achieved the same high-quality, low-cost results as Rochester. Indeed, Cortese says that the Florida site has become, in some respects, the most efficient one in the system.
...

Providing health care is like building a house. The task requires experts, expensive equipment and materials, and a huge amount of coördination. Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later? Getting the country’s best electrician on the job (he trained at Harvard, somebody tells you) isn’t going to solve this problem. Nor will changing the person who writes him the check.

What he's talking about here is the well known issue of assymetric information, where the doctor knows technology and the patient knows only that he's in pain. There are many examples of this besides the housing industry, and generally the free market solution is incorporation. Take computers. Most consumers have no idea what's in their computer and would be lost if they had to construct a computer from its components. So the market solution is to put the assembly of these components under one firm, so that the consumer than has an easier informational challenge in which he need only compare and contrast complete computers rather than all the combinations of components. The analogy with health care is that consumers can't easily distinguish and judge individual procedures but they can easily distinguish and judge health care companies based on their reputation and record of performance.

I believe this is what the HMO revolution was about in part, but we all know it ultimately failed when the consumer got pissed off that someone told them "no". My question is why does the Mayo Clinic apparently succeed at this? Not answered.

And he concludes:

Something even more worrisome is going on as well. In the war over the culture of medicine—the war over whether our country’s anchor model will be Mayo or McAllen—the Mayo model is losing. In the sharpest economic downturn that our health system has faced in half a century, many people in medicine don’t see why they should do the hard work of organizing themselves in ways that reduce waste and improve quality if it means sacrificing revenue.

In El Paso, the for-profit health-care executive told me, a few leading physicians recently followed McAllen’s lead and opened their own centers for surgery and imaging. When I was in Tulsa a few months ago, a fellow-surgeon explained how he had made up for lost revenue by shifting his operations for well-insured patients to a specialty hospital that he partially owned while keeping his poor and uninsured patients at a nonprofit hospital in town. Even in Grand Junction, Michael Pramenko told me, “some of the doctors are beginning to complain about ‘leaving money on the table.’ ”

As America struggles to extend health-care coverage while curbing health-care costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don’t, McAllen won’t be an outlier. It will be our future.

One clear way to tip the balance in favor of Mayo and other private providers is to eliminate Medicare as the personal piggy bank of profligate doctors.

Addendum: My brother the healthcare exec emailed me an answer to my question about Mayo v. HMO:

HMOs aren't a single concept. They are at least 2 different concepts.

The first one, which is the one that failed pretty significantly over the last 15 years, is the concept of steering patients into a particular group of providers, and the providers have loose to no other affiliation with one another and close to no ability to "manage" the costs, quality, or service of the system they are a part of.

The second concept is similar to the first, except the providers are significantly integrated and have the ability to collaborate to take costs out of the system and improve quality and service. They also generally have a shared financial incentive through capitation and benefit collectively and individually from costs coming down.

Most of the U.S. experience with HMOs was the first concept, and it left a bad taste in people's mouths. Patients felt restricted in their choices of providers and providers felt they had lost control over decisions and blamed someone else for this, mainly HMOs. The delivery system was essentially a group of individuals with individual interests, some of which were competing and most of which were disconnected from one another, both finanically and from an information perspective. This is largely the system we have in the U.S. today.

There are pockets of the second concept across the country. The article refers to these delivery systems as "accountable care organizations," a term coined in the following article (I have a subscription to Health Affairs if you want me to track down the full article):

http://content.healthaffairs.org/cgi/content/abstract/26/1/w44

It's really just a new term for the original concept of HMOs (NOT the sham HMOs in the first concept above), Mayo Clinic, and other organizations that have come together to organize the delivery of care, including sharing information and financial rewards collectively. It's a great concept with proven results as noted in the article in The New Yorker. However, it's going to be difficult to move our current system to this model on a dramatically larger scale because it requires a whole lot more Mayo Clinic-types with an organized approach rather than individual providers providing individual segments of a patient's care. The lack of naturally occuring such organizations is why the good HMO concept slipped into more of a sham HMO reality that most of us think of when we hear "HMO."

Bubbles and banks, the never ending story

2009-06-08T19:05:00.006-05:00

Tyler has a new paper in which he deflects blame for the financial crisis away from central banks and towards behavioral biases such as herd behavior and over confidence. See my comments there, but basically I'm wondering why we can't blame both. My dissertation is about trying to sort out the relationship between these factors. I intend to test in the lab and with simulations the idea that free banking better mitigates bubbles, including those arising initially from behavioral biases (what other kind is there?).

Deluded socialists and health care

2009-06-06T12:06:00.007-05:00

Tyler Cowen spells it out beautifully:

The "poorest" people are not those with low incomes but rather those with low human capital endowments. That includes the elderly because, even if they are very talented, on average they will die sooner. A typical 23-year-old lower-middle-class immigrant has a higher real endowment than does Warren Buffett.

Through Medicare, the U.S. government subsidizes the health care of the elderly. Given the embedded incentives in the system, the subsidy is especially large for people in the last year of life or so, namely the very poorest.
Western European welfare states may be more efficient, because they do more to expand routine health care access for the relatively young and this may have a higher rate of return. But those same systems are in critical regards less egalitarian. Bravo to them.
Many people do not look at the contrast this way. They wish to think they believe in egalitarianism, they wish to be skeptical of the United States, they wish to condemn the U.S. for its inequality, and they wish to raise the relative status of people who are not very successful under capitalism. When you put all those wishes together, those people will be deeply allergic to my argument.
A few of these people also confuse "high social status" with "well off." Since old, high-bank-account white males have lots of social status and power, these onlookers cannot bring themselves to regard those males as holding very poor overall endowments. They substitute in assessments of social status for assessments of absolute endowments (another sign of the claim that "politics is not about policy" but rather it is about whom we should admire and condemn).
I am amazed (but not surprised) by how frequently people think of egalitarianism in terms of social markers of status rather than actual forward-looking endowments.
It is common for more egalitarian policies to be less efficient.

Tyler is saying that socialists sell nationalized health care as egalitarian when in fact it is efficiency enhancing. Oh, the tangled web we weave. I believe he is right for the most part, but if you look at the dynamics of a policy of nationalized health care I think you will find that, yes, initially it is unegalitarian in that it takes away from the old and feeble and gives to the young and healthy but over time I think it becomes more egalitarian in that it takes from the young and healthy and gives to the young and feeble. However, all of this ignores the role of education, which I believe is the main determinant of health outcomes.

Deluded socialist perhaps reflects the base

2009-06-06T10:35:00.003-05:00

This from the WSJ:

Some fear that the inability of many European left-wing parties to attract voters is a cause -- not just a symptom -- of a rise among parties on the far right. "When people fear that they are not protected by their governments, they go back to nationalism," said Anthony Wedgwood Benn, a retired U.K. Socialist lawmaker.

Nationalism is socialism, see for instance the Nazis, i.e. the National Socialists.

What happens when bankruptcy court moves to the White House?

2009-06-01T12:07:00.002-05:00

Actually, in this instance it doesn't appear to be that bad, so far. Of course it is a terrible precedent, since we'll not always elect the best bankruptcy judge, but it appears Obama is perhaps as good as the typical bankruptcy judge. And largely the incentives are to look good in the "court of public opinion." But this story about the 31 year old put in charge of some major decisions should remind us all of the knowledge problem, i.e. that central planners' knowledge is always more limited than the market's:

“There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force,” Mr. Deese, a special assistant to the president for economic policy, acknowledged recently as he hurried between his desk at the White House and the Treasury building next door. “It was a little scary.”

Tell me about it.

But now, according to those who joined him in the middle of his crash course about the automakers’ downward spiral, he has emerged as one of the most influential voices in what may become President Obama’s biggest experiment yet in federal economic intervention.
While far more prominent members of the administration are making the big decisions about Detroit, it is Mr. Deese who is often narrowing their options.
A month ago, when the administration was divided over whether to support Fiat’s bid to take over much of Chrysler, it was Mr. Deese who spoke out strongly against simply letting the company go into liquidation, according to several people who were present for the debate.
“Brian grasps both the economics and the politics about as quickly as I’ve seen anyone do this,” said Lawrence H. Summers, the head of the National Economic Council who is not known for being patient whenever he believes an analysis is sub-par — or disagrees with his own. “And there he was in the Roosevelt Room, speaking up vigorously to make the point that the costs we were going to incur giving Fiat a chance were no greater than some of the hidden costs of liquidation.”
Mr. Deese was not the only one favoring the Fiat deal, but his lengthy memorandum on how liquidation would increase Medicaid costs, unemployment insurance and municipal bankruptcies ended the debate. The administration supported the deal, and it seems likely to become a reality on Monday, if a federal judge handling the high-speed bankruptcy proceeding approves the sale of Chrysler’s best assets to the Italian carmaker.
Mr. Deese’s role is unusual for someone who is neither a formally trained economist nor a business school graduate, and who never spent much time flipping through the endless studies about the future of the American and Japanese auto industries.

So what is his role? What is the analagous role in bankruptcy court?

Hard to imagine a worse way to spend $40 billion

2009-05-28T11:02:00.003-05:00

Read it and weep:

The filing also disclosed that GM will not repay the loans it has already received from the government or any additional federal aid it will get as part of the bankruptcy. When all is said and done, total assistance to GM is expected to reach nearly $40 billion.
Instead, the government will convert that debt into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase in value following an exit from bankruptcy.

I would rather the government spend it on a national toilet paper reserve. Why this is so much worse than similar bank deals is that GM is not likely to recover any time soon, and everyone knows that. Banks suffered from a sudden lack of market confidence, which government replaced to some extent with its explicit backing. GM suffered from a chronic quality problem, and there is no reason to think this will be fixed with government backing. You can make the same kind of argument with banks, and I do think to so some extent it is a matter of degree. But fundamentally, the government is good at providing liquidity but bad at providing quality. Nevertheless, I'm not betting on GM or the banks.

The next big thing

2009-05-27T11:09:00.003-05:00

The VAT, i.e. value added tax, or what I call the start-looking-for-another-place-to-live-besides-the-US-or-Europe-tax:

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.
Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he's received a number of phone calls from lawmakers interested in his idea, though "they can't quite imagine how to make it happen politically." Burman said the 25 percent rate has caused some sticker shock, and he's trying to figure out how to bring it down.
Graetz's proposal drew an endorsement from Volcker, who last year called it "a sensible plan for reform." (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama's pledge not to raise taxes on families who make less than $200,000 a year.

Seems inevitable. I'm not opposed to substituting the VAT for the income tax, but we know that's not what will happen.

Why does Newsweek exist?

2009-05-23T11:08:00.004-05:00

Michael Kinsley on the magazine's makeover:

What, for example, is this graphic on the letters page? Why, for that matter, is there still a letters page? It's the first page of content you come to. Five one-paragraph comments on the issue published two weeks ago--room for little more than a thumbs up or down. On the Internet, thousands of people have their say immediately and at length. And then a self-parody: "Your thoughts on swine flu" -the cover story two weeks ago--"in six words." Hali McGrath of Berkeley, California, submitted, "Blah, blah, swine flu, blah blah." And Newsweek published it.

My mother has subscribed to Newsweek I think my entire life. I don't recall ever reading anything enlightening, and the thumbs up thumbs down bull shit simply infuriated me. I think Newsweek must exist on mom-inertia.

Too big to jail

2009-05-23T10:38:00.003-05:00

While it's not the first best solution (get rid of federal deposit insurance and bailouts), I think we can call it a second best:

The agency [FDIC] traditionally collected a percentage of the deposits held by each bank, adjusted for the health of the institution. It now further adjusts to reflect the likely cost of a bank's failure, based on its business model.
The latest assessment goes one step further, moving away from the deposit model. Instead, the FDIC will collect 0.05 percent of each bank's assets, the amount of money loaned, invested or otherwise committed to customers. Smaller banks tend to have roughly the same amount of assets and deposits, because they lend to borrowers what they collect from depositors. But larger banks also lend money from other sources, such as borrowed money -- and as a result they now face larger assessments.
To limit the impact, the FDIC charged only the bare minimum required to keep the fund from dwindling to nothing, based on its projections of future bank failures. It backed away from a plan to collect a larger amount now, but officials said a second special assessment was likely at the end of the year.

I'm assuming, hoping, that the asset model involves adjusting for the health, i.e. risk, of the assets.

