Externalities Everywhere

Real live politicians continue to outdo late-night comics and their writers -- not to speak of George Orwell, wherever he may be. The Guardian of May 26 reports the following:

"The good news for Singapore's army of clandestine chewers: gum is going on sale legally for the first time in 12 years. The bad news: if you want some, you will have to register as a gum user and show an identity card every time you buy a packet. ... Nineteen 'medicinal' brands of gum such as Nicorette will now be available as part of a free trade agreement with America, but only on strict tightly-policed conditions. Anyone found trading illicitly will risk two years in jail, and a $S5,000 (1,650 Sterling) fine."

The article goes on to mention unsightly splats of disposed gum on sidewalks, etc.

Externalities (and antidotes) everywhere.

Tort Costs

The Financial Times of May 28 (sorry, I cannot link without agreeing to a 15-day trial subscription) reports on international comparisons of tort costs as percent of GDP. They are:

Denmark 0.4
UK 0.6
France 0.8
Canada 0.8
Japan 0.8
Switzerland 0.9
Spain 1.0
Australia 1.1
Belgium 1.1
Germany 1.3
Italy 1.7
U.S. 1.9

Depending on how one counts, we are the champions.

What explains the differences? Is it culture? Is it economics? Can we ever know?

America's lack of a loser-pays (contingency fee) system has been thought to be one cause of the problem. Defenders of our system argue that it is the best way to level the playing field.

Interestingly, the U.K. is the favorite example of loser-pays, the EU countries are thought to be closer to the U.K. and Australia's is an amalgam of U.S. and U.K. approaches. Jane Stapleton gives many more details.

The FT data do show that the U.K. and the U.S. are at opposite poles and that Australia is about half-way between them.

Bigger samples and we can get beyond the anecdotal. Good international cross-sectional comparisons are still the way to go.

Easy Bets

One easy way to win bets with Europeans (or other takers) is to insist that the latest goofy U.S. trend will soon be taken up by the Europeans. Obesity is the subject of the current hand-wringing. The U.S. is no longer the only place on Earth where the rich are thin and the poor are fat.

The European papers are full of solutions. Ban fat people from restaurants? It is seen by some as the logical extension of banning smokers from bars. Talk about slippery slopes! Many English are concenred( embarrassed) that the Irish did it first.

In a recent satire piece in the WSJ, P.J. O'Rourke speculated on the many benefits of the U.S. recusing itself from the world (Iraq, the UN, etc.). He concluded with the thought that they would like us again; they would line up to see our films, buy or magazines, watch our TV shows (or copy them).

Actually, we export; they import. Trade surplus!

Three Hypotheses

Well done international cross-sectional comparisons (even better if via panels of data) are cropping up more and more often. There will be many more of these as the data improve. For the social sciences, this is the way to go. The influences of culture and policies can be more sharply identified if such studies are done well. Giuliano and Narayan recently did exactly that to show that UK and US personal travel choices are more similar than dissimilar.

Can it be that culture and politics take a back seat to people's preferences? That the latter are remarkably similar over the world? That markets everywhere respond and cater to these?

Visit the suburbs of European cities, not their touristy centers (Disneylands for adults). Absent better measures, consider that shopping,living and playing are much more similar than dissimilar.

One day we'll measure the extent of similarity. It is a good bet that the three hypotheses will stand up.

Cynics and Exploiters

University presidents are most sanctimonious and hypocritical when it comes to college athletics. It is well known that the big schools/programs raise huge sums while participating in a legally sanctioned cartel (the NCAA) that exploits some very poor people.

In fact, this episode is one that legitimately earns the label "exploitation", a term that is widely used but seldom so applicable.

The new NCAA President, Myles Brand, is a former university president and he explains all of this much better than I can. His words are cited in a piece in today's WSJ by Stefan Fatsis, who notes that Dr. Brand refers to critics as "self-anointed radical reformers and incorrigble cynics." Yup. It's very hard not to be cynical when colleges take in billions but hide behind sweetheart-deal exemptions from anti-trust rules that assure that the workers get almost nothing, rarely even a college education.

The real exploitation occurs when lawmakers regulate this way.

Light blogging while I am traveling. But, you never know.

