Monday, October 22, 2012

The coming economic mega boom

I was recently handed a copy of the working paper by Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”. Spoiler alert, the music is about to stop for economic advancement in the U.S. The paper is thought provocative, but I put it down unconvinced. One of the better reviews I’ve read came from Gary Becker. Gordon’s paper has a strong flavor of “everything that can be invented has been invented” to it.

My counter to the Gordon hypothesis might be summed up in the actual quote from the former Commissioner of Patents, Charles Holland Duell, “In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold.”

All right, so “you ain’t seen nothing yet” is not exactly a counter hypothesis. But it does summarize my optimism which is rooted in a more sound argument. Like Becker, I believe dividends from the current industrial revolution period as defined by Gordon have yet to fully play out. The most significant potential gains and growth from major improvements similar to the epic advances cited by Gordon like running water, the internal combustion engine, and electricity would be medical advances (imagine a world where no one gets sick, ever; illness as a quaint artifact of history) and true energy independence (completely individualized, self-sufficient machines able to generate enormous amounts of energy on demand; a power station in every house, car, device).

It is reasonable that the Gordon thesis is ever more easy to convince oneself of. What comes next becomes further and further out toward what we can’t imagine. Let me reverse Gordon’s thought experiment (option A is you get running water and indoor toilets plus 2002 levels of electronic technology; option B is you get everything since 2002, but you have to give up running water and indoor toilets—a false-bargain, straw man if there ever were one). Here is the reversal: Pick the easier task. Task 1 is to explain to someone in 1800 the idea of running water and indoor toilets. Task 2 is to explain to someone in 1930 the idea of how you saw a status update on Facebook which caused you to program your DVR from your iPhone. The next technology is more difficult to imagine; hence, we fall for the illusion that advancement is also more difficult per se.

Some other critical thoughts I had were that:
  • Throughout Gordon’s paper there seems to be an under appreciation of quality improvements. Airplanes may travel at essentially the same speed as they did in 1958, but there is no comparison between the available experience then and now.
  • He cites four classic examples of greatly mistaken past innovation pessimism but then seems to build his own as he elaborates on the six headwinds.
  • In the headwinds I detect some cause/symptom confusion. The education and deficit headwinds, numbers two and six, have this quality.
  • Globalization cannot be a bad thing—part of headwind number four. This is especially odd considering the mostly positive ink he gives to immigration.
  • I agree that a consumption-based analysis is more compelling than income-based analysis. In fact, I believe that will be the only way to fully capture the measure of economic well being in the future, if not today, and that it should be uniformly extended to all—not just the bottom 99 percent. To call income inequality a headwind seems to miss the point that this is simply a bad statistic.
  • I agree with Becker’s optimism on addressing the first headwind, reverse demographic dividend, and the fifth headwind, energy and the environment.
I do agree that economic advancement probably is more a surge-subside phenomenon rather than the smooth glide path upward as the standard Solow-era modeling suggests. But is the party over? Technologies like 3-D printing and continuing communication advances (both a person organizing his thoughts more easily as well as collaborating thoughts more easily) suggest that the cost of experimentation will plummet in the coming decades. Whatever is left to be found, we have a better and better chance of discovering it.

Friday, October 19, 2012

Fair market value soon the norm, theft soon the abnormality

A few thoughts on ticket prices for events, sporting and otherwise. My familiarity is with sporting event pricing, but I assume most of this translates to other types of events pretty well.

Overall, I am optimistic that we are getting more rational and moral as a society regarding ticket pricing. Secondary markets are more acceptable including the important feature of tolerance for above face value pricing--scalping as the greedy call it. Notice the greedy here are those who expect to only and always pay at most face value for a ticket. Nevermind the inconsistency of failing to pay face value for tickets they do not want, but expecting the ones they do want to come without a premium.

