Tuesday, January 20, 2009

The Law of One Strange Price

Tyler Cowen at Marginal Revolution is rightly skeptical of macroeconomic explanation that rely on one strange price, including interest rates, tax rates, and the price of T-bills compared to cash. But it's only partly true. Yes, one screwy price is unlikely to mess with the whole economy (even for systematic prices such as interest rates and taxes). But it can if it's screwy enough. If the minimum wage was $100 an hour, there would be a major macroeconomic downturn thanks to that law alone.

The question becomes what is likely to be so out of whack. Interest rates and T-bills are traded on the market, checked and rechecked every day. If there is a systematic error, it's either short lived or relatively small. Taxes are checked as well (by voters), but that happens only every couple of years, if at all. They're also checked in a political process where the "right" tax is determined and spent by lawmakers acting on the voters behalf, instead the voters themselves. Most prices aren't so strange to mess up an economy by themselves. But if one is, I bet it's a tax.

Life Follows Death

During his inaugural address, President Obama rightly reminded us that it is the risk takers that ensure a better tomorrow. Yet he paradoxically argued that the current economic slowdown is the fault of greed and the market needs a "watchful eye." One cannot have both. Risk takers have to fail; otherwise it would not be risk. Pointing to mistakes as evidence of too much risk, of a need to remove bad decisions, necessarily curtails the capacity to make the right ones. We cannot have growth without bankruptcy nor more than we can have evolution without extinction.

The Smell of the Marble

Millions are gathering in the National Mall this morning to bear witness to the swearing in of Barack Obama. There's anticipation in the air that Mr. Obama is something unique and new. A different kind of politician.

He's certainly different (Joe Scarborough mentioned this morning that Obama is less prone to the sin of pride, which undos so many politicians). But the incentives of office haven't changed. Norris Cotton, a New Hampshire senator from the fifties to the seventies, warned colleagues of smelling of the marble, as in the white marble that covers DC. "And when you can smell it, you'll like it. And you'll be ruined for life." Great unchecked power leads to abuse and despite the Constitution's efforts, much of the power in Washington is unchecked.

This goes double for the presidency, whose role has expanded over the centuries but is now joined with a sympathetic congress. It's entirely possible that Mr. Obama, bending to expectations that he's a different kind of politician, will rise above such abuses. But the hero worship is strong and the people euphoric. Unless we become much more scrutinizing, he'll smell the marble.

Friday, January 09, 2009

Traffic Patterns and the Left Lane

Frustrated in DC traffic, a friend of mine wondered why, in the States, people drive in the city about as much in the left lane as in the right while in Europe, the left lane is traditionally held exclusively for people going very fast and passing. This is an excellent question and I think I have the solution.

Americans have low car taxes, free parking, few tolls, and relatively cheap gas. Not surprisingly, we have more cars compared to our European counterparts and traffic is thus much worse. With crowded streets, drivers learn it's far better to drive in the left lane if they're planning to turn left, even if the turn isn't for miles. No one wants to miss a turn because they never could claim a spot in the correct lane. Thus people drive in one lane as easily as they drive in the other.

The same can be said of interstate traffic, though the story's slightly different. With so many cars on the road, there's greater likelihood that the right lane will have an unusually slow driver. Constantly passing in and out of the right lane to avoid these drivers might induce the faster car to simply stick with the left lane, even though an even faster car will likely be stuck behind it soon. Thus we see very fast cars weaving through traffic, blazing a sort of third lane.