Teaching moment

What are the top three ideas in economics? How about (1) The non-zero-sumness we get from specialization and voluntary exchange; (2) The benefits (and inevitability) of creative destruction; (3) The fact that there is no economics without politics and no politics without economics. 

Call the latter "political economy" or call it "public choice" or call it "politics without romance."

All of my top three appear in this episode reported in today's WSJ: "Uber, Taxis Engage in French Street Fight ... Online Car Services to Oppose New Rule on Pickup Times". And what are the French public servants proposing? "Under the new rule, all car services—but not licensed taxis—must wait 'at least 15 minutes' between taking a reservation and picking up a passenger, more than double what car services like Uber say is their normal wait time. The only exception: pickups at four- and five-star hotels and at industry expos."

Where there are "public servants" there you will find interesting contrivances that seek "level playing fields."

I mention all this because (late to the party) I had my first Uber experience yesterday. The service was many times better than I had been getting from the LA taxi monopoly -- and the fare was lower.

I expect that the local public servants are well aware of the problem -- and that they have it in their sights.  

Pope Francis' turf

In today's WSJ, John Cochrane describes market-based alternatives to Obamacare.  Sounds like a no-brainer but apparently a hard sell in the "real world."

A page away, Paul Rubin writes "How to Roll Back the Demonizing of Free Markets ... 'Competition' carries a negative connotation, despite its contributions to human happiness."

The "How to" part is beguiling but there is a huge literature on how to get the non-zerosumness of markets into the heads of undergraduates and others.  Contrary to Rubin's argument, many of us celebrate the cooperation that happens quite spontaneously in markets.  I, Pencil and variants are widely taught.  Here is the movie.

An uncountable number of many-times-more-complex supply chains routinely serve us.  Unlike pencils, none of us could even describe them.  Baumol and Litan and Schramm note that "The most astonishing thing about the extraordinary growth and innovation that the U.S. and other economies have achieved over the past two centuries is that it does not astonish us."

I think Rubin is on the right track. Non-zerosumness is a wonderful thing. It happens in markets and it is celebrated in the world's great religions (The Evolution of God). This is Pope Francis' turf.

Great conversation

Russ Roberts and Judith Curry talk about climate change.  This is the most enlightening and delightful discussion of the topic I have yet seen or heard.  I am calling attention to it for the benefit of anyone who was not already aware of it.

Enjoy.

My regulators will be better than yours

Joseph Stiglitz writes "In No One We Trust ... Inequality is eroding our institutions and our way of life." in today's NY Times. What to do?

I suspect there is only one way to really get trust back. We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them. We did just that after the roaring ’20s crashed; our efforts since 2007 have been sputtering and incomplete. Firms also need to do better than skirt the edges of regulations. We need higher norms for what constitutes acceptable behavior, like those embodied in the United Nation's Guiding Principles on Business and Human Rights. But we also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.

I had to chuckle at the UN recommendation.  More than a few of the member states (and their delegates) are not the folks I would go to for advice on clean government. I also had to smile at the idea that the New Deal years were without cronyism. Those were the days?

We all like to be seen as on the side of the angels. But does that mean we do not consider how great wealth was accumulated?  Was all of it nefarious? Do we begrudge Silicon Valley billionaires who improved our lives in tangible and profound ways?  Did the Wall Streeters who Stiglitz attacks not get bailout help from Stiglitz's friends in high places?

It's easy. My regulators will be better than yours. Very smart people still talk this way. Politics without romance (public choice economics) got James Buchanan a Nobel in 1986 but since then most people have managed to ignore the whole thing.

Were Buchanan still around, he might even see this as ironic vindication. Romantic notions are the last ones to go.

ADDED

Here is "Public Choice 101" from Arnold Kling.

ADDED

Greg Mankiw lists six ways to get median income trends wrong.  All the errors bias results in the same direction?  Coincidence?

Winners and losers

Bootleggers and Baptists explains more than any macro-economic model I have seen. Someone alert the proper Nobel committee. Never underestimate the power of rent-seeking coalitions.

While we're at it, never underestimate the tenacity with which people will hang on to their sunk human capital.  (This is where even economists put aside what they know about sunk costs.)

Today's WSJ includes "California's Bullet Train Derailment A judge says the rail authority is breaking the law. Who cares!" Eminent domain is being used to confiscate private property for a project that will never be completed.

This morning's LA Times includes "Buses are their route to a brighter future" which emphasizes that it's not easy depending on the region's bus system. But it would be asking a lot to get transit fans to connect the dots. The Times has been beating the drums for rail transit for as long as I can remember.  We live in a world of trade-offs and we have less bus transit service now than we could have, had funds not been diverted by the campaign to build rail.  A lot has been spent so that fewer could be served. Where are all those who make it a point to be advocates for the people described in the story?  Read the whole thing.

Many years ago, the advantages of bus over rail for modern American cities was demonstrated by Meyer, Kain and Wohl. But that analysis was no match for the B and B coalition.

Designs

Before the tech-bust of 2000, Po Bronson wrote this:

"Silicon Valley Searches for an Image ... Recently a five-person crew from ABC's 'Nightline' planned a trip to Silicon Valley to shoot a minidocumentary.  Their subjects were preinterviewed, schedules were cleared, flights were booked.  There was only one problem: No one of the crew had ever been there before, and they had no idea what scenery to put on tape. Theye were hoping for the equivalent of New York City's skyline or the Hollywood sign. They needed to point the camera at something that captured Silicon Valley's buzz.  Instead, they found an endless suburb ..." (WSJ, Feb 9, 1998).

