Research agenda

Life is hard and most of us can use all the help we can get. Price signals are a great help. But even then, many of us are intrigued by the charms of cost-shifting. When others can be made to pick up some of the costs, many of us are ready to take on greater risks. Bastiat pointed to government as the illusion that we can all live at the expense of everyone else. Politicians in California and Florida have recently suggested that insuring those who choose to live in flood-prone or fire-prone areas might be a national project.

But it gets worse. Those who are optimistic about the scope for political action have embraced the findings of behavioral economics (e.g., many of us often do stupid things), embellished them as "internalities", and given a boost to nanny-state supporters. Jonathan Gruber wrote: "The weaknesses of the traditional model, and the enormous costs of smoking to individuals, suggest that government should play a larger role in regulating smoking in the U.S. than is suggested by the external costs of smoking alone."

For many of us, if we were to try to list some of the foolish things we have ever done, we would have our hands full. Avoiding making even more mistakes is a daily chore. But what if we were elected to do this for the population at-large?

Perhaps those who study behavioral economics should find the time to look into the self-control challenges encountered by those who seek and gain public office.

Unfair!

Arthur C. Brooks wrote about "Happiness and Inequality ... Americans are pretty darn equal on the important things" in yesterday's WSJ. Brooks' survey results show that the happiness Gini is much lower than the income Gini.

So all of those who worry over money inequality can relax because (i) money does not buy happiness (so stop fussing over money); and (ii) money inequality is made irrlevant because of happiness equality.

What's a redistributionist to do? Those on the left love the money-does-not-buy-happiness research (all you strivers are making a horrible mistake; capitalism that rewards striving is a big mistake, etc.) but they also love redistribution. Brooks' report must be the last straw. Soaking the the rich would just put them out of their misery. Unfair, indeed.

Not dismal

William Baumol, Robert Litan and Carl Schramm have written Good Capitalism, Bad Capitalism. and the Economics of Growth and Prosperity. They enumerate four types of capitalism: state-guided capitalism, oligarchic capitalism, big-firm capitalism and entrepreneurial capitalism. They show that the last is the best but that the modern U.S. has aspects of the last two.

The book has the flavor of a textbook. It contains nothing that is new or original but it packages a lot for the uninitiated. The trouble is that it does not make a compelling read. Perhaps it requires the spark of an exciting professor who assigns the book to students but elaborates to keep them interested.

In the Appendix, the authors acknowledge that their common sense story is largely missing from high-brow economics. They claim that this is because most of what they write about is not easily available in terms of useful data series.

I am note sure that I buy this. The Austrian critique of neo-classical economics comes to mind. Why focus on a world of equilibria when all of the interesting stuff has nothing to do with boring equilibia? Why focus on a world of efficient allocations when the interesting stories are how the many inefficient allocations generate signals and inspire actions that move the system towards better allocations? Nothing dismal about that.

No problem

Have you heard the one about central planning? Many have but most have not. Documenting the failures in California, Randal O'Toole totes up some of the costs in his latest monograph, Do You Know the Way to L.A.?: San Jose Shows How to Turn an Urban Area into Los Angeles in Three Streesful Decades.

When it comes to how we manage cities, nothing has changed. It is as though people believe that the problems of central planning were exposed on another planet. Take away the totalitarian trappings and no problem.

Costly attitudes and policies

In 2001, then-Governor Gray Davis cut the ribbons on the last segment on southern California's I-105 and proudly announced that there would be no more of these. The future lies with buses and trains.

The governor did not realize that transit causes congestion. The funds diverted have badly clogged the state's highways. California has some of the worst roads in the U.S.

The California approach may be "green" but it also kills. A 31-vehicle crash on a tunnel of the I-5 killed two adults and a baby. There may be more victims. Truckers had been complaining about the state of the tunnel for years. The full costs in delays and repairs are still unknown.

It's an old story and it has everything to do with the know-nothing attitudes that get a pass when it comes to environmental policy.

Persisting underclass explained

Students (and many others), when asked whether a hypothetical doubling of all incomes that would practically end poverty but would increase inequality is OK with them, turn thumbs down. This perplexes many professors (like this writer) who apparently don't get it. It turns out that it's in the genes. Most of us are so wired to demand "fairness" that we will let the poverty persist. Robert Lee Hotz summarizes recent neuroeconomic research on the matter in today's WSJ (excerpted below).

Is this how and why we get welfare state policies that sustain an underclass?

Charting the AgonyOf a Brain as It Struggles to Be
Fair

At the Canaan Children's Home in southern Uganda, the orphans
had no idea that a woman inside a brain scanner 9,400 miles away was playing
mind games with their food.

The children were the focus of a brain experiment under way at
the California Institute of Technology to explore the neural anatomy of
indecision. With the push of a button, the woman in the Caltech scanner could
distribute meals at the orphanage more fairly, but only by taking food off the
table, not by serving more portions.

