Friday, May 24, 2013

Thoughts on The Tornado

It is hard to describe the feeling you get watching the news from work downtown helplessly miles away from your home and family as a storm bears down. Not that your presence could do much, but the distance adds to the agony. You watch as a system that had largely passed the area suddenly develops on the back end. Then a storm chaser identifies a funnel emerging from the cloud. It quickly takes structure. And builds from there. A moment later it has made contact with the ground. In complete opposition to both likelihood and desire, it strengthens and strengthens and strengthens. Its direction is along a probable path but with random veering. All that is certain is that it will move northeasterly. As the overly excited and less than informative storm chasers on the scene and meteorologist in the station alternate between calm but incomplete narration and screaming panic, you do math in your head. What are the chances it moves more north than east? Too much north too quickly and your home and family are more and more likely to be in the certain path. What are the chances it dissipates? What are the chances it reaches your neighborhood but only glances your home? What are the chances your family can survive a direct hit? How powerful is this monster?

Here is what it looked like as neighbors watched it pass.

It was less than 2 miles south. It moved east more than north. My family was spared. Others were not so lucky of course. Their agony was realized in a crashing horrific wave. My heart is heavy for them.

The best I can do to describe the horrible, random terror is to say it is like a plane crash. Or perhaps like knowing that a few planes today will crash. You're in a plane; your family is in another; there are hundreds that will survive, but some will not...

Some other thoughts:

  • The fear of price gouging raised its ugly head not long into the tragedy. Although this tragedy was more isolated within a larger, unharmed community, the importance of letting the price system allocate goods and services was still as always very relevant. Hotel space, dump trucks, and pod storage units are just a few examples that come to mind. Immediately after the storm as sirens echoed as they would for hours, my neighbor told me that he was going to rush to the store to get ice as soon as his wife made it home. I had been home only about 30 minutes after the storm. Our power was out and would be out indefinitely. Once his wife got home he indeed went to the store returning with a very large camping cooler full of ice. This made me think of Munger's great example using ice (bottom of page 4) showing why anti-price gouging laws are very bad. In researching the link for that ice example I immediately found that Munger was already on the case. Because of the limited nature of this tragedy, the ice example may not apply here as well as in other cases. Yet it may still considering how bad traffic is in the area and how limited supplies may be over a short, critical period. I also don't know exactly why my neighbor with two young children felt the need to get the ice--might be for insulin, might be for beer.
  • These types of events challenge the lifestyle I live. I contend with two strong forces in my psyche: between being a minimalist and being a librarian/museum curator. I both long for an existence of commoditized possessions--easily replaceable, without sentimentality but at the expense of authenticity and personality--as well as an existence surrounded by things that tell a unique story. 
  • The conventional wisdom on storm shelters is based on weak cost-benefit analysis. The probability of need is very low, much lower than commonly felt, and the cost is high and non trivial, both the explicit cost of purchase and implicit costs of inconvenience and risk
  • That said . . . here is an idea of my own that borders on spending other people's money--gotta love that. Schools seem to be a way people (children mostly) are particularly vulnerable. Kids are a dependent group. Hospitals fall into this category as well somewhat. Retrofitting existing structures is most likely cost prohibited. But why not design new structures with intentionally collapsible hallways? This might work either in a basement structure or on a first level. The idea is basically a cylindrical-shaped long hall where the end walls are designed to fall into it to seal it off. Perhaps actual doors could be used or a staggered design to segregated the cylindrical hallway. 
  • The signs of generosity are amazing as is how freely and naively people will give money in support of the cause with little or no accountability.
I wish peace to those who have lost so much in this. And let perpetual light shine upon those who never emerged to see the Sun after the wind had passed.

Sunday, May 19, 2013

Rule of democracy: politicians don't lead, they follow.

I've thought about this idea for some time, and I continue to see examples of it. It isn't original to me except maybe to the extent I find it nearly ubiquitous.

I believe a rule of democracy is that politicians do not tend to lead but rather tend to follow the common view. This is true in a general sense and in most specific instances. On the surface it shouldn't be surprising, after all democracy is should give rise to this, and it is unclear if in aggregate it is a feature or a bug. I believe it is a bug on net, but only slightly, and I assign low confidence to this view. Say what you will about the results of totalitarianism, at least it is an ethos of leadership.

The most recent example I found was this one from Todd Zywicki of the Volokh Conspiracy. It the piece he is pointing out that traffic fatalities were falling for a steady and long period before the formal introduction of the National Highway Traffic Safety Administration (NHTSA) in 1970. His discussion is a bit richer than just that as he considers the merits of liability law and regulation versus market forces. Here is the graph that caught my eye (original source):

A similar graph can be plotted for nearly every regulatory agency. The one above reminded me of one I saw back in college, which led me to get out my old Economics of Regulation and Antitrust textbook. In that example workplace safety is shown to be steadily declining prior to and after the creation of OSHA.

I think Robin Hansen would be in agreement with my view--"Politics isn't about policy".

The reason I think this is a net bug is that government isn't well suited for many of the tasks it takes on. The incentives are bad, perverse, or at best non existent. Government is highly subject to regulatory capture. Government's one-size-fits-all approach, which is a natural and good product from equality before the law, is antithetical to evolutionary adaptation.

The reason I think this is only a slight net bug is that what we see generally is just a codification of the mores and demands society otherwise possesses. Hence, my libertarian problems with the 1964 Civil Rights Act with its limitations on freedom of association are mitigated by the virtues the law sought to create and the fact that society was moving that way anyhow. Government then just becomes a clumsy way to achieve what we are otherwise moving toward.