Gary Gorton on the shadow banking system

2009-05-18T19:59:00.003-05:00

Tyler Cowen and Arnold Kling comment on Gary Gorton's new paper. Here's the main idea:

Periodic banking panics have been the norm in U.S. history. But the panics appeared to end in the U.S. when deposit insurance was legislated in 1934. Combined with valuable bank charters and oversight by bank examiners, the Quiet Period was created. What changed? Bank charter values eroded under competition. Securitization is a more efficient way to finance loans. The growth of derivative securities caused an enormous demand for collateral. Over twenty-five years the shadow banking system evolved to meet the needs of this modern economy. Unfortunately, the vulnerability to panic was also produced.

Gary has an incredible knack for details and more than anyone else I've read he seems to be abreast of how the modern banking system is evolving. But I don't get why he doesn't apply the same rigour to understanding the pre-Fed era. Here's my comment on Tyler's post:

I don't understand how Gorton can honestly review the history of pre-Fed banking in the US and conclude that the frequent panics were all market failures and that federal deposit insurance finally saved the day in 1934. Does he know anything about the experience of free banking in Scotland or Canada or Australia? Panics occurred in the pre-Fed US precisely because of severe regulatory restrictions on branch and interstate banking and the bond-deposit requirement for bank note issuance. These regs didn't exist in Scotland, Canada, or Australia in the 19th century and things worked out great. Gorton's whole analysis stems from this assumption, so naturally he thinks federal deposit insurance should be extended to the shadow banking system. Instead, I think it's more likely that the shadow banking system, as the name implies, has evolved to avoid the regulations and the regulators and will continue to do so with each new regulation.

Interview with George Selgin

2009-05-06T12:26:00.005-05:00

By the Richmond Fed. It's an excellent overview of free banking. This is my favorite part:

Freedom to issue notes is important too. When banks can’t issue their own notes, well, they need a lender of last resort to supply them with notes. If we told companies that manufacture shoes that henceforth they could only make shoes for left feet, lo and behold, there would be a need for an “emergency” source of shoes for right feet, which could be created by establishing a new government agency for the purpose. Eventually people would say, “Thank goodness for the Government Shoe Agency. How would anyone be able to walk otherwise?”

By the way, I have the privledge of working with George on my dissertation, which involves using laboratory methods to explore the macro and business cycle implications of free banking versus central banking.

(HT to Tyler Cowen and Arnold Kling)

Real economics of quality health care

2009-04-29T12:45:00.004-05:00

Paul McBride, VP at Wellpoint (and my brother!), speaks here about health care at the Milken Instistute Global Conference (he's third from the left on the panel). He says the core problem is that as a society we've been too concerned about the incentives of producers while we largely absolve consumers of their responsibility. I couldn't agree more.

I would also add that medicine is probably doomed to inefficiency in this country and around the world. The main problem is that cost-benefit analysis has very real limits when applied to life and death issues. What's the price of life? This is a moral question more than an economic question. Hence, we have the hippocratic oath, the inability to let go of granny, the need to show that we care and that our care does not depend on price, and a good deal of religious belief in the power of medicine. Yes, we can make progress on certain margins, such as breaking up the AMA's monopoly of labor supply, but overall it's a tough row to hoe. Good luck, brother.

Addendum: The LA Times wrote a piece about it, particularly discussing how health care tourism is going mainstream. A bunch of commenters think this is somehow unjust. These are my comments:

It's called competition. It highlights how non-competitive the medical industry in the US has become. Blame the AMA, and their government enablers, for limiting the supply of doctors. Blame the FDA for limiting the supply of drugs. Don't blame capitalism, or competition.

UK once again the poor man of Europe?

2009-04-22T11:29:00.014-05:00

It is looking that way:

Britain's budget deficit will soar to a record 175 billion pounds as the economy shrinks at its fastest pace since World War Two this year, British finance minister Alistair Darling said on Wednesday.

To help bridge the yawning gap, Darling will slap a new 50 percent tax rate on the highest earners but the government will still have to issue a record 220 billion pounds of government bonds, way above even the highest forecasts.

But Spain is also a strong contender:

Nowhere is this cycle more evident than in Spain. Last month, it became the first of the 16 nations that use the euro to record a negative inflation rate. The drop, though just 0.1 percent, had not happened since the government began tracking inflation in 1961, and Spanish officials have said prices could keep dropping through the summer.
Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 percent, and sugar was down 5.7 percent. But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March, and there were slight declines in footwear, clothing and prices for household electronics.
...
While unemployment traditionally is higher in Spain than in much of Europe, the sharp increase has many here nervous. The jobless rate for those under 25 is at a Depression-like level of 31.8 percent, the highest among the 27 nations of the European Union.

I can remember someone telling me about 10 years ago that real estate would be cheap in Europe in 15 years (5 years from now). I think he relied on demographics for that prediction.

Addendum: IMF predictions.

Vernon Smith explains Austrian Business Cycle Theory, without using the word Austrian

2009-04-18T09:12:00.019-05:00

Don't know how I missed his article in the WSJ two weeks ago, but as always it's right on the money, so to speak:

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!
By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.
How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

The graphs comparing the last three real estate bubbles and the fed funds rate are compelling evidence that the Fed cannot escape blame.

While I've always been a little skeptical of Austrian Business Cycle Theory, i.e. bubbles are created by the Fed's easy money policies, I've never been able to make much sense of the critiques. Tullock, Cowen, and Krugman start and end with, what to me are absurd, neo-classical rationalist assumptions, namely that a) investors but not consumers are effected by interest rates, b) these two types are easily distinguished and do not effect each other, and c) investors are but a small minority of the economy. They believe too much in the models. Here's Tullock:

The end result of all of this is that we would anticipate that in an Austrian-style depression, there would be a good deal of unemployment in the capital goods industries, but this is, after all, a small part of the total industrial picture. Of course, such industries would not be able to buy as much in the way of consumer goods as they would otherwise, and this would add to the fall in prices which would have to be absorbed by other industries. Indeed, it would increase the bankruptcy rate. Because of the size of the capital goods industries compared to the rest of the economy, however, the forcing down of prices in other industries made necessary by this unemployment would once again cause bankruptcies but not unemployment.

You're telling me the capital goods industries do not to some significant degree include or effect home owners or stock owners, or that either group constitutes a minority in the US?

Here is additional support for the Austrians.

FDIC or Louis Sullivan

2009-04-15T17:46:00.004-05:00

This is the tradeoff, according to Scott Sumner:

Just imagine how fortunate the residents of Owatonna, Minnesota are, as they get to walk by this pre-FDIC bank building everyday (also see here.) I’m not saying that modestly reducing the FDIC coverage will revive the architectural fashions of the early 1900s, but if it produces buildings even 1/10th as beautiful as Sullivan’s masterpiece, then it will have been worthwhile.

Why be modest?

Obama takes on immigration

2009-04-09T09:19:00.005-05:00

Opponents of legalization legislation were incredulous at the idea that Mr. Obama would take on immigration when economic pain for Americans is so widespread.
“It just doesn’t seem rational that any political leader would say, let’s give millions of foreign workers permanent access to U.S. jobs when we have millions of Americans looking for jobs,” said Roy Beck, executive director of NumbersUSA, a group that favors reduced immigration. Mr. Beck predicted that Mr. Obama would face “an explosion” if he proceeded this year.
“It’s going to be, ‘You’re letting them keep that job, when I could have that job,’ ” he said.

This is the problem with focusing on full employment exclusively. We should also be focusing on how we are going to fill all those empty suburban houses. And on whether or not you like tacos and cheap labor.

Read the rest here.

Move the voting age to 30?

2009-04-09T09:09:00.003-05:00

Or maybe we just need to better teach better economics:

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.

Read the rest here.

The revolution is here

2009-03-27T11:19:00.002-05:00

Class War, an anarchist newspaper, has produced a special edition to promote the protest with an image of former Royal Bank of Scotland Group Plc CEO Fred Goodwin, whose house was vandalized this week, on a guillotine under the headline “Ready to Riot.” Another shows people dancing around a fire with the slogan “How to keep warm in the credit crunch -- Burn a Banker!” Public anger erupted at Goodwin’s 703,000 pounds annual pension after RBS was bailed out by the government.
The English Revolution culminated with the beheading of Charles I in 1649, ending the so-called divine right of kings in England. Today’s protesters say they draw inspiration from 17th century radicalism.
Four marches will converge on the Bank of England at midday on April 1 for a protest the organizers call “Financial Fools Day.” At the same time, there are plans for a blockade of the European Climate Exchange, in Bishopsgate, to protest against the market in carbon emissions.

It is appropriate that it begin at the birthplace of central banking:

The Bank of England, founded in 1694, has been the target of demonstrators before, according to the Bank’s Web site. In 1780 the bank, known as the Old Lady of Threadneedle Street, was provided with a military guard after it was threatened by a mob during anti-government riots. This was only discontinued in 1973.

Read the rest here.

Gee, I hope Tim Geithner is a nice guy...

2009-03-26T13:49:00.003-05:00

Because he just threw out the rule of law:

It would give the Treasury the power to restructure troubled companies to avoid economy-wide risks that would fall from either a bankruptcy or taxpayer-funded bailout. The government would either seize the company in a conservatorship, which would keep the company going while it is restructured, or in a receivership, which would break up the company and sell its assets.

Unlike in a bankruptcy that gives precedence to creditors, the Treasury plan would allow the government to unwind the company in the best interests of the economy as a whole.

If the government took control of a financial company, existing shareholders, management and creditors could lose everything. Existing contracts could be renegotiated or repudiated.

"Had the government possessed the authorities contained in the proposed legislation, it could have resolved AIG in an orderly manner that shared losses among equity and debt holders in a way that maintained confidence in the institution's ability to fulfill its obligations to insurance policyholders and other systemically important customers [my emphasis]," the Treasury said.

Who needs the courts when Tim Geithner and his pals can figure it out. Right. I'm afraid "systemically important customers" will mean those who lobby and bribe the most, which actually isn't too far from the way it was.

Read the rest here.

This is why I love Hungarians

2009-03-21T11:32:00.004-05:00

Even though they are socialists, they are not assholes:

Hungarian Prime Minister Ferenc Gyurcsany says he will stand down, as his government's popularity plummets amid the global financial crisis.
The Socialist leader, in power since 2004, told his party congress that he considered himself a hindrance to further economic and social reforms.
He is to officially notify parliament of his decision on Monday.
Badly hit by the global credit crisis, Hungary received a $25.1bn (£17bn) IMF-led loan last October.
"I hear that I am the obstacle to the co-operation required for changes, for a stable governing majority and the responsible behaviour of the opposition," he was quoted as saying on Saturday by Reuters news agency.
"I hope it is this way, that it is only me that is the obstacle, because if so, then I am eliminating this obstacle now.
"I propose that we form a new government under a new prime minister."

Something to remember.

AIG, when does it stop?

2009-03-16T10:14:00.004-05:00

From Reuters:

The payments to AIG counterparties include the provision of collateral to back up credit default swaps, a form of financial insurance that AIG's London office was writing; the purchase of the collateralized default obligations, a type of complex debt security that underlay that insurance; and payments to counterparties of a securities lending program.
Through three separate types of transactions, Goldman received an aggregate $12.9 billion. Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche got $11.8 billion and Barclays was paid $8.5 billion.
The AIG disclosures are still incomplete in that they do not include payments to the banks since December 31.
The list of counterparties was made public by AIG amid growing pressure on the insurer to come clean about the true beneficiaries of the bailout ahead of a congressional hearing on Wednesday at which AIG chief executive Edward Liddy is slated to testify.
Democratic Congressman Paul Kanjorski, whose committee will quiz Liddy, said the counterparties and bonuses would both be topics for investigation at the hearing.
Summers -- speaking before the payments to banks were made public -- called the AIG bonuses "outrageous" but said contracts must be honored, even though Treasury Secretary Timothy Geithner had "negotiated very forcefully" with AIG and done all that was "legally permissible" to limit the payments.
"We're not a country where contacts just get abrogated willy nilly," Summers, a former treasury secretary, said on CBS's "Face the Nation" program. "What the lesson is, is this: We don't really have a satisfactory regulatory regime in place."

Yes we do, it's called bankruptcy. Yes, it would be calamitous. How else do you propose ending this gross corporate welfare?

Addendum: James Hamilton agrees.

