Realism on Infrastructure Investment
Keith Hennessey has an excellent post on government infrastructure investment. Here are his key points:
- Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance). The pursuit of multiple policy goals lowers the expected economic growth benefit of public capital spending.
- Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.
- Non-geographic politics can distort government capital spending. This is principally an Executive Branch concern, as we saw with the Obama Administration’s decision to throw good money after bad to postpone Solyndra’s failure. And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
- Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort. We should allow them some rhetorical leeway, and we should recognize that government has other reasons to spend money than just to maximize future economic growth. At the same time, it’s misleading when they claim that increased government spending that serves other policy goals (some quite legitimate) also increases future economic growth.
- There’s a difference between government investments in the commons and government spending that primarily benefits individuals. A new airport benefits all who use it. A scientific research grant benefits the researcher and society as a whole if his research advances our understanding. A subsidized student loan is an investment in human capital, but the return on that investment accrues mostly to the student and his or her family. That’s not wrong, it’s just having a more limited effect on increasing long-term growth for society as a whole.
- Government investment in physical infrastructure is slow. The Administration learned this as they tried to force money out the door in 2009 for “shovel-ready jobs” that turned out not to be there. This doesn’t mean you don’t build roads and improve ports and airports, it just means the short-term fiscal stimulus argument for this type of spending is weak.
- Government investment in physical infrastructure is intentionally expensive because of “prevailing wage” requirements, championed by construction labor unions, that mandate the government must pay more for workers than an aggressive private firm might be able to find in the labor market.
- We should evaluate the marginal productivity benefits of additional investment. The President sometimes argues that building the national highway system was good for growth, therefore his specific proposal to increase highway spending is good for growth, too. But those are different investments, and we need to examine the marginal benefits (and rate of return) on the specific incremental investments he is now proposing. The transcontinental railroad definitely increased national economic growth, but that doesn’t mean the feds should subsidize a costly California bullet train with questionable growth benefits.
- International comparisons of government infrastructure are silly. U.S. government capital spending should be determined based on what will most increase U.S. productivity without comparison to what other countries are doing. If American ports are clogged and that is harming our trade and slowing American economic growth, then we should upgrade our ports. We shouldn’t instead improve our airports because other countries have shinier ones. We have a different geography, a different economy, and different infrastructure needs than does China, or Japan, or Dubai or France. It is crazy to suggest that the U.S. should build bullet trains because China is doing so.
- Government investment faces no market discipline. Capital investment in a private firm can face some of the above challenges—a CEO, for instance, might want a new facility built in his hometown rather than where it will produce the highest rate of return. Or a firm might reject an investment that would maximize its’ workers’ productivity because that investment is inconsistent with the firm’s broader strategic goals. But these firms ultimately face the discipline of the market to curb their excesses. Government does not, and in some cases policymakers are rewarded by their election markets to distort infrastructure investment even farther from its growth-maximizing ideal.
- Government capital investment financed by raising taxes on private capital investment will slow long-term economic growth. While in theory there probably are government infrastructure investments with very high rates of return, all of the above reasons suggest that in practice the actual rate of return on government-directed investment is going to be lower than in the private sector. If you advocate raising capital taxes (on capital gains and dividends, for instance, as Senate Democrats appear poised to do) at the same time you argue for increased government capital spending, you’re shifting capital investment from the private sector to the public sector. That will slow long-run economic growth rather than increase it.
As Hennessey notes and as I second this is not a denial that “smart government capital investment can increase productivity and contribute to faster long-run economic growth.” Instead, it’s an argument for caution but also for more thought about how to make government investment smarter. See also Tyler’s related comments.
Zombie Economics
No, this post isn’t about Say’s law. It’s about the economics of zombies. Glen Whitman and James Dow are editing a book, to be published by Rowman & Littlefield, that will examine the economics of the undead, especially zombies and vampires.
Ideal contributions will use economic reasoning to address issues related to the undead, use the undead as a means of exploring economic thought, or both. Abstracts and final essays should be written in an accessible and engaging style for a popular audience. Contributions should also make relevant reference to the undead in pop culture, such as the Twilight saga, Buffy the Vampire Slayer, the novels of Anne Rice, World War Z, the films of George Romero, True Blood, and The Walking Dead.
