What I’ve been reading

by on August 14, 2016 at 12:57 am in Books | Permalink

1. Samuel Fleischacker, The Good and the Good Book: Revelation as a Guide to Life.  A nice, articulate, and well-reasoned account of how a reasonable person might turn to faith and believe that faith and reason are compatible.  The author is a well-known Adam Smith scholar.

2. Abraham Hoffman, Unwanted Mexican Americans in the Great Depression.  The best and most readable book I have found on the deportation of Mexicans during the Great Depression, most of all during the 1931-1935 period.  Reading up on this era puts today’s America in useful perspective.

3. The Curse of Cash, by Kenneth Rogoff.  The quality of argumentation and presentation is high, as one would expect from a Ken Rogoff book.  Still, I don’t think it has so much to convince those who might be worried about a currency-less surveillance Panopticon, or those who think negative interest rates are mostly a contractionary and not-so-useful tax on financial intermediation.

4. Mats Lundahl, The Political Economy of Disaster: Destitution, plunder and earthquake in Haiti.  More of a potpourri of Haitian economic history than what the titles indicates, the best 20 percent of this book has insights you won’t find in other places.  For me that is a high hit rate, I liked it.

5. John Hardman, The Life of Louis XVI.  I’m only about fifty pages into this one, but so far it is a first-rate biography, both detailed and conceptual in nature, likely to make the list of the year’s best non-fiction books.

*Common Sense Economics*

by on August 13, 2016 at 3:02 pm in Books, Economics, Education | Permalink

The third edition is now out, and the authors are James D. Gwartney, Richard L. Stroup, Dwight R. Lee, Tawni H. Ferrarini, and Joseph P. Calhoun.

Self-recommending, this is a very good introduction to economics for say a smart high school student who reads books.  Sadly, more and more politicians and indeed professional Ph.d. economists need this wisdom too.

Saturday assorted links

by on August 13, 2016 at 1:25 pm in Uncategorized | Permalink

Let’s say the private sector is using a hurdle rate of five percent and the government a rate of one percent.  (Those numbers are illustrative only.)

Furthermore say the private sector uses five percent because it faces private risk which is in fact not social risk from a welfarist point of view.  In other words, the private sector ought to use a one percent hurdle rate, even though it does not, but people worry about their own portfolios rather than the broader social portfolio of projects in toto.  If the private sector switched to the one percent rate, of course, it would invest much more and lower the marginal rate of return on capital from five percent down to one percent, adjusting for all the required adjustments (taxes, transactions costs, etc.).

In such a world, if a new government project displaced private capital, the opportunity cost would be one percent at the margin.

But we are not in such a world, even if you think we ought to be.  If a new government project displaces some private sector capital, the marginal cost there is still five percent.

You can read Brad DeLong’s take on my post yesterday on the opportunity cost of extra government projects.  Brad longs for that cross-sector equalization down to one percent on both sides of the ledger and he makes many fine points.  But there is nothing in his argument which rebuts, or even tries to rebut, the claim that, given current imperfections the marginal opportunity cost is still five percent.

So the message of my original post stands as well, and you will note that is simply the mainstream micro take on this question which has been around since the 1970s, with the commonly understood answers pretty much crystallized by the early 1980s.

Addendum: Here is me, from the comments: “It is amazing how much “free lunch” economics one can read in these comments. Of course we should in fact apply multiplier analysis to the percentage of previously unemployed resources targeted by the new project, and a higher hurdle rate to the rest. You can argue over what is the percentage mix here, but please don’t pretend scarcity is no longer a ruling economic principle.”

Xenophon paragraphs to ponder

by on August 13, 2016 at 12:23 am in Uncategorized | Permalink

Australia’s government needs to scrap its “free trade Taliban mentality”, buy more local products and properly scrutinise foreign investment, says Nick Xenophon, the leader of one of the minor parties that holds considerable sway following last month’s election.

Most of all, it hurts that he is called Xenophon; some of you will know that Xenophon from ancient Greece was the first (surviving) author to point out the phenomenon of division of labor.