More Democratization of Luxury

Dramatic productivity improvements have been translating into significant human welfare improvements for the last several hundred years. As the trend accelerates (not just in the U.S.), some have noted the Democratization of Luxury. Cox and Alm document much of it and Virginia Postrel finds it in ever more examples of improved product design.

My colleague Berokh Khoshnevis is close to developing usable robots that can build homes. He notes that construction is the last major industry to be untouched by modern production methods. His work will soon change that.

Not only will construction costs fall dramatically (Berokh envisions building a home in a day) but the design options available to most of us will also expand significantly. Both are auspicious.

This morning's LA Times includes a wonderful essay by Cara Mullio and Jennifer Volland about the Killingsworth home in Long Beach, California. Homes like this (and many others not even imagined yet) will soon be available to most of us.

Capital Markets, the Web, Human Well-Offness and ButtKickers

This morning's LA Times includes "Answer to the fuel crisis (maybe) can be all yours ... The rights to a motor conversion technology are for sale on Ebay. No minimum bid -- but it does need some work ... Would you like to own the rights to technology that will free this planet from having to rely on oil -- foreign or domestic? It's for sale! On EBay!"

Why not? Buy and sell intellectual property rights on the Web and cut out some more middlemen. Actually, middlemen and other specialists will always be on hand where they can add value. It's just that their fees will now be facing new pressures.

Anything that reduces barriers between investors and inventors is to be welcomed.

Speaking of an improved quality of life, the WSJ's Walter Mossberg writes about the ButtKicker: "A Killer Amp --for Your Desk Chair ... Device Attaches to a Seat To Let Users Literally Feel The Vibes of Music, Games ... Is this a Great country or what? Thanks to technology, you soon will be able to not only hear your favorite music and the sound effects of videogames, but to actually feel these sounds, and not just in your heart and soul."

In a busy shared office space, these would go well with the headphones.

Consumer Sovereignty

Reading "Neither TiVo nor the Xbox nor your Wi-Fi-ed laptop is remaking American culture the way this thing is ... Bet on it ... The Tug of Newfangled Slot Machines" by Gary Rivlin made me accept the premise. Slot machine revenues are way beyond porn's and bigger than McDonald's, Wendy's, Burger King and Starbuck's combined.

These are the new high-tech kind, enhanced with specially made video entertainment clips (Dick Clark's is big), programmable to dribble out winnings at an optimal rate to keep players playing even as they slowly lose -- and with a stylized old-slots look, complete with wheels, beeps and chimes that maintains the "feel" that players like. Rivlin's piece suggests that these devices have the same hold on the beyond-60s set that video games have on younger people.

"The makers of slot machines may rely on the lure of life-changing jackpots to attract customers but the machines' ability to hook so deeply into a player's cerebral cortex derives from the more powerful human feedback mechanisms, a phenomenon behavioral scientists call infrequent random enforcement, or 'intermittent reward' ... 'The slot machine is brilliantly designed from a behavioral psychology perspective,' says Nancy Perry, a professor of psychiatry at the University of Connecticut School of Medicine ..."

Rivlin's coverage mentions no cognitive scientists among the creators. There is a mathematician that helps to fine tune the odds but the creative side is all industry types. They somehow get it right without PhDs. It's their business and that's what profit-inspired competition routinely does.

I simply must compare all this to the white elephants alluded to in yesterday's blog which are failures because their creators have no clue about what people want. How can they? No competition, no profit and only specialized knowledge of what people should want.

Social Engineering is Hard Work

The ten-year anniversary of the opening of the Chunnel, reports Christian Wolmar, goes unheralded because it has been an underperforming disappointment.

Let's see. People cannot drive through it (they can "transfer" cars onto and off shuttles and they can ride the Eurostar train) and airline deregulation in Europe has dropped cross-Channel airfares. My London-Berlin flight last year cost $25 (and $35 to have the ticket express mailed to LA). And this is Europe where gasoline prices are much higher than anything Americans have seen.

What do planners in Los Angeles want to build? High-speed rail to remote airports and high-speed rail to compete with north-south intrastate air and auto travel.

Just like the Chunnel, the price tags quoted are in the billions, almost all local planners and politicians are on-board. The proposals are seen as good ways to "get people out of their cars."