Crisis brings common sense to California

2009-03-13T12:55:00.002-05:00

Could marijuana be the answer to the economic misery facing California? Democratic State Assembly member Tom Ammiano thinks so. Ammiano introduced legislation last month that would legalize pot and allow the state to regulate and tax its sale — a move that could mean billions for the cash-strapped state. Pot is, after all, California's biggest cash crop, responsible for $14 billion in annual sales, dwarfing the state's second largest agricultural commodity — milk and cream — which brings in $7.3 billion annually, according to the most recent USDA statistics. The state's tax collectors estimate the bill would bring in about $1.3 billion in much-needed revenue a year, offsetting some of the billions in service cuts and spending reductions outlined in the recently approved state budget.

Read the rest in Time.

Challenge of the day

2009-03-13T12:35:00.004-05:00

Name one aspect or spending item of the federal government that doesn't infuriate a lot of people. I can only think of one: the National Science Foundation. And that's probably because it's so small that few people even know about it.

Compare that to what Chick-fil-A does for people (OK, they are annoying, but not infuriating).

I suggest that the "stimulus" should be directed towards the NSF and Chick-fil-A.

Party's over

2009-03-13T12:26:00.005-05:00

Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings.

From the WaPo. And get this, the party started suckin' last summer. I wonder when they'll kick everyone out:

Starting last summer, China's big state-owned banks -- including Bank of China and Bank of Communications -- began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt. In September, as what began as a U.S. problem began to spread around the globe, Ha Jiming, chief economist for the China International Capital Corp., warned in a report that Chinese government officials have realized that it's a "bad idea to put all their eggs in one basket." At that time, China had held a fifth of its currency reserves in Fannie and Freddie debt.

Time for a world currency?

2009-03-12T12:00:00.008-05:00

KAZAKH President Nursultan Nazarbayev has won backing for his plan for a single world currency from an intellectual architect of the euro currency, Nobel-prize winner Professor Robert Mundell.

That's from The Australian. As Mundell has argued, little countries stand to benefit most from a world currency. Consider this:

In a world of big international banks and multinational corporations, there is not much scope in practice for the monetary independence of any except a few large countries.

Mundell's argument hinges on economies of scale in convenience, information, policy, and insulation from international monetary shocks. Ultimately, he seems most concerned about inflation, and he believes inflation can be minimized by minimizing the number of currency issuers. I don't believe that. As he says, from 1949 to 1973 there was a de facto world currency, the US dollar, since nearly everyone was pegged to it. That ended when we went off the gold standard, and then engaged in double digit inflation throughout the 1970s. So what is to prevent a world central bank from doing the same? Say the UN institutes a world central bank. Can we really trust the UN to produce a steady money supply, transparently and without corruption, avoiding the temptation to abscond with the dough, aka seignorage? How transparent are central banks now? (try this link)

I believe money is like all goods in that quality matters, and thus reputation for quality matters. Hence, we need competition, and lots of it. Free banks did that for us, and they can do it again.

What took Iceland down?

2009-03-10T00:58:00.004-05:00

I blame mainly incompetent politicians and central bankers. Read the whole article in Vanity Fair:

There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.

Runner up goes to certain beliefs in "hidden people":

Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.”

(Hat tip to Tyler)

Not Brazil, but not bad

2009-02-26T23:42:00.003-05:00

Carnival in Germany. My kind of people.

(HT to Larry).

Turn up the printing press

2009-02-26T17:36:00.005-05:00

So says Scott Sumner:

Many economists simply assume that the current contraction has been caused by the financial crisis. After all, isn’t that obvious? Actually, no. For nearly a year after the onset of the financial crisis nominal GDP continued growing at better than a 3% clip. Now it is plunging. Most seem to assume that this new state of affairs was somehow caused by the Lehman failure, and the subsequent loss of confidence in the entire financial system.
My view is that this reverses the causality; it seems much more plausible that the current problems in the financial system are being caused by the recent (and expected future) sharp fall in nominal GDP. An unexpected decline in nominal
GDP puts stress on a banking system that is based on nominal debt. It is even more disruptive to a system that has become highly leveraged in expectation that the Great Moderation would continue, i.e., that central banks would insure that we never again saw a repeat of the plunging nominal GDP of the early 1930s. And it is devastating in a system that was both highly leveraged and already buffeted by severe losses in residential lending.
The 2007 subprime crisis did not cause the stock market crash of 2008, as stocks were still only modestly below record levels in early June 2008. The October crash occurred when investors began to see deflation and depression on the horizon, and saw that loan losses would spread from the already weakened subprime sector into the sort of commercial and industrial loans which would have been sound had nominal GDP continued expanding at close to 5%/year.

Read the whole thing. I tend to agree. But I'm trying to get his opinion on free banking as a long term solution to financial instability.

(HT to Tyler).

Why did they switch?

2009-02-25T14:08:00.004-05:00

The bill did not pass on September 29 because, despite significant pressure from the financial sector, the real side of the economy had not suffered commensurately with the financial side. That is, neither unemployment nor foreclosures were “high enough” in a sufficient number of congressional districts. The regressions show that legislators who switched their vote between September 29 and October 3 likely caved in to the lobbying efforts of the American Bankers Association. Hence, in all probability the October 3 vote would have failed again had it not been for the pressure exerted by the ABA.

That's from Carlos Ramirez, of GMU and the FDIC. He also taught me macro.

Signs of hope

2009-02-19T13:55:00.005-05:00

In Europe:

The European Union has turned into an undemocratic and elitist project comparable to the Communist dictatorships of eastern Europe that forbade alternative thinking, Czech President Vaclav Klaus told the European Parliament on Thursday.

Klaus, whose country now holds the rotating EU presidency, set out a scathing attack on the EU project and its institutions, provoking boos from many lawmakers, some of whom walked out, but applause from nationalists and other anti-EU legislators.

I saw Klaus speak about the environment, and I got to meet him. He makes me wish we had a rotating presidency. I'd love to see Governor Sanford of South Carolina as president, if only for a year.

Addendum: French students are not hopeful. 10-1 odds that the EU disintegrates.

One idea you won't hear from Congress

2009-02-06T22:14:00.004-05:00

There are, to be sure, risks of political interference from government involvement in banking, but all of the current proposals for increasing lending require more government involvement. The challenge is to find one that increases lending and does the least harm.

If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish. If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behavior, the risks are large and grow over time.

That's Paul Romer, not in Congress. He also (most likely) doesn't get paid by the big banks.

(HT to Tyler).

Stimulus is working, in DC

2009-02-04T15:56:00.005-05:00

There is good news for workers who still have jobs. A WorldatWork survey of more than 1,000 U.S. companies found that 77 percent of the work force can expect to receive base pay raises this year.
And Washington is among the four metro areas with the largest projected salary budget increases of 3.1 percent. The other three are: Philadelphia, Pittsburgh and San Francisco.
The results in the "WorldatWork Special Update: 2008-09 Salary Budget Survey" were determined from interviews in early December, after credit markets tightened and after the presidential election in order to gather the latest outlook for compensation plans for 2009.
A survey conducted in April 2008 found salary budget increases of 3.9 percent in the Washington area (also the top of the range) along with Boston, Denver, Houston, Los Angeles, Philadelphia, San Diego and San Francisco.

That's from the Washington Business Journal. It is already the case that the 3 richest counties and 9 of the 20 richest counties are suburbs of DC. Let's hear it for targeted stimulus! Maybe the idea is a kind of trickle-down economics. We get rich in DC, then we buy stuff from the rest of you poor bastards. I just got back from Haiti, but that's a long way to go for poverty tourism. Soon I'll be able to do it in my own country! First up is Seattle.

The Onion on economics as a predictive science

2009-01-12T22:24:00.005-05:00

"The state of this store does not in any way correspond to our standard criteria for judging long-term viability," said economist Graham Stinson, referring to Chicago's Fullerton Avenue branch, where more than half of the fluorescent lights are burnt out. "For instance, the canvas bins heaped with broken stemware in aisle six may be a sign that T.J. Maxx is on the verge of complete bankruptcy. Either that, or it's doing perfectly fine. It's impossible to say which."

More here.

Growth industry

2009-01-07T12:35:00.003-05:00

Electronic unemployment filing systems have crashed in at least three states in recent days amid an unprecedented crush of thousands of newly jobless Americans seeking benefits, and other states were adjusting their systems to avoid being next.

About 4.5 million Americans are collecting jobless benefits, a 26-year high, so the Web sites and phone systems now commonly used to file for benefits are being tested like never before.
Even those that are holding up under the strain are in many cases leaving filers on the line for hours, or kissing them off with an "all circuits are busy" message. Agencies have been scrambling to hire hundreds more workers to handle the calls.

Systems in New York, North Carolina and Ohio were shut down completely by technical glitches and heavy volume, and labor officials in several other states are reporting higher-than-normal use.

"Regardless of when you call, be prepared to wait and just hang on. Try not to get frustrated," said Howard Cosgrove, a spokesman for the Wisconsin Department of Workforce Development, which boosted its staff of telephone operators by 25 percent last month to cope with a phone system that has been overloaded for weeks. "We sympathize, we're on their side, we're doing our best to help them out."

Read the rest here. Frightening. It looks like we'll hit 10% unemployment real soon, probably this spring.

Arnold Kling sums it up

2008-12-31T18:15:00.005-05:00

Arnold links to his Congressional testimony, in which he provides an exquisite history and explanation of the crisis. Some excerpts:

To understand the problems inherent with securitization, imagine that you are a bank executive faced with two alternative routes for obtaining mortgage loans—a direct route and an indirect route. In the direct route, your loans are originated by your own staff. You establish standards, policies, and procedures for loan origination. You choose the markets in which you would like to originate loans, and you will probably focus on communities where you know the local economy. You hire and train personnel to follow internal guidelines.
Your compensation policies incorporate incentives for them to accept or reject applicants in accordance with company policy. Once the loan has been made, if the borrower misses a payment, your staff follows company procedures for contacting the borrower and resolving the problem.
In the indirect route, loans are originated by persons unknown to you, following guidelines established by someone else. The loans may come from communities with which you are totally unfamiliar. The originators may very well be paid on commission, which they can only receive if they close a loan—never if they reject an applicant. If the loan gets into trouble, you will have no control over how the delinquency is handled.
No sane bank executive would choose the indirect route over the direct route. In economic jargon, the "agency costs" of the indirect route are prohibitive. The originators of mortgages in the indirect route are operating under incentives that are contrary to the bank's interest. The misalignment of incentives between the bank and those acting as its agents in the indirect route will force banks to incur additional costs to monitor and review the work of the originators. Even with most diligent efforts, the bank is likely to incur higher losses from defaults, as originators squeeze bad loans through the cracks of the bank's monitoring systems.
It is surprising, therefore, that as of 2008, nearly three-fourths of mortgage debt in the United States had been originated using the indirect method. To reach this point required a combination of Wall Street ingenuity and regulatory anomalies.

I like this part too:

The suits treated mortgage securities as bonds, ignoring the power of the embedded options. In August and September, when policymakers began to perceive the severity of the crisis, the suits thought that mortgage securities could not possibly have lost as much value as their market prices indicated. Federal Reserve Board Chairman Ben Bernanke insisted that if the securities were "held to maturity" that they would have higher values. Treasury Secretary Henry Paulson proposed to have the government buy and hold these securities in order to "unclog" the financial system. However, this thesis, which in effect was arguing that the geeks had mispriced mortgage securities, proved to be incorrect. The banks that had invested heavily in these securities were truly under-capitalized. The mistakes had been made by the suits, not the geeks.

I always wondered what finance was really about, or rather why it has become this huge behemoth, representing some 40% of U.S. profits. Now I think I know. It's kind of like law, in that the big money is in finding novel ways to subvert the law, causing more laws to be created, and more opportunities for subversion, etc. Looks like a big part of those profits are nothing more than rent seeking.

This also makes me think that no amount of regulation will ever fix the problem, and that maybe the Austrians are right: we should return to competitive banking.

One word: Mariachi

2008-12-28T12:58:00.005-05:00

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.
Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.
Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.
“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”
At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

Read the rest here. The really funny part is I owned stock in this company. I recall thinking "the banks always seem to win, I should own a bank."

Republicans have a death wish?

2008-12-17T15:12:00.010-05:00

Not sure how this works, but my guess is that it's ultimately about cheap land and open spaces. Republicans apparently value these things more than whatever benefits accrue from being around others, which in this case is relative safety.

The death map comes from here, and the red state blue state map is here.