Apparently there is a “Great Xenophon stagnation” or even retrogression.  This passage notwithstanding, the Taliban, by the way, did not favor free trade.

Here is the full FT piece by Jamie Smythe.

Singapore leads the way, offering three-quarters of a million U.S. dollars to gold-medal winners, followed by Indonesia ($383,000), Azerbaijan ($255,000), Kazakhstan ($230,000) and Italy ($185,000).

I would say Italy should not be on that list, as they have some fiscal troubles, plus plenty of other sources of national pride.  And there is this:

…other countries offer alternative bait — like military exemptions (South Korea), a lifetime supply of beer (Germany) and unlimited sausages (Belarus).

Here is the article, via James Crabtree.

It seems to be living near failure, not necessarily experiencing it yourself:

Yet a major new analysis from Gallup, based on 87,000 interviews the polling company conducted over the past year, suggests this narrative is not complete. According to this new analysis, those who view Trump favorably have not been disproportionately affected by foreign trade or immigration, compared to people with unfavorable views of the Republican presidential nominee. The results suggest that his supporters, on average, do not have lower incomes than other Americans, nor are they more likely to be unemployed.

Yet while Trump’s supporters might be comparatively well off themselves, they come from places where their neighbors endure other forms of hardship. In their communities, white residents are dying younger, and it is harder for young people who grow up poor to get ahead.

The Gallup analysis is the most comprehensive statistical profile of Trump’s supporters so far. Jonathan Rothwell, the economist at Gallup who conducted the analysis, sorted the respondents by their Zip code and then compared those findings with a host of other data from a variety of sources.

That is from Max Ehrenfreund and Jeff Guo at the always-excellent Wonkblog.  And there is this:

White households tend be more affluent than other households, and Trump’s supporters are overwhelmingly white. The same is true of Republicans in general. Yet when Rothwell focused only on white Republicans, he also found that demographically similar respondents who were more affluent viewed Trump more favorably.

These results suggest that personal finances cannot account alone for Trump’s appeal. His popularity with less educated men is probably due to some other trait that these supporters share.

Rothwell’s results also very much downplay the roles of trade and China, compared to some other estimates.  Here is a link to Rothwell summarizing some of these results, I am not sure if there is a link to the full study proper.

Friday assorted links

by on August 12, 2016 at 11:56 am in Uncategorized | Permalink

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.

No, it is not zero, not even if government borrowing rates were literally at zero.  Yet I’ve seen that claim a few dozen times in the last year or two, so let’s walk through some arguments that were fully standard by the 1970s.

Opportunity cost is ultimately defined in real resource terms, converted into value.  So if the government borrows more money and mobilizes robots to do some work, that means fewer robots to do work elsewhere.

So what is the marginal private rate of return on capital?  That’s a bottomless pit sort of question, but it’s not unusual to find sources which suggest a number for the average return in the range of 15% or so, see p..53 from this Stern School study here (pdf), with the median estimate running at about 12% (p.54).  The papers from the 1980s found about the same, sometimes higher.

That’s way too high, says this stagnationist!  Let’s instead cut it down to historic U.S. equity returns and say seven percent for the return at the margin.

Now, even today there are some unemployed resources.  But most government fiscal policy works through well-known, fairly large contractors that at the margin have already well-established networks of capital and labor.  So circa 2016, I don’t think that is a significant factor.  Even in more down times, fiscal policy doesn’t always target unemployed resources so well.

That means a government project faces a seven percent hurdle rate.  You may wish to up that for risk (the value of government output covaries positively with national income), and more yet for irreversibility.  Let’s say that brings us up to a ten percent hurdle rate, and that’s being quite conservative.  Sometimes irreversibility premia can multiply hurdle rates by 2x or 3x.

So that’s a (hypothetical) hurdle rate of ten percent, not zero percent.  Of course it’s not unusual for private companies to use hurdle rates of twenty or more for their investment decisions.

