Forecasting

Two things usually occur in late December. Economists make economic forecasts for the coming year -- and others remind them how terrible their forecasts of the previous December have turned out. How about those oil prices?  Here are more from a year ago.

The economics we know helps us to grasp (perhaps forecast) broad patterns but it is not a good guide to the sorts of point forecasts that so many love to make. We are comfortable saying that if a Cuban entrepreneurial class is allowed to emerge and be free, the island will flourish.  Here are others of that nature.

But most of us have no clue what the price of gold or real estate or whatever, even the SP 500, will be at the end of next December. In their private lives, even economists buy index funds.

The WSJ's Jason Zweig discusses all this in his column today. He describes Ken Arrow's stint as weather forecaster during WWII.  Arrow saw that the models used for one-month weather forecasts were awful but was told by superiors, "The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes." This all happened before Catch-22 was written.

Zweig also points us to a study that demonstrates the superiority of simple over fancy models. He also cites an on-going evaluation of forecasts, maintained by Phillip Tetlock and his associates.


In a WSJ op-ed of May 4, 1998 (I held on to it for great classroom discussions), Edward Yardeni wrote about Y2K, "We must prepare for the possible collapse of essential government services, including tax collection, welfare payments, national defense and air traffic control."  One can say that the alarmists perhaps helped us prepare -- and we did avoid the calamity.

Happy New Year.

ADDED

If you want to play, this is via Bill McBride.

The moral case

Doomsday forecasts fail because they fail to consider that (non-scarce) human ingenuity, incited by credible property rights, will doom the forecasts -- and the policies they spawn. The Ehrlich-Simon bet is a perfect example. Simon clearly got it and Ehrlich was clueless. But religious-left alarmists are not exactly open to evidence that undermines the faith.  Have any of them noticed that peak-oil never happened -- and is receding as we speak?  Have any of them noticed that spending mega-bucks on high-speed rail and subsidized electric cars is beyond silly?

Much of the story is well documented by Alex Epstein in his The Moral Case for Fossil Fuels.  He updates themes developed by Julian Simon, Indur Goklany, Matt Ridley, Bjorn Lomborg, to name just a few. Beyond that, Epstein properly emphasizes the moral case. With fossil fuels, we get human flourishing; without them, the opposite.He does not dismiss the climate story but carefully demonstrates that "the science" is not "settled."  In fact, the greater peril is from making huge economic sacrifices with little serious prospect of gain. The Germans may decide to follow stupid policies; perhaps they will wise up. But why is John Kerry of all people lecturing the Indonesians and others that it is their obligation to remain poor.

Epstein is quotable throughout the book.  Here is one of many:

Nineteenth-century coal technology is justifiably illegal today. The hazardous smoke that would be generated is now preventable by far more advanced, cleaner coal-burning technologies. But in the 1880s, it was and should have been perfectly legal to burn coal this way -- because the alternative was death by cold or starvation or wretched poverty. (p. 43)

Why are so many (seemingly) educated people who will live longer and better than their ancestors behaving like gullible and hysterical Luddites? Why in a sea of good tidings are so many (including "thought leaders" in Epstein's phrasing) eager to seek and focus on bad news?  I have no idea.  Here is one attempt to explain the puzzle.

Checks, balances, bells

Most American school kids learn about the system of checks and balances written into the U.S. Constitution. At that level, it is very attractive and (seemingly) limits the damage that any one group can do to the rest of us. The whole arrangement was (seemingly) settled by the 1803 Madison v. Marbury ruling.

But the reality is much more complex and much more interesting. Public choice economics reminds us that all of the players are people who consider incentives and constraints -- and who also have their biases. Judges cannot be expected to be a race apart. They cannot be expected to operate outside any political context. This is one reason one can lose money betting on judicial rulings and, especially, Supreme Court decisions.

All of this and more is nicely rendered by Damon Root in his Overruled: The Long War for Control of the Supreme Court. Spoiler alert: the book's last chapter is titled "No Peace."  Nothing is settled. The idea of judicial deference to legislation (by the states or by Congress) has been embraced by the likes of Oliver Wendell Holmes, Jr., Robert Bork and John Roberts -- and many others. The Fourteenth Amendment to the U.S. Constitution and its various clauses are also embraced and ignored in zig-zag fashion.

Read the book. Do not bet on how Obamacre will fare in the upcoming King vs Burwell decision this Spring. Do not expect that the public comments of Prof. Jonathan Gruber will not be a factor. Rung bells are never un-rung.

ADDED

Here is a review of the book by a legal scholar.

Externalities and all that

“When all voluntary transactions have been entered into by market transactors, there still remain some interactions that ought to be internalized but which the market forces left to themselves cannot cope with” (Carl Dahlman, JLE, Apr 1979).  There is apparently no residual claimant. Add one and you get the following:

“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” (The Economist March 1, 1997).

I am prompted by a recent piece by Jason Potts, “Innovationis a Spontaneous Order” in Cosmos and Taxis (full disclosure, I am a consulting editor).  Potts discusses five spontaneous orders: science, business models, co-operation, clusters and copying.  It is, however, useful to differentiate cities from clusters; Potts seems to use them interchangeably.