While she pondered, the 12-ton fMRI scanner at the
university's brain-imaging center traced the synaptic patterns of equity,
remorse and reward in her brain. In these riptides of neural currents, the
researchers sought clues to human variables missing from the mathematics of
conventional economics.

The quirky experiment exemplifies the new field of
neuroeconomics. Behavioral economist Ming Hsu and his Caltech colleagues
combined financial-decision theories and medical brain-imaging tools to analyze
the brain as a living engine of economics, one fine-tuned by evolution through
eons of foraging for scarce resources. These scientists studied hard choices,
documenting how competing networks of neurons unconsciously shape the way we
buy, sell, risk and trust.

During this test, the scientists wanted to see how synapses
valued fairness against the desire to avoid harming others. The dilemma can
arise when a limited resource is distributed unequally, and the only way to help
one person comes at another's expense -- whether in profit sharing, setting
affirmative-action policy, or rationing health care.

In the summer of 2006, when they organized the test, Dr. Hsu
and his colleagues could imagine no more agonizing choice, within the
constraints of medical ethics, than to ask people to take food away from orphans
in a war-torn African country.

An online search led them to the Web site for the Canaan
Children's Home, a one-story green building with a clinic next door, set amid
the trees and chicken coops a half hour's drive from Jinja, Uganda. As of April,
100 children were living there, many of them orphaned by AIDS, said Frank P.
Crane in Richmond, Va., chairman of the Uganda Missions Action Committee, which
monitors the home's finances.

It was the winsome faces of those children -- whose
photographs had been posted on the Web site to solicit charitable donations --
that caught Dr. Hsu's science eye. Here was the perfect experimental device for
stirring the turmoil of indecision, the researchers agreed.

The team next contacted Tom Roberts, an attorney in Richmond,
who created the Web site. He gave consent for the photos to be used. Because
there would be no contact with the children and no actual consequences of the
experiment to the orphanage, "I said help yourself," Mr. Roberts
recalled.

Dr. Hsu wanted the pictures to heighten the realism of the
experiment.

In the scanner, each volunteer could equalize how a fixed
amount of donated meals was shared between orphans -- but only by taking away
meals from those who had more than others and thereby reducing the total number
of meals given to the orphanage. The allocation of meals was sometimes fair,
sometimes not. "We manipulated the allocations and how much could be taken
away," Dr. Hsu said.

To trigger the brain behavior, the 26 volunteers had to
believe their decisions really would affect orphans being denied their seat at a
groaning board of plenty where others feasted. So, the experimenters made them
all study a 10-page brochure with pictures of 60 orphans.
In 36 rounds of testing, each subject had 10 seconds to choose the lesser of two evils: Allow some children to keep more than their fair share of meals or take away their
food to eliminate inequity.

It was a measure of the economics of morality. Dr. Hsu made
the inequities more or less severe by changing the number of meals donated to
different groups of children. That provoked patterns of neural activation that
revealed the brain's distaste for injustice and its willingness if the disparity
was wide enough -- in one case, one child receiving five times more than another
-- to punish the rich by putting them on short rations. To redress the extremes,
people were willing to confiscate meals even when it hurt the orphanage as a
whole, ...

Fun read

Attend a lot of seminars in the social sciences and become (rightly) wary of data mining and regressions. One colleague memorably referred to each as "an admission of defeat."

But Ian Ayres' Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart is must-reading for the uninitiated, especially those of the vast innumerate but educated conspiracy.

There is practically something for everyone. I did not know about "Isabel" which helps physcians (who use it) diagnose patients' ailments. This is just one of the areas where Ayers emphasizes the benefits of a new division of labor between man and machine.

Ayers has a strange aversion to super-crunching in the service of price discrimination. But the practice involves transfers that keep many businesses in the game while serving a larger audience.

But above all, the book is fun to read. It should pique interests in many quarters. In a better world, it would be required reading in high schools everywhere -- presented by teachers who can grasp and appreciate the topic. One can dream.

Rhetoric examined

Here is the abstract and the link to an interesting paper that I heard presented last Friday, by Professor Nicole Stelle Garnett of the Notre Dame Law School.

Most urban growth management proposals fail the efficiency test but Professor Stelle Garnett writes that they are also promoted with a "rhetorical flourish" that is suspect. Most suburbanites did not abandon the central city and do not owe it anything. The idea that they have to be rounded up and corralled by a regional government is silly. Most suburbanites came from other suburbs. The escape-and abandonment-version has been out of date for over fifty years.

One can add that that migrants are free to move and do not really owe anyone anything. But political rhetoric is what it is. It is also true that city and suburb are part of a single economy and even if there are political walls, there are also gains from trade.

The recent San Fernando Valley secession move in L.A. was also thwarted with rhetoric to the effect that such things are just not done in polite society. On has to wonder just how polite cartelized government really is.

