The drift

Posner and Becker each argue for market-based tuition loans to college students.  But both poltical parties and their presidential candidates as well as most of the popular media argue that these loans should be below market.  "I cannot afford college" is often the extent of the argument.  Therefore everyone else should be coerced into subsidizing it.

Most of the electorate goes along.  There are now more families with a keen interest in subsidized college tuition than ever. 

But was it always this simple?  Did major resource reallocations always simply go with the politics of the day? Apparently not.

I am greatly enjoying The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded Freedom, by Robert A. Levy and William Mellor.  (The Preface by Richard A. Epstein alone is worth the price of admission.)

The executive and legislative branches can be expected to push for expanded authority.  That is their nature.  This is why it takes an engaged judiciary to look beyond politics -- and to get over the idea that they are there to implement "good policy", whatever that is.  Levy and Mellor claim that (roughly speaking) we once had such a judiciary.  But that was before the dirty dozen.

Much harm

I have already mentioned my great appreciation for Jonathan Haidt's The Righteous Mind.  He taught us that many of our political disagreements are with people who respond to different "Taste Buds of the Righteous Mind" (title of his Ch. 6). There are five (later in the book, six) of these and we respond them in different degrees.  People on the left are most sensitive to the "care-harm" and "fairness-cheating" buds, but less sensitive to the "loyalty-betrayal" "authority-subversion" and "sanctity-degradation" buds.  Move to the right of the spectrum, and people weight all of these almost equallly. 

With all that in mind, I looked at Michael Kinsley's "For whom the bridge tolls ... In Seattle, it's no longer true that, no matter how rich you are, there are some things -- like traffic congestion -- that you can't buy your way out of," in today's LA Times.

Kinsley understands the economic argument for rationing by willingness-to-pay, but prefers a world of shared misery.  Bridge tolls constitute "... another chipping away at our shared life as citizens, and another area where money makes the difference."

But in this what-to-price-what-not-to-price discussion, where do we draw the line?  And "free" access can come at a very high price; we can easily end up with very large-scale but widely shared harm if we are not very careful.

Oil prices

It appears that gasoline and crude oil prices are falling once again.  Energy prices are notoriously volatile so this is no surprise.  Market forces are complex and prices are very hard to explain or predict day-to-day.

It's an old story.  When oil prices rise, politicians, including President Obama and his Oil Speculation Task Force (apparently not from The Onion), sense a grandstanding opportunity and start looking for shadowy plotting "speculators". 

What about when prices fall?  Either the market manipulators have taken the day off or they are engaged in a too subtle game of subterfuge to throw us off their tracks.

But pity the politicians.  All markets develop spot prices based on demand and supply hunches by participants who try to look at more than the present.  I doubt that there are any acutely myopic market participants who behave any other way.  This is regardless of whether they actively enter into futures contracts.  The option of futures contracts allows side bets for those who want them -- for those who want a portfolio that includes hedges.  This is good for them and good for the rest of us who benefit from better informed prices in our lives.

But side bets and hedges can also go wrong.  Corrections happen all the time.  The wisest traders encounter surpsises.  Prices can always be wrong.  The world we live in is that way.  The good news is that the prospect of corrections is built in.

This is apparently too subtle for the world of politics.  So we get the spectacle of adults seriously touting childish stories.

Here is much more.

More good news needed

Just below is the abstract of a recent article by Randall Holcombe and DeEdgar Williams, ("Urban Sprawl and Transportation Externalities") published in the Winter 2010 Review of Regional Studies:

One argument in support of minimizing urban sprawl is that sprawl creates transportation externalities. A problem with empirically examining the relationship between sprawl and transportation externalities is that sprawl is a difficult concept to quantify. This paper uses a measure of sprawl designed by Ewing, Pendall, and Chen (2002) to examine the relationship between sprawl and commute times, automobile ownership, miles driven, fatal auto accidents, air pollution, and highway expenditures. An empirical investigation finds that there is no statistically significant relationship between sprawl and any of these transportation externalities.

Holcombe is among the best researchers in urban economics and the two authors utilize the Ewing-Pendall-Chen measure of "sprawl". 

But who cares?  "Sprawl" is auto-oriented development.  And anti-auto-anti-modernity sentiment runs very deep. 

