Creative destruction meets Baptists and bootleggers

America's outside-the-rustbelt auto industry is too big to ignore. So we may not get the standard Baptists and Bootleggers outcome.

Today's LA Times includes "Knights in white SUVs ... In Georgia, a Kia plant promises 2,500 jobs. Grateful residents wonder why Detroit deserves a bailout."

I am old enough to remember that auto imports (first from Europe and then from Japan) began making serious inroads in the U.S. market in the 1960s. The Big Three have been in decline for about 40 years.

Yes, they have made changes. But not by enough. Any U.S. comparative advantage in this business is found on the map (of six southern states) and accompanying chart (listing 7 auto plants now operating and 3 underway) of the LA Times piece.

Two simple points

In today's WSJ, John Taylor writes "Why Permanent Tax Cuts Are the Best Stimulus." It's fairly simple. The permanent income hypothesis has been a staple of economic analysis for many years; stimulus checks may not deliver what's been promised

Bev Dahlby has recently published The Marginal Cost of Public Funds. It's a very serious topic and the lauded "need" for infrastructure spending is not the slam dunk that that we read about in the NY Times.

Two very simple points that must be apparent to the brain trust that President-elect Obama has assembled. I think.

Redemption and romance

I have not yet read the Sunday papers (honest), but it's a safe bet that there will be more stuff comparing President-elect Obama with FDR. Perilous economic times incite thoughts of redemption-through-politics. Yesterday's stock market rally was attributed to the announcement of the name of the prospective Secretary of the Treasury.

Nobelist James Buchanan articulated public choice economics some years ago and famously introduced it as "politics without romance."

It's always good to know that the people appointed to high office are not crazies. But the hope that a crew of wise men and women will do magic is silly. We see shadow boxing by Fed chiefs and Treasury officials on an almost daily basis. The contributions by various elected officials adds nothing that might be a cause for optimism.

A low profile by the whole bunch of them might inspire market participants. ("Animal spirits" according to Keynes.) But how romantic is that?

Too much fun

When adults take industrial policy seriously then anything goes. Rahm Emmanuel's "You don't ever want a crisis to go to waste. It's an opportunity to do important things you would otherwise avoid." is too revealing to let pass. It showed up in WSJ coverage of health care policy (thanks, Brad) and also in a whacky piece in the NY Times by Prof. Robert Goodman ("Have You Driven a Bus or a Train Lately"?) If taxpayers are going to subsidize GM to build green autos, why not subsidize them even more lavishly to build high-speed trains -- or whatever else greens and statists dream up.

The fact that resources are scarce, and therefore should be channeled to uses that large numbers of people actually desire, easily gets lost. There's too much fun to be had.

Some good news

These are not the best of times, but perspective is always a good thing. I just heard a radio interview with Nicholas Eberstadt on his book, The Poverty of the Poverty Rate: Measure and Mismearure of Material Deprivation in Modern America. There are various accounts of this nature (see, for example, Cox and Alam), but the message bears repeating. It is amazing how ill-informed the complainers are.

I can remember when Europeans scoffed at American coffee, wine, food, etc., with some justification. Much of that has changed and high-end bourbon, tequila, scotch and vodka are even found in super market liquor departments.

But what about beer? The local stuff was always an embarrassment and the Europeans were right. But apparently no more. The current New Yorker includes "A Better Brew: The rise of extreme beer." And it's manufactured in the U.S. (and without the benefit of the Washington protectionists.)

Get this. "In 1965, the U.S. had a single craft brewey: Anchor Steam in San Francisco. Today there are nearly 1,500."

It was bound to happen. Declinists, take note.

Go figure

The montary base is heading straight up. (HT Bart Kosko and Jim Moore).

Prof. John Cochrane asks "Is Now the Time to Buy Stocks? ... Here is what the historical evidence suggests" (in the Nov 12 WSJ).

Conchrane's story is interesting and he includes a compelling graphic, but the St. Louis Fed's graphic is stomach-churning.

Audacity

I just listened to the Arnold Kling interview at Econtalk.org. Interviewer Russ Roberts and Kling describe how Wall Street hubris got us into a mess (and all the necessary regulatory tools were there, but not adequately utilized) and how Washington hubris is likely to keep us there. We just got more Paulson ad hoccery this morning.

This morning's WSJ includes "Good-Bye to All That... A cheap cynicism has brought us to disaster. Let's try a little audacity." Audacity sounds much better than Washington hubris.

On the same page, there is "Obama's Car Puzzle ... You have in GM's Volt a perfect car of the Age of Obama -- or at least the Honeymoon of Obama, before the reality principle kicks in. Even as GM teeters toward bankruptcy and wheedles for billions in public aid, its forthcoming plug-in hybrid continues to absorb a chunk of the company's development budget. This is the car that, by GM's own admission, won't make money. It's a car that can't possibly provide a buyer with value commensurate with the resources and labor needed to build it. It's a car that will be unsalable without multiple handouts from government."