That was then. Fast forward and here is Paul Goldberger on plans underway for the Valley:

"In a community that you could almost say has prided itself on its indifference to architecture, Apple, which had already changed the nature of consumer products, seemed now to want to try to do nothing less than change Silicon Valley’s view of what buildings should be."

Read the whole thing. Goldberger is disappointed in how two large projects are taking shape, Norman Foster's ideas for Apple and Frank Gehry's plans for Facebook.

"Undoubtedly, both buildings will bring a degree of architectural excitement to Silicon Valley that it has never seen before. But the real question is whether, for all their ambition, they will do much to change the underlying suburban culture. They are both big, private, sealed-off corporate villas that most people will reach by car. At a time when the city, not the suburb, seems to hold the allure for younger workers in the technology industry, how much will Foster’s refined, iPhone-like architecture or Gehry’s lively, garden-topped workspace matter? Twitter’s renovated office space in an old San Francisco neighborhood may, in the end, be the real harbinger of the future."

The new look will make life simpler for future camera crews.  But employees who can afford it will commute from San Francisco -- which no one designed.  Steve Jobs had an amazing knack for finding pleasing designs for small gadgets.  But how scalable is that knack?

Silicon Valley will continue to thrive as long its workers come up with ideas.  They will exploit the great communications gadgets available to them to do that -- to find ways to interact no matter the design of their work setting. 

Wealth and spatial order of cities

Chris Webster and Lawrence Wai-Chung Lai published their Property Rights, Planning and Markets: Managing Spontaneous Cities in 2003.  They highlight the various "orders" they see relevant to cities, including "spatial order".  In describing the latter, they note the economics of land markets and also the possibilities of externalities as well as their internalization.

I went back to Webster and Lai because I just came across Glaeser and Gottlieb's "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the U.S." Here is their abstract:

Empirical research on cities starts with a spatial equilibrium condition: workers and firms are assumed to be indifferent across space. This condition implies that research on cities is different from research on countries, and that work on places within countries needs to consider population, income, and housing prices simultaneously. Housing supply elasticity will determine whether urban success reveals itself in the form of more people or higher incomes. Urban economists generally accept the existence of agglomeration economies, which exist when productivity rises with density, but estimating the magnitude of those economies is difficult. Some manufacturing firms cluster to reduce the costs of moving goods, but this force no longer appears to be important in driving urban success. Instead, modern cities are far more dependent on the role that density can play in speeding the fl ow of ideas. Finally, urban economics has some insights to offer related topics such as growth theory, national income accounts, public economics, and housing prices.   

They mention density thirty times throughout the article but they do not say much about it. Cities are cities because they are more dense than non-city areas. And we know that this is beneficial -- otherwise cities would not be the "engines of growth."  But there are many possible densities and there are many densities within each city.  In other words there are complex spatial patterns that matter.  How do we get the patterns that work? the ones that enable cities to continue to compete for labor and capital (especially entrepreneurial capital)?

I think that Webster and Lai are on the right track. There are emergent spatial orders. In fact, although they do not say so in so many words, the spatial patterns that succeed are the ones that manage to internalize many of the possible positive externalities -- while  creating enough distances to avoid many of the negative ones.  Profitable locations include ones that deal with externalities this way.

This is how the land market process is essential. This part is much more interesting and complex than just "density".  It also highlights the fact that there are more than just the standard textbook ways (Pigouvian taxes or Coasian rights trades) to internalize externalities.This is part of spatial order. It is part of how cities create wealth.

Gross Output and GDP

Mark Skousen celebrates the fact that Commerce's BEA will soon issue quarterly reports on Gross Output (GO) -- in addition to regular GDP reports.

Most Econ 101 courses cover the various limits of GDP accounting which are well known.  The economy is huge and complex; efforts to sum it up in a single number are heroic.  Compromises are inevitable. "Accountants measure what they can."

GDP is crafted to avoid double-counting.  In the process some data are not reported.  In contrast, input-output accounting and modeling are now widely used and available.  These highlight gross output consequences that do include all inputs and all outputs -- even though the value of the latter may include the value of the former.

Businesses practice double-entry bookkeeping and that has never brought on double-counting worries.  GO and GDP serve different purposes.  GDP reports all of value added. But all of activity is greater than all of value added.

My friends and I have been interested in linking economic activity to infrastructure activity.  Here is an example.  Infrastructure services are required for all material inputs as well as all material outputs.  This is just one example where GDP cannot replace GO

How to really help

Here is Prof Arindrajit Dube's summary of research that points to moderate to negligible unemployment impacts of a minimum wage law.  Here is Prof. Don Boudreaux's response.  Color me skeptical when it comes to claims that the Law of Demand does not hold.  The intuition that higher prices are incentives to discover substitutes has been corroborated an uncountable number of times.  There may be cases where within some narrow range of price hike there are short-term negligible effects.

But this is all the green light that the class-warriors need as cover.  Their redistribution and price-fixing agenda is way beyond any short term and narrow range. Steven Landsburg notes that if there are no unemployment effects, there are likely to be price effects. Who shops at WalMart and MacDonald's? Not the 1%.

But the deeper point is that the only way to really help low paid people is to give them an education and a marketable skill. It is telling that those most eager to be seen as lining up to "help people" are also reluctant to back the radical shake-up of the public schools that might make a difference to the very poorest. The Obama Justice Department fights school voucher programs where and when it can.

Meaningful shake-up has to be bottom-up-demand-driven. This means choice and empowering the parents.  Shake-up from the top is Obamacare.  The difference between schooling and education is best identified by parents, not the people responsible for the current state of the public schools in poor neighborhoods.

ADDED

Here is Pritchett discussing his book with Russ Roberts.