This is how and why we get many of the transportation policies we get. This morning's LA Times includes a report on the latest challenge to the California bullet train plan.  It appears that backers had assumed a cost of ten cents per-passenger mile but the outside study fnds that international experience is much close to to 40-50 cents per passenger-mile.

Today's WSJ includes "An Economic Approach to the Environment ... Resources are limited.  Cost-benefit analysis can inform our decisions" by Bjorn Lomborg.  He mentions that:

In 2004 and 2008, we commissioned panels of more than 50 world-class economists—including several Nobel laureates—to assess responses to global problems based on volumes of new cost-benefit analysis research. In 2004, the project recommended (and thereby helped catalyze) greater spending on HIV/AIDS prevention and treatment. In 2008, it led to more investment in the delivery of micronutrients to malnourished populations.

So there is some grounds for optimism in public policy.  Good news is always welcome.

Back to the future?

Nostalgia runs deep; into your life it will creep.  We know this.  But The New Yorker's Adam Gropnik calls attention "The Forty Year Itch," a mysterious 40-year nostalgia cycle.  AMC's Mad Men is hot because it takes viewers back about 40 years.  Why 40 years?  This is when most people take stock?

I suppose that there is an evolutionary psychology story out there somwhere.  Millions of years of natural selection favored those who looked back fondly.

Bob Mankoff posted these nostalgia cartoons.

I like how Gropnik closes.

And so, if we can hang on, it will be in the twenty-fifties that the manners and meanings of the Obama era will be truly revealed: only then will we know our own essence. A small, attentive child, in a stroller on some Brooklyn playground or Minneapolis street, is already recording the stray images and sounds of this era: Michelle’s upper arms, the baritone crooning sound of NPR, people sipping lattes (which a later decade will know as poison) at 10 A.M.—manners as strange and beautiful as smoking in restaurants and drinking Scotch at 3 P.M. seem to us. A series or a movie must already be simmering in her head, with its characters showing off their iPads and staring at their flat screens: absurdly antiquated and dated, they will seem, but so touching in their aspiration to the absolutely modern. Forty years from now, we’ll know, at last, how we looked and sounded and made love, and who we really were. It will be those stroller children’s return on our investment, and, also, of course, a revenge taken on their time

This brings me to a fun discussion with UCLA's Matt Kahn at today's USC Lusk Center Rena Sivitanidou Memorial Research Seminar.  (We honor Rena with an annual top-flight research seminar). Matt discussed the economic opportunities that China's bullet trains provide.  Bullet Trains (Matt argues) create "firm fragmentation" opportunities; a company's whole operation does not have to sit on the expensive real estate. 

But does not the internet offer the same opportunities?   How do we trade off in-person for on-line interactions?  We do not yet have the answer in 2012.  But what about in the 2050s?  Will we smile at thoughts of bullet trains and their possibilities, as entertained in the 2010s?  I think so.

That Preamble

James L. Payne worries about the Preamble of the U.S. Constitution.  Specifically, he notes, "promote the general welfare" leaves the door wide open to government action in a wide variety of areas.  Couple this with a growing public sentiment that there are few alternatives to goverment action  and you get steady growth in the size and scope of the Federal government.

Last weekend's WSJ included "Tornado Recovery: How Joplin is Beating Tuscaloosa ... One city is letting business lead the revival, the other is imposing top-down rules and waiting for FEMA.  Guess which one is rebuilding faster." by David Beito and Daniel J. Smith.  (Note David Beito along with Alex Tabarrok were co-editors with me of The Voluntary City which covered many related themes.)

I agree with Payne that government action has become the default response in spite of strong evidence that the results are often unsatisfactory or worse.  Almost all Americans deal with the Postal Service, the IRS, TSA, their local DMV and many others.  Yet, many of these people think that the Tuscaloosa approach is the way to go.  This is why both political parties are statist with only moderate differences in the flavor of statism they offer. 

Lately candidate Obama seems to be following a left drift strategy.  Will candidate Romney see this as an opening?  I doubt it.

The ears have walls

Michael Shermer's The Believeing Brain is a treat.  He argues that our beliefs inform our knowledge, rather the other way around.  Much of this was covered in Jonathan Haidt's The Righteous Mind, which Shermer cites extensively.

