Month: August 2016

Collective Property in Palo Alto

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.

What is the opportunity cost of additional government borrowing?

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

Brazil is still the country of the future

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

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.

How significant is racial discrimination in Brazil?

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

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?

The culinary culture that is San Francisco

I am all in favor of San Francisco’s $13 per hour minimum wage (which rises to $15 by 2018), plus mandatory paid sick leave, parental leave and employer health care contributions. But labor costs at restaurants are inching past 50 percent of total expenditures, an indicator of poor fiscal health. Commercial rents have also gone bananas. Add the ever-rising cost of frisée and pastured quail eggs and it’s no wonder that many restaurants are experimenting with that unique form of sadism known as “small plate sharing,” which amounts to offering a big group of hungry people something tiny to divvy up. Even nontrendy joints now ask $30 for a proper entree — a price point, according to Mr. Patterson, that encourages even affluent customers to discover the joys of home cooking.

That is by Daniel Duane for the NYT, on how Silicon Valley shapes the northern California dining scene and it is of interest more generally.

The Great Recession

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.


Coin flip experiments as a measure of status quo bias

That is what the new Steve Levitt paper looks at and it does seem people stick with their current circumstances too much:

Little is known about whether people make good choices when facing important decisions. This paper reports on a large-scale randomized field experiment in which research subjects having difficulty making a decision flipped a coin to help determine their choice. For important decisions (e.g. quitting a job or ending a relationship), those who make a change (regardless of the outcome of the coin toss) report being substantially happier two months and six months later. This correlation, however, need not reflect a causal impact. To assess causality, I use the outcome of a coin toss. Individuals who are told by the coin toss to make a change are much more likely to make a change and are happier six months later than those who were told by the coin to maintain the status quo. The results of this paper suggest that people may be excessively cautious when facing life-changing choices.

Of course not all coin flips turn out the right way.  And furthermore we all know that the control premium is one of the most underrated ideas in economics…

Medical arbitrage markets in everything

Under the “third party” arrangements, nonprofit organizations work as a front for medical care providers trying to win higher payments from private insurers that pay more than government programs like Medicaid, insurers say. For example, UnitedHealth Group last month sued a dialysis chain, American Renal Associates, alleging fraud. In its suit, UnitedHealth said American Renal hooked patients up with a charitable organization that helped patients pay their premiums, according to media reports.

Even though patients were eligible for Medicaid coverage for the poor, according to this New York Times report, the kidney care company wanted them to be covered by a private insurer so the dialysis providers could be paid a higher reimbursement.

Here is more, via Megan McArdle.  And here is Megan on who is gaming Obamacare — everyone.

Tuesday assorted links

1. Museum economics.

2. The Lion in the Living Room: How House Cats Tamed Us and Took Over the World.  I recommended many sources to the book’s author, Abigail Tucker.

3. “Chinese tourist who lost wallet in Germany ends up in refugee shelter — Man diverted to home in Dülmen after mistakenly filling in asylum application instead of stolen goods report.”  He was there for two weeks — “He was then taken 220 miles (360km) to a refugee shelter…and given food and spending money like other refugees. “He simply did what he was told,” Schlütermann said.”

4. Free the mayor, he does not deserve time in jail.

5. How dictators evolve.

6. You may or may not like limiting transfers and cutting taxes on the wealthy, but it is Orwellian to call that “redistribution.”   How about “unredistribution” at least?  “De-redistribution”?

The big idea that won’t fix Europe’s banks

That is the topic of my latest Bloomberg column, and that idea is banking union:

Imagine a pan-European version of the FDIC…By making depositors indifferent to the risks banks take on, the guarantee would eventually spread to other parts of the economy. A financially troubled government, for example, could easily pressure banks to buy its securities — effectively relying on the insurance to support its fiscally questionable behavior. If the government ultimately defaulted, other countries’ taxpayers would be responsible for making the depositors whole — not quite the same as a fiscal union, but pretty close.

