Problem with "market-friendly" interventions

Buy a car and you incur significant fixed costs.  The more you drive, the lower your average cost.  When ownership taxes add to the fixed cost, they encourage more driving.

Research by National University of Singapore economists investigates the specifics for that city's Certificate of Entitlement (COE, applied to auto ownership) plus its Additional Registration Fee (ARF, applied to new car purchases).  Specifically, as the tax goes up by 1 percent, kilometers driven increase by 0.345 percent.

Singapore planners have been widely praised for having implemented road congestion pricing in 1975.  The other taxes were meant to complement it.  But even "market-friendly" interventions can have a downside that has to be considered.  In this case, the COE and the ARF work against the congestion tax.

Who "killed" the Chevy Volt?

The short answer is market reality.

But smart people "know" who "killed" General Motors' EV1.  In fact, they also "know" who "killed" Los Angeles' original street car system (Snell Report).  Conspiracies are easier to digest for some than the workings of markets.  The fact that markets reflect revealed preference realities makes it extra important to conjure fairy tales.

We are not quite ready for "Who killed GM's Volt?"  But it may be time to outline some screenplays and talk to people about financing possibilities.

Today's WSJ reports "GM Curbs Volt Plant Production ... General Motors Co. said it plans to suspend production of its battery powered Chevrolet Volt for 26 days as part of a move to pare excess inventory."  Uh oh!

GM had been declining for many years and should have been allowed to go into normal bankruptcy.  But politicized bail-outs of large unionized companies are hard to resist.  To compound the problem, picking "green" winners is also politically appealing.   Add the appeal of federal consumer tax credits, which are topped off in some states.

Put them all together and we get the Chevy Volt.  Explaining away the failure should be simple.  It's been done many times.

ADDED

Randall Holcombe points out that MPG goals are not policies.  The goals are feel-good soothing.  The policies (above) ar the killers.

Helping the NY Times to be helpful

When the Republicans hold their conventions, the New York Times usually offers its readers a helpful guide to the various species of Republican. I recall that in 2004 when the event was in NYC, the Times felt the obligation to help readers in case one actually encounters a Republican in the streets of the city.  NYC is supposed to be as cosmopolitan as the U.S. gets.

But perhaps Times editors are not as helpful as they think. Today's guide describes the Party's Libertarians as "pro-business".  It's an unfortunate but profound error.  Being "pro-market" and "pro-business" are very different.  Most business people are eager to become crony capitalists and, thereby, a serious threat to economic success.  Crony capitalism is where and how those on the left and the right hold hands.  It is also the source of a long list of policy errors and economic failings.

A helpful guide to Times writers and editors must start with a primer which teaches that "pro-market" and "pro-business" are anything but synonymous.

ADDED

Mark Perry hits the same theme.

Two exotic water options

Matt Kahn rightly call attention to the fact that public discussions of "drought" never mention the water pricing option.  Subsidized state-allocated water is surely a big part of the problem.  But politicized allocation is deemed by many to be somehow superior to market allocation.

Today's WSJ includes "Your Are Drinking What? ... With water in short supply across the country, it's time to take a serious look at recycling sewage."  Even the WSJ's writer cannot bring himself to note the pricing alternative.  Yes, short of privatization, state agencies can price.  They do own the meters.

But pricing is still viewed in many quarters as exotic or sinister or not "fair" -- to the extent that drinking the treated urine of the population at-large is a more palatable option.

I am OK with the science of recycling wastewater.  If we can discuss it in polite company, perhaps we can also discuss the pricing option. 

The big win-win

Craig Newmark has fun with this list of young economists' big ideas. 

But on a more serious note, James Surowiecki writes about The Track-Star Economy. He cites all of the athletic successes at the London Olympics by foreign atheletes who trained in the U.S.  He elaborates on the importance of letting in the "stars" from any an all fields.  But U.S. immigration policy is not there yet.

The national debate on immigration makes it seem as if immigrant workers were competing with native-born workers for shares of a fixed pie. That’s always a questionable assumption, but in the case of skilled immigrants it’s simply wrong. Their presence makes the pie bigger for everyone.