Me and Paul: The joys of blogging

2008-12-16T17:09:00.004-05:00

Paul Krugman shows you don't win the Nobel prize by thinking small. He's calling for a massive Keynesian fiscal stimulus. Not just here, but all over the world! I just hope he remembers to tell us when to stop:

To understand the problem, think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would “leak” away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs.

Individual European countries are in much the same situation. Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment.

For the European economy as a whole, however, this kind of leakage is much less of a problem: two-thirds of the average European Union member’s imports come from other European nations, so that the continent as a whole is no more import-dependent than the United States. This means that a coordinated stimulus effort, in which each country counts on its neighbors to match its own efforts, would offer much more bang for the euro than individual, uncoordinated efforts.

He even provides us with the math, so there can be no doubt. Except I still have doubts, and so do many others. See all the comments, especially this one. Here is mine:

Sounds like you're claiming there are spill over effects with a fiscal stimulus, which I agree with. Thus you're calling for coordination in Europe. Wouldn't that rosy scenario lead to spill over effects outside Europe? So would you really like to see world-wide coordination? Even if that were possible, and all spill-over effects neatly cancelled each other, then where are we? Yes, we might have a short term benefit of slightly higher demand than otherwise would be, but we'd be stuck with the very real and enduring cost of more government control of the economy. If that sounds good to you, I suggest you go to your local post office and think about it while you stand in line for hours.

Postrel summarizes the research on bubbles

2008-12-13T00:47:00.005-05:00

Read the whole thing, but here's a snipet:

At least that’s what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that’s not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn’t seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best. Besides, Noussair emphasizes, “you don’t just get random noise. You get bubbles and crashes.” Ninety percent of the time.

Incidentally, my dissertation is building upon this work. I'll let you know how it turns out after I corner the stock market.

(HT to Tyler)

Addendum: Where is the next bubble likely to occur? This research tells us it will likely occur where we have little experience, just as the dot com bubble occured in a new technology we had little experience with, and the real estate bubble occured after a generation of flat prices and no record of significant nation wide declines. My guess is that treasury bonds are the new bubble, since it was roughly a generation ago that they performed this well. You'd think knowledge of history would matter more, but it doesn't. Only experience.

Things you can do in authoritarian China that you can't do here

2008-12-05T13:34:00.003-05:00

China plans next month to raise tax on regular gasoline by five fold and diesel fuel tax by eight fold, in a move to take advantage of falling crude prices and encourage energy conservation, state-run media reported Friday.

...

Government officials see the dramatic fall in global crude oil prices -- currently around $43 a barrel, down from a high of about $147 in July -- as "a perfect opportunity" for the increase, the report said.

Read the rest here. Of course, it's a pretty bad time to be raising taxes, but in the long run this is good policy. China and India and many other heavy polluters have been subsidizing gas consumption, not taxing it. You could probably make the argument that we in the US have also been subsidizing gas consumption on balance, when you take into account the highway subsidies.

But is there any country currently proposing to lower taxes, gas or otherwise, in this likely deflationary environment? Has any country ever tried lowering taxes in a deflationary environment? Is there any reason why? I see only two, niether of which make me optimistic about the future:
1) We have only the experience of the Depression, and only the Keynesian reaction, so we are too afraid or stupid to try anything else.
2) With voters paralyzed in fear/stupidity, the most successful politicians, i.e. the most venal, will sieze this "perfect opportunity" to expand their power.

Merry Christmas and to all a good night!

The patience of 8th graders

2008-11-20T23:34:00.003-05:00

Something to keep your mind off your 401k. Marco Castillo and Regan Petrie, two visiting economists at GMU, have an interesting study which certainly breaks new ground in education research. From the abstract:

We experimentally investigate the distribution of children's time preferences along gender and racial lines. Black boys have significantly larger discount rates than any other demographic group. Discount rates among Black girls are comparable to rates among White girls. Although White boys exhibit higher discount rates than girls, the difference is small and not statistically significant. These results are robust to alternative measures of patience and to regression analyses that control for socio-economic background and school performance. The measured differences in discount rates are large. All things equal, a Black boy requires expected returns to education 13-15% higher than Black girls to compensate for his larger discounting of future payoffs. Equally importantly, we show that impatience, as measured by discount rates, has a direct effect on behavior. An increase of one standard deviation in the discount rate increases by 5 percent the probability that a child incurs at least 3
school-related disciplinary actions. This result suggests that experiments capture new and relevant information on children. Overall, our results suggests that time preferences might play a large role in setting appropriate incentives for children. Understanding the factors behind these differences in preferences is an important area for future research.

Mind you, given their data limitations, they cannot fully identify the conditions which create such differences in time preferences, e.g. family characteristics such as education of the parents. But this is a start.

Common sense

2008-11-20T23:16:00.003-05:00

"I don't think they should bail them out because ... obviously something's not right in the way they're running their business, and why should the American people have to bail them out if they can't figure out how to do it right?" September Quinn, the busy waitress, said after the lunch rush at the Inn Between.

More here. It's people like this that keep the dollar afloat, not the spendthrifts in Congress.

Somalian stimulus plan (SSP)

2008-11-19T18:42:00.003-05:00

"There are more shops and business is booming because of the piracy," said Sugule Dahir, who runs a clothing shop in Eyl. "Internet cafes and telephone shops have opened, and people are just happier than before."

More here.

Google's accidental innovators

2008-11-18T13:02:00.002-05:00

In their 1998 paper, the Googlers cited Prof. Ben Bagdikian's theory of Media Monopoly. Page and Brin swallowed the idea that U.S. media markets were controlled by a cabal of corporations, manipulating content to protect advertisers, and stifling competitive entry to protect their shareholders. According to Bagdikian, just four megacompanies share the U.S. Media Monopoly: Disney, News Corp., Time Warner and Viacom. (News Corp. is the corporate parent of Dow Jones, publisher of Barron's.) Resistance was futile.

If Brin and Page had been deterred by the bleak forecast offered by Bagdikian, Google today would not be worth some 90% of the capitalization of the four media oligarchs combined.

That's GMU's Thomas Hazlett in Barron's.

Probability of being the swing voter

2008-11-17T15:25:00.010-05:00

There are 4 senate races that are still too close to call (I believe they are all in recount), and Missouri is too close to call in the presidential race. By the latest count, Al Franken is within 206 votes of winning the senate race in Minnesota, where the total number of votes was around 2.9 million. From Time:

But Jacobs says he does not expect a huge shift in recounting residual votes. "The bigger issue is how we handle these absentee ballots [which are the subject of the Franken lawsuit]," he says. Mark Jeranek, who voted for Franken, cast an absentee ballot in Beltrami County, located in northwestern Minnesota, that was rejected because he didn't sign the envelope in which he placed his ballot. The Franken campaign sent him an affidavit that he is considering signing. "I don't want to be a cause for revolution, but at the same time I want my vote to count," the 39 year-old environmental consultant says. "It's kind of neat — at least for a senatorial race — that it really does come down to every individual vote."

None of this squares with the typical public choice assumption, going back to Downs and Tullock, that the liklihood of being the swing voter is 1/n, where n is the number of voters. That is, the number of close elections indicates it is not a uniform distrubution, i.e. you need to take into account the median voter theorem. For this reason, I think a binomial distribution is more appropriate, such as that used by Barzel and Silberberg. The following graph illustrates how these two assumptions differ over the size of the electorate. I've assumed p=1/2 for the binomial distribution, and calculated P as the probability of being within 1 vote of a tie.

Clearly, in large elections such as those at the state and national level, both probabilities approach zero. Thus, voters in these elections aren't paying too much attention to this sort of calculus. Rather, expressive voting is probably a more important factor.

Addendum: To illustrate the main point here I've reproduced the same graph below but on a log-log scale. You can now see that especially in large elections the choice of binomial versus 1/n is critical. For instance, in Al Franken's race with 2.9 millions voters, if one assumes a binomial distribution, then there is a 1/711 chance of effecting the outcome. Therefore, if we assume the cost of voting is, say, $1, due to time lost, travel expense, etc., then one need only expect benefits greater than $711 for it to make sense to vote for one's preferred candidate. Compare that to the case of a uniform distribution, where benefits would need to exceed $2.9 million. You can see that the paradox of voting is not such a paradox if one makes realistic assumptions, even if we restict our analysis to non-expressive, i.e. instrumental, benefits.

Remember modesty?

2008-11-16T18:53:00.004-05:00

The hubris of the military imperialists was bad enough without adding to it the hubris of the aid imperialists.

That's Bill Easterly on Paul Collier's Bottom Billion. (HT to Tyler)

Stuff I don't usually read

2008-11-15T21:24:00.004-05:00

I would not be surprised to see the G-20 monetize at least 20% of the U.S. debt markets. THAT MEANS …

Gold would be priced at over $10,000 an ounce.

Currencies would be devalued by a factor of at least 12 to 1, meaning it would take 12 new dollars or euros to equal 1 old dollar or euro.

That's Larry Edelson at Money and Markets. I don't know what to say. Buy gold.

Also see this montage of clips by Peter Schiff, who predicted our current financial mess whilst being laughed at.

The dangers of complexity

2008-11-15T12:09:00.007-05:00

I hope none of you voted for Obama thinking this would put an end to special interest politics, or the wars. It looks like the military-industrial complex, along with all the other government-industrial complexes, will continue unabated. From the New York Times:

John L. White, a former Clinton official charged with overseeing the new Defense Department, is a partner in a firm that invests in defense contractors. Michael Warren, charged with overseeing Treasury, is chief operating officer of a firm that lobbies for clients including the U.S.-India Business Council.

Several of the officials have ties to Fannie Mae, the government-backed mortgage firm whose implosion this fall contributed to the financial meltdown. Thomas Donilon, overseeing the State Department, is a partner in the law and lobbying firm O’Melveny and Myers who until three years ago lobbied for Fannie Mae. Wendy R. Sherman, the other official charged with reviewing the State Department, once headed Fannie Mae’s charitable foundation.

...

The vast majority involved are second-tier officials of the Clinton administration, eager to help another Democrat take control of the White House. With the exception of a few academics, almost all of them spent the intervening years in the private sector, usually capitalizing on the connections and expertise they developed in the Clinton years.

Maybe this is why the Framers preferred a simple solution: strict and severe constitutional limits on the power of government.

Highway robbery

2008-11-11T20:52:00.003-05:00

If you're wondering why the stock market is back near 5 year lows, I think it has something to do with the eagerness of Democrats, including Obama, to hand over more billions to the car companies. It certainly frightens me. Bush is no paragon of free-market virtue, but he is apparently the only one standing in the way of this non-sense. Once he's gone, we're looking at two years to life of binging at taxpayer expense. I expected as much from Pelosi and Reid, but I wanted to give Obama the benefit of the doubt. Truly disheartening. Politics continues unabated.

Here's what the Wall Street Journal has to say about it, and they're quite a bit more tempered than I:

Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.

As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.

Also see this and this.

Obama =? Hitler

2008-11-11T12:02:00.005-05:00

From the AP:

Broun cited a July speech by Obama that has circulated on the Internet in which the then-Democratic presidential candidate called for a civilian force to take some of the national security burden off the military.

"That's exactly what Hitler did in Nazi Germany and it's exactly what the Soviet Union did," Broun said. "When he's proposing to have a national security force that's answering to him, that is as strong as the U.S. military, he's showing me signs of being Marxist."

...

"We can't be lulled into complacency," Broun said. "You have to remember that Adolf Hitler was elected in a democratic Germany. I'm not comparing him to Adolf Hitler. What I'm saying is there is the potential of going down that road."

The educated Democrats among you are saying this is crazy and alarmist. But ask yourselves how many Obama voters, or voters generally, are aware of this history.

Krugman, I still don't get it

2008-11-10T23:33:00.017-05:00

He offers very sound logic as to why a fiscal stimulus works in the short run:

The economic lesson is the importance of doing enough. FDR thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

Now tell me how we're going to muster the political courage to cut government spending and fire people once the economy recovers. Federal spending never decreased in the 20th century, except in the years immediately following the huge spending increases of WWI and WWII.

As a percent of GDP federal spending went from roughly 3% pre-Depression to a peak of 25% in 1982, and declined to 20% during the 90s essentially because GDP outgrew government.

For this very reason, wouldn't tax cuts be a more sensible stimulus? He's a smart guy and he won the Nobel prize so you know he's thought about it. But he just can't bring himself to say it. At least he gives us the converse, that tax increases reduce economic growth:

Well, it wasn't as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren't felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

So why doesn't he simply recommend a tax cut now, particularly a capital gains tax cut, and reduced spending later? This is why I'll never win a Nobel prize.