We are once more led through the arguments as to why the liberals and conservatives of our political spectrum will not really hear each other.  This stuff is convincing as well as depressing.  Why bother even trying to parse and report the data?

Just when you are about to forget about marshalling argument and evidence, Shermer explains why there are grounds for hope.  The scientific method is responsible for great strides in our understanding of the cosmos.  From Aristotle to String Theory, we have come a long way.

But what does all this have to do with the stuff of political debates.  Here we get four pages on the Jared Diamond's "biogeographical theory" towards the end of the book.

Having convincingly argued that political debate is pointless, and that the scientific method is wonderful, Shermer does not really connect these.  A fine book, nevertheless. 

His chapters on consipracy theories are must reading.  The X-files and many others like it have a huge following.

Bottom-up climate policy

Climate is global and climate policy (if there is to be one) has to be international.  Local emissions policies make no sense; they impose local costs with little if any local benefits.  Even the Europeans' cap-and-trade program is not of an adequate global scale.  Permit prices have been falling ("As carbon prices sink, unease rises") because local permit demand is limited.  As a result, incentive effects to adopt cleaner technologies are muted.

It would function more like the textbook version if there was a single global cap-and-trade.  But that will never happen.  International unity on the issue only exists at the level of feel-good platitudes and communiques.

What to do?  Natural gas is replacing coal in the U.S.  The power plants that burn them will continue to get cleaner -- as they have been for many years.  The many "doomsday" forecasts rest on assumptions of static technology.  That assumption becomes sillier by the minute. 

Straw man clunker

Many things are attractive but tricky (even dangerous).   After fast cars and fast company, there are all of the extreme sports and also theorizing.  I mention this in reaction to Eric Weiner's "Not their father's economics" in yesterday's LA Times.  He rightly criticizes economics as (still) taught in some quarters. "Do people ever have 'perfect information' ...?" 

No, of course not. They routinely avail themselves of information markets.  In the "information age", these grow as we speak.  Who, these days, makes a major purchase without an internet search?  As ubiquitous are branding and reputation.  Buyers and sellers seek trust realtionships because they all understand the game.

But views like Weiner's are widespread.  One can argue that (ever popular) "doomsday" is not imminent because prices are there to elicit on the supply side and ration on the demand side.  But that often gets a knowing response to the effect that "economics" is suspect because of all the silly assumptions -- including everyone has "perfect information." 

The straw man has great utility in many circles.  How many learned papers have been written to challenge the neo-classical straw man?  What would some people do without him?  It's a serious question.

Austrian economics (regularly exposited by Peter Boettke and colleagues at Coordination Problem) shows that one can jettison many of the silly assumptions and still have useful things to say.  In fact, one does not have to be an Austrian to abandon any talk of "perfect information" -- and focus instead on all of the interesting information markets that are all around.  Let's get rid of this clunker.

Incomplete analysis

High-speed rail for California is silly beyond words.  But we live in a Bootleggers and Baptists (B and B) world.  Some people accept implausible stories for religious reasons and others practically live at the public trough. 

Here is an interesting graphic from the Silicon Valley Mercury News.  If you accept that the project will be built for $68.4 billion and if you accept that the current 83% shortfall will be met by a combination federal money and private investors (who will have to be teased into this deal by still other goodies not currently budgeted anywhere) and if you accept that California cap-and-trade revenues will materialize and if you are ready to assume that these moneys will be funneled to California HSR ...  Where to stop?

The B and B alliance does not require serious arguments.  The studies and the budgets and the projections are only there so that politicians and their acolytes can pretend that this is serious.

The bigger point is that economists and others note that there are negative externalities in the world which are not internalized by private action (see previous blog post).  Policy makers can act to internalize these via Pigouvian taxes or via cap-and-trade.  But who administers either of these?  That question is asked much too rarely.  The latest California HSR news suggests an answer. 

Why is the conventional textbook presentation so naiive?

Much work to be done

E.O. Wilson ends his essay on tribalism this way:

Civilization appears to be the ultimate redeeming product of competition between groups. Because of it, we struggle on behalf of good and against evil, and reward generosity, compassion, and altruism while punishing or downplaying selfishness. But if group conflict created the best in us, it also created the deadliest. As humans, this is our greatest, and worst, genetic inheritance.