In theory, fixing the system should not be a tough thing to do, since the immigration of highly skilled workers is one of the few issues on which there is genuine bipartisan support. Mitt Romney and Barack Obama, remarkably enough, have called for streamlining the system in similar ways, and John Conyers, a Democrat, and John Chaffetz, a Republican, are sponsoring a recent House bill that would make it easier for small-business owners in the U.S. to get green cards. The catch is that, for all this bipartisan comity, there is no urgency in Washington on the issue, and voter anxiety about the weak economy and the scarcity of jobs gives politicians an excuse for inaction. Tough times have always lent themselves to nativist sentiments and closed-door policies. But in the case of highly skilled immigrants these policies are a recipe for stagnation. The U.S. is excellent at importing cheap products from the rest of the world. Let’s try importing some human capital instead.

I agree.  But the international talent pool also includes many non-stars and each should have the chance to go where he or she is most valued.  Even the non-stars should find their niche (and thereby enrich) any number of supply chains.  The real economic win-win is realized in this way.

Pesky critters and trade-offs

It's easy to be critical of the "green jobs" mantra.  Free lunches are very rare. 

At the risk of a compound bad pun, I have to point to "To Battle Iguanas, Purto Rico has a New Plan: Put Them on Menu ... Overrun With Reptiles, Island Hopes to Export Their Meat ..." (WSJ, August 20). Yes, there are countries near Puerto Rico where people like to eat these green-toned critters. The story mentions that the export project would double as pest control and create jobs too.

Speaking of "green" it's not pretty when politicians talk about energy sources and espouse support for "all of the above".  Federal subsidies currently do support all of them, but in vastly different magnitudes.  Federal support for "none of the above" would be best.

The WSJ recently contrasted the various levels of federal support on a "dollars-per-megawatt-hour" basis.  Just looking at the extremes, oil and gas get $0.64 per megawatt-hour, but solar gets $775.64.  That's a ratio of 1212.

It's sad that "all of the above" sounds good on the stump and on the evening news.

Up from the past

Here is Mark Perry on the 40th anniversary of the Club or Rome's report.  They were simply the latest in a long line of way off-base doomsayers.

Here is an updated worry ("The cost of cool") from today's NY Times.  What will we do when the world's poor start consuming air conditioning?

There are some things the author might think about.  First, if the world's urban poor become consumers of A/C it is because they have become more productive.  The pool of goods and ideas will have expanded.  Second, the technology is never static and it is a good bet that A/C will become more efficient.  Third, pricing externalities is always an option.

There have always been forces may be at work that the pessimists overlook

This week's Economist includes "A continent goes shopping ... Africa's growing middle class has money to spend."  The picture, like all others, includes setbacks and rough spots.  But who on Earth wants to swap places with their ancestors?  The future has its challenges, but the past was much worse.

ADDED

Ronald Baily has much more on the failed doomdsay theme.

Reach for the rose-colored glasses

Political campaigns, especially presidential elections, can be depressing.  Robert Barro recently cited the astounding level of economic ignorance that both presidential candidates had embraced (in the WSJ):

The level of economic commentary during the presidential campaign has not been high. Democrats have accused Mitt Romney of the crime of shipping jobs abroad while at Bain Capital, and Mr. Romney has responded by denying the charge. No one takes the economically appropriate position for a job outsourcer: "Yes, I shipped some jobs abroad to save money, and this choice was correct not only for my company but also for the U.S. economy."


Outsourcing is essentially the same as importing a good from a foreign country. In the former, a company buys foreign labor services. In the latter, a company buys the good that embodies foreign inputs, particularly labor services. So, it makes no sense to be a free trader with respect to imports and exports of goods while opposing outsourcing. Opposing either is protectionism.

The central issue is why free trade is attractive. ...

One day later, Jerry Brown (LA Times Aug 15) showed why state-level campaigns are not much better as he plugged for a California tax hike ballot measure.

Flanked by education and labor leaders, dozens of schoolchildren and his dog, Sutter, Gov. Jerry Brown formally kicked off his campaign Wednesday for Proposition 30, the measure on the November ballot that would raise taxes on state sales and incomes of more than $250,000.


Brown used a Sacramento high school as the backdrop for the event, calling Proposition 30 a choice about whether Californians want to provide more funding for schools. In vintage Brown style, he quoted from the New Testament to make his pitch to voters, urging them to ask the state’s wealthiest residents to pay higher taxes to boost education spending.

“To those who much has been given, much will be required,” he said quoting from the Gospel of Luke, saying the state’s highest earners “now have an opportunity to give back.”

There are, of course, an uncountable number of similar examples. Tuning out is tempting but we live in a world where politicians matter. They influence huge chunks of GDP and much more.

But I always reach for the rose-colored glasses.  Dean Stansel pointed me to his "An Economic Freedom Index for U.S. Metropolitan Areas."  There is apparently significant variability (and choice) at this level of geography.  Half of the twenty lowest-ranked metro areas are in California.  Eleven of the twenty top-ranked ("freest") areas are in Florida.

