The real world

Hydraulic fracturing is partly responsible for a positive "oil shock". "How Plunging Oil Scrambles Geopolitics" by Prof. Brenda Shaffer (gated) in today's WSJ looks at discomfort in Russia, Venezuela and Iran. But there are positive effects in all of the oil consuming nations also. Administration policy did not see this one coming; they do what they can to impede fossil fuel production and push hard for "renewables." 

We also have new records on Wall Street. High asset prices (that reward "the rich") are another one of those embarrassments because Washington policy (on its face) was to help everyone but "the rich." Policy (here and abroad) that keeps interest rates low do a so-so job providing an economic recovery but they do push up asset prices. Good for asset owners. What about the poor and the middle class?  Not so good. Here is a nice NYT summary.

Central planning is hard work. At best, you hit the target you want to hit. At worst, your policies backfire. We have neither. For the case of oil, we get a windfall of good economic outcomes from policies that are the opposite of those executed. For the case of asset prices, there is also a windfall but not the one policy makers had in mind. It could have been much worse. The worldview our policy makers use is seemingly not of the real world.

Mismatch

The Economist of Oct 25 includes "The geography of joblessness."  The piece cites new studies, not the same old cross-sectional "spatial mismatch" research of the 1960s and 70s, using newer longitudinal data less likely to confuse cause and effect. Higher unemployment, the cited studies show, can be linked to residential location further removed from areas of high job concentrations.

One of the suggestions made in the piece is to "improve" public transit. As with most discussions of "the need" for more infrastructure, there are many ways to spend more money. Not all of them are beneficial. Transit spending in the U.S. has been rising for decades with almost nothing to show for it.

But been-there-done-that. The original spatial-mismatch work was used to justify transit subsidies back in the day. A significant social and economic problem would be "solved" via policies and politics dear to Bootleggers and Baptists (B & B).  But the long-term decline in public transit's share of passenger miles has not been touched by the massive subsidies.  Meanwhile, unemployment and underemployment have been rising.

Unemployment and underemployment are difficult and complex problems. They probably have a lot to do with poor public schools, lack of skills, poor of work habits. But these are beyond the realm of  B & B policies. The mismatch is between the problems and the policies.

"Diversity"

Here is Peter Boettke calling attention to a PBS story with and about Walter Williams. Watch the clip.

I find that Williams is always worth listening to. He explains basic economics as clearly as anyone. This is particularly important because too many college econ courses are obscure and forgettable. Williams also has a personal history that is worth hearing about.

Call your local affiliate for date of showing -- or go to this list. I will not be able to see the program. LA is not on the list, neither is NY, Chicago, San Francisco, Seattle, Portland, etc. I see only two of the large U.S. metros represented: Philadelphia and Washington, DC.

Station managers and/or their audiences in most of the large cities seemingly have a narrow (predictable) view of diversity.

Networked innovation

Many people saw PBS' various installments of Steven Johnson's How We Got to Now. Here is the book which is equally enjoyable. In fact, the book is crammed with great visuals and parallels to the TV presentation (though not in the same order). This may be a new thing: market a book and a TV series that are practically interchangeable; watch the popularity of the one prompt interest in the other.

Economists see a world of supply chains. I like supply chains of ideas; we get smart and we get ideas by interacting with each other.  Johnson likes to string inventions together ("networked innovation"). Gutenberg got people to read; many then discovered that their eyes were not so good; the people who had found how to work with glass also found a way to make lenses for seeing-eye glasses; it was not long before we got to microscopes and telescopes and all of the science these brought forth. Johnson evokes chains like these throughout the book.

Once clean water was possible via chlorination, there were public baths. Once we had these, women's bathing suits became skimpier. Historians of ideas are supposed to make connections and some of Johnson's will be challenged. But what fun. "Before the rise of municipal pools, women bathers generally dressed as though they were bundled up for a sleigh ride. By the mid-1920s, women began exposing their legs below the knee; one-piece suits with lower necklines emerged. Open-backed suits followed by two-piece outfits followed quickly in the 1930s. (p. 149). And we know the rest of the story.

Just-so stories are just human

We love narratives. We produce and consume just-so stories all the time.  In today's NY Times, Konika Banerjee and Paul Bloom ask "Does Everything Happen for a Reason?" They add, "Of course not. But studies suggest we have a natural urge to think so."  We are pattern-seeking. This is a very practical tendency acquired via evolution. It has the well known downside that jumping to conclusions entails risks. Nevertheless, Banerjee and Bloom wind up this way:

Some people are more prone to find meaning than others. In large-scale survey studies also reported in the journal Cognition, we found that highly paranoid people (who tend to obsess over other people’s hidden motives and intentions) and highly empathetic people (who think deeply about other people’s goals and emotions) are particularly likely to believe in fate and to believe that there are hidden messages and signs embedded in their own life events. In other words, the more likely people are to think about other people’s purposes and intentions, the more likely they are to also infer purpose and intention in human life itself.

