Transactions cost

It seems strange but for most of its life, economics was a field of study that did not recognize transaction costs. Look at the 200-year Ngram results, below. Ronald Coase changed things. Without him, we would be stuck with Nirvana economics, still teaching things that students could easily see are not terribly useful or linked to the world they know. Today's NY Times includes "Is Owning Overrated? The Rental Economy Rises." The report speculates about cultural shifts in attitudes and the effects of the recession. But it also mentions, "... technology has made borrowing possible on a broader scale, and between strangers. Social networking profiles and rating systems offer a level of trust and verification, and mobile phones equipped with GPS take much of the work out of matching people with nearby services." It is the money, and the trust, and the attitudes, and the possibilities. Tech is changing the world in profound ways. And in ways that conventional measures, including GDP, cannot be counted on to capture. We get better use of the resources and capacities we have. This can go a long way.


ADDED: Here is the econtalk discussion of AirBnB. Listen to the story -- and hear about the numbers.

More cost-benefit? Better cost-benefit?

In this morning's WSJ, Edward Glaeser and Cass Sunstein write on "How to Deregulate Cities and States ... Cost-benefit analysis and 'lookbacks' could lift unnecessary burdens of occupational licensing." You bet. But who will do these studies?  I think that's the real challenge.

Some years ago, Robert Hahn and Paul Tetlock published. "Has Economic Analysis Improved Regulatory Decisions?" They found, "... there is not strong support for the view that economic analysis has had a significant general impact."  What to do?

Given these unimpressive results, where should we go from here? Perhaps what is needed is a more disciplined and formal commitment to benefit-cost balancing, led by the president and Congress, along with comparable officials abroad. As noted above, such a commitment could entail mandating benefit-cost analysis of important regulations in statutes. Congress could also codify a version of the current executive order requiring benefit-cost analysis. It may also want to consider subjecting some proposed laws to at least a crude benefit-cost analysis prior to voting on them. Already, Congress often asks for estimates of the budgetary impacts of laws and proposed laws.

But Congress' record on this is, to be polite, mixed. Pork first. Even when studies are done, they are all over the place. Here is an apparently serious cost-benefit analysis of California's high-speed rail plan.

Many years ago, Charles Lave suggested that consultants be required to bond their forecasts. If taxpayers are asked to accept huge risks into the indefinite future, why should those who grease the wheels accept none of the risk?

What would the specifics of such a consulting contract look like?  This discussion should occur before we simply demand more cost-benefit studies.

Ferguson

Dan Henninger writes about Ferguson in this morning's WSJ.  He cites horrific unemployment rates among young black men. Part of the problem is their lack of education.  Here is the punch line.

The decline of inner-city public schools is the greatest, most bitterly ironic social tragedy in the 50 years since passage of the liberating civil-rights acts. But what works here is no longer an unsolvable mystery. It is the alternatives that emerged to the defunct public system—charters schools and voucher-supported parochial schools. Over the past 20 years, these options, born in desperation, have forced their way into the schools mix. Freed of politicized, sludge-like central bureaucracies, they've proven they can teach kids and send them into the workforce.

Economic growth is nonpartisan. But inner-city public education is totally partisan. Democratic politicians made a Faustian bargain with the teachers unions, and the souls carried away have been the black children in those doomed schools.

This is the part of the Ferguson problem that can be addressed. It does not come up as the popular tropes and the usual political players (from Holder to Sharpton) are paraded before media. Those from the education status quo establishment are not interviewed. I still wonder how they sleep at night. 

Romances

I cannot be certain that this marks the end of Vladimir Putin but the man is apparently closing some of the Moscow McDonald's.

I walk by the local Whole Food's on my daily trek and see how they proudly display their "locally grown" and "from farm to table" credentials.  Many other markets and restaurants do the same. From Moscow to LA, the romance is apparently easier to grasp than comparative advantage and gains from trade. But Marco Polo and all those European explorers celebrated in grade school history were paid to find trade routes.

It is more than gains from trade comparative advantage. Economizing on transport and emissions is not enough.  All resources are to varying degrees scarce. How do we trade these off against the personal preference orderings that each of us value?