Cities and growth

David Emanuel Andersson has ably edited The Spatial Market Process, which includes various efforts (including one by me) to apply Austrian Economics to cities. Jane Jacobs is cited often.

Everyone has seen footpaths worn over lawns in places where the designer should have built a path, but did not. Whereas, markets help to align quantities supplied with quantities demanded, getting highway networks that align supply with demand is a peculiar problem. There are many highway links that are over crowded and occasionally ones that are over capacitated. And on some lawns we even get spontaneously developed links.

All of us participate in various supply chains, including various networks which I have called “supply chains for ideas”. We form the demands and occasionally also lend a hand on the supply side.

For physical entities, route choice, mode choice, trip frequency choice and trip scheduling are mostly in our hands. When it comes to highways, the supply side is out of our hands; when it comes to social networks, we create the demands as well as the network at the same time.

Moving things usually involves transactions. But we also interact in ways that do not involve transactions. These are the negative and positive externalities. They do not involve networks, but they do involve nearness because they dissipate with distance. What we call “the technology” forms the necessary conditions for an externality, but propitious locations determine which ones become realized.

When the dust has settled, there are patterns of location (land use), network flows of people and goods and ideas -- and realized positive as well as negative externalities. All this is selected from a huge combinatorial space.

This is a very big order, made much bigger and much more interesting because the dust never settles. It is always agitated.

We get economic growth (including the formation of good ideas) when and if the pieces are continuously re-oriented beneficially. The pieces do this best when price signals are clear and when a clear rights regime is in place. And even in our world of second-best, we usually manage to move ahead.

All of this is way beyond abstract theories of cities. Rather, it applies the best economic theories to understanding cities.

Politicians gone wild

Acemoglu and Robinson asked "What's the Matter with Argentina?"

They use its history as a case study of what goes wrong when "extractive institutions" run roughshod.

 Patrick Sullivan points me to the Seattle Times coverage of the Buenos Aires subway shutdown.

"A strike that began Aug. 3 over wage disputes has halted subway service in Argentina, where a million commuters are stuck amid a power struggle between Argentina's president and the mayor of Buenos Aires. ...

You have to read the whole thing to believe it.  We are almost used to the craziness that comes out of Argentine politics.  But this is pretty amazing.

Just when we lose patience with home-grown politicians, we must not forget to look at how their counterparts act in much of the rest of the world.   

Thinner lab rats?

The New Yorker's James Surowiecki ("Downsizing Supersize") looks to behavioral economics to find something kind to say about Mayor Bloomberg's proposed soda ban.

 ... perhaps the most cunning aspect of Bloomberg’s proposed ban is that it would function as a kind of stealth tax on consumption, while leaving average-sized sodas untouched. Currently, on a per-ounce basis, large drinks are much cheaper than smaller ones—which encourages people to supersize. The soda ban should shift this. Two sixteen-ounce servings are bound to be more expensive than one thirty-two-ounce serving, which creates another disincentive to drink more.

If all this sounds as if New York’s soda consumers were about to become the subjects of an elaborate social-science experiment designed to reshape their behavior and desires, well, that’s kind of true. But then we’ve been the subject of just such an experiment, run by beverage and fast-food companies, for the past forty years. If Bloomberg has his way, we may start feeling like we’re white rats in a maze, but at least there’s a good chance we’ll be thinner rats.

But who wants to be the rat in any mayor's lab?  That's exactly the "nudge" problem.  It gives politicians another lever.  I do not like "soft paternalism" -- or any other kind.

I know there is the perennial externalities argument: fewer obese folks, lower health costs and benefits all around.  But there has to be a cost-benefit analysis to back this up.

How much effect would the ban really have?  How big would the dollar savings really be?  In light of the easy access to cheap sugar highs in our world, to ask the question is to answer it.

Unsustainable

Whenever I see a city ambulance make an emergency call, they are accompanied by a fire truck and crew even when there is no visible fire; the firefighters just hang out.  I had never bothered to think twice.  We do know that fire retardants and fire prevention are better than ever.  It stands to reason that there are fewer fires. But fewer firefighters is not an option for local leaders. Holman Jenkins takes this up in this morning's WSJ.

It takes twice as many firefighters to put out half as many fires as it did 30 years ago. Fewer fires because of better fire safety is one reason, but another is the dispatch of overqualified firefighters and their vehicles to things that aren't fires.

