Wednesday, May 28, 2008

Asbestosis Gone Wild

A court in New Jersey recently ruled Spanish citizens can now sue Owens-Illinois and other asbestosis-related firms based on exposure from U.S. ships. This does not have to translate into actual harm from the exposure. Like most asbestosis litigation, post hoc ergo propter hoc works just fine in the court of law. Indeed, the even possibility of harm is enough to cost Owens-Illinois. To punish firms so overwhelming cheapens our society in two ways.

First we get too little asbestosis. Asbestosis is not evil and its optimal amount is not zero. It's useful and safe in many areas of our society. (Indeed, its wide application is why asbestosis litigation never seems to go away.)

Second we lose good ideas in the process. This is not limited to opportunity costs coming from litigation-related expenses. The possibility of similar attacks can destroy a development before it even starts. If asbestosis litigation can completely ruin an industry, companies are less willing to engage in ideas that they think could be twisted down that same route. Sometimes this is good but the level of asbestosis litigation likely makes firms so risk averse that the net effect is undesirable.

This second issue is critical but often ignored because this lost opportunity is never seen (be definition). It makes it difficult to estimate the true cost of asbestos litigation. But if the technological and economic progress in the past few decades is any indication, that cost is a lot higher than most people might think.

Tuesday, May 20, 2008

Order At A Bargain

This week on EconTalk Allan Meltzer poetically reminded us that
A country that won't experience a small recession will end up having a big one.
Free markets are messy things and it won't be perfect all the time. Nothing will be perfect all the time. We must remember that slowdowns and corrective recessions are the price we pay for the benifits of a dynamic and enriching society. And we're getting a damn good deal.

Monday, May 19, 2008

If You Build It, They Will Ride

Paul Krugman claims Americans face a paradox as we adapt to higher oil prices and away from our suburbia lifestyle.
Public transit, in particular, faces a chicken-and-egg problem: it’s hard to justify transit systems unless there’s sufficient population density, yet it’s hard to persuade people to live in denser neighborhoods unless they come with the advantage of transit access.
This is not really a big problem if you remember your marginalism. Extend a single rail line through a residential area. If oil prices are as high as everyone says they are, people will move to that area. Apartment buildings will replace townhouses (and if you're smart, you bought some of that land around the rail before the construction was announced).

Firms solve this problem all the time. Wal-Mart constructs its stores in the middle of no where. It doesn't fret about the low population density (it prefers it, actually) because it knows people will come to it. Same goes with any large scale project that people will want. Assuming, of course, they want what you're building.

Wednesday, May 14, 2008

All Bad Stuff Isn't Worth Avoiding

As the semester closes, a student came in to collect his final and we got to talking about immigration. He's concerned about illegal immigration, largely for security reasons. Keep out the illegal immigrants and you'll to keep out the terrorists. It only takes one to make a disaster, after all.

But the optimal amount of terrorism (or pollution, accidents, illiteracy) is not zero. It might seem so because we really don't like seeing bad things happen (terrorist attacks being some of the most tragic) but complete prevention is a very costly thing to do.

Reducing terrorism requires the command of a vast amount of resources. Thus increasing security reduces the amount of things we can do (workers are busy patrolling borders). This "opportunity cost" is can actually cost lives: doctors tend soldiers with heat stroke instead of citizens with heart attacks. Terrorism reduction through border control also reduces the number of people who peacefully work in the US (the vast majority of them) so our opportunity cost deepens. We not only have fewer people producing other things, we have fewer people producing at all.

The cost of terrorism reduction increases faster than it falls. Picking out the obvious amateur is pretty easy, but once all the easy guys are caught, tracking down the elusive expert is much harder. For each percentage point closer to zero we get, that single point costs more and more. Our "increasing marginal cost" puts a tremendous amount of strain on our economy without obvious benefit beyond that one more person captured.

Preventing terrorism in the U.S. is particularly expensive. The country's size makes it that much harder to find terrorists. Its decentralization means any terrorist attack will have a small impact on the functionality of the country. Its productivity means that we are giving up so much more when we wander the desert looking for illegals. The accounting costs are very high. The opportunity costs are very high. The benefits are pretty low. Zero is not the optimum.

Tuesday, May 13, 2008

Playing with Statistics

Bill Moyers appeared on The Daily Show tonight and fretted over the rising gap between "the rich" and "the poor." That these terms are arbitrary and vague didn't seem to bother him. Nor did he seem to mind that the numbers are useless. Comparing a gap now and a gap twenty, ten, or even five years ago assumes nothing else has changed.

But lots of things have changed, including the people the numbers are looking at. People are moving higher up in incomes and starting at lower incomes (because of immigration, more schooling, etc). This is a great scenario but Moyers' naive examination of it would suggest disaster. When we follow the individuals (which we don't do enough of so the data is a little old), "....the bottom 20% in 1975 were also in the top 40% at some time in the 16 years follow." (Sowell, p135) Here's a table from Steve Horwitz's page that gives us a more complete picture:

Income Mobility 1975 to 1991 (UM Data)
Bottom 20% (1991)Fourth 20%Middle 20%Second 20%Top 20%
Bottom 20% (1975)5.114.621.030.329.0
Fourth 20%4.223.520.325.226.8
Middle 20%3.319.328.330.119.0
Second 20%1.99.318.832.637.4
Top 20%0.92.810.223.662.5

Sunday, May 11, 2008

Why Are There No CEO Assassins?