The story of how markets have allocated scarce resource in such a manner that there are more people than ever on Earth and most of them live better and longer than their ancestors sounds pretty romantic too. "In France, at the start of the industrial revolution, one-fifth of the population only had sufficient energy to beg." (Dora Costa, JEL, Dec 2013). Untold classroom hours spent teaching about markets seemingly  missed transmitting the big story.

George Hilton

George Hilton has died.  Here is the post at the UCLA Economics Department's website.

George contributed "What Did We Give Up With the Big Red Cars?" to a symposium that Ross Eckert and I put together at USC in 1976.  LA did not lose its streetcars, he showed, because of a any corporate conspiracy. The conspiracy story, however, survives. It is just too sweet for some people to give up.

Hilton called attention to the fact that Los Angeles and other modern cities are built for auto use. Adding rail lines will not change that. Many years later, we have found out that George was correct. But we did it the hard way -- by wasting billions of dollars on rail projects.

These crony capitalist projects have almost nothing to do with transportation. Tom Rubin recently reported that the Los Angeles MTA provided 497.2 million transit rides in 1985 but remained stuck at 495.3 million rides in 2014. The LA area had grown considerably in the intervening years. Here is one of Tom's recent studies.

Ross Eckert (also deceased) was George Hilton's student at UCLA. Together, they wrote about "The Jitney's" in 1972. Door-to-door service that might compete with the private auto had been regulated out of existence by you-know-who. But it is now 2014 and the cronies in the taxi industry and city hall have finally met their match. Here is the intro to Gordon Crovitz's column on Silicon Valley's interest in a regulated internet, from this morning's WSJ.

The only thing better for consumers than a disruptive innovator breaking up a monopoly is competition among multiple innovators. The race to upend the taxi industry by providing cheaper, more convenient rides ordered via smartphones is accelerating, leaving regulators in the dust. The challenge led by upstarts Uber and Lyft goes beyond new choices for rides. It's also a reminder that regulators are the enemy of innovation.

The innovators will win but only after much has been lost in time and treasure. Had people only listened to George Hilton in 1976.

Long shot

Those writing about cities focus on overall performance or on urban structure. I claim that these are closely linked. We get growth if urban structure is congenial.  But consider the three dominant conversations in the study of urban structure.

The canonical model of urban economics develops the idea that land uses arrange themselves in terms of how users value accessibility -- actually plural; many destinations matter. We get the prediction that ever cheaper access causes ever more city spread. The evolution from pedestrian city to streetcar city to automobile city corroborates this. I suggest that smart-phone city will continue the trend.

There is also the visionary planning approach, based on architecture-high-modernism-urban design traditions. "Garden city" and "smart growth" designs are examples.  These approaches are static and popular in many circles -- but  have not had any discernible real world impact.

Finally, there is the Jane Jacobs-F.A. Hayek complex self-ordering arrangements view. Locators evaluate complex trade-offs as they seek propitious locations -- to exchange and form new ideas and to produce new things. If enough of them succeed in finding propitious locations, we get city growth.

Here is a passage from The Economist's obit for Peter Hall:

He soon changed his mind. Wherever that [top-down, rational] approach was tried—in Birmingham, or Glasgow, or around the elevated Westway in north-west London—it caused exactly the sort of ugliness and alienation he had hoped to banish. In the 1970s he began arguing that one way to deal with urban decay might be a bonfire of regulations; the idea, he said, was to “recreate the Hong Kong of the 1950s and 1960s inside inner Liverpool or inner Glasgow”. That sort of fertile chaos, he came to believe, was exactly what made cities so important, and such exciting places to live. He was an early advocate of the view—these days the received wisdom—that by allowing people to form connections with like-minded colleagues, cities are the engines of a country’s economic, cultural and artistic life.

I am not sure that this is the "received view."

But let locators form connections. Let them locate where they get the connections that work for them. But getting to that state requires flexible land markets and overcoming the efforts of those wedded to the second approach. It means a light touch from planners. Given that the mainline view favors the visionary planning approach, that would be a long shot.

