More than meets the eye?

There is always more than one theory.

My explanation of Hawaii's gasoline price controls, yesterday, was the standard political grandstanding story. R.S. Radford has another explanation, which brings with it an intriguing puzzle. R.S. sent the following (I quote with permission and I could not have posed it nearly as well):

"Hawaii's new gasoline price controls ... raise the most fascinating public-choice issues I've encountered in a long while. Surely it's a coincidence ... that these controls were trotted out barely two months after the Supreme Court's decision in Lingle v. Chevron? In Lingle, the Court upheld previous Hawaii regulations controling the rent gasoline producers (like Chevron) could charge the independent dealer-operators who lease producer-owned service stations.

"As we know from the example of mobile home park rent control [in California] , the operative effect of this sort of legislation in general is to allow the renters to capitalize the market value of the regulations into the price of their leasehold when they sell it to a new tenant. But what made the regs at issue in Lingle different from the mobile home park context is that there is a dual revenue flow between Chevron (and other producers) and their dealer-lessees: the dealers pay rent on their stations, but they are obligated to buy all of their gasoline from the landlord-producer. Thus, theoretically, Chevron could have prevented its dealers from capitalizing the value of gas-station rent control by jacking up the wholesale price of gas by an offsetting amount. Now, of course, the new price controls -- which inexplicably cap only the wholesale price of gas -- strip the producers of this offsetting market power, clearing the way for dealers to start pocketing windfalls by selling their rent-controlled dealerships to third parties.

"So far, pretty obvious. The puzzling part is, who could have made this happen? Unlike California mobile home park residents, the Hawaii gasoline dealer lobby cannot be an important force in state politics, either numerically or financially. I mean (and I'm totally guessing here), how many gas dealerships are there in Hawaii? Thirty-five? And assuming such a lobby even exists, it would be going toe-to-toe in Gucci Gulch (or whatever they wear in Honolulu) against a counter-lobbying cabal of multinational corporations listed on the NYSE.

"Anyway, I'm stumped. Even if some local service station operator had broken into the legislature at midnight and slipped this bill into a stack of papers to be voted on the next day, you'd think Chevron, Exxon, et al, would have spotted it and blocked it. I'd be interested in any theories you might have, the more conspiratorial the better. The Truth Is Out There!"

Possible cabals in exotic settings are much more fun than one more poke at economic illiterates.

The more things change ...

In 1947, Humphrey Michell published "The Edict of Diocletian" in the Canadian Journal of Economics (no link to the article found). The paper begins, "In 301 A.D., the Emperor Diocletian, with whom were associated his three co-rulers, promulgated an edict which fixed for the whole Roman Empire maximum prices for commodities, freight rates, and wages. According to the evidence available, and it is certain that the whole edict has not been recovered, price 'ceilings' for over 900 commodities, 130 different grades of labour, and a considerable number of freight rates were fixed and severe punishment promised to all 'black market' operators who dared to sell above the maximum. So elaborate a price scheme was not tried again until 1,600 years had passed ..."

Unlike 301 A.D., we now have a fairly solid body of economic analysis along with corroborating experience that price controls are simply crackpot. If price does not ration, something else will -- and the something else can be distasteful (arbitrary allocations) as well as costly (deadweight losses). But this improved state of knowledge matters very little because, following natural disasters and/or price rises that inconvenience the many (as in oil), like clockwork, politicians cannot resist temptation and jump into the breach to "do something" about prices.

People not only get the politicians but also the newspapers they deserve. On prices, they all seem to be on the same page. This morning's LA Times includes: "California Watches Hawaii's Effort to Cap Prices."

It is as though a rare and noteworthy experiment is in progress.

Sorting out

This morning's WSJ coverage of the Jackson Hole monetary policy confab cites Prinecton's Ricardo Reis and Alan Blinder, praising Alan Greenspan as "the greatest central banker who ever lived."

I have several times alluded to remarkable praise for Greenspan's monetary policies from, of all people, Milton Friedman. Part is the normal retirement well-wishing, part surely has merit. Historians will sort it out.

Historians are, of course, still sorting out the monetary history of the U.S., the causes of the Great Depression (I like the "Murphy's Law" explanation), and the 20th-century romance with top-down economic planning, part of Brink Lindsey's "Industrial Counterrevolution" (explained in his Against the Dead Hand).