Largely the good trends are direct and indirect products of technology. Directly because the Internet allows us to transact and make a market in tickets at very low cost. These markets are getting deeper, more transparent, and faster while at the same time offering enhanced service like views from the seats a buyer is considering purchasing. It is also becoming more of a commodity, which is also a good thing unless your paycheck has Stubhub at the top of it. The network effects will help the biggest and best market makers retain market share, but the steep fees are not long for this world. Watching the creative destruction in this market has been interesting over the past 15 years. The rise of local dealers who played a great role physically connecting buyer and seller has been supplanted by electronic exchanges including bar codes that make physically delivery unnecessary in many cases. We've gone from street speculator to the bourse to the NASDAQ in a decade.

Indirectly technology affects the trends by allowing the seller to be anonymous. It is tough to look into the eyes of a father standing with his son asking the price and rightfully tell him the market price is a 100% premium above face value. This is becoming a sellers' market in many cases but still with many benefits to the buyers. Efficiency cuts both ways. Technology also favors a different type of seller that may be more appealing to buyers; hence, above face-value pricing may be more acceptable. Soon the "jerks" won't be in the middle buying up tickets and selling them [when they can] at a premium. You know, the jerks who stand in the rain waiting for me without any promise that I'll come just in case I want to attend the event. But middlemen (more likely the needs for some kind of middleman) do not always go away; often they just adapt.

The feeling among those for whom it is important may be, "When I purchase online, I know I'm buying from the original season ticket holder who just happens to be unable to attend the game. I no longer must contend with the [dreaded] scalpers." But that feeling is probably wrong. The middlemen are there and probably always will be, thankfully, hopefully.

Wednesday, October 17, 2012

Causes of the Great Recession and the Slow Recovery

My views on the macroeconomic landscape in America and abroad over the past five years, much like the landscape, have been in flux. Here is my current view as to the approximate causes of the Great Recession itself and the reason the recovery has been so poor. I'm limiting my evaluation to the more immediate and direct causes--therefore, the notable absence of multi-decade-long TBTF bailout contributions and regulatory failure including subsidization of housing, et al.

Causes of the recession:

  1. Federal Reserve policy failure allowing NGDP growth to fall extraordinarily below trend (the tightest money policy since Hoover). This is the shorter-term portion of the causes. For this I'd approximate 50% of the responsibility. (HT: Scott Sumner)
  2. Structural problems perhaps best understood through a Patterns of Sustainable Specialization and Trade (PSST) framework. Included in this grouping is malinvestment playing a major role. This is the longer-term portion of the causes. For this I'd approximate 40% of the responsibility. (HT: Arnold Kling)
  3. Everything else. 10% responsibility.
The combination of factors 1 and 2 created the perfect storm for this event to be so damaging. A recent post by Scott Sumner relates to this. Either 1 or 2 would have been sufficient causes for a recession or recession-like events. Cause 1 creates much more acute, short-term pain. Cause 2 creates much more hidden dead-weight loss by changing the fundamental glidepath of growth. Perhaps we lose one-half to one percent off of average annual growth for 10-30 years. This would be a truly colossal loss--remember, growth is a compound number that affects results with many orders of magnitude. 

The reason the recovery has been so poor:
  1. Federal Reserve policy failure to get us back to or toward trend NGDP levels. Our inability to close the potential-real gap will make future generations both laugh and cry. I'd give this 55% responsibility.
  2. Prolonged PSST difficulties. This is hard to avoid given how bad the PSST problem was. Some good portion of it, mind you, was an unavoidable consequence of free market growth in a less than free market world. Government makes creative destruction less creative and more unnecessarily destructive. I'd give this 25% responsibility.
  3. Regime uncertainty and undesirableness, which has many facets. Tax policy is a mess. Government spending is on an unsustainable trend with no likely solution or solver to be found. Regulation continues to respond on cue--more complications and gamesmanship (Dodd-Frank), more intrusions and forced bargains (Obamacare). Minimum wage increases and unemployment benefits extension get the incentives backwards from the goal. I'd give this 15% responsibility.
  4. Everything else. Surely there is something else, or are these categories jointly exhaustive? Potentially 5% responsibility. 
As with any economic period, there are many contributing factors and some are and may remain hidden.