My newly found of love of Burn Notice reminds me of a question Robin Hanson posed to use a few weeks ago. Why don't firms assassinate the CEOs of their competitors? It seems pretty strange but industrial sabotages is an old practice and a highly paid CEO is the lynchpin of the company.

It's not like it would be that difficult to get away with it given the resources these firms have at their disposal. Besides, most murders don't get solved if they are done halfway smart and pulled off by someone not in the system. Mob families have contract killings all the time (using "all the time" in a loose sense). So why aren't CEOs dropping like third world dictators? Here's a few theories.

Rule of law. This is a bit of hand-waving but it's worth noting that my above examples of common assassinations (mobs and developing nations) take place in contexts where the rule of law is precarious at best.

Externalized benefits. Your gain is your third party's gain. But she's also your rival and didn't have to pay for the hit. Even if just two firms are the biggest boys on the block by far, the threat of a new competition (which would surely arise) could get you to shrug your shoulders. Why off the CEO of Pepsi when that will allow another Pepsi to rise up? Meanwhile, Pepsi's still there and now you have two rivals.

Retaliation. This is how mob bosses (and some nations) keep the peace. A CEO is less willing to off his counterpart if he believes they'll respond in kind.

Built in redundancy. In a weird way, every firm large enough to make the risk worth it is prepared for it. It's likely not explicit, but every shareholder knows their CEO could have a heart attack or die in a car accident. If the CEO is worth his salary (and the economic analysis suggests he is), then he's worth taking out an insurance policy for. This means there are other guys who know just as much about the firm and are probably almost as good as the guy in charge. True lynch pins (such as Steve Jobs and Warren Buffet) are rare. Ok sure, you could just take out the back ups, but how do you know who they are? And more than one mysterious death will raise attention--the chance of getting caught rises pretty quickly with each additional dead body.

Shhhhhhh. Of course for all we know CEOs are killed, but we just know them as heart attacks and horrible accidents. Remember the whole idea is not getting caught.

Saturday, May 10, 2008

Upcoming Final Exam

I hope my money and banking students can answer the following:

Select one of the methods we discussed on how expansionary monetary policy increases GDP (there were five in total, from lecture 19) in the short run. Detail the logic (i.e. the series of causation) of why this avenue of monetary expansion increases GDP. Why won’t this work in the long run? At what point in the causation does the method you selected stop working? Why?

Sunday, May 04, 2008

Why Banks Hate Foreclosures

In the mess of the sub-prime collapse, you occasionally hear that the banks purposely lent to people they knew couldn't pay back the loan. This why they get the loan money and keep the house. Seems like a pretty good deal. Why don't banks do this all the time?

Banks are a business--they don't really want the house, they want the money. You can't pay your workers with bits of a home. You can't use it to invest. You can really only use it to live in, but all the management staff has a place to live already. Homes are what economists call "illiquid" assets--assets that can't turn into other things easily. Banks prefer liquid assets such as bonds, futures contracts, stocks, and cold hard cash.

Can't the bank just sell the house it forecloses? That is what they try to do, but each day it takes costs the bank money in the form of lost opportunities. CNN reported that people who gave up the home to the bank tend to trash the home. They rip out piping, steal toilets, take out cabinetry, lay claim to fixtures, and punch holes in the wall. One family grabbed a pair of decorative columns from a home. Homes like these have to sold at a discount or the bank pays to fix them up. And then they have to pay to keep the house from accumulating additional damage while it sells. It all adds up to time and money down the hole in the floor where the toilet used to be. And banks don't like it.

Thursday, May 01, 2008

There Is No Peak of Progress

James Howard Kunstler appeared on the Colbert Report today promoting his new novel about a world without oil. Kunstler claimed we have hit the peak of oil and now we must get off of oil and abandon our Wal-Mart suburbia ways.

Kunstler is mistaking economics with physics. There's a finite amount of oil, but that's not what we care about. We care about energy. As the price of oil rises we find new sources of electricity. We improve wind, solar, nuclear, coal, geothermal, and oil efficiency. We find new deposits, including things we never considered oil before. Someday we will not use oil, but it will be phased out, not ripped away. Kunstler imagines the oil wells "drying up" will come as a surprise--a paradox concerning that's what everyone talks about. Assuming ignorance on the part of the oil companies (who's fortunes are made on the stuff) is patently absurd.

Colbert wisely (though I doubt he meant it this way) brought up the terror of Y2K, asking "When's that going to hit?" I remember the scares of the millennium bug vividly, the concern that planes will fall out of the sky and the world will suddenly end. It didn't. No one wanted to go back to the Stone Age so programmers fixed the problem. Now we are better off than we were eight years ago, and the Y2K scare a distance and quaint memory. Kunstler's novel will surely follow the same path.