If we are now emerging from the central planning optimism of the IC, then money managers' increasing sophistication is a part of this cycle. Richard Timberlake's "Gold Standard and the Real Bills Doctrine in U.S. Monetary Policy" (in the recent Econ Journal Watch) appears to be an important part of the sorting out. Economists' understanding of monetary policy and gold standards (real and imagined) helps us to better understand and learn from the monetary mistakes that have been made.

Consider this remark by the author: "A true gold standard provides an economy with a set of rules precsribing the conditions for the supply of common money. Once the rules are in place, the system works on the principles of a spontaneous order. Human design is limited to the framework for the standard, and must refrain from meddling with the ultimate product -- the quantities of both base and common money."

We live and learn.

Going where (almost) no man (or woman) has gone before

It's all so obvious -- once someone has done it. Networks can be fitted to many things, including webs of ideas and legal opinions.

The Economist ("Statistical modelling: The wisdom of Hercules") reports on legal research by Prof. Seth Handler that involves plotting networks that link large numbers of Supreme Court decisions, in order to detect patterns of precedent. Webs and central nodes emerge.

The research shows, not surprisingly, that the legal landscape changes in the 20th century. Cited work by James Fowler and Sangick Jeon reveals that, " ... before the American Civil War, the most authoritative cases involved freedom of contract. After the war and until the 1930s, when Roosevelt's New Deal was enacted, these were replaced by cases dealing with balance of power to regulate commerce between Congress and the states. Finally, around the second world war, as the Supreme Court shifted its focus to civil liberties, the most important cases became those concerning freedom of speech. According to the model, civil rights opinions remain ascendant today."

Along the way, the reliance on precedent decisions, the analysis shows, experienced a "precipitous drop." Yes, they do legislate from the bench.

Unintended self-parody (more)

You try to run a serious blog and this stuff comes along. And just when I had thought that public libraries were going to have trouble keeping up with e-books, cheaper retail prices of books and reading rooms at the local bookstore.

From today's WSJ:

"Not a Swedish Joke"

"If you find yourself in Malmo, Sweden, and happen to see a homosexual, an imam and a gypsy walk into a bar, it's not a joke. These are just some of the people who can be borrowed -- yes, borrowed -- from the local library for a 45-minute chat in a nearby pub as part of an effort to fight discrimination.

"Ullah Brohed pioneered the 'Living Library' project earlier this month. 'You sometimes hear people's prejudices and you realize that they are just uninformed,' she says. And since a library exists to educate, she decided to give Swedish bigots the opportunity to come face to face with the prejudice of their choice. The Malmo library also offers a Danish man (since some Swedes and Danes don't get along too well) and, to our great embarrassment, even a journalist. 'Maybe not all journalists are know-it-all and sensationalist,' Ms. Brohed says.

"Inspired by this example, a library in the Dutch city of Almelo plans to start its own human lending program next month. 'The customers can rent a veiled Muslim woman and finally ask her all the questions they would never dare to ask if they met her on the street,' says the director, Jan Krol. Of course, Mr. Krol must adopt his offerings to local tastes. So apart from the usual suspects -- a gay man, a Muslim and a gypsy -- there will also be a politician, a hard-drug user, a gay woman and a German (that World War II episode).

"Given the daily reports of widespread anti-Americanism in Europe, we are surprised that neither Mr. Krol nor Ms. Brohed has a Yank in stock. Should Americans ever become available in libraries in, say, Paris or Berlin, even Jacques Chirac and Gerhard Schröder could check them out."

Public service

Now that the California redistricting initiative (Proposition 77, which would take that authority from the politicians) is back on the Fall ballot, a momentous battle is underway. Dan Walters explains.

It's the Governator in his favorite posture, in an uphill fight, up against politicians from both political parties who are not gridlocked on this one, having joined hands to save their jobs. And they are supported by almost any lobby in sight. The left-leaning ones have been the most outraged, some expressing the fear that this will "hurt the working man."

When the re-election of California legislature incumbents hits 100% while the approval ratings of the same people hovers between 20% and 30%, disenfranchisement by high-tech redistricting is suspect.

For the next few weeks, there will be a great stretching sound heard from around the state as partisans invent story lines to protect their fiefdoms.