Possible topics include: supply and demand in the market for blood; the operation of zombie labor markets; the political economy of responding to undead threats; macroeconomic recovery after a zombie apocalypse; what zombie and vampire behavior tell us about rational-choice modeling; etc.
The editors are soliciting abstracts for potential papers, submission guidelines are here.
Not in a Better Place
Better Place, about which I was optimistic several years ago when visiting Israel, is not doing well:
Better Place, which staked out its position in the electric car market with an innovative battery-swapping technology, has sold only about 750 cars in Israel, while piling up losses of more than $500 million. Agassi was forced out of Better Place in October, his successor as CEO quit in January, and the company has put its global rollout on hold. Better Place needs to raise more money this year, and that won’t be easy, insiders say.
The devil appears mostly to be in the details. The technology works, people who use it like it, but it isn’t cheap enough yet to overcome a bunch of individually minor regulatory and societal hurdles.
One point which occurs to me is that the automatic battery-swapping technology pairs well with self-driving cars. The cars can charge themselves when not in use.
Hat tip: Brad Plumer at Wonkblog.
Online Education and Jazz
A common responses to my article, Why Online Education Works, is that there is something special, magical, and “almost sacred” about the live teaching experience. I agree that this is true for teaching at its best but it’s also irrelevant. It’s even more true that there is something special, magical and almost sacred about the live musical experience. The time I saw Otis Clay in a small Toronto bar, my first Springsteen concert, the Teenage Head riot at Ontario Place these are some of my favorite and most memorable cultural experiences and yet by orders of magnitude most of the music that I listen to is recorded music.
In The Trouble With Online Education Mark Edmundson makes the analogy between teaching and music explicit:
Every memorable class is a bit like a jazz composition.
Quite right but every non-memorable class is also a bit like a jazz composition, namely one that was expensive, took an hour to drive to (15 minutes just to find parking) and at the end of the day wasn’t very memorable. The correct conclusion to draw from the analogy between live teaching and live music is that at their best both are great but both are also costly and inefficient ways of delivering most teaching and most musical experiences.
Edmundson also says this about online courses:
You can get knowledge from an Internet course if you’re highly motivated to learn. But in real courses the students and teachers come together and create an immediate and vital community of learning. A real course creates intellectual joy, at least in some. I don’t think an Internet course ever will.
Edmundson reminds me of composer John Philip Sousa who in 1906 wrote The Menace of Mechanical Music, an attack on the phonograph that sounds very similar to the attack on online education today.
It is the living, breathing example alone that is valuable to the student and can set into motion his creative and performing abilities. The ingenuity of a phonograph’s mechanism may incite the inventive genius to its improvement, but I could not imagine that a performance by it would ever inspire embryotic Mendelssohns, Beethovens, Mozarts, and Wagners to the acquirement of technical skill, or to the grasp of human possibilities in the art.
Sousa could not imagine it, but needless to say recorded music has inspired many inventive geniuses. Edmundson’s failure of imagination is even worse than Sousa’s, online courses are already creating intellectual joy (scroll down).
(Sousa was right about a few things. Recorded music has reduced the number of musical amateurs and the playing of music in the home. Far fewer pianos are sold today, for example, than in 1906 when Sousa wrote and that is true even before adjusting for today’s much larger population. Online education will similarly change teaching and I don’t claim that every change will be beneficial even if the net is good.)
Sousa and Edmundson also underestimate how much recording can add to the pursuit of artistic excellence. Many musical works, for example, cannot be well understood or fully appreciated with just a few listens. Recording allows for repeated listening and study. Indeed, one might say that only with recording, can one truly hear.
Recording also let musicians truly hear and thus compare, contrast and improve. Most teachers will also benefit from hearing and seeing themselves teach. With recording, teaching will become more like writing and less like improv. How many people write perfect first drafts? Good writing is editing, editing, editing. Live teaching suffers from too much improv and not enough editing. Sometimes I improv in class–also called winging it–but like most people I am usually better when I am better prepared. (Tyler, in contrast, is the Charlie Parker of live teaching.)
Sousa and the modern critics of online education also miss how new technologies bring new possibilities. For Sousa then, as for Edmundson today, the new technologies are simply about recording the live experience. But recorded music brought the creation of new kinds of music. Indeed, a lot of today’s music can’t be played live.
