Monday, May 31, 2010

Brad DeLong Channels His Inner Shopaholic

Addressing Tyler Cowen's take on the crisis, Brad DeLong writes
So I don't see how Tyler then gets to:
But even if that fiscal policy is a good idea...
Where does the "but even" come from? I see no "but even" earlier in the market: the cost of borrowing for the government has fallen--the market value troday [sic] of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea,
Just because something's cheap doesn't mean you should buy it.

To DeLong's credit he acknowledges that the low interest rate means fiscal policy passes various cost-benefit tests. However many economists question the fundamental effectiveness of expansionary fiscal policy; indeed, this is exactly what Cowen was addressing. That then puts into question every cost-benefit test you can cite. I don't care how pretty the dress is. If it turns out to have a big hole in it, the sale doesn't matter. Not unless they pay you to take it. (And a negative interest rate is the only condition I'd like to see the government borrow at this point.)

Thursday, May 27, 2010

Governance Is Not the Same Thing As Action

In response to Sen. Hatch's stanch opposition to any tax increases in Obama's announcement to reduce the deficit, Ali Frick asks
How is it that fundamentally unserious people — people who do not want to govern and have no business governing — keep running for and winning governing office?
Because the constituents know he's governing; he's just not governing the way you want him to. And since they're right-wing and you're left-wing, that's exactly why they re-elect him. Reducing the deficit almost certainly means increasing taxes but battling another branch of the government, even if it means to stone wall, is a political tactic. And such tactics are used to manage the Union, even if management means preventing harmful policy. Especially if it means preventing harmful policy.

The Mbaiki Witch Trials

His principal advice to clients, he said, was to act normally and refrain from casting any spells in the courtroom.
That's from this article about witch trials in the Central African Republic.
By some estimates, about 40 percent of the cases in the Central African court system are witchcraft prosecutions. (Drug offenses in the U.S., by contrast, account for just 12 percent of arrests.) In Mbaiki—where Pygmies, who are known for bewitching each other, make up about a tenth of the population—witchcraft prosecutions exceed 50 percent of the case load, meaning that most alleged criminals there are suspected of doing things that Westerners generally regard as impossible.
But how does the court determine if someone's a witch? Surely it can't be as sloppy as just arbitrarily declaring yes or no just by looking at them.
I asked how one determined guilt in cases where the alleged witches denied the charges. “The judge will look at them and see if they act like witches,"
Wow. Well surely this witchcraft law is actively trying to be repealed by local groups and international NGOs alike. I can't imagine any reason to keep this law on the books.
[an Italian group called COOPI that exists to promote human rights and the rule of law] supported keeping the laws on the books, for pragmatic reasons: if people thought witches could hex with impunity, mobs would simply seize the alleged offenders, bring them to a pit, and bury them alive.

HT: Alex Tabarrok

Thursday, May 20, 2010

Yglesias on Paul on Civil Rights

I enjoy reading Matthew Yglesias and more often than not, I learn something new. But when it comes to politics his brain seems to fall out of his head:
....Rand Paul let the cat out of the bag and admitted that under his brand of libertarian conservatism he can’t support the 1964 Civil Rights Act or other non-discrimination legislation as applied to private businesses. He goes out of his way to explain that he doesn’t actually favor segregated lunch counters, he just thinks it would be wrong to do anything about them.
No, no he doesn't. Not supporting the law is not the same thing as being indifferent to the injustices of Jim Crow unless you're foolish enough to think that the only instrument of good in this world is government. This isn't to say that the 1964 bill wasn't a good idea but it wasn't the only possible way to eliminate segregation.

Tuesday, May 18, 2010

Costs and Benefits of Virtual Federalism

Arnold Kling and Tyler Cowen argue for virtual federalism (VF) to solve the Middle East conflict. Arnold Kling explains
I would like to have a different sovereign, but without having to move. Under virtual federalism (as proposed in the widely-unread Unchecked and Unbalanced), we would unbundle the services that the County provides. I could then contract with another provider for trash collection, snow removal, fire protection, or other services.
My initial thought is that this results in lots of important questions related to geographically-derived economies of scale. If several people have different sovereigns, then you've created a mix match of territory a government has to cover. With trash collection, this isn't a huge deal--workers just has to drive around everywhere, probably with an on board computer, and collect from customers. Kind of like UPS but in reverse.

But the logistics of snow removal get absurd. Trucks would have to lift their plows when they pass an outsider's home, which keep banks of snow that your neighbors have to navigate around. If you live in a cul-de-sac and two guys on either side of the street at the mouth of the dead end get their snow removal from someone far away, and the snow is bad enough, those on the inside get snowed in even though the snow plows have already passed. And since any local government would focus on the areas with the highest concentration of customers (which will probably be the neighborhood nearest the snowplows), those on the inside of the cul-de-sac could wait for a while.

Okay, so you could say that a path's made to link trapped areas with everything else, but how do you handle fires? A fire in one house can spread to another depending on wind. If the fire department for the home on fire is located farther away than the department for the neighbors, you'd get fire fighters arriving to contain (but not put out) the fire while someone might be inside suffocating. It seems remarkably inefficient.

But it still could be optimal--I don't know how much waste fire departments would eliminate in response to competition nor do I know how much people will opt to go for the closer department simply because it's closer (which would mitigate the impact of the first issue). But I suspect that time-sensitive services will be less efficient than than services that are not time-sensitive.