And they love to refer to it as "public service."

Rip Van Winkle investing

"If you're so smart, why aren't you rich?" This is the epithet that is especially irksome to economists, who are supposed to have some understanding of the economic tides.

Today's NY Times reports ("Be Warned: Mr. Bubble's Worried Again") that Yale's Robert Shiller went public with his "irrational exuberance" call in 1996 -- and the stock market collapsed less than four years later. He made the famous call when the NASDAQ Composite was near the 1,000 mark. We now know that it rose to over 5,200 in early 2000 and then fell precipitously. It is now back near 2135. Rip Van Winkle's $1 million dollars left in a NASDAQ Compsite index fund when Schiller made the call would have more than doubled in less than nine years and Rip, wiping the sleep from his eyes, would not be all that disappointed.

Van Winkle's peers, on the other hand, might have listened to Shiller and moved into ten-year Treasuries which were earning approximately 6.5%at the time -- and would be about one-half million dollars poorer than Rip today. Many others would have bailed when the NASDAQ hit bottom two years ago and would really be in bad shape.

Economic forecasting is no walk in the park. Even for economists.

Crazies, here, there and ...

Columnist Max Boot recently wrote, "Hamastan? Gaza pullout worth the risk ...For almost 40 years, the conceit has been growing around the world that Palestinian terrorism can be explained and even excused by Israeli occupation of the West Bank and Gaza Strip. This was always a dubious proposition in light of the fact that Arabs have been fighting Israel since its formation in 1948, not since its conquest by those territories in 1967. The PLO began its attacks while the West Bank was still part of Jordan and gthe Gaza Strip was part of Egypt."

Actually, there is a mountain of such conceits. Thomas Friedman once suggested that each side has to find the fortitude to "face down its crazies" to break the logjam. One side is now doing just that and Friedman and all those who cling to even-handedness -- and substitute mythical symmetry for analysis will have to regroup.

Symmetry is a stretch and it is dubious that anyone on the Arab side will soon face down their crazies. In fact, the nuts are often the ones in charge.

It has been suggested and debated that democracies do not make war on democracies. In that debate, the bar was set high by the suggestion that there were no exceptions. Excellent odds would not be bad. When will there be democracy on the other side?

If not in our lives, then a combination of walls, regroupings and focused offense may be all that is left. This seems to be the policy. It has, of course, to be wrapped in hopeful rhetoric. The plan, after all, must also face down the crazies among friends and international elite opinion.

Not just bowling alone

The Census Bureau has just released Examining American Household Composition: 1990 and 2000. The report makes interesting reading, although the lead sentence may cause some heartburn: "Householders living alone had become the most common specific household structure in 2000, ..." Yes, almost 26% were living alone but all the rest lived with someone else. It is just that the way that the remaining 74% are carved up does not give rise to a single category that tops 26%. I guess that Census tabulators want to make the news too.

One thing that the bad news bears seldom acknowledge is that more people now live alone because they can. Children in poorer times and places stayed with parents (and grandparents and others) because a separate household was not affordable -- not necessarily because they were better people.

Of the 45 relationship combinations enumerated, fairly high up on the list (#15 and #16) were households with adopted children. Over 1 million households included an adopted child. No comparisons with 1990 are possible because the question was not asked. Yet, I hope that we keep tracking this one and also that we see it trending up.

A little knowledge ...

Cold weather cities and regions in the U.S. have been relatively uncompetitive for some years. In "Smart Growth: Education, skilled workers and the cold-weather cities", Ed Glaeser finds links between human capital and growth and looks for an exogenous indicator and picks the number of local higher education establishments. (While the schools tend to be in place and established, their growth may be responsive to local conditions.)

Glaeser's analysis also points to the common sense guides for city growth: do not overregulate, lower taxes, fix the schools, limit crime.

Trouble is that the "educated classes" are also responsible for the crackpot policies that undermine Glaeser's policy guide. University communities (Berkeley, Madison, Cambridge, Austin, Tucson come to mind) often breed the silliest policies (rent controls, "living-wage" agreements and much weirder stuff like Berkeley's nuclear-free zone status, to name just a few).

Education can be a funny thing. Looking at its policy underside in more detail is a research agenda strongly suggested by Glaeser's findings.