In his excellent 1966 disquisition, The Prospects for Recording (highly recommended, fyi), pianist Glenn Gould said that using the technology of the studio “one can very often transcend the limitations that performance imposes upon the imagination.” The same will be true for online education.
Addendum: Andrew Gelman comments.
Sydney Bleg
I will be in Australia next week talking about Launching the Innovation Renaissance. Most of the time I am tied up speaking in Melbourne and then to PM&C, Treasury, and the Innovation departments in Canberra. I will, however, have a bit of free time in Sydney. Recommendations welcome.
Only the Cyborgs Can Compete With the Robots
I think this is inevitable and in a way desirable. Only the cyborgs can compete with the robots.
MRUniversity New Courses!
We have four new courses at MRUniversity and a brand new design! The new courses are
- The Euro Crisis, a 90 minute mini-course over 3 weeks.
- The Economics of Media, 4 hours over 4 weeks.
- The American Housing Finance System, 15 hours running to June taught by Arnold Kling.
- Mexico’s Economy, a 4.5 hour course over 4 weeks taught by Robin Grier.
You can find our more about all of the courses at MRUniversity. Lots of new features as well. After registering, for example, you can click the “Follow this Course” button on the main course page and receive weekly email updates on course content, video chats and what other MRU users are up to. We have also made it easy to add material by clicking the “User Contribution” section under the videos. There you can add videos, research, news and opinions related to the video. We’ll feature the best user contributions on our homepage.
Also do check out the new home page and be sure to scroll down to see The List, all of our videos released so far. And remember, all of our videos are freely available for non-commercial use. If you teach economics or related material feel free to assign a video for homework or try flipping the classroom!
Even more courses coming soon!
Finally, a big hat tip to MRU’s web guru and program manager, Roman Hardgrave, who has done a stellar job on the new features and design.
Cognitive Democracy: Condorcet with Competence
We usually think of democracy as a way of aggregating diverse preferences but we can also imagine that we share similar preferences and that what we disagree about is the best way to achieve those preferences. From this perspective, democracy can be thought of as a tool for information aggregation. Using simple probability theory, Condorcet showed in 1785 that even when each individual voter has only a slightly better than chance probability of choosing the bettier of two options the probability that majority rule chooses the better outcome quickly goes to 1 as the number of voters increases (the wisdom of the crowds).
A number of writers at Crooked Timber have been discussing Knight and Johnson’s The Priority of Democracy, one strand of which involves such an cognitive defense of democracy. Cosma Shalizi, for example, writes:
Democratic debate is a tool for cognition, for harnessing the dispersed knowledge of the citizens and their diversity of perspectives and insights.
But does an cognitive defense of democracy lead to universal suffrage? Or does it suggest what Melissa Schwartzberg calls “epistocracy”, rule by the educated? (See also Henry Farrell’s comments). The wisdom of the crowds breaks down when the crowd’s errors are systematically biased rather than random. As Peter Boettke notes, Bryan Caplan makes a strong case in The Myth of the Rational Voter that better educated voters are less systematically biased than the average voter and more likely to agree with experts on questions of fact.
When voters are not equally competent some remarkable mathematical results show that the best cognitive democracy is not universal suffrage and one-person, one-vote but a specific form of weighted voting.
Begin with a simple example. Suppose there is one correct decision and there are three voters each trying to reach the correct decision with competence levels of {.55, .55, .55}, where the competence levels are just the probabilities that each voter chooses the correct decision. The best a dictator could do in choosing the correct decision is .55 but if use majority rule the probability of reaching the correct decision is 0.57475, higher than that of any individual voter. (We reach the correct decision if all three voters reach the correct decision which has prob .55^3 or if two voters reach the correct decision and one does not, as this can happen in three ways the probability of the latter is 3*.55*.55*(1-.55) for a grand total of .57475.) Moreover, if we were to increase the number of voters to 100, the probability of majority rule reaching the correct decision goes to 84%–far above that of any dictator, this is the essence of Condorcet’s theorem.
Now let’s assume that the voters have competences of {.55,.60,.70}. Majority rule, using the same reasoning as before, gets us a democratic competence level of .673, not bad but notice that this is less than the competence level of the highest competence individual. The ideal voting system in this case would weight voter three enough so that she determines the outcome, thus giving democracy a competence level of .7.