Monday, October 15, 2012

The evolution of a rivalry

This weekend was the annual Red River Rivalry, one of the greatest rivalries in college football. It has a remarkable and storied tradition. For me it was my 29th in a row to attend. During that tenure, I've seen it all, and I can say that in a way I believe few true sports fans can match. My deepest agonies of defeat and greatest joys and thrills of victory in all my sport spectating have come in that Cotton Bowl stadium in the middle of the State Fair of Texas in Big D, half-way between Norman and Austin.

As much as the experience has maintained its continuity, there are a few significant changes that have taken place. I have watched as that game and the weekend that surrounds it has evolved over time. It is unmistakably a more subdued, sophisticated, and superficial affair. For the most part these changes are good. A little of the pure rivalry is lost, I believe, but on the whole it is a better environment. Some of the changes have been:

  • The center of fan pre game (night-before) activity has moved away from the rowdy and rough areas like Deep Ellum and the West End and into the tony Uptown and stylish Knox-Henderson.
  • Yelling at, taunting, and otherwise verbally berating opposing fans is generally gauche and rare.
  • Wearing team colors the night before is rare rather than the norm (this contributes to the prior trend).
In summary the behavior is better, the environment cleaner, and the atmosphere more sophisticated. 

Most of this, probably 80%, I attribute to the wealth effect. We've gotten a bit wealthier in both fan bases overall, but in particular the selection of fans has probably gotten considerably wealthier. The explosion in sophistication in Dallas, some of it genuine wealth, some of it the so-called $50,000 millionaires, has attracted a different crowd to the game. These fans are willing and able to spend much more for the OU-TX experience, and they crowd out other fans that more resembled what I saw in the mid-eighties. Also, the relaxed attitude generally for secondary-market ticket sales, read market prices, have further pushed out the fans of lesser means. 

The remaining 20% or so behind the evolution would include the significant downturn both teams experienced in the 1990s. This surely washed out some of the marginal fans. Also, the general encouragement of respectfulness would seem to have played a role. This attitudinal shift started at OU around the time of Stoops' arrival, but I believe it was incidental to him per se. Lastly, the extreme and probably over-the-top police enforcement during the 1980s and 1990s in Dallas surrounding the OU-TX game stands out. For a while they seemed intent on taking away the fun as the took brawlers off the streets and made what I witnessed to be arbitrary arrests of public drinkers (not drunks, mind you). There were literally invisible lines that once crossed would land you ziptied on the curb without warning. 

Again, I think the evolution is overall positive, but some of the spirit is lost.

PS. There is nothing like beating Texas. Boomer Sooner!

Wednesday, October 10, 2012

Come fly with me--since the cost has never been much lower

Mark Perry at the Carpe Diem blog points to a couple of interesting data sets showing the steady downward progression in the cost of flying. It is a great post with what will be for some, but not us at MM, very surprising facts. I like the conclusion:
Overall, consumers have reaped significant benefits from the deregulation of airlines in 1979, and have saved billions of dollars in lower fares.  Like any industry, the airline industry is evolving over time, and consumers have to adjust to the changes.
Read the whole thing.

That last line and my recent air travel got me thinking a little about where I see the evolution of the airline industry headed. FWIW, my forecast is for reduced or eliminated class distinctions within individual flights. I believe service levels will be separated by airline generally and occasionally by airplane. Watching the odd, halfhearted auction that took place before every leg of my recent American Airlines flight brought me to this thought. People vie for upgrades in ways that more resemble prisoners asking for special privileges from the warden rather than paying customers engaging in free market transactions.

I love Southwest Airlines, but I realize their approach may not appeal to everyone. I just can't believe the current model still in use by so many other airlines appeals to anyone. That's why I see a role for an airline specializing only in first/business class service. And also I see airlines that have entire planes or routes that offer one level of service with other routes/planes offering another level completely. There will be more a la carte purchasing of goods and services in flight. American among others is doing some of this by selling food items and pricing preferred seats at a premium. Expect a lot more of this but perhaps in a more appealing way. I think the winning airlines will be those who are more transparent and trusted in their ticket pricing. Today's approach is filled with penalties; tomorrow's will be much more about amenities.