Read your own paper

Many Greens celebrate high oil prices, hoping that they will cause us to come to our senses.

But the front page of today's LA Times reports: "No Drive to Mass Transit ... Raul Mercado loves his 2002 eight-cylinder Mustang convertible but hates the high cost of operating it. As gas prices hit record highs in recent weeks, the security guard has been shelling out $40 each time he fills the tank. To save money, he bikes or walks to the beach instead of driving, ... But leave the Mustang at his Long Beach home and take the bus to work in Inglewood? No way. 'I have to pay', Mercado said. Public transportation 'takes too long.'"

The lead editorial of the same edition announces "Pumped-up public transit ... Amid all the pain inflicted by skyrocketing oil prices, there is a silver lining in LA ... the jump in MTA ridership will give the mayor considerable ammunition when he goes looking for federal and state funds ..." ... for more transit projects, including rail -- which the editorial admits, is "underutilized."

No one can accuse LA Times reporters of bending to the paper's editorial slant. Nor can anyone accuse their editorial writers of reading their own front-page news.

Transit's decline through the last 60 years has been steady (in spite of huge subsidies), even through the various oil "shocks". In the 70s, Americans swtiched to smaller cars, rather than use transit.

While security guard Raul Mercado grasps the simple truth -- that his time has value and in dispersed cities, transit is incredibly time consuming -- it is still beyond the capabilities of LA Times editorial writers. Many of the latter have been singing the same tune for many years and, therefore, share the blame for multi-billion transit waste in LA.

Ethics and environment

Yesterday's WSJ included "Greenhouse Passes ... To Cut Pollution, Dutch Pay a Dump In Brazil to Clean Up ... Kyoto Treaty Creates Market In Gas-Emission Credits ..."

Problems create opportunities and, whenever possible, traders will see this and act. Going one better, potential traders will even do what they can to be inventive about lowering transactions costs so that trades that were once thought to be unlikely become routine. This is now happening on the internet fairly regularly. The history of wealth creation has lots to do with the scope of the exchange economy being expanded this way.

In the Summer, 2005, Independent Review, Mark Pennington notes that free-market envrionmentalism still has to persuade most of the environmental movement, whose members are likely to remain hostile unless there is what they consider an ethical argument and approach. Pennington's "Liberty, Markets, and Evironmental Values ... A Hayekian Defense of Free-Market Environmentalism" elaborates on the ethics of free market approaches.

There may be a widening, if grudging, acceptance of market efficiency but economists have been slow to remind others that markets are also a place of choice and liberty -- unless markets are corrupted by politics and politicians.

Religious freedom

Papers that report on tests of economic growth hypotheses across large international cross-sections keep cropping up. Ilan Alon and Gregory Chase have just published "Religious Freedom and Economic Prosperity" in the Spring/Summer Cato Journal.

There are many types of freedom and the power of economic freedom to generate prosperity has, not surprisingly, been well documented. What does religious freedom add? The authors test a religious freedom index in four models, where it competes with other freedoms to predict variations in prosperity (PPP per capita GDP). "All of the models using religious freedom as an explanatory variable had the predicted sign in the coefficient, and three of the four using the religious freedom variable exhibited significant results." (p. 405).

It seems that those who are eager to deny religious freedom already know the score.

Optimists and liberals

In yesterday's NY Times, David Brooks wrote on The Virtues Of Virtue, "According to the Bureau of Justice Statistics, the rate of family violence in this country has dropped by more than half since 1993. ..." In the same section, there is "Where Killers Are Out of Style ... The murder rate in New York is still falling. How low can it go?"

Brooks tries to explain the good news and notes: "The first thing that has happened is that people have stopped believing in stupid ideas: that the traditional family is obsolete, that drugs are liberating that every adolescent's social duty is to rebel."

I agree. These and other 1960s ideas (many still popular on the left to this day) are both stupid and ruinous.

Why do conservatives point to the positives where they exist while liberals do not? There are many reasons, but among them is the inability to stop believing in exactly the dumb ideas that Brooks cites.

Back to the future?

I am reading Fred Siegel's delightful The Prince of the City: Giuliani, New York and the Genius of American Life.