More generally, if the voter competences levels are {p1,p2,p3} then the cognitively most efficient voting scheme gives each voter a weight of Log[pi/(1-pi)]–the result is remarkable for a being such a simple formula of the voter’s own competence level (note that the individual’s weighting is not a function of the competency levels of the other voters.) The result was shown first in this context by Nitzan and Paroush, Nobel-prize winner Lloyd Shapely and Bernard Grofman also made important contributions and see Grofman, Owen, Feld for some related results.)
Democracies make many decisions which are information based (Does Iraq have weapons of mass destruction? Will an invasion make the US safer? Do phthalates cause significant health risks?). Note also that we might also use this method for many committee decisions. Which scientific approach is deserving of greater funding? Which marketing plan should we adopt? Is surgery the best option? and in these decisions weighting votes by a measure of competence, which can be estimated from past decisions, may lead to significant improvements in outcomes.
Voters have diverse preferences not just competences but we could combine cognitive and preference aggregation theories of democracy by using high competence voters from different demographics categories to estimate what people would think about issues if only they were better informed. In this way we can distinguish differences due to knowledge from those due to preferences and we could upweight the competent while maintaining demographic balance thus creating a cognitive democracy based on enlightened preferences.
CAFE Standards are Extremely Inefficient
In Modern Principles, Tyler and I explain that a command and control regulation is a less flexible and thus more expensive way of reducing energy consumption than is a tax. How much more expensive? A recent analysis estimates that the new fuel economy standards are 6 to 14 times more expensive than an equal consumption-reducing gas tax. Valerie Karplus, one of the authors of the new analysis, writes in the NYTimes:
I and other scientists at the Massachusetts Institute of Technology estimate that the new standards will cost the economy on the whole — for the same reduction in gas use — at least six times more than a federal gas tax of roughly 45 cents per dollar of gasoline. That is because a gas tax provides immediate, direct incentives for drivers to reduce gasoline use, while the efficiency standards must squeeze the reduction out of new vehicles only. The new standards also encourage more driving, not less.
Acrobatic Quadrocopters
Imagine balancing a pole on one finger then throwing it into the air and catching it with another finger. Then watch this.
http://youtu.be/pp89tTDxXuI
Machines have been stronger than us for a long time but now they are becoming more flexible, agile and graceful than us as well, not to mention smarter. More here on the math.
Hat tip: Umair Haque.
Intrade Traffic Plummets
From the FT
The number of people using Intrade has plummeted since a US government crackdown late last year…At its peak, Intrade counted 112,000 users. At midday on Wednesday, the site said there were 509 – and 498 were guests.
The vanishing traffic raises questions about the predictive value of a market feted by journalists and academics as a pioneering gauge of public opinion.
The government failed to protect the public from CDOs plumped up with bad mortgages or from swindlers like Bernie Madoff but don’t worry when it comes to the markets that Arrow, Schelling, Smith, Hanson, Wolfers et al. said have “great potential for improving social welfare” the government has got it covered. Call me cynical but I suspect Intrade would have been better treated had it been a project of Goldman Sachs.
Armen Alchian
Armen Alchian has died. Alchian was both clever and wise, an unusual combination. His 1950 paper Uncertainty, Evolution and Economic Theory applied basic insights from evolutionary theory to suggest new approaches to economic ideas. Alchian, particularly with Demsetz, began the analysis of property rights not only what property rights do but how they evolve with changing circumstances (the link goes to Alchian’s entry on this topic in the CEE). Alchian’s textbook with Allen, University Economics which became Exchange and Production, is a classic; never a bestseller among students but avidly read by masters. The Alchian-Allen theorem, sometimes called the third law of demand, continues to bedevil theorists despite its simplicity. I am a fan of his paper Costs and Outputs which generalized some ideas about production and time and inspired Fisher Black. I never met Alchian but have always profited from reading his papers and I was truly grateful and also thrilled when he blurbed my book Entrepreneurial Economics. Fred McChesney has a good appreciation including Alchian’s pioneering event study which was suppressed for national security reasons; Bob Higgs remembers Alchian’s legendary class at UCLA and here is Larry White interviewing William Allen about A Life Among the Econ his memoir of UCLA economics during its glory years.