Alex Tabarrok has more. And Tyler offers some better advice. So does Greg Mankiw.

The Obama Effect: Al Gore starting to make sense

2008-11-05T16:06:00.008-05:00

Business -- and by extension the capital markets -- need to change. We are too focused on the short term: quarterly earnings, instant opinion polls, rampant consumerism and living beyond our means. As we have often said, the market is long on short and short on long. Short-termism results in poor investment and asset allocation decisions, with disastrous effects on our economy. As Abraham Lincoln said at the time of America's greatest danger, "We must disenthrall ourselves, and then we will save our country."

At this moment, we are faced with the convergence of three interrelated crises: economic recession, energy insecurity and the overarching climate crisis. Solving any one of these challenges requires addressing all three.

For example, by challenging America to generate 100% carbon-free electricity within 10 years -- with the building of a 21st century Unified National Smart Grid, and the electrification of our automobile fleet -- we can encourage investment in our economy, secure domestic energy supplies, and create millions of jobs across the country.

We also need to internalize externalities -- starting with a price on carbon. The longer we delay the internalization of this obviously material cost, the greater risk the economy faces from investing in high carbon content, "sub-prime" assets. Such investments ignore the reality of the climate crisis and its consequences for business. And as Jonathan Lash, president of the World Resources Institute recently said: "Nature does not do bailouts."

Read the rest in the WSJ. I've never heard him make such sense. He seems to have read some basic microeconomics. What's wrong with the world? It must be the Obama Effect.

Now, the next lesson is public choice. That's where we disabuse ourselves of the dream that government can somehow address these problems in a better way than the market. I have hope, sincerely, that Al and Barack will eventually learn these lessons.

Addendum: Let me illustrate. The simplest policy improvement would be an increase in gas taxes. Will it happen? Probably not, it's unpopular.

Get out the vote for Cheech and Chong!

2008-11-03T23:24:00.005-05:00

You have always been big supporters of pot legalization. Do you think that's imminent?

Chong: The more they study it, the more they find out that it's good for you. It treats so many ailments. It really is a medicine, and it has been since the beginning of time. The Bible was actually written by people under the influence of cannabis, there's a lot of proof of that. I think personally that the marijuana culture is the answer to America's economic woes right now. Because this is the biggest cash crop in the world, and the stock market falling has not hurt the pot industry whatsoever. So whether they legalize it or not it really doesn't matter, because it's here to stay and it's up to the government to decide if they want to keep spending billions of dollars on a hopeless cause.

Cheech: I just want it to be legal so we can be the spokesmen, and then we never have to work again!

That's change I can deal with!

Read the rest here.

Greenspan and the gold bugs

2008-11-03T12:57:00.010-05:00

Greenspan's testimony on October 23rd makes a lot of sense, and I agree that high finance got a little too high. It was a bubble, for God's sake, meaning most people bought into it, including the masters of the universe on Wall Street. But Greenspan ignores the fact that he was the true master, or maestro, as they called him. He had the most power of all and thus bears at least a large part of the blame. Namely, he lowered interest rates to below 2% following 9/11 and kept them there until mid-2004, extending what was then a mild bubble in house prices into a record breaker (see the chart from wikipedia).

During this time it became global, as do all bubbles, in the form of world-wide investor sentiment and the expansionary policies of the world's central banks. Many of the world's stock markets doubled or tripled between 2003 and 2007. And now the party is over.

Greenspan is making Ron Paul and the other gold bugs look more and more reasonable, even the Wolf Wave guy:

UP 38% year over year and almost triple the size of any monetary expansion since 1985; and you haven't seen ANYTHING yet. This is the face of FUTURE inflation. Add to this the HUGE expansion of government to save and provide for you, where $1.00 goes in and .10 cents of goods or services comes out; the rest goes to line the pockets of their CAMPAIGN contributors and the government enforcers they have SPAWNED in leviathan government. THIS IS WHY THE STOCK MARKETS ARE COLLAPSING and will continue to do so until they turn higher in a ZIMBABWE-like rally to escape the debasement and the “Crack-Up Boom” EXPLODES in your face.

The nuttiness of these guys makes me doubt their story. Please read the whole thing, there's plenty of truth in it, and I am now more than ever ready to consider returning to the gold standard. But I am buying stocks, particularly emerging market stocks. Gold keeps falling because we are not in the "Crack-Up Boom" apocalypse. We have reasonable leaders, such as Bernanke who knows the Depression inside and out, and even Obama I think will make measured decisions that often go against the most radical elements of his party.

Early hints about Obama appointees

2008-11-03T10:17:00.003-05:00

From Politico:

His personal assistant, Reggie Love, will wear jeans, as he always does on election days. And Jen Psaki, the press secretary who has traveled with the Obama press corps almost every day since the Iowa caucus, will slip into the cowboy boots that she bought during the Texas primary—if for no other reason than she feels they are “lucky.”

About 20 guys in the Ohio office haven’t shaved since Obama pulled ahead of McCain, Pickrell said, pausing to point out a bearded colleague who walked by. “We shower, we change clothes, we do all that stuff,” he said, but they haven’t put a razor to their faces. “It’s ridiculous, I admit it, but what else are you going to do?”

I don't fear Obama, I fear all the kooks and goobers in the Democrat party who he will be forced to turn to fill all the appointments. Imagine James Carville running the Education Department. God knows who gets to run the Treasury, someone from Goldman Sachs I presume. Buy that stock. As for HUD, I'll make a wild prediction that someone from ACORN gets that, say the embattled founder Wade Rathke.

Rank fetishism

2008-10-18T20:05:00.004-05:00

Elias Khalil gave an excellent talk yesterday at ICES, providing a compelling explanation for why we continue to put up with politicians. Here's the abstract:

The dominant view of corruption is based on the principal-agent framework: corruption undermines the interest of the principal. This view cannot explain why corruption, in many cases, is accepted and even demanded by the public, the principal. This paper provides a general theory that provides an answer. It redefines corruption as privileges enjoyed by people of high rank, what is called "rank fetishism." The principal demands people in authority to indulge in privileges to enhance, via heightened neurotransmitters, their own neural capital.

Essentially, blame Smithean sympathy, the peculiar kind. Peculiar sympathy is when we imagine ourselves as others, to avoid the pain of our own frustrated ambitions. Setting up leaders thus psychologically benefits us, the followers. Likewise the designated leaders benefit in more than the obvious way, they psychologically rise to the occasion, e.g. Sarah Palin. It is therefore a kind of free lunch, up to a point. Eventually the process can get out of hand, e.g. the French revolution, or Emelda Marcos and her 3000 shoes. Let's hope it doesn't come to that.

Why did it take so long for this to happen?

2008-10-05T21:11:00.001-05:00

Everything about Alison Gannett is green, from her straw-bale house to her solar-powered appliances. But when you're as serious about curbing carbon as she is, a mere hybrid won't do. That's why she spent $35,000 to install an extension cord on her Ford Escape Hybrid.

She is among a small but vocal — and growing — number of people who aren't waiting for automakers to deliver plug-in hybrids. These early adopters are shelling out big money to have already thrifty cars like the Toyota Prius and Ford Escape Hybrid converted into full-on plug-in hybrids capable of triple-digit fuel economy. "I love watching the mileage go up," says Gannett, a world champion extreme skier and dedicated eco-evangelist. "The highest I have gotten is 232 mpg. I average around 80-100 mpg."

Read the rest here.

Ig Nobel prizes announced

2008-10-05T14:06:00.003-05:00

We all know it and science has proved it - wires, string, and hair will inevitably tie themselves in knots.

This astonishing non-revelation is one of 10 pieces of real research honoured this year with Ig Nobel Prizes.

The spoof alternatives to the rather more sober Nobel prizes were presented in a ceremony at Harvard University.

Other winners included studies that showed coca cola was an effective spermicide; and that fleas on dogs jump higher than fleas on cats.

Read the rest here.

What is Dodd after?

2008-10-02T10:10:00.005-05:00

From the WaPo:

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, acknowledged last night that it was tempting to oppose a bailout and "stick a finger in the eye of the bankers and the tycoons whose greed brought us to this crisis."

"But after the rush of righteousness fades, what then?" said Dodd, an architect of the package. "We can take a cut at Wall Street, but Wall Street won't feel the brunt of the pain."

From this we might conclude that Dodd is for reducing the capital gains tax. Or we might conclude that he just wants to spend more money. I wonder which it is.

Let's do nothing

2008-09-29T11:23:00.007-05:00

Tyler posts about Brad DeLong and the gang who are arguing for nationalization:

Now it's time to go back to three principles. There are three
options:

* Do nothing.
* Bailout (a la Paulson)
* Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization. Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

Except Hoover didn't do nothing. In January 1932 he bailed out the banks:

Consider what happened during the 1930s. In the fall of 1931, the Hoover administration realized that financial institutions no longer held the trust of depositors, investors, businessmen or each other. These organizations were losing deposits so rapidly that the financial system faced complete collapse. These organizations needed to cleanse their balance sheets of assets, which under current conditions, had little immediate value and could not be used to raise cash.

In January 1932, the Hoover administration created the Reconstruction Finance Corp., an entity authorized to extend loans to all depository institutions in the nation. The RFC could accept as collateral a broad array of assets, including those deemed to be of little immediate worth but of potential long-term value. During its first year, the RFC lent nearly $1.5 billion and acquired equity stakes in thousands of financial institutions. As a share of the capital of the financial industry, this lending would be the equivalent of roughly $100 billion today. During its second and third years, the RFC extended loans to banks and acquired equity positions in financial institutions amounting to more than $3 billion dollars, equal to roughly $200 billion today.

The financial crisis slowed temporarily, but the bleeding continued. Bankers restricted lending to entrepreneurs, consumers and each other. Industrial production plummeted. Unemployment skyrocketed. The financial meltdown resumed, forcing the president to declare a national “banking holiday.”

It’s worth reiterating the theme of this historical analogy in stark terms. In the past, we faced a similar situation and employed similar policies. The policies marked a deepening of the downturn, not an end to the agony. The policies signaled the demise of the financial system and the need to construct new institutions.

It's time to let creative destruction run its course.

OK, just blame the Democrats

2008-09-28T13:00:00.004-05:00

Vernon Smith, writing in 2007, blamed Bill Clinton:

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.

Read the whole thing in the WSJ. He even brings in a little Adam Smith.

How Democrats and Republicans created the financial crisis

2008-09-25T10:19:00.008-05:00

My mom alerts me to this article by Kevin Hassett, who blames the Democrats:

It is easy to identify the historical turning point that marked the beginning of the end.
Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page'' of allowable interpretations.
Then legislative momentum emerged for an attempt to create a "world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. "We are placing the total financial system of the future at a substantial risk.''
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: "It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

OK, that's pretty convincing. But what was Bush doing? He was cheerleading the bubble with his calls for an "ownership society," a phrase which he failed to mention last night in his explanation of the causes. I think on balance Democrats deserve more of the blame, because they fundamentally believe more in government intervention. However, too many Republicans, including Bush and McCain, don't understand the market, and so cannot defend it against the inevitable and relentless calls for government intervention.

Like Adam Smith, Russ Roberts keeps it simple

2008-09-23T16:54:00.008-05:00

The turmoil in the housing market and the resulting financial crisis is just the latest example of political failure. Politicians wanted more home ownership than the market produces on its own, especially among low-income families. To encourage this politically popular goal, Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were allowed to privatize their profits and socialize their losses. At the same time, Housing and Urban Development (HUD) required them to expand their commitment to affordable housing. Freddie and Fannie achieved this goal by buying bundles of subprime mortgages.
...

Both presidential candidates will promise a risk-free world with high returns. But peddling that fantasy is the cause of the current crisis. We treat our children this way--we do our best to insulate them from harm and still allow them to grow. I'd like politicians to treat me as an adult, paying the price for my recklessness and reaping a reward when I am prudent. Returning to that world, the world of markets, is the beginning of a return to stability.

Read the rest here in Forbes. So this is simple, right? Then why do most people not get it? Clearly that's more complex, but simply put I think we've produced a monster with our social democracy, and it thrives on the weaknesses of human nature, not just stupidity, but laziness, greed, and deceiptfulness.