The shopping mall described above is a cluster, not a city. Cities could be a collection of such clusters and one has to wonder if there are interactions between the clusters that remain to be internalized.  If so, by who?

Potts elaborates, “The basic units of a cluster are nevertheless knowledge-using and knowledge-generating firms.  Such firms will tend to co-locate to the extent that knowledge externalities can be created and exploited.  This is a property of the ‘absorptive capacity’ of the firms themselves, not of the environment.  (The ‘Coase theorem’ suggests that we would expect firms to bargain and contract their way toward internalizing the externality.)  Innovation networks and clusters simultaneously emerge as the network and special dimensions of this growth-of-knowledge process.  They are the emergent consequence of firms discovering and exploiting knowledge complementarities.  Clusters and innovation are part of a mutually constituting spontaneous order.”

I like the fact that Potts cites the exchange of knowledge. He also cites possible Coasian bargaining toward internalizing. The rest of the paragraph calls attention to my favorite theme: we get innovation networks, spatial clusters and the development of ideas as part of the same process. The right spatial arrangements are the key to growth. What can planners do? Recognize that they are an unlikely residual claimant and let the bargaining and contracting proceed.

Our harsh culture

Today's NY Times includes "Dude, Close Your Legs: MTA Fights a Spreading Scourge." Perhaps we should face up to the fact that there are some rough edges in American culture, including how many Americans behave in public spaces and places, including public transit.

(Also in some private places.  I witnessed an episode this morning where police were called because an irate customer lost her composure -- to put it mildly.)

And no one has any good ideas on what can or should be done. In our recent history, there has been more exit than voice as many Americans have de-camped to suburban areas in the hope of encountering less harshness. There is also the choice of private spaces (including shopping malls and Disney-type parks) over conventional public spaces.  Not to be overlooked is the fact that many Americans have a pretty good green space in their back yard.

Many Americans flock to European cities to enjoy the public spaces and parks as well as street life -- and public transit. Quite a few return and ask how we can mimic all of these things at home.  Then it's usually off the to races, including the inevitable tut-tutting about the "need" for more investments in public infrastructure. As though it is simply about more money.  The money part, of course, has the support of all the usual suspects.  Aaron Renn nails that one in a recent post.  I also cited some Los Angeles  infrastructure spending gone awry, in a recent post.

We do not know what to do about homeless street people.  We do not know what to do about an increasingly harsh culture.  In fact the latter greatly amuses audiences of many current movies. The evolution of American public behavior is easily seen by viewing the popular films of today vs those of fifty+ years ago.

What is to be done? This is complex but step #1 has to be an end to denial. We have a problem and it's not just about "starving" infrastructure.

I wish the NY MTA luck with their campaign. Once the middle class abandons public transit, it's all over for that mode. In many other large U.S. cities, that ship sailed some years ago.

Fasten seatbelts

Is it possible to have low interest rates and low down-payment requirements on home purchases without there also being risky lending? Events leading up to 2008 suggest that the answer is "no". But we are now heading this way -- again. Will this time be different? Who will be the adults this time? Marginal Revolution points to "fear of God" oaths required of Dutch bankers. But that's over there.

I just came across this from Arnold Kling and his review of Peter Wallison. Their summary of the last "boom" is convincing. I cannot see how a next round will be different. The participants are as politicized as ever. Housing markets and credit markets are seen as a great opportunity for policy makers of all stripes. Many on the left want to "help" low-income households get into a home; many on the right want to "help" builders sell more homes. That's quite a potent coalition.

Take a moment and take policy makers out of the picture; ask what would markets do on their own? Lenders would assess risk and adjust terms (including required down payments) accordingly. Lenders who guess wrong would (we hope) pay the price. Learning from failure is all we have. Fraudulent practices would have to be policed and prosecuted -- as with all transactions in all markets.

But in light of the potent coalition just cited, this is not the way housing will be financed in America. As they say, "fasten your seatbelts."

Faith-based planning

It's an old story but the hole gets deeper. The idea was to "get people out of their cars."  Or perhaps to line the pockets of cronies.

Be way generous and find creative accounting ways to cut the cost figure in half. It's still a disaster.

What $15 billion (spent on rail transit in LA) buys*
		1985		2012		Change
		Bus only system		Bus and rail
All unlinked trips (million annual unlinked)		497		465		-6.44%
Bus		497		353.4		-28.89%
Light rail		na		46.5
Heavy rail		na		55.8
LA county population (m)		8		10		25%
LA county immigrant population (m)		0.64		3.5		447%
	* Capital costs only
	Sources:
	$15 billion spent: http://ti.org/RailCapitalCost.pdf
	MTA unlinked trips: http://www.ntdprogram.gov/ntdprogram/
	2010 county immigrant pop: http://www.caimmigrant.org/wp-content/uploads/2014/09/LosAngeles.pdf
	1985 immigrants: http://www.censusscope.org/us/s6/m4480/chart_migration.html

ADDED "The trouble with Socialism is that eventually you run out of other people's money" — Margaret Thatcher But what about "sustainability"?