You can find all of these works and more in Alchian’s Collected Works.
Aviation, Liability Law, and Moral Hazard
By 1994 the threat of lawsuits had driven the general aviation industry into the ground. Cessna and Beech ceased production in the 1990s and the other major player, Piper, went bankrupt. The problem was caused by liability law and the long-tail. Cessna, Beech, and Piper had been producing planes since 1927, 1932, and 1927, respectively, and airplanes last a long time. Thousands of aircraft built in the 1930s and 1940s are actively flown today and the average age of the general aviation fleet (small non-commercial aircraft) is more than 24 years. Liability law also grew stronger in the 1980s and 1990s so aircraft manufacturers found themselves being sued for aircraft that they had produced decades earlier. Essentially, the manufacturers found that they could be sued for any aircraft that they had ever produced.
In 1994, however, Congress passed GARA, the General Aviation Revitalization Act. GARA said that small airplane manufacturers could not be held liable for accidents involving aircraft more than 18 years old. When it was passed a huge stock of potential liability claims were lifted from the manufacturers and the industry was indeed revitalized. GARA also provided an interesting test of moral hazard theory. Usually, when liability is moved from producers to consumers, both the producers and the consumers adjust; the product changes and so does behavior, so it is difficult to parse out the effect of moral hazard alone. In the case of GARA, however, liability was lifted from the manufacturers on planes that they had produced decades earlier and no longer controlled so we can isolate the influence of the liability change on the consumers of aircraft.
My latest paper (with Eric Helland) just appeared in the JLE. We use the exemption at age 18 to estimate the impact of tort liability on accidents as well as on a wide variety of behaviors and safety investments by pilots and owners. Our estimates show that the end of manufacturers’ liability for aircraft was associated with a significant (on the order of 13.6 percent) reduction in the probability of an accident. The evidence suggests that modest decreases in the amount and nature of flying were largely responsible. After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.
GARA thus appears to be a win-win because it revitalized the industry and increased safety. The latter came, in a sense, at the expense of the pilots and owners who now bore a greater liability burden but they were the least cost avoiders of accidents. Moreover, the pilots and owners of small aircraft were big supporters of GARA thus suggesting strongly that prior to GARA liability law for aircraft had been inefficient and destructive.
Tabarrok Talk
I will be speaking at GMU’s Economic Community Forum on Tuesday; free and open to the public.
Topic: Launching the Innovation Renaissance
Date and Time: Tuesday, February 19, 2013 from 7:30 p.m. to 9:00 p.m.
Location: Dewberry South in the Johnson Center, Fairfax Campus
High School Safety in Northern Virginia
Here is a letter I wrote to the principal of my son’s high school:
Dear Principal _____,
Thank you for requesting feedback about the installation of interior cameras at the high school. I am against the use of cameras. I visited the school recently to pick up my son and it was like visiting a prison. A police car often sits outside the school and upon entry a security guard directs visitors to the main office where the visitor’s drivers license is scanned and information including date of birth is collected (is this information checked against other records and kept in a database for future reference? It’s unclear). The visitor is then photographed and issued a photo pass. I found the experience oppressive. Adding cameras will only add to the prison-like atmosphere. The response, of course, will be that these measures are necessary for “safety.” As with security measures at the airports I doubt that these measures increase actual safety, instead they are security theater, a play that we put on that looks like security but really is not.
Moreover, the truth is that American children have never been safer than they are today. Overall youth mortality (ages 5-14) has fallen from 60 per 100,000 in 1950 to 13.1 per 100,000 today (CDC, Vital Statistics). Yet we hide in gated communities, homes and schools as never before.
When we surround our students with security we are implicitly telling them that the world is dangerous; we are whispering in their ear, ‘be afraid, do not venture out, take no risks.’ When going to school requires police, security guards and cameras how can I encourage my child to travel to foreign countries, to seek new experiences, to meet people of different faiths, beliefs and backgrounds? When my child leaves school how will the atmosphere of fear that he has grown up in affect his view of the world and the choices he will make as a citizen in our democracy? School teaches more than words in books.
Yours sincerely,
Alex Tabarrok