Nationalists, Socialists, and Wall Street's just desserts

2008-09-18T12:55:00.007-05:00

A friend asked me to comment on Meyerson's op-ed in today's WaPo:

Someone needs to invest in the United States of America. For the past decade and, in a broader sense, for the entire duration of the Reagan era, both government and Wall Street have opted not to. Should Barack Obama win, the era of neglectfulgovernment will probably come to an end. No matter who wins, Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.

Here's what I wrote him:

Meyerson here is quite right that investment has decreased in America, and increased in the rest of the world. But he seems to think this is a real bad thing, because we're Americans damn it and we deserve to be richer than everyone else? This guy is both nationalistic and socialistic, a wonderful combination of sentiments, which has been tried before, it's called National Socialism, aka Nazism.

A more fruitful question is why are investors bailing on America? I have some ideas, like out of control government no longer limited by the Constitution so that we're pretty much no longer such a special place. But I'd love to hear the candidates weigh in on this, rather than scapegoating.

The long goodbye

2008-09-17T11:57:00.013-05:00

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.
Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

That's from the NY Times. Hope you're invested in other countries!

Bum strategy

2008-09-14T10:10:00.003-05:00

George, a lanky man who pedals a bicycle around town and sleeps on a building roof, said paparazzi and parking valets can be a problem when he panhandles outside celebrity haunts. But being close to wealth can lead to $100 handouts, or finds such as gold jewelry, video cameras and an Armani suit.

He was so thrilled with the suit that he wore it panhandling until he noticed he wasn't doing too well.

"You have to have a certain look to get sympathy — dirty, kind of stupid, not aware," he said.
He also knows an opportunity when he sees one. For a couple months, he hung out in a vacant house, lounging by the pool drinking up the liquor he found in a cabinet until the owner walked in on him. He managed to flee.

"I was just using the facilities," George said. "I wasn't robbing no one."

Read the rest here.

National service as therapy

2008-09-11T20:38:00.008-05:00

I'm watching CNN's national service forum. Obama and McCain seem to agree national service is the way to go. If you're feeling selfish, lazy, or pathetic, serve the nation. If you're otherwise just down in the dumps, serve the nation. If you want to be social and connect with others, serve the nation. If you want to be helpful and charitable, serve the nation. If you want to kick some aaaaaass, serve the nation. If you want to do something greater than yourself, you need to serve the nation, fool. (Mr. T for president!)

Interestingly, one of the interviewers (not Judy Woodruff) brought up Touqueville's observation that American's are crazy about voluntary associations. Then the interviewer asked if national service crowds out voluntary service. Obama: "No. Those are old arguments. ... Part of my job is to make government cool again." I guess Hitler, Stalin and Mao kinda gave it a bad name?

OK, Obama would say that's extreme, instead the problem is the special interests. I agree, so how the fuck are you going to keep special interests out of the national service racket?

So she's hot, and she gives a great speech

2008-09-04T11:07:00.005-05:00

But Sarah Palin adds little more than stage presence to the ticket (Did you see the contrast when McCain walked on stage? He looked like he was in pain.) Of course, that's pretty much all that matters in politics. That and finding a good scape goat. For Republicans, there are the foreigners-cum-terrorists, and to a lesser extent the elites in the media, academia, and politics. For Democrats there are the Americans who are uneducated, religious, and xenophobic, i.e. Republicans, and of course business, profits, and capitalism generally.

I wish it were different, but just listen for the lines that get the biggest applause.

No wonder the stock market is down today.

News from my home state

2008-09-02T10:17:00.005-05:00

Alabama is rolling out a creative but controversial program that will subject its 37,527 state employees to possibly humiliating at-work weigh-ins and fat tests. If they tip the scales, they'll be given a choice: slim down or pay up.

I don't know if creative is the word. They're simply more willing to face facts: it's the second fattest state in the union.

Read the rest here.

Driving, much worse than nose-picking

2008-08-26T11:39:00.006-05:00

From today's Post:

Motorists continue to grumble about record high gas prices, but a new study suggests there is at least one benefit: Fewer traffic fatalities.
...

Nationwide, traffic deaths last dipped below 37,000 in 1961. The number peaked in 1972, at about 55,000, and in recent years has hovered near 42,000, Sivak said.

High gas prices have changed the habits of commuters across the country. People are using public transportation, scooters and motorcycles, and working from home.

Lon Anderson, spokesman for AAA Mid-Atlantic, said he experienced the changes firsthand during a recent drive to Richmond. Traffic moved at a mere 70 mph.

"I can't remember when somewhere around 70 miles per hour was the average speed of traffic on 95," Anderson said of the interstate. "There are certainly many drivers out there who have taken some steps to reduce the amount of gas they are burning. . . . That is one of the few good sides to very high gas prices: That if people drive less, we're going to save lives."

But that's pretty important, life that is. And driving kills us in a lot of ways, from air pollution to unwalkable cities. Plus there are the other negative externalities which maybe don't kill us but detract from the quality of life, e.g. the isolating and anti-social nature of driving. I'm wondering why we have to wait for gas prices to curb this behavior. What happened to social disapprobation? Why is nose-picking in public not OK but driving is just fine, so long as you don't nose-pick while driving?

I believe it is because too many are confused about freedom, and particularly the connection between political and social freedom. We are too often willing to fight for social freedom, i.e. freedom from disapprobation, even at the expense of political freedom. Yes, this is a conservative position. It means I support Al Gore's disapprobation of driving, yet not his calls for government enforced higher gas mileage standards. Too many conservatives are not willing to make the trade off.

And too many libertarians don't even believe there is a trade off. Just more or less freedom. In fact, we can never be totally free. Instead, political and social freedom are substitutes to a large extent. This is why the socially restrictive Victorian era coincided with the greatest political freedom we've known, and the socially free 1960's coincided with the high tide of Marxism/Statism/Socialism.

But that's not to say there is no progress, or that libertarians are completely off base. Sometimes society gets more of both social and political freedom, and it is worth striving for. And I believe in constitutional guarantees of political freedom, precisely because politics is the most effective means of social progress. That is, many of our most unjust social traditions, e.g. slavery, ultimately had to be overcome in the political sphere. It took an Abe Lincoln to orchestrate emancipation. It took a Gandi to break down the unjust traditions of Hinduism. And maybe it takes an Al Gore or Obama or McCain to point out the injustice of environmental degradation. All of this entails political force, less political freedom. Without political power as the focal point, it seems social progress is terribly slow.

The bottomline is we must acknowledge the trade off, but favor political freedom over social freedom through heavy reliance on constitutional guarantees. Nose-picking is optional.

Starting over in New Orleans, Mancur Olson style

2008-08-19T23:01:00.005-05:00

When I asked Paul Vallas what made New Orleans such a promising place for educational reform, he told me that it was because he had no “institutional obstacles” — no school board, no collective bargaining agreement, a teachers’ union with very little power. “No one tells me how long my school day should be or my school year should be,” he said. “Nobody tells me who to hire or who not to hire. I can hire the most talented people. I can promote people based on merit and based on performance. I can dismiss people if they’re chronically nonattending or if they’re simply not performing.”

Read the rest from the NY Times.

Also, the EIA looks into who's paying the bills in Denver.

The Olympics sells much better than the Capitalism

2008-08-14T20:48:00.011-05:00

I'm watching 2 Americans and 2 Belgians play beach volleyball in Chow Yong Park. Why are so many countries willing to fully embrace and compete in the Olympics, historically a Western institution and still slanted toward Western sports and athletes, and yet unwilling to embrace and compete in the historically Western institutions of free trade, property rights, and the rule of law? We in the West get the gold either way, i.e. through path dependence, but the rest of the world is learning how to play beach volleyball instead of how to avoid famine.

Maybe we should introduce experimental economics as an Olympic sport.

The Story of Stuff with Annie Leonard

2008-08-14T11:47:00.007-05:00

Here it is. She claims to have 3 million viewers, so let's try to nip this in the bud.

This is a neatly packaged montage of all the familiar Marxist-Luddite gripes, and still without any real solutions proposed beyond "sustainable development, get involved, click around." This will always be the case because it is an intellectual fraud, most useful for rallying political movements, which in turn destroy millions of lives (USSR, Mao's China, Nazis).

As for her gripes, she is right to blame pollution and externalities, but what she fails to realize is that they are ultimately caused by a lack of property rights, not capitalism, profits, corporations, consumption, greed, etc. If we paid the full cost of disposing of our garbage, e.g. through a private dump rather than having goverment take it away magically, then we'd consume less and be more careful with our refuse.

Child labor is a bit more complicated, since we're talking about countries where child-slavery is still OK. Those countries have a lot of problems, chief among them is poverty. Capitalism can fix that. It worked in Europe, it can work anywhere. That's not to say that moral pressure from the world community isn't effective, especially in the short term, but ultimately we must let these countries get rich through capitalism and free trade. And remember that perhaps the most important thing we trade is ideas.

(Hat tip to Sammy, who also pointed me to this gem, a guy discussing the Georgia-Russia war with peanut butter on his face.)

Anthony Bourdain and Ted Nugent

2008-08-06T11:31:00.004-05:00

...make great TV. No Reservations is the best travel show I can imagine, the only one I can stand. From Anthony's blog:

I didn't seek Ted out, by the way. I was summoned. He called a while back, said we should make television together - -and then told me exactly how. When the Nuge says jump? You ask only "How High?" and "How much ammo will I need?" In TedWorld, by the way, it all makes perfect sense.

Here they are discussing the negative externalities of obesity.

I can't wait for next week's Tokyo episode.

New book about Teach for America

2008-08-05T12:24:00.005-05:00

Relentless Pursuit by Donna Foote. Here is what the Weekly Standard says about it:

The last few chapters are especially fascinating for policy enthusiasts as they offer a hopeful look at the changes taking place in public education. TFA teachers at Locke launched a special "academy" within the larger school that was showing promising results. An important component of the academy was an extra period that allowed teachers to spend time with students in subjects where they needed extra help. The TFA teachers persuaded Locke's principal to call a teachers' meeting to discuss making the extra period a schoolwide reform.

When the TFA teachers made impassioned pleas to their colleagues regarding the need for more class time, the teachers' union rep coldly retorted: "If you guys want to work 20 percent more, and not get paid 20 percent more, then vote for seven periods." The teachers voted down the proposal to extend the school day by a 72-to-36 vote. (Interestingly, Locke students supported the idea of a longer school day.)
But the story does not end there. After the 2005-06 school year, several TFA teachers left Locke to start two nearby "Green Dot" charter schools where bureaucracy and union work rules would not be an impediment to student achievement. These schools immediately proved so successful that Locke's principal, Frank Wells, saw the light and decided to join forces with Green Dot. After a protracted struggle with the union, Wells was able to convince a majority of Locke's tenured teachers to sign a petition that would allow the school to convert to charter status. Last year the Gates Foundation provided $8 million to fund Locke's transformation into 10 small Green Dot charter schools, and the new Green Dot Locke campus opened its doors last September--minus 22 incompetent teachers Wells had long sought to get rid of.

My sympathy makes me nonexpressive

2008-08-03T23:55:00.005-05:00

Will Wilkinson summarizes The Theory of Moral Sentiments:

We are naturally sympathetic. Of course, our sympathy is rather limited and weak. But because we are sympathetic, we sympathize with the weakness of others’ sympathy. So, being sympathetic to the limits of others’ sympathy, we mute the expression of our own emotions, so that others will not be made uncomfortable or burdened by their failure to connect fully with what we really feel. And, likewise, we appreciate it when others do this for us. A sympathetic person doesn’t put other people out. Observing many instances of this pattern of praise for the sympathetic accommodation of weak sympathy (”thank you for not asking me to be that sad for you!”), we produce a general rule. And then we apply it to ourselves and come to disapprove of freely expressing unmuted emotion even when alone — even though we are actually having our emotions and not trying to sympathize with them. Our natural sympathy, wedded to the general weakness of sympathy, generates an individual conscience that demands that we be no more emotional than other people are ready to handle. Therefore, stoic self-command is awesome. “It’s OK! Just let it all out.” Nonsense! Why would you so rudely embarrass yourself with your own emotions?

I hope my girlfriend is reading this.

What happens when politicians set prices

2008-07-28T10:22:00.004-05:00

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.

...

Malaysia’s government incited public anger on June 4 when it raised gasoline prices by 40 percent. The prime minister, Abdullah Ahmad Badawi, announced the following week that he would retire, although he has since said that he will not do so until 2010.

Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.

