Alex Tabarrok

An international team of scientists from the Search for Extraterrestrial Intelligence (SETI) is investigating mysterious signal spikes emitting from a 6.3-billion-year-old star in the constellation Hercules—95 light years away from Earth. The implications are extraordinary and point to the possibility of a civilization far more advanced than our own.

The safe bet is against but stranger things have happened.

Here and more information here.

Hat tip: Next Draft.

The rest of the story” stories have a punch line that twists everything that came before into an entirely new and deeper perspective. My favorite such story is about John Nestor.

Nestor became a minor if hated celebrity in the mid-1980s in Washington, DC for his policy of driving on the beltway in the left hand lane at 55 mph, not a mile faster, the rest of the traffic be damned. Nestor believed that the 55 mph speed limit saved lives and he was going to help other people by slowing them down regardless of the exasperation, raised fingers, or honking. He knew better than other people.

The truth, of course, is that it’s actually variance in speed that kills so by driving more slowly than everyone else Nestor was increasing risk not lowering it. But that’s not the punch line. The punch line? John Nestor was an FDA bureaucrat so obstinate that even the overly cautious FDA thought he was a menace and they pulled him from his job in the renal section for not approving a single new drug in more than four years. On the roads or at the FDA, John Nestor illustrated why I say caution can be deadly.

My second favorite story like this comes from a recent article on land use policy by Mark Gimein at the New Yorker:

In 1948, a federal housing bureaucrat named Paul Oppermann, trying to come to terms with the perils of the nuclear age, proposed a solution to the problem of protecting America’s cities from the bomb: empty them out preëmptively by encouraging the population to move to suburbs and small towns of fifty thousand or fewer. “No power in the world could afford to drop an atomic bomb on a city of 50,000 or less” is how the San Francisco Chronicle summarized the talk that Oppermann gave to a local planning organization. Plus, Oppermann explained, you get slum clearance into the bargain.

The punch line? “The next year, Oppermann assumed office as San Francisco’s planning director.” As Gimein notes Oppermann wasn’t able to move people out of San Francisco but he was able to “[cripple] growth with arcane lot-size rules and off-street-parking-space minimums.”

So now you know the rest of the stories.

Paper Pushers

by on August 27, 2016 at 7:25 am in Economics, Law | Permalink

Excellent piece by Tim Carney:

Five years ago, a new quirky-sounding consumer-rights group set up shop in a sleepy corner of Capitol Hill. “Consumers for Paper Options is a group of individuals and organizations who believe paper-based communications are critically important for millions of Americans,” the group explained in a press release, “especially those who are not yet part of the online community.”

This week, Consumers for Paper Options scored a big win, according to the Wall Street Journal. Securities and Exchange Commission chairman Mary Jo White has abandoned her plan to loosen rules about the need to mail paper documents to investors in mutual funds.

Mutual funds were lobbying for more freedom when it came to mailing prospectuses — those exhaustive, bulky, trash-can-bound explanations of the contents of your fund. In short, the funds wanted to be free to make electronic delivery the default, while allowing investors to insist on paper delivery. This is an obvious common-sense reform which would save whole forests of trees.

You won’t be surprised to lean that Consumers for Paper Options is funded by paper mills, timber firms and the Envelope Manufacturers Association.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

City_ArtMichael Heizer, the large-scale sculpture artist, has been building City, a sculpture in the Nevada desert since 1972. City is reputedly on the scale of the Washington, DC’s National Mall and something like Teotihuacan but no one knows for sure since “Visitors are explicitly not welcome, and due to its orientation away from the road and system of earthen berms no part of “City” can be viewed from the ground without trespassing on posted property.” A few photos have been smuggled out.

The New Yorker has an interesting article on Heizer. Naturally I appreciated his thoughtful consideration of the economics of building something for the ages:

“City” is made almost entirely from rocks, sand, and concrete that Heizer has mined and mixed on site. The use of valueless materials is strategic, a hedge against what he sees as inevitable future social unrest. “My good friend Richard Serra is building out of military-grade steel,” he says. “That stuff will all get melted down. Why do I think that? Incans, Olmecs, Aztecs—their finest works of art were all pillaged, razed, broken apart, and their gold was melted down. When they come out here to fuck my ‘City’ sculpture up, they’ll realize it takes more energy to wreck it than it’s worth.”

From the University of Chicago letter welcoming students:

…Earning a place in our community of scholars is no small achievement and we are delighted that you selected Chicago to continue your intellectual journey.

Once here you will discover that one of the University of Chicago’s defining characteristics is our commitment to freedom of inquiry and expression. … Members of our community are encouraged to speak, write, listen, challenge, and learn, without fear of censorship. Civility and mutual respect are vital to all of us, and freedom of expression does not mean the freedom to harass or threaten others. You will find that we expect members of our community to be engaged in rigorous debate, discussion, and even disagreement. At times this may challenge you and even cause discomfort.