There are further complications if the borrowing is financed by foreign finance capital.  But there is still likely a real resource displacement in the home market as robots are shifted from one line of work to another.  In addition, foreign ownership of the debt is about one-third of the total, noting the average and marginal here may diverge.  Still, the domestic capital case seems to be the dominant effect.

You really can bicker about the right number here, and I’ve elided the question of whether some of the crowding out might come from consumption through a positive elasticity of robot supply; check the early papers of Martin Feldstein on related questions.  But if someone tells you zero percent is the correct hurdle rate for government infrastructure investment, they are wrong.

Opportunity cost remains an underrated idea in economics.

Thursday assorted links

by on August 11, 2016 at 1:55 pm in Uncategorized | Permalink

That is my latest Bloomberg column, and here is just one bit from it:

Third, Brazil’s political history has been an odd mix of dictatorship and extreme decentralization. Until the late 1980s, a series of autocratic leaders took power but failed to govern outlying regions successfully. Governance remained based on a colonial model with an authoritarian leader at the center and autonomous power blocs throughout the regions — a system that, for all of its periodic dynamism, proved ill-suited for modern times.

That colonial legacy is being dismantled, in fits and starts.  Brazil now has a real democracy and some degree of political accountability, though it falls short of a well-functioning federalism, as illustrated by the fiscal troubles of Rio de Janeiro and many other parts of the country. Income inequality has been falling (contrary to the trend in most countries), extreme poverty has virtually been eliminated and Brazil has moved up the rankings in terms of education.

I love to visit Brazil. I have been chased by aggressive pre-teens wielding sharpened sticks and even shot at, yet I remain an unreconstructed optimist. It’s actually a major achievement to remain “the country of the future” for so long. Can you say the same about Argentina or Venezuela? If there’s one thing we know from Olympic competition, it’s that if you remain in the game through successive rounds, your chances of winning only go up.

Do read the whole thing, there is much more detail at the link.

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.

Here is one recent paper by Leticia J. Marteleto and Molly Dondero:

Racial disparities in education in Brazil (and elsewhere) are well documented. Because this research typically examines educational variation between individuals in different families, however, it cannot disentangle whether racial differences in education are due to racial discrimination or to structural differences in unobserved neighborhood and family characteristics. To address this common data limitation, we use an innovative within-family twin approach that takes advantage of the large sample of Brazilian adolescent twins classified as different races in the 1982 and 1987–2009 Pesquisa Nacional por Amostra de Domicílios. We first examine the contexts within which adolescent twins in the same family are labeled as different races to determine the characteristics of families crossing racial boundaries. Then, as a way to hold constant shared unobserved and observed neighborhood and family characteristics, we use twins fixed-effects models to assess whether racial disparities in education exist between twins and whether such disparities vary by gender. We find that even under this stringent test of racial inequality, the nonwhite educational disadvantage persists and is especially pronounced for nonwhite adolescent boys.

The pointer is from the highly rated but still underrated Ben Southwood.

Observations on seeing Paul McCartney

by on August 11, 2016 at 12:07 am in History, Music | Permalink

1. Many of the best songs were from his solo or Wings period, especially those designed to be played live, and designed to work without the backing voices of the other Beatles.

2. The first two-thirds of the concert pulled out an impressive number of obscure songs, most of which worked, including a bluesy “Letting Go” (can anyone other than Kelly Jane Torrance place that one without using Google?).  Paul flat out told the crowd he doesn’t care if they like these other songs less.

3. Often the best Beatle song vocals were Paul doing either John or George parts, because you didn’t know exactly what to expect and thus you were let down less by his 74-year-old vocal cords.

4. His stamina was remarkable.  The show was almost three hours long, with little in the way of breaks for him, and he is playing two nights in a row.

5. At the time of its release, “Hi Hi Hi” seemed like a commercial piece of crud, but it has become iconic and satellite radio treats it with respect as well.

6. Paul has been with his current touring band for fifteen years, far longer than he ever was with either Wings or the Beatles.

7. There is a fellow who collects “album covers that are parodies of Beatle album covers,” and he has over 2,000 of them.  How is that for markets in everything?