While this disrupts the classic model of price discrimination in airlines, we have already seen those models challenged and changed in movie theaters, et al. Pricing is more uniform and theater quality much higher for me today than it was a decade ago. There are many routes to profitable air travel.

Thursday, October 4, 2012

Wither economic freedom

The Cato Institute recently released the latest Economic Freedom of the World annual report. Click here to hear an interview with one of the report's authors, James Gwartney. The United States has again slipped in the rankings, now landing at 18th place. It seems the U.S. is falling both relatively (understandable as other nations advance and potentially not material if the differences are slight, which they are not) and absolutely (a much more serious problem).

For me this raises a few questions for progressives:
  1. Do you care?
  2. Is this a bad but necessary situation as other, conflicting goals are realized?
  3. Do you outright deny the report's findings (does this assume you do care about economic freedom?)
My guess is that the answers are basically 20% of the time No, N/A, N/A; 50% of the time Yes, Yes, No; and 25% of the time Yes, Maybe, Probably; and 5% of the time Yes, No, No.

To be clear, I believe the answer should be Yes, No, No.

Wednesday, October 3, 2012

Here's a vote for rationality

I planned on writing a post on why I don't vote. In it I planned on laying out the inconsistencies and illogical reasoning behind the many arguments offered by the pro-vote movement. Rather than hack my way through that, I will direct you to the timely and very well written article in the latest issue of REASON by Katherine Mangu-Ward. In it she hits all the critical points. 

Here is a particularly good passage:
Voting is widely thought to be one of the most important things a person can do. But the reasons people give for why they vote (and why everyone else should too) are flawed, unconvincing, and sometimes even dangerous. The case for voting relies on factual errors, misunderstandings about the duties of citizenship, and overinflated perceptions of self-worth. There are some good reasons for some people to vote some of the time. But there are a lot more bad reasons to vote, and the bad ones are more popular. 

The first thing I like to do when confronted (make no mistake it is always a confrontational attitude) with the question, "Why don't you vote?" is to reverse the questioning, "Why DO you?" This lets me know exactly what approach my adversary is taking: wistful hope shrouded in mathematical ignorance, a desire or duty-bound obligation to feel a part of the process, a genuine understanding of the futility coupled with a defendable enjoyment of voting, et al. 

My simple explanation for my position is as follows: It is a matter of principle and pragmatism. First the practical, my vote will not affect the outcome of an election. "But what if everyone thought and acted that way?" comes the familiar refrain. "Then I would vote and determine the outcome of elections. Now let's drop the childish hypotheticals." If you believe that your vote "counts", you are simply and severely mathematically mistaken. I would expect that you are more likely to mis-vote for the opposing side than vote as intended and meaningfully affect the voting outcome. You can enjoy the process and justify your actions on those grounds. In this sense rational voting is like rational gambling: you should vote/gamble because of the pleasure of the experience itself (contribution to democracy/thrill of potential jackpot), not because you believe you will likely change the outcome/win more than lose.

You can also take (the smallest) pride in knowing that you did affect the aggregate numbers for your side by a unit of one. And by proudly broadcasting the "I voted!" signal, you are perhaps unwittingly showing that you went to relatively great expense to support your side. But for what are you truly showing support?

This brings me to the principled reason. Generally there is very little difference between the candidates in an election--emphasis on very. To the extent differences appear, experience shows they disappear or are significantly reversed once rhetoric becomes policy. When voting on specific ballot measures where the distinctions between sides appears more clear cut, we are up against two forces: unintended consequences and the futility of fighting the tides. Voting down a tax increase may open a backdoor for politicians to increase debt. Voting against a measure to grant imminent domain powers to a private company doesn't change the fact that many in the population believe progress requires submitting this liberty. Most importantly, my non vote is a vote of disgust at the ever-reaching growth of the state and the worship of collective action as a problem solver. And I guess it is a little jab at those who don't understand probability.