Our commitment to academic freedom means that we do not support so called ‘trigger warnings,’ we do not cancel invited speakers because their topics might prove controversial, and we do not condone the creation of intellectual ‘safe spaces’ where individuals can retreat from ideas and perspectives at odds with their own….

The Efficient Markets Hypothesis

by on August 24, 2016 at 7:35 am in Economics | Permalink

In the first video in the Personal Finance section of our Principles of Macroeconomics course we pointed out that mutual fund managers do not beat the market on average. Why is this? In the second video, we take a look at the efficient markets hypothesis.

I’m rather fond of this video as it has some good story-telling elements, features Einstein in an important cameo (do you know why?) and yet also covers important ideas in an intuitive yet deep way.

The Return of Glass-Steagall???

by on August 24, 2016 at 7:25 am in Economics, Law | Permalink

The Atlantic writes:

Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?

The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.

Here’s part of what I had to say:

When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”

The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.

…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.

…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.

Robert Reich, Sheila Bair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic.

New MRU Course: Money Skills!

by on August 22, 2016 at 7:23 am in Economics, Film | Permalink

We have a new course at Marginal Revolution UniversityMoney Skills. The first set of videos overlap with our Principles of Macroeconomics course and cover things like lessons from economics for investing in the stock market. We also cover this important material in our textbook, Modern Principles. Later videos will cover time discounting (mortgages), career choice, renting versus owning and other topics depending on demand.

Here’s our first video, How Expert Are Expert Stock Pickers? Later in the week, Tyler will cover the theory of efficient markets.

The Japanese Zoning System

by on August 19, 2016 at 12:04 pm in Economics, Law | Permalink

In Laissez-Faire in Tokyo Land Use I pointed to Japan’s constitutional protection of property rights and it’s relatively laissez-faire approach to land use to explain why housing prices in Japan have not risen in past decades, as they have elsewhere in the developed world. A very useful post at Urban kchoze offers more detail on Japan’s zoning system. Here are some of the key points.

Japan has 12 basic zones, far fewer than is typical in an American city. The zones can be ordered in terms of nuisance or potential externality from low-rise residential to high-rise residential to commercial zone on through to light industrial and industrial. But, and this is key, in the US zones tend to be exclusive but in Japan the zones limit the maximum nuisance in a zone. So, for example, a factory can’t be built in a residential neighborhood but housing can be built in a light industrial zone.

…[the] Japanese do not impose one or two exclusive uses for every zone. They tend to view things more as the maximum nuisance level to tolerate in each zone, but every use that is considered to be less of a nuisance is still allowed. So low-nuisance uses are allowed essentially everywhere. That means that almost all Japanese zones allow mixed use developments, which is far from true in North American zoning.

…[The] great rigidity in allowed uses per zone in North American zoning means that urban planing departments must really micromanage to the smallest detail everything to have a decent city. Because if they forget to zone for enough commercial zones or schools, people can’t simply build what is lacking, they’d need to change the zoning, and therefore confront the NIMBYs. And since urban planning departments, especially in small cities, are largely awful, a lot of needed uses are forgotten in neighborhoods, leading to them being built on the outskirts of the city, requiring car travel to get to them from residential areas.

Meanwhile, Japanese zoning gives much more flexibility to builders, private promoters but also school boards and the cities themselves. So the need for hyper-competent planning is much reduced, as Japanese planning departments can simply zone large higher-use zones in the center of neighborhoods, since the lower-uses are still allowed. If there is more land than needed for commercial uses in a commercial zone, for example, then you can still build residential uses there, until commercial promoters actually come to need the space and buy the buildings from current residents.

In addition, residential means residential without discrimination as to the type or form of resident:

…In Japan…residential is residential. If  a building is used to provide a place to live to people, it’s residential, that’s all. Whether it’s rented, owned, houses one or many households, it doesn’t matter.
This doesn’t mean that people can build 10-story apartment blocs in the middle of single-family houses (at least, not normally). As I mentioned, there are maximum ratios of building to land areas and FAR that restricts how high and how dense residential buildings may be. So in low-rise zones, these ratios mean that multifamily homes must also have only one to three stories, like the single-family homes around them. So in neighborhoods full of small single-family homes, you will often see small apartment buildings full of what we would call small studio apartments: one room with a toilet.>

In short, as the author concludes, Japan’s zoning laws are more rational, more efficient and fairer than those used in the United States.

More details in the post. Hat tip: Sandy Ikeda.