China and India are up there too. Read the rest here. In other words, as a percentage of GDP, many Asian countries spend as much on fuel subsidies as we do on defense.

I can hear you getting fatter

2008-07-27T15:09:00.002-05:00

The Treasury Department gains unlimited power, until the end of 2009, to lend money to Fannie Mae and Freddie Mac or buy their stock should they need it. The Federal Reserve takes on a new "consultative" role overseeing the companies.

The measure includes $15 billion in tax cuts, including a significant expansion of the low-income housing tax credit and a credit of up to $7,500 for first-time home buyers for houses purchased between April 9, 2008, and July 1, 2009.

Democratic leaders, recognizing that the measure could be one of the last items to become law during what's left of their abbreviated election-year schedule, tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt.

Conservative Republicans were vehemently opposed to the bill, particularly the help for Fannie Mae and Freddie Mac. Critics charge the companies enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

Sen. Jim DeMint, R-S.C., delayed the final vote because Democrats refused to allow him a vote on a proposal to ban the companies from lobbying or making political donations to lawmakers.

"We can't have the people who are supposed to watch over these organizations getting money from these organizations," DeMint said. "At least if we're going to ask the American taxpayer to be on the hook for billions, possibly trillions of dollars, let's stop this."

That is sad.

Jobs for experimentalists

2008-07-09T13:09:00.003-05:00

Within the last three years, both Google and Yahoo have built in-house economics facilities of their own to work on such tasks as optimizing their keyword auctions, and dozens of other companies have turned to outside consultants for help on specific projects. EBay used experimental economists to develop a new seller-feedback system that wound up boosting the total value of goods sold on the site by 25 percent, according to the researcher who worked on the project.

Read the rest from Wired. The article mentions Vernon Smith, but alas not the ICES lab that he built at GMU, and where I'm a research assistant.

The real cause of the housing bubble

2008-07-03T10:44:00.003-05:00

But one area in which Cindy McCain’s spending — and its impact on her husband’s lifestyle — can be chronicled is real estate.

Property records show that trusts and corporations controlled by her and her children spent nearly $11 million between the summer of 2004 and February 2008 on three condominiums in Phoenix and a pair outside San Diego.

Read more here. I guess the Austrians are right, bubbles are always caused by government.

The Metro monopoly keeps serving up laughs

2008-06-26T13:20:00.004-05:00

Another question I asked my students was the following:
1) What kind of business is Metro? Are you happy with that? How could it be improved?

The answer of course is it's a sorry-ass government monopoly, which can only be remedied by competition. In the meantime it gets to do things like raise price way above marginal cost, pack people like sardines into rush hour trains, run non-rush hour trains rediculously infrequently, completely abandon bus schedules, put you on hold for hours when you call, run off the rails, open the doors while moving and on the side without a platform, run people over, and waste money on frivolous programs and excessive salaries.

Today's Examiner finds one more reason to laugh or cry or cry through the laughter:

A Metro station manager and a Metro custodian were arrested on prostitution charges after an undercover transit police investigation found they arranged sexual trysts for money from inside the Dupont Circle Metro station.

At one point the employees used the Metro loudspeaker system to facilitate an illicit sexual arrangement, according to police who arrested the pair last week.

I think H.L Mencken's statements on democracy apply equally well to Metro:

I report only that when the suckers are running well the spectacle is infinitely exhilarating. But I am, it may be, a somewhat malicious man: my sympathies, when it comes to suckers, tend to be coy. What I can't make out is how any man can believe in democracy who feels for and with them, and is pained when they are debauched and made a show of. How can any man be a democrat who is sincerely a democrat?

This post is dedicated to Rusty at Why I Hate DC.

Have some fun, shoot the gun!

2008-06-26T12:14:00.005-05:00

Shooting guns is not fun for me, nor do I enjoy chainsaws, but I do believe we should be allowed to own them. Of course there should be restictions on what you do with them and where you use them, e.g. not near my ear. And everyone draws the line somewhere, i.e. no sensible person believes in a right to own nuclear weapons.

So I'm glad the Supreme Court has overturned DC's ban on handguns. That it existed for 32 years, during which time we were named murder capital of the world, illustrates how out of whack democracy can get.

Principles of microeconomics

2008-06-24T13:32:00.004-05:00

I just finished teaching this as a summer school course at George Mason, my first time teaching. I had no idea what to expect, but I'm happy to report that I really enjoyed it. My students were fantastic. We covered 15 of the 16 chapters in Gwartney and Stroup's Microeconomics, an excellent introduction to the subject.

Here are some of the questions I asked on the final, and for which most students gave very good answers:

1) Why are wages lower for women on average?
Answer: Specialization in the household.

2) Is the lottery fair? Explain using the difference between procedural justice and social, or redistributive, justice.
Answer: It's voluntary so it's procedurally just, but it widens income inequality so it's not socially just. See Hayek's "Atavism of Social Justice" in New Studies. (Do you think voters and pols get this distinction?)

3) Why are gas prices so high?
Answer: Many reasons, including supply constraints from OPEC and Congress, inelastic demand, and government subsidies.

4) Why do theaters offer discounts to students and the elderly?
Answer: Price discrimination.

I also wanted to ask a question about the difference between inequality and diversity, but we didn't spend enough time on that.

Cristo Rey schools

2008-06-23T22:17:00.004-05:00

The concept of having students work to earn their tuition was borne of financial necessity. Children like Muñoz are desperate to escape the gangs and low expectations of big city public schools, but few can afford the full cost of a private education.

Over the past decade, though, members of the Cristo Rey network have discovered that requiring students to work does more than keep tuition low. It teaches children that there’s life beyond high school, with its teen-centered obsessions on things that don’t matter. It teaches them that working hard can help them get ahead—a lesson students from far nicer areas than the Pilsen/Little Village neighborhood could stand to learn, too. The model has helped revive Catholic inner-city education, and it offers some lessons for education more broadly. Anyone can create one school that works. The Cristo Rey Network has hit upon one of the few education models that can actually be replicated with reasonable success. It seems to be working everywhere it’s been tried.

Who shall we blame for teen pregnancy?

2008-06-19T11:10:00.003-05:00

I have no idea. Here's the story from Time:

School officials started looking into the matter as early as October after an unusual number of girls began filing into the school clinic to find out if they were pregnant. By May, several students had returned multiple times to get pregnancy tests, and on hearing the results, "some girls seemed more upset when they weren't pregnant than when they were," Sullivan says. All it took was a few simple questions before nearly half the expecting students, none older than 16, confessed to making a pact to get pregnant and raise their babies together. Then the story got worse. "We found out one of the fathers is a 24-year-old homeless guy," the principal says, shaking his head.
...

Gloucester's elected school committee plans to vote later this summer on whether to provide contraceptives. But that won't do much to solve the issue of teens wanting to get pregnant. Says rising junior Kacia Lowe, who is a classmate of the pactmakers': "No one's offered them a better option." And better options may be a tall order in a city so uncertain of its future.

Who shall we blame for high gas prices?

2008-06-19T10:29:00.003-05:00

From the LA Times:

The lines are getting longer, and Tang Yao is finding fewer gasoline stations open in his neighborhood here. But the 48-year-old motorist has no gripes about the price at the pump.

While consumers in much of the world have been reeling from spiraling fuel costs, the Chinese government has kept the retail price of gasoline at about $2.60 a gallon, up just 9% from January 2007.

During that same period, average gas prices in the U.S. have surged nearly 80%, to about $4 a gallon. China's price control is great for people like Tang, who drives long distances in his gas-guzzling Great Wall sports utility vehicle.

But Tang and millions of other Chinese are bracing for a big jump in pump prices. The day of reckoning? Everybody believes it's coming right after the Summer Olympics in Beijing conclude in late August.

"Everything will change after the Olympics," said Tang, a real estate businessman, as he waited for an hour to fill up at a service station in a Shanghai suburb.

Sorry, Tang, it's today:

Oil fell below $134 a barrel on news that China will raise retail gasoline and diesel prices for the first time in 8 months to help refineries recoup losses from record oil prices.

More from the a-holes who are playing with prices:

At a meeting of energy ministers in Japan over the weekend, a senior official at China's top economic policymaking body said the surge in crude prices should not be attributed to rising demand from developing countries such as China and India. Rather, Zhang Guobao, vice chairman of China's National Development and Reform Commission, blamed the high oil prices on speculators.

Which is exactly what our a-holes are doing:

In a pair of lengthy and sometimes testy closed-door sessions in the Senate last week, executives from Goldman Sachs and Morgan Stanley, two of Wall Street's largest investment banks, made the case that their multibillion-dollar investments in energy contracts have not led to higher oil prices. Rather, they told Democratic staff members of the Energy and Natural Resources Committee that the trades allow international markets to operate efficiently and that the run-up in oil prices results not from speculation but from actual imbalances of supply and demand.

But the executives were met with skepticism and occasional hostility. "Spare us your lecture about supply and demand," one of the Democratic aides said, abruptly cutting off one of the executives, according to a staff member in the room.

Another aide at the meetings warned the executives that no matter what arguments they muster, it would be hard to prevent Congress from acting. Referring to a vote earlier this year to impose new mileage standards on automobile makers, the aide said, "At 90 bucks a barrel, Congress rolled the autos for the first time in 30 years -- is it too much to think that Congress will impose more restrictions on you if oil goes to $150 dollars a barrel?"

Guess who's to blame.

Iowa flooding

2008-06-19T10:02:00.002-05:00

"Cities routinely build in the flood plain," Enshayan said. "That's not an act of God; that's an act of City Council."

Since when does DC pass up federal money?

2008-06-17T11:28:00.006-05:00

When the teachers' unions demand it. Here's Dan Lips describing Del. Norton's absurd battle:

How much funding for the education of students is District of Columbia Delegate Eleanor Holmes Norton willing to lose to prove a political point? At least $18 million, apparently.

Del. Norton is using her voice in Congress to try to end the D.C. Opportunity Scholarship program, a federally-funded program that currently helps more than 1,900 disadvantaged kids attend private schools in the District.

This program has proven widely popular with D.C. families. Since it began in 2004, approximately 7,200 students have applied -- about four applicants per scholarship.

...

Unfortunately, Del. Eleanor Holmes Norton remains fiercely opposed to vouchers. She was honest about her intentions: "I can tell you that the Democratic Congress is not about to extend this program." As the House Appropriations Committee considers whether to fund the program, Norton appears intent on leading an effort to block the $18 million in funding for scholarships.

For D.C. taxpayers, this is a costly way to score points in the political struggle over public education. Terminating the program would pull $18 million out of the D.C. public education system and increase the burden on the school budget by sending 1,900 kids back into public schools.

For families with children in the scholarship program, it's impossible to quantify what taking these scholarships away will mean. You can hear directly from participating families themselves by visiting http://www.voicesofschoolchoice.org/. There, families explain how they are benefiting from the opportunity to choose a safe and effective private school for their children.

Conveniently, as the House Appropriations subcomittee considers the issue today, the Department of Education issues a report claiming no significant improvement from vouchers. From the Post:

The congressionally mandated study, conducted through the Institute of Education Sciences, the department's research arm, compared the performance and attitudes of students who had scholarships with those of peers who sought scholarships but weren't chosen in the lottery.
Both groups took widely used math and reading tests, such as the Stanford Achievement Test. Overall, there was no statistically significant difference in performance.

But some groups of voucher recipients showed improvement. For instance, among students who earned relatively high reading scores before the program started, those with scholarships progressed faster and are now about two months ahead of their peers.

Students who previously attended struggling schools -- a group the program is designed to help -- showed no boost in test scores compared with their peers. Grover J. "Russ" Whitehurst, director of the institute, said one possible explanation is that those children lagged far behind academically and had trouble adjusting to what may be a more demanding classroom.

Parents of students with scholarships were more satisfied with their children's new schools and were less likely to worry that schools could be dangerous, the report found. Students showed no difference in their level of satisfaction.

First, the program has purposely been hobbled by its political enemies through regulations and spending limits, precisely to limit any significant effects. Second, insignificance indicates just that, i.e. neither significantly positive nor negative effects. This is not surprising in a new (and hobbled) program. Third, so why give up the federal money? There's no loss to DC taxpayers. Fourth, a little perspective is in order. We're talking about allowing parents and kids, poor parents and kids, the freedom to choose a way out of a miserable state run monopoly. If monopoly is so great, why not expand it to shoe sales, let the government do that. Or consider the beautiful irony of the Senate's monopolized cafeteria, courtesy of Jonah Goldberg:

As befits a government-run commissary, the Senate cafeteria has a decidedly Soviet attitude toward variety. It has averaged only two new menu items a year over the last decade. The food is so bad, every lunch hour Senate staffers rush to the House side of the Capitol, like starving New Yorkers of the future storming the last Soylent Green vendor.