Tough Mom Needed

The NY Times comments on Mercedes' slip in quality rankings, along with the same occurring for other German classic brands. The story also remarks that new EU rules may nix the Made in Germany label, in favor of the new Made in the EU. Economic integration may be a good idea but the EU example presents problems -- including an ugly currency replacing some much more intriguing designs.

The Economist also chimes in with respect to Germany's economic problems and the slow pace of labor market reforms. Writing about an important reform commission: " ... The Hartz Commission, established to reform the labour market and create new jobs, has sociologists on board but not a single economist."

Economists aside, is there a Margaret Thatcher in Germany's future? It took a very tough lady to change Great Britain's course. Germany's troubles require no less. Mother's Day is a good time to start the search

Postscript to yesterday's blog. Anna Schwartz adds that an important part of the story is Friedman's steady work as a popularizer of important ideas.

Ideas Matter

Milton Friedman reiterates his own changed view of the Fed -- because it has changed -- because economic thinking has changed -- because Friedman-Schwartz showed the way. All of this from Friedman's Reflections in the recent Cato restrospective, A Monetary History of the US: After 40 Years. From Friedman's brief opening essay:

"In an April 15, 1988 WSJ op-ed, I wrote, 'No major institution in the U.S. has so poor a record of performance over so long a period as the Federal Reserve, yet so high a public recognition.' That conclusion was, I believe, amply justified by our book and experience in the quarter century after its publication. Fortunately, as I wrote in a WSJ op-ed of August 19, 2003 ('The Fed's Thermostat'), it no longer is."

"Since the mid-1980s, central banks around the world have reacted to the mounting evidence of monetary research by accepting the view that their basic responsibility is to produce price stability. More important, they have succeeded to a remarkable extent as they have discovered that far from being a trade-off between price stability and monetary stability, they are mutually supporting. The variability of prices is less by an order of magnitude since the mid-1980s than it was before, not only in the U.S., but also in New Zealand (the first country to adopt an explicit inflation target), Great Britain, Euroland, Japan and elsewhere."

Ideas matter and good ideas have a way of being heard. It may take time but it is powerful.

Virtuous Cycles

There is increasing evidence that property rights are the most important basis of economic development. Surprise. Solow's 1956 paper still gets a lot of play but my undergrads are consistently reminded that technological advance does not descend on us spontaneously.

Indeed, there is increasing evidence for a virtuous cycle, whereby prosperity and property rights reinforce each other and co-evolve. This is probably the best explanation for our long-term increasing affluence, longevity, etc. The latest Cato Journal features yet another contribution to these ideas, by Bernard Heitger.

And the news is even better. The latest Journal of Economic Literature includes a survey by Brian Copeland and M. Scott Taylor which demonstrates that we also get more concern and care for the environment along the way. Higher incomes are also good for the environment.

What's not to like?

Productivity

The latest productivity readings (for the first quarter) look very good. When economists speak of "the fundamentals", this one has to be very near the top. We also enjoy a system where the fruits of these advances are quickly brought to market and the benefits disseminated to workers, investors and consumers. This is on top of the underlying good news that we live in a world where creativity and risk-taking are on the move.

There are always two "jokers" involved when one attempts to connect good news like this with rosy forecasts. They are the international scene and the oddball policies that politicians might come up.

It is, therefore, all the more remarkable that economic progress continues. The underlying economy is much stronger than the data show. We get over 5% of annual productivity growth in a system that has to discount the two jokers.

Livable Cities

Livable Cities are all the rage among planners. There are even lists of such places.

Consider that the top-ten U.S. counties in terms of adding most private sector jobs in 1991-2001 were Maricopa (AZ), Harris (TX), Dallas (TX), Clark (NV), Los Angeles (CA), Orange (CA), San Diego (CA), Cook (IL), Santa Clara (CA) and New York (NY). Not surprisingly, there is very little overlap between these (and the next 20) and the 30 "most livable". (Admittedly the jobs data are for counties, not cities, but the point holds.) Perhaps economic opportunity is no big deal for the list makers.

The most livable are described this way: "Each of this year's 30 Most Livable Communities have developed innovative approaches to prepare for the New Economy through creative strategies, actions, and visions of their leadership."

Is it any wonder that the two lists are distinct?