Jonathan Haidt has a similar message in his important book, The Righteous Mind: Why Good People are Divided by Politics and Religion. Haidt notes that "groupishness" and "groupish righteousness" are, not only facts of life, but central to our morality, which "binds and blinds".

"Fair" is a famously difficult and slippery idea.  But "fairness" (and "unfairness") assertions are everywhere, widely embraced as an indispensible rhetorical device in politics. 

But there is an example of unfair which is clear. It is the simple fact that the accident of birth capriciously places all of us in vastly dissimilar circumstances.  Various international contrasts offer the most serious examples.  What can we possibly do about that?  I agree with those who suggest that open borders would be the most powerful policy response.  But that requires a cosmopolitan posture that has to overcome our tendency to "groupishness".  But Haidt cites Robert Putnam's finding that immigration and ethnic diversity reduce social capital.

"So the next time you find yourself seated beside someone from a different [moral] matrix ... Don't just jump right in.  Don't bring up morality until you've found a few points of commonality or in some way established a bit of trust.  And when you do bring up issues of morality, try to start with some praise, or with a sincere expression of interest.  We're all stuck here for a while, so let's try to work it out." (p. 318).

There is much work to be done. 

Private and public planning

I often use the following clipping from an old Economist (March 1, 1997) as a conversation starter about what is private and what is public, in classroom discussions of cities and planning, etc.:

“In many economics textbooks, the presence of externalities is invoked as a justification for government intervention in the marketplace. Yet the private sector often finds its own solutions to externality problems. This is the secret of the shopping mall’s success. Because a property developer owns the entire shopping complex, its profits depend on the entire mall, not on any particular shop. By choosing the right mix of tenants and charging rents that reflect each store’s contribution to the mall’s overall revenues – including the business it brings to other stores – the developer can ‘internalize’ the externality and maximize its profits.”

How scalable is all this?  And what are the possible boundaries between "public" and "private"?  I place these in quotes because the simple example of the mall shows that various privately owned facilities and spaces are open to the shopping public.  The private planner who owns and operates the mall has every incentive to get the public spaces (including accessibilities and infrastructure) right, in ways that facilitate use of the whole site.

A new book by Grazia Brunetta and Stefano Moroni (Contractual Communities in the Self-Organising City: Freedom, Creativity, Subsidiarity) goes over much of the relevant material when it comes to private city planning.  First, they manage to link the private communities phenomenon to the work of Ebenezer Howard, a connection that was new and useful to me.  Second, they take a stab at the public-private division of labor question:  "... it would be better if public administration guaranteed only the basic abstract rules and the main networks of infrastructures; and that contractual communities should be free to compete in delivering the detailed rules and neighborhood-level services.  In other words, the advantages that Tiebout had foreseen in the competition among a number of public units delivering services would be enhanced in these units were private ..." (p. 57). 

The passage refers to Charles Tiebout and voting-with-feet Tiebout-sorting, which probably works best when the competitors are private. Note that Charles Tiebout discussed "consumer-voters".  But we are all consumers while not all of us are voters.  Recognizing this, highlights the importance of the cited Brunetta-Moroni sentence.

Sweet spots

"If this wine cost any more, I could not afford it; if it cost any less, I could not drink it."  I do not know who said it (Groucho Marx?), but it nicely illustrates the "sweet spots" (in just 21 words) that we all look for.

Businesses look for combinations of price and quality that work in the market -- and that allow it to stay alive or even prosper.  I have no idea how they do it.  Perhaps a small owner-on-the premises business has a shot at getting it done, although even that is not simple.  I have no idea how a large enterprise like Toyota (for example) does it year after year.  It's a very tough challenge. Success and failure (if allowed by politicians) weeding-out is all we have.

I am at a LV hotel for a meeting.  The venue is an example of a corporation that has settled on a sweet spot (local optimum) that may or may not survive. My check-in took over an hour and it was downhill after that.

Low prices are available at this place (available because they are able to price discriminate) and quality is awful.  Is that enough to survive?  I do not know.  I will never set foot on these premises again, but that is not a big deal.  If they have not found a sweet spot, will they be saved/rescued by agencies of local, state or federal government?  That is a very big deal.