Experience suggests this is entirely possible. Around the time of the 2011 sovereign-debt crisis, European banks were very heavily loaded with government securities, in part because fiscally weak domestic governments had encouraged it. Some commentators compared this arrangement to two drunks leaning against each other, with no lamppost in sight. The incentives for such a dangerous dependence would be stronger yet if bank deposits were guaranteed at the euro area level.

Governments could also take advantage of deposit insurance more directly, through state-owned banks. Suppose Portugal expanded the operations of the government-owned Caixa Geral de Depósitos, the largest bank in the country, to attract deposits and invest the money in infrastructure and other state projects. By insuring the deposits, the EU authority would in essence be guaranteeing a bond issue of the Portuguese government, even though the funds would be channeled through a bank. This wouldn’t be a fiscal guarantee of the entire Portuguese government budget, but it could prop up spending at the margin.

Do read the whole thing.

Rigged elections for me but not for thee

Donald Trump created quite the stir a few days ago when he suggested that the forthcoming Presidential election was going to be “rigged.”  I’m not sure what exactly he meant by that, or even if it’s worth debating, but I did see my Tweeter feed respond with real furor.  This will undercut faith in democracy I read, and thus the media needs to call him out on it.  Yet over the last few years or indeed decades I also have seen the following:

1. Numerous arguments insist that money buys elections and campaign finance reform is imperative.  That’s not exactly my view, with Trump himself now being Exhibit A on the other side of the issue, but please try to be consistent.  A lot of you believe that elections are (were?) rigged!  (Hey, psst…when can we go back to them being rigged againAsking for a friend!)

2. Numerous arguments that Republican-backed voter registration requirements are keeping significant numbers of voters, most of all minority voters, away from the polls.  That wouldn’t quite count as “rigging,” because the outcome still is not preordained, but it would be a form of slanting.

3. Not long ago, the conventional wisdom was that the race would be Clinton (Hillary) vs. Bush (Jeb).  Fortunately, that is not rigging, rather we call it “spontaneous order.”  Besides, it didn’t happen.  We ended up with Clinton vs…Tormentor of Bush.

4. Do we not all teach the Gibbard-Sattherthwaite theorem to our Principles classes on week three?  In case you forget, the theorem shows that under some fairly general assumptions elections processes are manipulable in a rigorous sense which is defined in social choice theory.  You can think of this as a corollary of the Arrow Impossibility Theorem, actually.

People, I am so glad we don’t teach our students that elections are rigged, it is so much more important to teach that they are “manipulable” in the precise sense defined by social choice theory.  Sadly, Mr. Trump failed that part of the course, because the silly boy wrote down the word “rigged” instead and botched the whole answer, heal so messed up the distinction between inter- and intra-profile versions of the theorem.

5. A related branch of social choice theory, stemming from Dick McKelvey’s work in 1979, suggests that when the policy space has more than one dimension, the agenda setter in Congress has a great deal of power and typically can shape the final outcome.  True, that is Congress rather than a general democratic election.  By the way, how many dimensions does the policy space have these days?  If you’re not sure, that means the answer is “more than one.”  Good thing that only “Congress keystone of the Washington establishment” is rigged!

6. Major political scientists from schools such as Princeton tell us that elites determine policy and ordinary voters have very little say in what happens.  Don’t know if he used “the r word” or not!  (By the way, I agree with the critique of Dylan Matthews.)

7. The American electoral system is designed to give the two major parties a huge initial advantage.  I’m not suggesting that the public is actually itching to elect Jill Stein, but it would shape final outcomes a good deal, for better or worse, if the electoral playing field were more even in this regard.

Personally, I think median voters more or less get what they want on a large number of issues, especially broad-based ones in the public eye.  You won’t find the word “rigged” popping up too much in the MR search function, besides I started blogging (and breathing) after Kennedy vs. Nixon.  But my goodness, I can in fact understand why Donald Trump thinks the system is rigged.  For years, you have been telling him that it is.

p.s. I don’t in fact teach the Gibbard-Sattherthwaite theorem in Principles and you won’t find it in the world’s very best Principles textbook.  That we rigged.

Addendum: How many Democrats have alleged that the 2000 Presidential election was rigged?  Or that today most Americans want some form of tougher gun control, but that the system is rigged against that outcome happening?