Siegel sets the stage this way. "Giuliani first saved the city from its own, apparently intractable, political pathologies well before he saved the city and country from the panic that could have followed the 9/11 attacks. Time and again, from reducing crime and welfare, to driving the mob out of the garbage industry and reforming City University, he achieved what the conventional wisdom had assumed was impossible. The third and by far the least known of his extraordinary accomplishments was to revive the idea of upward mobility for the poor in a city whose economy had been organized around servicing poverty."

Reading the early chapters, I confess that I had forgotten just how toxic liberal policies towards the cities were. Siegel reminds us of racial politics at its cynical worst, incited by armies of opportunists and economic know-nothings -- to name just the headliners.

Siegel demonstrates that Giuliano had the Machiavellian clarity of vision as well as the skills to take all of this on and to succeed.

He is to be reckoned with, especially (in Siegel's view) as 2008 will be a year when the Bush coalition will give way to a more centrist Republicanism.

Bill Frist has taken note -- and is surely reading The Prince of City, if he has not already done so.

London fallout

Governments can be predators and they can be incompetent. They are often both. Going to war unleashes multiple horrors, including the expansion of government's role and reach. This is why libertarians and others insist that going to war is a last resort, reserved for genuine emergencies.

The current debate is over the question of whether we are now in one of these. That sentiment will change when the next outrage occurs. Given how easy these are to perpetrate, what are the odds? No one knows but we now know how easy they are to mount. No one needs to learn to fly a jetliner.

The London subway attacks emboldened security forces as well as the many plotters. I fear that they were most inspiring to the psychopaths. 7/7 may turn out to be more ominous than 9/11.

No trade-offs in Portland -- reconsidered

Some weeks ago, I posted my skepticism re a NY Times columnist's gullible acceptance of a Portland claim that they had found a way to reduce greenhouse emissions at no cost. Just win-win.

Richard Posner's piece on the NY Times Book Review last Sunday nicely summarized the state of big media in the U.S. They bristle at the bias charge but it is clear that we all have predispositions (no one is pure) and the attitude of most big-media journalists is obvious. It gets weird when they pompously deny it -- and then jump at the chance to report news of the sort that had come out of Portland but which has now been exposed as resulting from a math error.

Rich Page called my attention to a news release from the Cascade Policy Institute, "Portland Now Admits Math Error in Global Warming Report". It appears that their carbon dioxide emissions had been going up, not down.

Will the Times print a correction? How big? What page?

The mother of all punch lines

The financial pages of major newspapers usually have plenty of fare to feed, both, bullish as well as bearish moods. What to make of the WSJ's inclusion (in their "Money and Investing" section) of historian Niall Ferguson's comparisons of 1914 with today, recently delivered to a gathering of Merrill Lynch executives and clients? There is a punchline at the very end. But it's worth reading the build-up first.

"The Big Picture: Circa 1914
Historian Sees Similarities In Today's Investment RisksAnd Pre-World War I Era"

"In a world that has become increasingly savvy in understanding and measuring all kinds of risks, investors often ignore what may be the biggest of all -- geopolitics.

"Big mistake, says Harvard University history professor Niall Ferguson.

"In a recent lecture to Merrill Lynch executives and clients, he contends that in analyzing financial and economic risks, forecasters tend to ignore geopolitical ones. And when they do take politics into account, investors usually stick to what they can personally recall.

"We need to go further back than living memory to understand the predicament in which we currently find ourselves," says Prof. Ferguson, according to a transcript of his lecture.

"That 'predicament' is the uncanny similarities between the current era of globalization and the original one of roughly 1880-1914, which first harnessed the powers of global communications and swift transport to link the world economically. That ended with the June 28, 1914, assassination of Austrian Archduke Franz Ferdinand and the onset of World War I.

"Then, as now, fears of inflation were negligible. The difference in yields on corporate and emerging-market bonds and those on benchmark government securities was shrinking. Stock-market volatility was abating. Commodity, especially energy, prices -- then it was coal, today oil -- were rising rapidly.

"Other parallels, notes George Magnus, senior economic advisor at UBS, include deregulated and integrated global capital markets, expanding international trade, strong foreign-direct investment flows and the search for new markets.

"As for geopolitics, the first era of globalization was marked by 'a dominant but financially overstretched global power, rival powers that defined themselves only in opposition to the dominant power, new regional powers with global aspirations, the Great Game in Central Asia [then over access to India, now to oil], a proliferation of 'failed states' and state-sponsored armed groups,' Mr. Magnus says. Then the global power was the U.K., now the U.S. Sound familiar?