You don't really care when your trash is picked up, as long as it is picked up sometime that day. But the local governments want their trash route to be all in the same general area to makes it cheaper to pick it up. So trash services will be pretty good: they will make recycling easy for you, they take a large variety of trash (furniture, e-waste, yard waste). They know you'd easily change to a farther away government (because you don't really care) and the costs of many people leaving is high relative to the benefit, so they will work hard to keep you.

Time-sensitive services like fire fighting, snow removal, and water pipe repair will get worse because governments know it will be more expensive for you to go to a farther away competitor. If the plows nicks your car, you might let it slide because you're not willing to switch allegiance to a distant competitor where you'd have to wait an extra hour or two while he takes care of people who are close by.

Competition is not immune to waste and I'm not sure if this system has less of it. But VF buys peace in Jerusalem, then I'm sure it's worth it. But for us? Seems cheaper just to move.

Sunday, May 16, 2010

The House of Econometrics

Last week Russ Roberts interviewed Ed Learner about econometrics. They noted, quite correctly, that any given econometric study has a lot of arbitrariness of it. the author of any work can jiggle the model until s/he gets the desired results. This is a problem and every economist knows it. And because we know it, it takes a lot of studies saying the same thing to be convinced of anything. A brick is too small to build up a house, so we get a lot of bricks. A single study is too precarious to hang a major conclusion on, so you get a lot of studies.

This is crucial because Roberts often points out that whenever he asks another economist to point to an econometric study which changed their opinion on economics, he doesn't get an answer. Of course he doesn't get an answer; no study is good enough! It's like asking which brick of a house holds its roof up. All of them do. But unless you've specialized in the field, you can't remember all of the studies. You probably haven't read them all (hence it appears that studies just confirm people's belief).

Which is why Roberts' question is a bit of a red herring. Intellectual houses are built over decades--it takes that long to get enough studies done. That's why the process of adoption is so slow and why it looks like it doesn't convince anyone. Yesterday's studies convince tomorrow's economist.

Thursday, May 13, 2010

There Ought To Be a Law

I'm not too fond of new laws but new CBO estimates for the health care bill tack on an additional $115 billion (silly them; they forgot to consider administration costs and other spending). Each new bill (or bill for which the CBO makes estimates for), should include a clause that if it turns out the bill is much more expensive than originally estimated, it should be automatically repealed and put to a re-vote. A lot of people defended this bill because it would help with the deficit; now those costs undo most of that (and you can be sure these costs will only go up). Those supporters have been duped and a re-vote seems to be the only fair way to fix the wildly inaccurate estimation.

But I guess Congress is too busy blaming banks for misleading customers.

Update: Most of that increase is the continuation of existing programs and isn't really part of the bill. Still, there ought to be a law.

Tuesday, May 11, 2010

Flying the Quiet Skies

Christopher Elliot has a nice piece on loud children on planes, suggesting planes ban parents who have proven to let their children scream. Elliot admits that after his first plane trip with his three kids, he realized he couldn't control them and grounded his family. That's a wonderful sentiment and I wished more families were as concerned about their externalized costs as Elliot is. But it's just not a practical solution. Suppose a family emergency necessitated speedy travel: would he still refuse to fly? I doubt it. Therefore, the optimal solution isn't a corner solution.

Instead, we could use a Coasean solution (well, Coase-like since transaction costs are too high for full bargaining and we're not focusing on the least cost avoider). Airlines would amend the agreement when you buy the ticket (which already includes clauses about when you can cancel the reservation, etc) to include a provision that if the stewardesses feel your child is too loud (perhaps in part based on customer complaints), they charge some additional price based on the length of the flight. To prevent the company from saying anything is too loud and to compensate those suffering from the screaming child, the airline then reallocates that money to those in the seats nearest the screaming child.

This system punishes those parents who don't control their child (generating the incentive for them to be better parents or avoiding flying altogether) while still allowing them to fly if they feel circumstances warrant it. The costs to the airline would be small since so much passenger information, including credit card numbers, is in their database anyway. But it's not zero, so there's an incentive to not report every little scream as a violation.

Monday, May 03, 2010

The Housing "Crisis" Was in the Past

On the housing crisis John Stossel asks of real estate lobbyists "why is the price drop a crisis? Sellers are hurt, but buyers benefit." True enough, if oil prices fell as fast as housing prices, the only ones who would call that a crisis are environmentalists. So why are falling prices a crisis? They're not. They are a sign we were in a crisis. It only seems like a problem because the cure is more painful than the disease even though it is less fatal.

Falling prices mean we over-invested in housing. That was a mistake in the past; had there been less investment in home building, there would have been more investment elsewhere and, since housing prices fell so much, we can confidently say that the "elsewhere" would have been much more productive.

Falling prices means people were over-dependent on the value of their homes when they used it to back a loan. This is particularly bad for banks who collect these homes when people defaulted. If housing prices were lower (as they should have been), banks would have demanded more collateral, which would have reduced today's defaults and today's cost of defaults. There's an element of the financial problems in this as well and certainly the housing mis-allocation contributed to it.

The inflated housing prices in the past is like a bad relationship. The break up might be messy, but the problems were in the past.

Saturday, May 01, 2010

The Apartment that Simon Built

It was Julian Simon who wrote in the Ultimate Resource 2 (p12):
Greater consumption due to increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen.
In Hong Kong, population density means space is at a premium. Responding to high rents and tight quarters, architect Gary Chang found a way to fit 24 rooms into one.

The narrator calls the house "a technological marvel" but there's nothing in inherent the idea which prevents it from being implemented 10, 20, or 50 years ago (and to lesser degrees, such an idea has been used before). What's important is that all this amazing apartment took was hard work and some creativity, effort that might not have been worth the time if Hong Kong had fewer people in it.