WHATEVER the origin of our belief in life’s meaning, it might seem to be a blessing. Some people find it reassuring to think that there really are no accidents, that what happens to us — including the most terrible of events — reflects an unfolding plan. But the belief also has some ugly consequences. It tilts us toward the view that the world is a fundamentally fair place, where goodness is rewarded and badness punished. It can lead us to blame those who suffer from disease and who are victims of crimes, and it can motivate a reflexive bias in favor of the status quo — seeing poverty, inequality and oppression as reflecting the workings of a deep and meaningful plan.

Not everyone would go as far as the atheist Richard Dawkins, who has written that the universe exhibits “precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, and no good, nothing but blind, pitiless indifference.” But even those who are devout should agree that, at least here on Earth, things just don’t naturally work out so that people get what they deserve. If there is such a thing as divine justice or karmic retribution, the world we live in is not the place to find it. Instead, the events of human life unfold in a fair and just manner only when individuals and society work hard to make this happen.

We should resist our natural urge to think otherwise.

We have also developed the scientific method of inquiry whereby we seek to do better than be "just-so" storytellers.

Just-so storytelling is the way most people discuss the everyday price gyrations on asset markets. Stock markets have had a bad October -- and there is no end of explanations.  Also in today's NY Times,  Robert Shiller discusses, "When a Market Theory is Contagious ... Is the world suffering 'secular stagnation'? Yes or no, the idea alone keeps hurting stocks." Shiller notes the prominence of "thought viruses."

These viruses and many other just-so stories are always out there. But buy-and-hold investment strategies are too boring for many. They flock to the casino with predictable results.

Water

The LA papers are full of worries over the local drought but have yet to discover, pricing, incentives, and politicized misallocations. This is why I was happy to find Eduardo Porter's "The Risks of Cheap Water" in the NY Times.

Water can be metered and sold. There is no reason other than politics for nutty politicized allocations. Politicians do like politicized allocations. There is a nice post on all this by Alex Tabarrok at MR. Gary Libecap has been all over California water policy missteps for some time.

Milton Friedman quipped, "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.” People smiled. But in California, we have droughts, popping water mains, water cops to patrol who waters when. Dirty cars are now a local badge of honor. It's funny bit it's not.

Legacy

Getting my own medical care, I have encountered more than a few medical professionals who are practicing  here from abroad and who treated me very well.  I was glad they are here and I expect that they are also better off practicing medicine in the U.S. than in their native land. Good old fashioned gains from trade.

This morning's WSJ includes an op-ed by E. Fuller Torrey, "How the U.S. Made the Ebola Crisis Worse ... The total number of Liberian doctors in America is about two-thirds the total now working in their homeland."  Torrey wants the U.S. to produce more home-grown health professionals so that this kind of thing cannot go on. Expect others to call for restrictions on how many professionals from abroad are allowed to practice here. Gary Becker advocated auctioning immigrant permits to the highest bidder. That would not address the problem that Torrey writes about.

The very big problem is the one Adam Smith wrote about many years ago.  Some nations are rich and some are poor. And whereas some poor places can become rich (as in East Asia), many others are less likely to make the transition. Local tribalisms and civil wars (and their consequences) stand in the way. The way to address the problem that Smith addressed is to allow in more Liberians (and others) rather than fewer.

It is worth repeating that a flailing Pres. Obama, eager to leave some kind of a legacy, can do more for the legacy (and for the world) by moving away from his left-wing-hack platform (minimum wage, high-speed rail, green energy, and all the rest) towards reformed immigration. He even says he wants this but is blinkered by U.S. politics as her perceives them. That is not legacy stuff.

Open borders is the idea but that scares too many Americans. An enlightened president would promote a version that trades all of the nutty restrictions now in place with plausible controls: no lunatics, no psychopaths, no fanatics. The enlightened part and the serious work would be to fashion these. The rest of the job would be to knock enough heads in Congress to get it passed into law. Barack Obama would have left a worthy legacy.

All the way down

Tyler Cowen cites Jean Tirole's Nobel-winning economics as exemplifying elaborations of principal-agent theory (and problems).  Who do you trust to carry out an agreement? Which parts of the deal are implicit and which are explicit? 

There is the regulator and the regulated. The regulator is beholden to the legislature. The legislature is beholden to the voters, Perhaps. Tirole gets credit for formalizing the story. Here are two equations I remember from way back (undergrad days?): 50% + 1 = 100%; 50% - 1 = 0. This describes voting rules in most democracies. In fact, it is 50% of those bothering to show up and to vote, not 50% of "the electorate" and not 50% of those eligible.

So it is principal-agent problems all the way down.  A great achievement of the advanced economies is the widespread extension of trust to strangers. McCloskey cites Bourgeois Virtues. But these can only go so far; where they end is where principal-agent difficulties show up.

Private planning

Pete Boettke points us to the Mercatus 40th anniversary celebration of Hayek's Nobel award. Keynote Israel Kirzner discusses the context and the various advances in Austrian economics in these forty years. Watch the video. 

But whereas the idea of centrally planned economies has fallen on hard times these past forty years, the idea of top-down planning of cities and regions remains respectable almost everywhere. In the modern version, the threat of environmental crisis is invoked and conventional city planning is seen as an important antidote. Yet quite a bit of private planning goes on in cities -- and much more could be done. These are the themes of a new anthology, Cities and Private Planning, edited by David Emanuel Andersson and Stefano Moroni that was just published. Included is a chapter by Wendell Cox and myself.