Growth

Pay me now or pay me later, (actually, "Pay Taxes, Be Happy") suggests Dan Akst in the NY Times. He is referring to federal deficits and unfunded liabilities with Medicare and Medicaid being the biggest worries. The policy options have been discussed for some time. Higher taxes, lower benefits, "reform" (which these days is the label of choice for all sorts of fixes, many of them not so good), or some combination of these.

So, can we "grow our way" out of these deficits? U.S. economic productivity over the last half century has approximately doubled. There are the usual measurement problems but the Cox-Alm data strongly suggest that material well-offness has better than doubled in that time. This performance has been in spite of politics as unusual as the scope and size of government has grown significantly.

No one can predict the future (goes the cliche) but we do all the time. We have no choice. We cannot "know" performance over the next fifty years (the stretch of many doomsday scenarios) but given the choice of a bet on slower growth vs faster growth, I would pick the latter.

Individuals' planning is over a shorter span and this rosy scenario may have limited relevance. Yet, societies do have a longer horizon and doomsday scenarios must be put into long-term perspective. Accelerating productivity is likely as is the relaxation of economic growth "speed limits". This sort of talk occurred in the late 1990s and is now in bad repute. Yet the recent recession was mild. We are all the time too preoccupied with recent events.

Industrial Policy

Industrial Policy has been post-Berlin Wall code for all sorts of government involvements in the economy. When the Japanese economy was doing well in the 1980s, socialists clung to IP, making much of the example of Japan's MITI, even though socialists had just experienced a bad decade (or century).

Much less was heard about the merits of IP when Japan's economy floundered in the 1990s. In fact, the term IP is not much used in the US anymore but, of course, its essence is all around us.

Some of our most regulated markets are land and housing in cities. Land use and land improvement is routinely thought to be the province of local (or state) governments -- which are thought to be implementing some sort of master plan. The nomenclature resonates with just enough people who put normal skepticism aside -- or who may see an opportunity for gain. This is why IP is simply the politicization of markets -- with all of the attendant problems.

Put Eminent Domain Abuse through Google and thousands of sites come up. Most depict episodes that restrict property rights, limit liberties, diminish market efficiency and raise serious equity concerns. What's not to dislike?

Can there be eminent domain without eminent domain abuse. Perhaps not. Bruce Benson has argued that holdout problems are not, by themselves, potent enough to warrant eminent domain powers. Perhaps the only way to limit eminent domain abuse is to jettison eminent domain.

Footprints and Brainwaves

I suppose it is possible to link education and affluence with a secular view and to link the latter with a weakness for environemtalist hokum. How else to explain Santa Monicans spending a pleasant Saturday afternoon at a public event that touts "The Ecological Footprint"? Visitors are taught how to calculate the amount of earthly space their consumption habits account for, multiply that by a growing population and contrast the product with the available space on earth. Any thought of subsitutions (in consumption or in production), especially those prompted by scarcity signals (or any thought of the role of technological change), is just not there. In fact, beyond multiplication, there is little discernable thinking at all in play.

The newspaper coverage goes along and reports that, "the 8.3-square-mile city has a footprint of 2,747 square miles, ... a swath that would take in most of California ... but the city announced last month that it had shrunk its footprint by 5.7% between 1990 and 2000."

Transportation Policy

A case can be made that the US has no urban transportation policy worthy of the name. Roads and parking are, for the most part, not priced rationally -- with predictable results. Public transit is seen as a jobs program -- also with predictable results. Cities regulate taxis, creating legally sanctioned monopolies -- also with the predictable results that service is expensive and poor and that city coffers and wealthy owners make monopoly profits.

The Economist reports the New York City story: "Higher fares for an unfair racket ... If a city goes to the bother of regulating its taxi industry, it should presumably have the interest of residents at heart. How, then, to explain the system in New York? It benefits neither passengers nor drivers. Instead, most of the proceeds flow to a third group of 'medallion holders' -- the people who own the aluminum badges that give a taxi the right to pick up passengers on the street. The going rate for a medallion is now about $300,000, so they are usually owned by investment companies, investors or partnerships rather than the driver.

"These monopoly franchise rights were granted back in the Depression, when then notion of using rationing to fight deflation seemed like a good idea. In 1937, 11,787 cab licenses were handed out at $10 each. Remarkably, no more medallions were handed out until 1996 when the city desperate for money (again), sold off another 400 ..."

Why does anyone expect politicized systems to do any better?