Audacity indeed.

Analogies gone wild

Today's LA Times carried this headline: "Economists see revival of an old fix ... Public works projects once disminssed as too slow, are on the table again. Obama backs the FDR-era idea."

Just days before the election, the Times business writer told readers to "Say no to traffic ...," advocating a "yes" vote for multi-billion dollar rail projects for LA county and the state. The county measure seems to have passed, raising the local sales tax at the worst possible time. State budget problems have prompted the Governor to propose higher sales taxes. And the state proposition to build mega-dollar high-speed rail, which requires a 2/3 majority, is also close to passage.

The wasteful nature of these projects is well known. It is strange but not surprising that a time of economic difficulty is seen as a time to pile on the economic blunders. Intellectual President-elect or not, the stars are aligned for pork dressed up as wise policy.

On the bright side, California voters have approved a redistricting measure which might (might) put the brakes on some of the mendacity. But the model of redistricting done by an impartial body (retired judges?) might be useful. Subject all of the infrastructure pork proposals to cost-benefit analysis by a similar impartial body (retired economists?).

There is the obvious (and disturbing) analogy between having politicians in charge of gerrymandering district boundaries, having public agencies do project evaluation of projects they would operate and having the bears guard the honey.

Falling in love

The economy, dysfunctional inner city schools, unfunded social security and medicare liabilities, and incoherent health care policies make my big-four-elephants-in-the-room list of domestic problems. Higher taxes, protectionism, industrial policy, and throwing more money at failed programs and institutions with powerful lobbies are not promising antidotes. Ringing speeches that evoke "hope" and "change" and a dozen other platitudes cannot overcome the stunning mismatch between the problems and the policies.

The Republicans occasionally talked a good game but made a mess. They deserve what they got. But what about the rest of us? Why does politics (let alone ever more of it) make some of us queasy? One of the reasons is the ringing speeches and the emotional responses.

Here is Hayek's very useful (perhaps most underlined and cited) insight on the matter:

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules of the micro-cosmos (i.e., the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings of make us wish we do, we would destroy it. Yet, if we were to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once. To apply the name 'society' to both, or even to either, is hardly of any use, and can be misleading (The Fatal Conceit).

Only a skunk at a picnic (in Grant Park?) would cite this wisdom. It is much easier to just fall in love.

Warming

Benjamin Friedman (The Moral Consequnces of Economic Growth) tells us that prosperous people are nice to each other. Now, Lawrence E. Williamson and John A. Bargh, writing in the October 2008 Science explain that "Experiencing Physical Warmth Promotes Interpersonal Warmth."

"Warmth" is the most powerful personality trait in social judgment, and attachment theorists have stressed the importance of warm physical contact with caregivers during infancy for healthy relationships in adulthood. Intriguingly, recent research in humans points to the involvement of the insula in the processing of both physical temperature and interpersonal warmth (trust) information. Accordingly, we hypothesized that experiences of physical warmth (or coldness) would increase feelings of interpersonal warmth (or coldness), without the person's awareness of this influence. In study 1, participants who briefly held a cup of hot (versus iced) coffee judged a target person as having a "warmer" personality (generous, caring); in study 2, participants holding a hot (versus cold) therapeutic pad were more likely to choose a gift for a friend instead of for themselves.

Climate change is not exactly news. When climate stops changing, then something very strange is afoot. And there are even people who have looked at the benefits of warming. But the fact that it may make us more civil is good news. This benefit-cost stuff keeps getting tougher.

Pinball

"Stuff Happens" t-shirts are easy to find. Less popular are "Cycles Happen", "Price Swings Happen, "Bubbles Happen" or any such.

Robert Shiller writes "Challening the Crowd In Whispers, Not Shouts" in today's NY Times.

Yes, many smart people, (including of course Shiller) were alarmed by real estate price trajectories. And many used the B-word. In today's piece, the writer asks why economists do so less than others.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.

In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.

In short, [psychologist] Mr. Janis’s insights seem right on the mark. People compete for stature, and the ideas often just tag along. Presidential campaigns are no different. Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president. Unless Mr. Greenspan was exceptionally insightful about social psychology, he may not have perceived that experts around him could have been subject to the same traps.

True enough. But the well known fact that cycles can (and often will) overshoot and undershoot does not equip anyone to know when enough is enough -- or what to do about it. Banning short-sales illustrates what not to do. Once we get into the fix-it mode, we can easily do more harm than good.

While it is easy to recount past warnings about price bubbles, it is much more difficult to identify early warnings about how housing price swings would interact with mortgage and credit markets. That is the much more interesting discussion. How the ball bounces in pinball is also tough to predict.