There is a growing library of discussions of private city planning. Look here, here, here, here for starters. There will be more. Most of the authors included in these volumes are on the job.

Romance

James Buchanan's famous description of his work "Politics without romance" hit the nail on the head. But most people cannot or will not shed the romance. Here is Martha Nussbaum chatting with Russ Roberts:

Why do I say, 'government represents the people'? Look, you do not need to show that you win to show that government is in some meaningful sense, yours. Of course, if you have a vote, some people will win and some will lose. But having the chance to weigh in on those policies is what I'm talking about. In the era when women couldn't vote, well they might often get what they wanted by wheedling their husbands and getting the husbands to give them what they want. But there's a crucial difference--namely, that they are being dominated. The government is not accountable to them. And in the era where women have the vote, it's different. Women don't always win. No, of course not. But no individual wins all the time. That's what democracy is about. But on the other hand, you are in that process. And it is in that sense, yours. Even the Constitution, which I think does, by the way, command the agreement and assent of a pretty large proportion of Americans at some level of generality, you know, there's an Amendment process. So, you can always work at organized work to amend the Constitution if you don't like it, and see how it goes. You can't expect to win, but you can participate in that process. Now, as far as education goes, I'm back to what I said before. If government wants to experiment with charter schools or with vouchers, fine. Let them experiment with that. But in the end of the day it's a system supported by the people. And the results, we have to look at the results and see what they are. And politicians will be defeated if they don't do well by that.

It's that simple. It's just about the will of the people. "The people" can always amend the Constitution; "the people" will prevail.

I just read Bootleggers and Baptists by Adam Smith and Bruce Yandle. They work to put some flesh on Yandles' original 1983 rendering of the model. They apply it to recent events including Obamacare, Detroit and Wall Street bail-outs, etc.

Everyone knows that politics make strange bedfellows but Yandle's insight was to describe the nature of the bedfellows in the modern U.S. context. The book is remarkably slim (under 200 pages) but it could have been as almost as lengthy as the accumulated Federal Register. But that would be repetitious; the same theme repeats itself daily -- add what goes on in state and local government.

In the "Why Baptists?" chapter, the authors take note of our spiritual side and describe how their model brings that into the analysis of daily politics. The most vocal "Baptists" these days are environmentalists; they provide cover for the many Solyndras.

Smith and Yandle refer to the "Occupation" demonstrations and note that these could have been a Bootleggers and Baptists moment. Prompting relaxed mortgage underwriting standards, politicians were on the side of the housing affordability angels; mortgage originators thrived under the Fannie/Freddie implicit (soon to be explicit) bail-out guarantee.  Then after 2008, Wall Streeters craning for bail-out money were allied with those eager to be seen as "doing something" to "save jobs."  That theme is still alive. In this morning's NY Times, Neil Irwin rehashes why Lehman Bros. could have/should have been bailed out.

But, like Nussbaum, the "occupy" street people had a much easier time with the old chestnuts. In their case, just good old fashioned (and romantic) anti-capitalism.

High or low densities?

Urban economists and urban planners love "density". I put it in quotes because the details (How high? Where? At what cost?) are often ignored. The argument is simple. New ideas prompt productivity and growth. We form new ideas when we interact with others. Higher densities prompt higher volumes of encounter and interaction. 

But there is also the problem that the dominant trend has been to lower average densities. See, for example, Bruegmann's indispensable book. 

“Most American anti-sprawl reformers today believe that sprawl is a recent and peculiarly American phenomenon caused by specific technological innovations like the automobile and by government policies like single-use zoning or the mortgage interest deduction on the federal income tax.  It is important for them to believe this because if sprawl turned out to be a long –standing feature of urban development worldwide, it would suggest that stopping it involves something much more fundamental than correcting some poor American land-use policies.  In the following chapters I will argue that the characteristics we associate today with sprawl have actually been visible in most prosperous cities throughout history.  Sprawl has been as evident in Europe as in America and can now be said to be the preferred settlement pattern everywhere in the world where there is a certain measure of affluence and where citizens have some choice in how they live.” (p. 17)

 At the level of the urbanized areas, the U.S. trend has been towards lower average densities. Considerable detail (courtesy of W. Cox) is available here and here.

I have mentioned previously that my fromer student Chen-Yi Lin looked at U.S. talent migration at the sub-metroplitan level (the PUMAs) and found considerable complexity in terms of the many densities that attract smart and credentialed people (Lin, C.Y. (2013). Talent migration: Does urban density matter?, Unpublished doctoral dissertation, Los Angeles: University of Southern California). Collaboration opportunities are available in all sorts of places -- and in many ways.

The American Community Survey data show that "work at home" has risen steadily, from 3.2% of all workers in 2000 to 4.4% in 2013. Still small but the public transit industry commands many billions of dollars of annual subsidies and cannot touch this rate of growth. I would say that the trends we see facilitate collaboration and innovation at many densities -- including low densities.