SUBURBS AS EXIT, SUBURBS AS
ENTRANCE

Most academics assume that suburbanites are “exiters” who have
abandoned central cities. The exit story is a foundational one in the fields
of land-use and local-government law: exiters’ historical, social, and
economic connections with “their” center cities are frequently used to
justify both growth controls and regional government. The exit story,
however, no longer captures the American suburban experience. For a majority
of Americans, suburbs have become points of entrance to, not exit from,
urban life. Most suburbanites are “enterers”—people who were born in,
or migrated directly to, suburbs and who have not spent time living in
any central city. This Essay reexamines current debates about growth
management and regional governance in light of the underappreciated
suburbs-as-entrance story. The exit paradigm provides a
powerful normative justification for policies constraining urban growth. When
it is stripped away, proponents are left with utilitarian arguments.
Economists challenge these arguments by showing that metropolitan
fragmentation actually may be efficiency enhancing—and these arguments may
ring hollow with suburban enterers themselves. This Essay sounds a cautionary
note in the growth management and regional government debates. The exit story
is an outdated rhetorical flourish that tends to oversimplify the case
for—and camouflage the complexities of—policies restricting suburban growth,
especially when it comes to distributional and transitional-fairness
concerns..

http://lawweb.usc.edu/faculty/documents/NGarnett.pdf

Brain cramps

Here are the opening paragraphs of the lead front-page story in today's WSJ. This is old news, of course, because almost all politicians and many others have discovered the cop-out "fair trade" which they can get behind foursquare. (Where would they be without that "f" word?) Media interviewers never probe this. No one asks what the costs would be, here or abroad.

Zero-sum stories still sit best with most people. This in spite of the fact that exchange is spontaneous and universal and always has been -- even with "foreigners". Doing what comes naturally and thinking it through are apparently not the same. Even smart commentators like The New Yorker's James Surowiecki revert to language on American consumers being "hooked on imports."

Republicans Grow Skeptical On Free Trade
By John Harwood

WASHINGTON -- By a nearly two-to-one margin, Republican voters
believe free trade is bad for the U.S. economy, a shift in opinion that mirrors
Democratic views and suggests trade deals could face high hurdles under a new
president.

The sign of broadening resistance to globalization came in a
new Wall Street Journal-NBC News Poll that showed a
fraying of Republican Party orthodoxy on the economy. While 60% of respondents
said they want the next president and Congress to continue cutting taxes, 32%
said it's time for some tax increases on the wealthiest Americans to reduce the
budget deficit and pay for health care.

Six in 10 Republicans in the poll agreed with a statement that
free trade has been bad for the U.S. and said they would agree with a Republican
candidate who favored tougher regulations to limit foreign imports. That
represents a challenge for Republican candidates who generally echo Mr. Bush's
calls for continued trade expansion, and reflects a substantial shift in
sentiment from eight years ago.

"It's a lot harder to sell the free-trade message to
Republicans," said Republican pollster Neil Newhouse, who conducts the
Journal/NBC poll with Democratic counterpart Peter Hart. The poll comes ahead of
the Oct. 9 Republican presidential debate in Michigan sponsored by the Journal
and the CNBC and MSNBC television networks.

The leading Republican candidates are still trying to promote
free trade. "Our philosophy has to be not how many protectionist measures can we
put in place, but how do we invent new things to sell" abroad, former New York
City Mayor Rudy Giuliani said in a recent interview. "That's the view of the
future. What [protectionists] are trying to do is lock in the inadequacies of
the past."

Such a stance is sure to face a challenge in the 2008 general
election. Though President Bill Clinton famously steered the Democratic Party
toward a less-protectionist bent and promoted the North American Free Trade
Agreement, his wife and the current Democratic front-runner, Hillary Rodham
Clinton, has adopted more skeptical rhetoric. Mrs. Clinton has come out against
a U.S. trade deal with South Korea.

Other leading Democrats have been harshly critical of trade
expansion, pleasing their party's labor-union backers. In a March 2007 WSJ/NBC
poll, before recent scandals involving tainted imports, 54% of Democratic voters
said free-trade agreements have hurt the U.S., compared with 21% who said they
have helped.

The dollar value of good institutions

I am still taken by the World Bank's research on intangible wealth (my blog of last Saturday). Their estimate of intangible wealth per U.S. worker was just over $400,000. Congenial institutions, in their view, are part of intangible wealth.

But if I take the NPV of U.S. GDP (all 2006 data here) and subtract the dollar value of the labor force (at $5-million per worker) and also subtract the BEA's estimate of the value of fixed assets (less consumer durables), then the only way that I can get a residual (per worker) that is close to the WB result is to use a discount rate of 1.47%. That's low but not crazy. It assumes a very low-risk asset (the U.S. economy in this case).

This is back-of-the-envelope and does not follow the WB report's approach. But it works. Undermine institutions, add risk and the discount rate goes up bringing the residual down.