Light touch?

The Economist of Dec 6 features "A planet of suburbs". They editorialize about "A suburban world." Yes, the world is becoming suburban. This is why it is useless to generalize about so large a space (so large a population) via a single moniker. One upon a time, city vs suburbs worked. But no longer.  Many suburbs now include "sub-centers" significant enough to rival many downtowns.

The coverage also suffers from the usual cliches about "sprawl". "Suburban sprawl imposes costs on everyone." The Economist has seemingly accepted that central planning has had its failures but its writers still look for the central planning of cities to somehow fix the many "market failures" of sprawl.

Getting this wrong is no small thing. Growth is the biggest economic challenge. Cities are "the engines of growth."  But we have to grasp how and why. I have often mentioned that the economy that serves us is one where supply chains are formed and managed via the interactions of large numbers of strangers. Many of us ask our students to read and ponder I, Pencil.

Many of the supply chains that serve us occur in cities. Parts of chains may be best under one roof (industrial organization) or within one city (spatial organization). Which parts? Getting each kind of organization right requires entrepreneurial trial-and-error. That means significant freedom. Top-down planning ought to be minimal and with a light touch.

ADDED

Some ideas on growth -- for anyone who has not already seen this collection. 


 

Amazing containerization

Here is Scott Sumner writing about, among other things, our modern world. I liked this part:  

Did King Louis the 16th of France (who was probably the richest person in the late 1700s) have a lower or higher living standard than an average American today? It depends on what you value. If you have a big ego, and like to live in a big house and be surrounded by people who flatter you, then you'd say he had a higher living standard. But he only lived 38 years (not untypical of that period) and lacked cell phones, TV, films, jet trips to exotic locales, Japanese and Thai restaurants, the internet, fast cars, etc. In some ways his life was quite monotonous. You can probably tell which life I'd prefer. On the other hand, if you read Thomas Piketty you might come to the conclusion that he'd make the opposite choice. ... However, I don't think antibiotics would have saved Louis XVI's life . . .

Or as William Baumol, et al. put it, “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 must say that I am astonished, and even more so, having just read Marc Levinson's The Box. Ports and transhipment points are bottlenecks and chokepoints. All the more reason to implement containerization whereby freight is easily moved from truck to train to ship and back again. Costs came way down. But not easily or in a simple way. Tremendous capital had been sunk into bulkhead ships -- and their established labor forces. To get to where we are now required a small revolution, including the difficult cooperation of regulators, port authorities, unions, shippers from different modes and competing countries, not to mention the major shipping countries (and their various port authorities) around the world. This did not happen overnight. Levinson tells the story and in a very readable way throughout. Read it and, once again, cherish the fact that all of this came about -- not instantly and not easily -- but in time to make our lives many times better than that of any Louis or any historic royal.

Silicon Valley

Here is Nicholas Lemann writing about Google in a recent New Yorker:

What about the emphasis on that ninja-attracting culture? That’s especially difficult to transport outside a tight radius from Mountain View. One of the ironies of the tech economy, duly noted by Schmidt and Rosenberg, is that while the products and the users are geographically untethered, the businesses that supply them are increasingly clustered in one physical location, Silicon Valley. That’s because of the unusual, and apparently non-replicable, infrastructure of support there: the Stanford engineering school, the Sand Hill Road venture-capital firms, the angel investors, the talent pool of coders and engineers, the technical-infrastructure providers. First-rate coders are in high demand, and employers, including Google, have to deliver special working conditions and high-performing stock options in order to keep them. The ability to attract talent has a much bigger economic payoff in Silicon Valley than it does in most industries; conversely, the rest of the world is littered with the remains of attempts to create the next Silicon Valley, complete with smart creatives.

There is untertheredness and there is clustering. We should think about location choice. Location and land are inputs in production and must be carefully evaluated -- just like all other inputs. All the players are involved in complex trades -- of things and ideas.  There is a complex and profound choice problem. Given the site choices available at any moment, we trust that entrepreneurs will make good choices, ones that poise them to succeed.  There is nothing static about this. There are many moving pieces and continuous re-evaluation. Land use planners cannot do this for them and must be prepared to be flexible. 

Ed Glaeser even suggests this: "Primary Idea: Eliminating Local Land Use Powers." It's worth reading.

Los Angeles

I want to re-post what Joel Kotkin and Wendell Cox say about LA traffic and transportation.  Read it. They are, of course, correct in their analysis.  Trouble is that this message has been falling on deaf ears for as long as I can remember.  Billions have been wasted on rail transit in LA and transit ridership remains stuck, very low considering the large low-income immigrant populations in the area. Kotkin and Cox explain that we are not and will never be another NYC.

But the mantra of public officials and the LA Times and other local worthies is that we "need" more funding to fix local infrastructure and you-name-it.  Why in the world would new money be spent more wisely than what has already been thrown away?  Because the same folks would do the deciding (and "analyzing") and spending.  High-profile projects will come before common sense projects. So there never can or will be "enough" money.