Here’s a post I wrote in 2009 (no indent) that I will update today:

In an interesting paper, Aghion, Algan, Cahuc and Shleifer show that regulation is greater in societies where people do not trust one another.  The graph below, for example, shows that societies with a greater level of distrust have stronger minimum wage laws.  Note that the result is not that distrust in markets is associated with stronger minimum wages but that distrust in general is associated with greater regulation of all kinds.  Distrust in government, for example, is positively correlated with regulation of business.  Or to put it the other way, trust in government (as well as other institutions) is associated with less regulation.

minwagedistrustrespectdistrustAghion et al. argue that the causality flows both ways on the regulation-distrust nexus. Distrust makes people turn to government but in a society with a lot of distrust government is often corrupt and this makes people distrust even more.  Crucially, when people distrust others they invest not in the highest return projects but in human and physical capital that is complementary to distrust–for example, they invest in human capital that helps them bond with their group/tribe/family rather than in human capital that helps them to bond with “outsiders” and they invest in physical capital that is more difficult to expropriate rather than in easier to expropriate capital, even though in both cases the latter investments may be the all-else-equal higher return investments.  Such distrust traps are quite similar to Bryan Caplan’s idea traps.

Thus, societies with a lot of distrust generate regulation and corruption and citizens who don’t have the skills or preferences to break out of the distrust equilibrium.  Consider, for example, that in societies with a lot of distrust parents are less likely to consider it important to teach their children about tolerance and respect for others.

The update should be obvious. More and more this appears to be describing the United States. More distrust in government, more regulation, lower growth and more people who are so distrustful of one another that they can’t cooperate to break out of the bad equilibrium. Here drawn from Our World in Data is interpersonal trust in the United States.

DistrustoverTime

Kate Downing, a member of the Palo Alto Planning and Transportation Commission, has resigned in protest at its no-growth policies. She writes:

After many years of trying to make it work in Palo Alto, my husband and I cannot see a way to stay in Palo Alto and raise a family here. We rent our current home with another couple for $6200 a month; if we wanted to buy the same home and share it with children and not roommates, it would cost $2.7M and our monthly payment would be $12,177 a month in mortgage, taxes, and insurance. That’s $146,127 per year — an entire professional’s income before taxes. This is unaffordable even for an attorney and a software engineer.

…I have repeatedly made recommendations to the Council to expand the housing supply…Small steps like allowing 2 floors of housing instead of 1 in mixed use developments, enforcing minimum density requirements so that developers build apartments instead of penthouses, legalizing duplexes, easing restrictions on granny units, leveraging the residential parking permit program to experiment with housing for people who don’t want or need two cars, and allowing single-use areas like the Stanford shopping center to add housing on top of shops (or offices), would go a long way in adding desperately needed housing units while maintaining the character of our neighborhoods and preserving historic structures throughout.

The vituperative responses to her letter in the local paper (quite a few now deleted for language) included many like the following:

What with everything going on I have come to realize there is a vast difference between Baby-Boomers, X-Generation, and Millennials. Not sure where Kate falls into that, suspect she is a Millennial, but her overall lack of experience regarding city planning shouts out. “Disruption” is code for the Millennials, not so for Baby-Boomers. We are not going to turn ourselves on our heads because the younger group demands change.

And another:

I’m so glad we have one less inexperienced, new resident on the Planning and Transportation Commission that is demanding that long-time residents sacrifice their hard-earned quality of life for young, new residents that want the benefits without the sacrifice and hard work.

These kinds of claims are perfectly sensible. The people who bought their homes a long time ago lucked into a windfall and they resentfully lash out at anyone trying to cut in on that windfall. But notice how un-American these claims are. The current residents want to protect their gains by telling other people how they can use their property. When a new restaurant starts to take patrons from an old restaurant we generally don’t think that the old restaurant–the long-term resident–has the right to prevent the new restaurant from opening. The same is true, by and large, for new technologies and ways of doing business. Yet when it comes to residential land we give the old residents a veto on the new.

We have collectivized property in the United States (unlike in say laissez-faire Tokyo). Property is not fully collectivized, of course, but a person’s land is not their own–it’s subject to the dictates of the collective. Collectivization has been tried in many other times and places and the results are by now predictable. Collectivization in Palo Alto has produced inefficiency, high costs and a politicization of choice that makes for ill-will and endless conflict.

Baltimore Tipped

by on August 11, 2016 at 7:23 am in Current Affairs, Economics, Law | Permalink

Last year I wrote, In Baltimore Arrests are Down and Crime is Way Up. I worried that a crime wave occasioned in part by a work stoppage could tip into a much higher level of crime:

With luck, the crime wave will subside quickly, but the longer-term fear is that the increase in crime could push arrest and clearance rates down so far that the increase in crime becomes self-fulfilling. The higher crime rate itself generates the lower punishment that supports the higher crime rate…

In the presence of multiple equilibria, it’s possible that a temporary shift could push Baltimore into a permanently higher high-crime equilibrium. Once the high-crime equilibrium is entered, it may be very difficult to exit without a lot of resources that Baltimore doesn’t have.