According to auditors, the chain of restaurants run by the Senate food service, including the snooty Senate Dining Room, has almost never been in the black. It's lost more than $18 million since 1993 and dropped about $2 million last year alone. If the food service doesn't get an emergency bridge loan of a quarter-million dollars, it won't be able to make payroll.

So how will the Senate fix the problem? Well, with California Sen. Dianne Feinstein taking the lead, the Democrats -- that's right, the Democrats -- have called a classic Republican play: Privatize it.

The House of Representatives made the switch in the 1980s, and its food service is now better. And profitable: the House has made $1.2 million in commissions since 2003. True to the founders' vision of the Senate as the more slow-moving branch of government, the Senate has taken 20 years to follow suit.

This was a painful decision for many Democrats who believe that privatization cannot be justified simply because it delivers better service and higher quality for less money. "What about the workers?" they cried. Apparently, some in the Democratic caucus feel that the top priority in the restaurant business is to generate paychecks for people who are bad at their jobs.

Feinstein, head of the Senate Committee on Rules and Administrations, was forced to deal with reality. "It's cratering," the Washington Post quoted Feinstein as saying. "Candidly, I don't think the taxpayers should be subsidizing something that doesn't need to be. There are parts of government that can be run like a business and should be run like businesses."

Yes, yes, go on Dianne. Run with that thought. Explore it, as the therapists say.

Perhaps you might meditate on the District of Columbia's public school system, which spends roughly $14,000 a pupil in exchange for one of the worst educations in the country. Every year, one of the greatest mysteries in the nation's capital is whether textbooks have been delivered to the right kids, or even to the right schools. It can take until Christmas to get it all worked out. FedEx Corp., meanwhile, can tell you where any of its millions of packages are in more than 100 countries, right now. (Why not just FedEx the textbooks to the kids?)

And fifth: There's an immense amount of evidence that vouchers work. See Salibury and Tooley's international overview, especially Lewis Andrews chapter on special education.

American weddings

2008-06-15T18:10:00.001-05:00

This is not Monsoon Wedding, this is a real wedding in downtown DC! Manan Shah married Swati Raval at the Ronald Reagan building. He rode in on an elephant. Read more, courtesy of today's Post.

Occasionally I wonder about the extravagance of American weddings. Especially when I'm forced to buy a $100 herb grinder for my friend because that's all that's left on his Williams-Sonoma registry. I've been to a few weddings that probably cost upwards of $100,000. I know some couples who have taken out loans to pay for it. According to this site, the average wedding costs $28,732. What gives? Why not get married in Safeway, as I plan to do?

I figure part of it has to do with credible commitment, i.e. the bride and groom will think twice about redoing such a costly venture. And in this way they are also tying their own and each others hands to some extent. This of course was accomplished by the bonds of marriage before divorce became socially and legally acceptable, with the advent of no-fault divorce, etc. So has the cost of marriage gone up as a result? I can't really tell from this site (or without paying for a subscription), but I would need to correct for increased income anyway. One thing to look at is divorce rates by state and see if that is correlated with average wedding cost. It looks like states in New England and the Midwest have the lowest divorce rates. So I would expect them to have the cheapest weddings.

So does that mean India, with notoriously extravagant weddings, should have high divorce rates? Good luck finding those numbers!

Happy father's day

2008-06-15T12:43:00.005-05:00

I was that one, and my father, flawed in the manner of all those cursed with opposable thumbs, was more than a presence. Judged against the void of paternity around us, he was fanatical. This was as much by choice as by chance; I was the sixth of seven kids born to four women. Some of us were born to mothers who were best friends. Some of us were born in the same year. It was all a tangled mess on paper, but measured against "Family Ties" or even "The Cosby Show," it was love, and it formed my earliest and most enduring sense of family.

We were not allowed to refer to each other with the prefix "half" (as in "half-brother" or "half-sister"), as Dad always told us that the half gets in the way, and when the mother of one spoke, it was law, as sure as if the mothers of all were speaking at once.

That's from today's Washington Post. Is it just me or are our newspapers getting much better?

Dewey Beach 911!

2008-06-14T21:48:00.004-05:00

Battle-weary police forces along the Delmarva shoreline are bracing today for the peak of beach week, when as many as 150,000 high school graduates from around the Washington area descend on seaside towns in droves, without parents, and bearing the threat of mess and mayhem.

Already this week in Ocean City, Md., nearly 100 people have been arrested for raucous behavior — everything from a fight on the boardwalk drawing 500 onlookers to 27 drug arrests in one night alone.

In nearby Dewey Beach, Del., the residents of an entire house were arrested earlier in the week — 25 students on charges of underage drinking and possession of drug paraphernalia.

“Finally saw my first gas-mask water bong,” said Cliff Dempsey, a Dewey Beach police sergeant, describing a seized military-style gas mask with a plastic tube and bowl attached for smoking marijuana.

DC v. New Orleans

2008-06-12T17:26:00.003-05:00

Jay Greene talks about DC vouchers v. Louisianna vouchers. Remember when we competed for murder capital of the world?

Shall we grow bananas in America?

2008-05-22T12:28:00.006-05:00

"The principal purpose of agriculture policy in the United States is to guarantee we're not as dependent on other countries for our food as we are for our fuel," declared House Republican Conference Chairman Adam H. Putnam (Fla.). He broke not only with Bush but also with House Minority Leader John A. Boehner (R-Ohio) and the presumptive Republican nominee, Sen. John McCain (Ariz.), who opposes a bill he has called wasteful.

"If I was a farm-belt guy, I would be all over my district now, saying, 'I stood with you, not the party of the president,' " said Rep. Tom Davis (R-Va.), who wrote to GOP leaders last week, urging them to defy Bush or at least allow rank-and-file members to save themselves. "Anytime you can separate yourself from someone with a 28 percent favorability rating, that's a good thing."

The five-year measure continues and in some cases expands traditional farm subsidies, and it is stuffed with billions of dollars of new money for anti-hunger programs, conservation programs, fruit and vegetable growers, and the biofuels industry. Dairy farmers will get as much as $410 million more over 10 years to cover higher feed costs. House and Senate negotiators tucked in an annual authorization of $15 million to help "geographically disadvantaged farmers" in Alaska, Hawaii and Puerto Rico.
The bill assures growers of basic crops such as wheat, cotton, corn and soybeans $5 billion a year in automatic payments, even if farm and food prices stay at record levels. And subsidies for the ethanol industry will decline only slightly, leaving largely intact support for the biofuel industry, which has been blamed for contributing to higher food prices.
An unusual coalition of urban liberals and Republican fiscal conservatives tried to sustain Bush's veto. "Merely because the president is not the most popular person in the country today doesn't mean he's always wrong," said Rep. Ron Kind (D-Wis.), who pushed for sweeping changes to the farm-support system.
But that coalition was overwhelmed by the larger bipartisan coalition committed to defending rural constituents, food stamp and school nutrition programs, and new benefits for African American farmers. Nutrition programs will consume about two-thirds of the spending.
"This is a bill about feeding the hungry," pleaded Sen. Ken Salazar (D-Colo.). "This president is turning his back on the people of America."
Hundreds of grass-roots organizations, including food banks, supported the legislation. The National Farmers Union rallied more than 1,000 organizations in favor of the override.
"Although it's pork to most of the country, it's prime rib to the farm belt," Davis said.

This is the essence of pork. Read the rest of it here. By the way, this week I started teaching principles of microeconomics, which I believe should include an introduction to public choice. This article will provide a good illustration of the special interest theory of politics.

Education roundup

2008-05-16T22:50:00.003-05:00

1) Alex Tabarrok and the New York Times on New Orleans' new schools.

2) Paul Peterson on the eduction industrial complex.

3) Marion Barry comes out in support of school choice.

4) Juliet Williams on teachers unions busting the budget in California.

Obama's dilemma

2008-05-12T22:18:00.007-05:00

A) This survey indicates that 80% of African-Americans favor school choice, and 70% of African-American Democrats would be more likely to vote for a candidate supporting school choice.

B) 41% of the National Education Associations' rank and file likes McCain, while the 1% in charge do not.

Education reform in DC looking ever more likely

2008-05-06T10:35:00.011-05:00

Mayor Fentry has named Rick Hess and Kenneth Wong as independent evaluators of the city's school reforms. That is yet more good news for DC's kids, maybe not so good for the adult interest groups which stand in the way of reform. Here is Hess on the need to focus on labor market reform:

For two decades, choice-based reform has been unwisely and deceptively offered by its proponents as something akin to a miracle cure that will boost student achievement, unleash competition, and advance core democratic values.

Along the way, little attention has been paid to the design of these efforts to deregulate a $500 billion a year industry, fostering a vibrant supply of effective providers, nurturing effective mechanisms for quality control, or understanding the multiplicity of arrangements and practices that stifle even nontraditional schools and service providers. For instance, the choice community has had next to nothing to say about the need for venture capital in education, about the ways in which personnel policies and benefit systems stifle new ventures, or about how consumer choices should impact the compensation and job security of educators and school leaders.

One result is that some who were once enthusiastic proponents of “choice” have reversed course and expressed doubts about the viability of educational markets — without ever having stopped to consider all the ways in which simply promoting one-off choice programs falls desperately short of any serious effort to thoughtfully deregulate schooling or promote a coherent K-12 marketplace. Indeed, some have abandoned the choice bandwagon with the same ill-considered haste that marked their initial enthusiasm.

For decades, we have poured money into schooling while seeing few obvious benefits. Current per-pupil spending in constant dollars more than tripled between 1961-62 and 2003-04, from $2,603 to $8,886. Pupil-to-teacher ratios plunged, from 25.1 students per teacher in 1965 to 15.3 per teacher in 2007. Meanwhile, educational progress has been disappointing, at best, over the past quarter-century. This is the epitome of pushing on a string. In an economy marked by new technologies, labor-saving devices, steady growth in productivity, and an evolving labor pool, we are hiring and deploying educators just the way we did a half-century ago. The result is that new investments have not delivered the hoped-for results.

In other words, we need to do what is difficult, we need to fire people, and overcome the special interests which protect them. School Chancellor Michelle Rhee is doing just that. God bless her.

Addendum: Good to see the DCist is in agreement.

Wondering why education reform is so hard?

2008-05-01T12:52:00.008-05:00

Largely because the teachers unions have an inside track on pulling down money for themselves, money that could have been used to educate kids. For example:

New York City is paying $81 million over two years in salaries and benefits for teachers without permanent teaching jobs, according to a report being released on Tuesday.

The teachers are part of the so-called reserve pool, which holds teachers whose positions have been eliminated, but who have yet to secure a new permanent teaching position at another school.

The reserve is an outgrowth of the city’s contract with the teachers’ union, which ended seniority rights in staffing decisions as well as the automatic transfer of teachers who had been cut because of shrinking enrollment, the closing of large schools or the elimination of particular programs. At the time, Chancellor Joel I. Klein said he would rather absorb the cost of the teachers in the reserve pool than saddle principals with teachers they did not want.

Under the contract, teachers whose positions have been eliminated from one school and cannot find another to hire them, or who simply do not look for a new job, are assigned to schools to fill in as substitute teachers or temporary replacements. They collect full teacher salary and benefits.

Teachers at those schools are required to show up every day at regular school hours and are available for principals to use as substitutes, but the principals are not required to do so. Officials at the Education Department said they did not track how often the principals used the assigned substitutes, or whether they did at all.

It's not just New York, or the U.S., it's anywhere special interest politics is allowed to prosper. New Zealand in the 1990s came closest to a complete overhaul of education, and yet one institution remained: the teachers unions lobbied to prevent any real changes to the labor market, effectively preventing schools, principles and parents, from choosing their personnel.

As for which candidate is most likely to fight these interests, it's looking like it might be McCain, though Obama may be better suited to negotiate the increasing gap between teachers unions and black voters.

Photos of Tollesbury and Morocco

2008-04-07T12:16:00.004-05:00

On the way back from India we stopped in Tollesbury, England to see some friends. Then we went to Marrakesh, Morocco to see another friend. Then I came home.