In Orange County, Calif., only 2% of responses involve fires. In Massachusetts the figure is 5%—only because Massachusetts doesn't count emergencies that don't result in injury or property damage.

The Orange County Grand Jury, an official watchdog agency, is the latest to plumb this phenomenon: "This transition from fire emergencies to medical emergencies has not generated major changes in the operation model. . . . Each emergency call generally results in both fire trucks and ambulances being dispatched to the site of the emergency regardless of the type of emergency."

Many towns and cities try to get by with two or three firefighters per truck, which makes sense when a truck is responding to a fender bender or bicyclist who fell down. The firefighter-dominated National Fire Protection Association insists on five firefighters per truck—which makes sense when a truck is responding to a fire.

What would really make sense, of course, is properly manned fire trucks responding only to fires, leaving other emergencies to one- or two-person police or ambulance crews. But firefighter unions are among the most politically potent in the country.

I have often complained that LA roads are in a state of disrepair worthy of a third world backwater.  I was in China last year and the city roads I was on were all much better.  Our city, county and state leaders are chained to their union supporters.  Wage and pension commitments are the natural result.  (Here is where I get to say "unsustainable.")  

Daniel DiSalvo documents politicized commitments to public sector unions in this latest book.  I have not yet read the book but listened to an author interview this morning.  I plan to add the book to my "must read" pile.

Ethics

Randy Cohen ("If Kant Were a  New York Cyclist", NY Times, Aug 5) makes what he claims is an ethical case.  "The rule-breaking cyclist that people decry: that’s me. I routinely run red lights, and so do you. I flout the law when I’m on my bike; you do it when you are on foot, at least if you are like most New Yorkers. My behavior vexes pedestrians, drivers and even some of my fellow cyclists. Similar conduct has stuck cyclists with tickets and court-ordered biking education classes. But although it is illegal, I believe it is ethical. ..."

Our cities and our traffic laws are geared to autos.  Everyone likes their cars, but many also feel a bit cowed.  The "green" and morally superior thing to do is walk or bike.  Cohen sees his acts as victimless and also superior and, hence, ethical.
 
Ethical arguments for law-breaking usually involve weightier issues.  Cohen must know that once there are enough law breakers like him, there could be real problems.

My first trip to China was in the early 1980s and I witnessed tremendous etiquette by large numbers of bicyclists who, not contending with many cars, but just each other, seemingly managed very well.  Pedestrians, even foreigners, once they got the hang of slowly wading across busy streets, had no problem.  The streams parted gently around you.      

But Manhattan is clearly not 1980s China. I worry when Cohen evokes Amsterdam and Copenhagen.  Manhattan does not come close to these either.

Perspective

Some of my best memories from grad school are sitting in classes and listening to the impromptu musings of Brit Harris.  He may have been the first to refer to "gi-go" as "garbage in-gospel out".  Brit was a pioneer modeler of urban structure and he knew what he was talking about.

Post-2008, many people are taking a second look at macro-economic models.  Nevertheless, there is always the problem of people reporting their model results with a little too much enthusiasm.

Matt Ridley takes up the theme in today's WSJ, "How Bias Heats Up the Warming Debate."  He notes, "The late novelist Michael Crichton, in his prescient 2003 lecture criticizing climate research, said: 'To an outsider, the most significant innovation in the global-warming controversy is the overt reliance that is being placed on models.... No longer are models judged by how well they reproduce data from the real world—increasingly, models provide the data. As if they were themselves a reality.'"

Models are essential, but so is perspective.

Dreaming

The LA Times' Steve Lopez took some heat from the usual suspects for being skeptical of the value of Los Angeles' new (not really new ) Grand Park which is just latest add-on to Los Angeles' uninteresting Civic Center complex.

The complex now has the Walt Disney Concert Hall, but even that addition has not provided the boost that boosters have sought for almost a hundred years.  People do show up for the music, but most run away after the show.  This is still LA. Venues are scattered and the possibilities for pedestrian exploration are limited.

LA Live, LA's Chinatown and Little Tokyo have their modest attractions, but they do not easily link to Grand Park. The government office buildings which dominate civic center are dead at night and not much better during the day.

Many who live here and enjoy LA seem to have trouble coming to terms with the fact that it is not New York or San Francisco or Seattle or Paris or you name it.  It will never be any of these. 

There are even people who dream of the pathetic LA River as taking on the role of a Danube or Seine or Thames. 

Dreamers are fine, but somehow they often want me to pay for their projects.