Writing at FEE, Daniel Bier takes a long look at crime in Baltimore and the history of problems which got us to this point. He notes that the sharp drop in arrests which I discussed was indeed temporary.

But unfortunately:

Tabarrok’s fear that “a temporary shift could push Baltimore into a permanently higher high-crime equilibrium” looks to be borne out. Crime shot up due to temporary factors, but once those factors receded, the police [have] been unable to cope with the new status quo. Baltimore’s vicious crime cycle remains stuck in high gear.

…With 178 killings already in 2016, Baltimore is on track for 294 murders this year — shy of last year’s total of 344 homicides, but well above 2014’s total of 211.

To quote HBO’s The Wire, if Baltimore had New York’s population, it would be clocking nearly four thousand murders a year.

Daniel argues that Baltimore does have the resources to get back on track but at this stage in the game it may not have the will.

In one important respect, Baltimore is worse off than Ferguson, MO. Ferguson had poor policing but an average crime rate. Baltimore has poor policing and a sky high crime rate. Baltimore desperately needs more policing but the police have lost the trust of a vital part of the community and as the Department of Justice’s report on Baltimore brutally illustrates, in some cases rightly so. The DOJ report might provide the impetus for a surge–a large but temporary influx of federal funds for new hiring under a new police administration–that could reestablish a decent equilibrium and reform the department at the same time. Many, however, will decry a federal “takeover” of policing. Ironically, the law and order candidate might be more likely to impose Federal control, albeit it would be less likely to work.

Baltimore is truly stuck between a rock and a hard place.

The Great Recession

by on August 10, 2016 at 7:25 am in Economics, Education, Film | Permalink

Our latest video from Marginal Revolution University covers the Great Recession and financial intermediation. It draws from our popular textbook, Modern Principles of Macroeconomics.

It’s an interesting process working with our creative animation team. We don’t always know what is possible let alone what works best in this medium and they don’t always know the economics so we have lots of discussion about the visuals, the pacing, the storytelling elements, the sounds and the music. It took us quite a while to get this video right because it covers a lot of material and we had to get the animations precise to correctly convey the economics but we are pleased with the final result.

Enjoy.

The Right to Try

by on August 7, 2016 at 7:36 am in Economics, Law, Medicine | Permalink

Right to Try legislation permits patients fighting a terminal illness to get access to not-yet-FDA-approved drugs. Thirty-one states have passed Right to Try legislation with massive shows of support but so far these laws are untested by the courts so it’s not clear whether they are anything but expressive. The massive support for Right to Try laws, however, suggests that there is demand for a better FDA as Bartley Madden writes:

Freedom is a powerful rallying call and 31 states have now passed Right To Try legislation with sky-high approval ratings by citizens.

…[But] the states do not have the legal authority to circumvent the FDA. Moreover, drug developers have a major disincentive to participate because, to survive, drug developers need to secure FDA approvals for their new drugs. And circumventing the FDA by providing not-yet-approved drugs to terminally-ill patients could easily slow or prevent FDA approvals.

…A better solution is Free To Choose Medicine (FTCM). It would solve the dilemma facing politicians who are pulled in one direction by citizens’ demands for more freedom and in the opposite direction by FDA proponents with demands for a highly-controlled process. A clear, brief explanation of FTCM is available on the Internet in the PowerPoint presentation, “Free To Choose Medicine and Right To Try.” It explains how we will all benefit from more freedom of choice.

First, the Free To Choose track (separate from the FDA’s conventional clinical testing track) enables patients and their doctors to make informed decisions about the use of FDA-approved drugs or not-yet-FDA-approved drugs. Patients, under the guidance of their doctors, would learn about initial safety results and up-to-date treatment results of FTCM drugs. FTCM drugs for a wide range of illnesses (not just terminal illnesses addressed by Right To Try) would be available up to seven years before conventional FDA approval.

Second, FTCM legislation would provide for government oversight of an open-access, Internet-accessible database. It provides up-to-date information for patients and doctors about a FTCM’s drug’s potential benefits and risks before they choose to use it. This is a self-adjusting system wherein more patients use FTCM drugs that work well and vice versa.

The open-access database would contain treatment results of FTCM patients including their genetic makeup and relevant biomarkers. This database (not part of Right To Try legislation) would reveal subpopulations of patients who do extremely well or poorly with the new drug. Pinpointing such groups of patients is a huge benefit to, not only patients, but to biopharmaceutical researchers working on new breakthroughs in medicine.

Third, FTCM federal legislation needs to provide a new type of drug approval – Observational Approval – based on treatment results for real-world patients who receive the FTCM drugs. This would motivate drug developers to participate as well as expedite insurance reimbursement for patients.

Naturally, I agree with Bart on the need for FDA reform.

Is this real? Is it effective? I don’t care. I love it.