"Add in anti-Western armed organizations -- in the 19th century, they followed the teachings of Karl Marx, today Osama bin Laden -- and "there is a striking resemblance between what is happening now and what was happening 100 years ago," Prof. Ferguson says.

"Of course, any parallels go only so far and no one is saying investors should dive under the bed. Still, in the years preceding the First World War, investors chose to ignore the threats that were brewing. The well-oiled global economic and financial machine had fostered a "sense of exaggerated security," Prof. Ferguson says. That's a valuable lesson to remember today.
In fact, back then the mood was so complacent that the first mention of the possibility of even a small war the Harvard academic could find in the financial press was an article in The London Times of July 22, 1914. That was just seven days before the Austro-Hungarian artillery began bombarding Belgrade and less than two weeks before Britain declared war against Germany. Major European financial markets closed for the rest of the year.
'Everybody thinks the biggest financial crisis was the [1929] Wall Street crash and its aftermath,' Prof. Ferguson says. 'But 1914 was far, far worse...if they had allowed the markets to reopen, there would have been a complete wipeout.'

"So what is today's investor to do? 'Gold would be the best thing to have as a long-term store of value,' says Eoin Treacy, a strategist at Fullermoney.com, a global strategy service. Investment strategists also say that commodities should perform well, along with investments designed to enable investors to bet on increased volatility. Meanwhile, stocks should do poorly, because a catastrophe probably would rattle consumer confidence and in turn economic growth.

"Investors currently regard bonds as largely a haven. Money managers warn that the threat of surging oil prices could fuel inflation, which could sink long-dated bond prices. For instance, bonds failed to offer investors any protection during the 1973 Yom Kippur War. Prof. Ferguson notes that in off-market trading from July 8 to Dec. 19, 1914, Austrian government bond prices plunged 23%, while French securities fell 15%, Russian ones 8.8% and U.K. bonds 9.6%.
To be sure, there have been some improvements in the past 100 or so years. There are many more democracies, and warfare is on the wane. What is more, many economists think policy makers have learned from past mistakes.

"Even so, Prof. Ferguson says, "Globalization could end in our time, not with a whimper but with a bang." The hard part, he acknowledges, is designing "a perfect portfolio for coping with the outbreak of World War III."

Property, development, law, endowment and fun

The link between property rights and economic development has been recognized for many years, elaborated by Adam Smith, yet stranegly ignored by much of neo-classical economics. But it is now back, again being taken seriously by many scholars. Douglass North and many others share the credit.

Particularly interesting in this light, is a recent NBER working paper by Ross Levine, "Law, Endowments and Property Rights."

Levine sums up his investigation this way:

"Property rights affect individual liberty and national prosperity. While scholars have hypothesized about the sources of variation in property rights for over 2500 years, researchers have begun to test theories empirically only recently. Researchers have made enormous strides in empirically assessing different theories of the determinants of property rights, but these investigations are in their nascent stages. The law and endowment views offer compelling theories of how legal heritage and natural selection endowments shape property rights today. I see no reason to neglect either explanation but believe that considerably more work is needed in each."

The paper includes a splendid overview of a wide range of relevant background literature for each of the two main hypotheses.

Economics may never have been this much fun.

Do they know? Do they care?

The 2002 Census of Governments reports that there were 87,525 local governments in the U.S., of which almost 36,000 were cities or townships. I have never seen a survey that determines how many people know what city they reside in. Postal city addresses often do not match municipalities.

We do know something about voter turnout. It tends to be small for local elections. Table 419 of the Statistical Abstract of the U.S. (2003) shows percent voting in even-year elections only. In the 1998 Congressional elections, 41.9% of the voting age population voted; as expected, it was slightly higher in 2000 (the last year reported in this Table) with 54.7% of eligible voters voting.

Data on off-year local elections are harder to come by. We calculated that for just California, in 2001 only 15% of eligible voters went to the polls (114 local elections); in 2003 it was 24% (96 local elections).

Researchers still estimate rank-size relationships from city population data. Why? These are seldom economic units, being defined by arbitrary boundaries. And the voting statistics suggest that cities also lack political significance for most people.