ADDED

There is lots that is easy to find re the first two perspectives.  Sandy Ikeda has been most influential describing the less known Jacobs-Hayek view of cities.

Water: markets or cops?

The economics of water has typically been divided into the problem of water quality and the related problem of quantity; once water is of acceptable quality, who gets it and how much and on what terms? In both instances, there is considerable discussion of how (when) to use market mechanisms.

For the water quality problem, Karen Fisher-Vanden and Sheila Olmstead survey the state of water pollution trading in the U.S. The clean water allocation problem -- treating water as the scarce resource that it obviously is and enlisting markets to fulfill the dual functions of rationing demand and eliciting supply -- is treated in just about any principles textbook.  But instead many countries' national governments guarantee "The rights to water and sanitation in national law." In most cases, this has amounted to a tragic case of simply posturing. Many millions die every year. The problems of rationing and eliciting are not easily addressed via political and administrative means.

At the same time, the simple economic rationale for market provision has not made a lot of headway either. I recently (July 31) blogged about water policy and waste in my own neighborhood.  This morning's LA Times reports on the "water cops" that are now on the case:

It's a daunting task — just four people, full time, policing an area of about 460 square miles. For that reason, they mostly respond to calls or emails from people who report their neighbors watering lawns on the wrong days, spraying down sidewalks or allowing street runoff. The agency does not reveal the identity of the tipsters.

Laugh or cry? Pricing water and deputizing every consumer as his or her own water cop is beyond the pale. Instead, we get silliness piled on silliness.

Wrong cure, wrong disease

There will always be business cycles. Even the wisest and best intentioned investors will make mistakes. The open question is whether the know-how and the tools we have to manage macro-economic ups and downs make things better or worse.  There is no slam-dunk answer to the question but I lean to the "worse."  Would the recent downturn have been less severe without the monetary and fiscal and housing and countless other interest-group inspired policies in place before 2008? The slow recovery is now explained (more macro-economic know-how) by "stagnationist" explanations. We last saw those during another period of abysmal recovery, the New Deal years.

Joel Mokyr's op-ed ("What Today's Economic Gloomsayers Are Missing") in today's WSJ is on point. (1) Our welfare is all about growth, so get the growth right; (2) Its all about the new technologies that prompt growth; (3) We do a poor job measuring and identifying the effects because they are mainly about increased consumer surplus; we cannot accurately measure improved productivity.

Mokyr offers this example: "If telecommuting or driverless cars were to cut the average time Americans spend commuting in half, it would not show up in the national income accounts--but it would make millions of Americans substantially better off." Even worse, some would point to how few jobs will have been created by these innovations.

Finally, there is the big irony: we would probably get more growth if we backed off from the many policies now aimed at dampening business cycles. Growth is natural. Investors and savers seek each other -- and find each other because their plans mesh with the plans of credit market middlemen. But again this is where ham-fisted policy interventions (Dodd-Frank, etc.) can cause real damage. 

ADDED

Timothy Taylor and Arnold Kling re Dodd-Frank: it's a work in progress.

Self control

Given the choice of looking after assets on-hand vs. initiating high-profile flashy new projects, the latter always wins. My previous post noted the 20-million gallon L.A. water pipe break (cited in today's WSJ). But every day there is a new chapter. Today's LA Times cites L.A. street repair shortcomings -- and the bizarre LA City Hall bungling behind it (see the whole story). They seemingly cannot find ways to spend earmarked street repairs money they have. The City Council had cancelled plans for a ballot measure that would have increased the local sales tax for street repairs just in time.

Call it a public choice story (public sector unions first; citizens last); call it a "squeaky wheel" story (public sector unions first; citizens last).

But the inept "leaders" are also the people eager to involve themselves in the cosmic issues -- "sustainability", "climate change", all sorts of private behavior (restaurant menus, e-cigarettes) or private contracts (employer-employee, renter-tenant, etc.). The hidden-true-cost-but-feel-good policies are always high on the agenda. It is beside the point that those who lead the charge have no special expertise in the cosmic issues. Why not show that you have mastered the basics and only then indulge in the fun stuff?  The fun-first impulses are what we try to teach the very young ones to control.