I'm sure I'll have more examples and more thoughts on this. Suffice it for now to summarize that while regulatory approaches to problems are suboptimal solutions (at best second-best if not third-best approaches) they are in fact more solution than new problem. But of course when opportunity cost exceeds benefit at the margin even slightly, the makings for compound disaster are created.

Sunday, May 12, 2013

Highly linkable

Don Boudreaux and John Cochrane deliver a one-two punch at the idiocy that wrapped up in anti-free trade "energy policy".

The War on Drugs is evil: example #207.

Europe is super cool, BTW.

From Megan McArdle, example #336 why the current tax code including taxing capital hurts us. Sure, it doesn't hurt like jumping on a bicycle with the seat missing, but it hurts.

Sunday, May 5, 2013

Escape from New York

I've returned from a jam-packed trip to NYC that was part business and part pleasure. I always find it hard to leave New York without feeling that leaving is a mistake. It is such an amazing place. Very few places on Earth can boast the same wide-range of risk/return opportunity sets. Here are some thoughts:

  • To my impression, by a wide margin no other American city is as much an international city. This is an underappreciated quality.
  • It is a shame people tend to be too uncreative to appreciate experiences that are not "tourist traps". 
  • The success of the city, largely a reflection and exacerbation of the success of American free enterprise, disguises and minimizes the drag of being in the People's Democratic Republic of Bloomberg [insert any prominent former or future mayor as well]. It is hard to see the forest of unintended consequences when dealing so directly with the trees of real-world problems. Viewed in this lens, it becomes easier to excuse the frequent acquiescence to bureaucratic and technocratic power.
  • If your only impression of life in NYC was from television sitcoms, you would be missing 75% of it. If it were only from movies, I'd say you are still missing 50%, and most of that corresponds to the prior missing 75%. 
  • Goldman Sachs, the business portion of my adventure, is a first-class organization. I am often a critic of the revolving door between government regulators of GS and executive positions at GS along with other regulatory capture issues. Being in the heart of the dragon, one sees clearly how that cozy relationship maintains harmony. Literally, the janitors at GS exude more confidence and professionalism than I've seen among bank presidents. Uniformly both in informal conversations and formal presentations, every representative of GS was quite impressive--not cocky or arrogant, but definitely assured of themselves and their organization and certainly serious. They can and do laugh (when appropriate), but I am certain they physically lack the ability to giggle. 
  • I appreciate Goldman for having me as a guest at what was a very good conference filled with good information and entertainment. I now have more respect for them as a money manager, and it is with more confidence that I consider investments with them for my clients. 
  • Here is a random thought I had during the conference: Does corporate paternalism and generosity breed acceptance for governmental paternalism? This is similar to the forest/trees thought referenced above. People in these companies are very well taken care of with all ancillary needs provided or sourced, they are used to showing ID cards and having limited access within their firm and even on their floor or in their business group, they work in "safe" environments insulated from the "chaotic" world outside, etc. 
  • Depending on your perceptive sensitivity to any given behavior, you can get the feeling that "everyone" in NYC matches that given behavior. For example, everybody jogs. Of course, everyone doesn't. But it is easy to be misled being that there are countless examples of any behavior, activity, etc. to be found. That is one thing >60,000 people per square mile will get you. This goes a long way to explain misconceptions visitors come away with.
  • Being in the beautiful jungle of so many choices, a thought I have had previously occurred to me again. A key to happiness is being easy to please. If you can see the good in things (be optimistic) and if you can refrain from pickiness (see things as highly substitutable), you can greatly expand your happiness. In economic terms, the flatter your indifference curves and the looser your budget constraint, the greater your utility potential. 
  • Nearby our hotel was a Whole Foods grocery. We have a Whole Foods store in Oklahoma City, but the store in NYC, as a microcosm of so much else, is quite different from the store in OKC. The selection was larger in scope and scale, and the services included delivery for a flat $10 fee. No such delivery option is available in OKC. Discussing this with my wife dovetailed with other grocery economics discussions we have had. We've thought before about the intrinsic differences among stores like Whole Foods and Central Market versus Safeway and the local Crest Market versus Sam's Club and Costco. Not to get too far off on tangents, but this thought problem brings up the difficulty of finding a comparable basket of goods for inflation as well as other comparisons. Back to the central idea, what are people getting out of food shopping? The joy of bargain hunting (optimizing $/calorie) versus the joy of elegant shopping (optimizing the experience per se) could be generalized extremes along what seems a reasonable dimension of quality/quantity tradeoffs (optimizing selection and discovery). At what point is the only physical grocery shopping we do that done as an entertainment (elegant shopping) with the remainder done online including preprogrammed? 
  • Enough random thoughts. Here are some pictures from a great trip. Enjoy!

Friday, April 26, 2013

Highly linkable

We begin with a couple of strong ones from Bryan Caplan. Here he goes to the mattresses with free-market economists on the "grave evil" of unemployment.

Next he delivers a one, two punch on the issue of public (especially federal) versus private compensation.

David Friedman weighs in on and perhaps settles the infamous and riling post from Steven Landsburg--that's the post that sounds like New York's hottest club . . . it has everything: pornography, rape, environmental destruction, a midget named "Wharhol" who'll throw Campbell's Soup cans at you . . . Okay, I made that last part up.

Bob Murphy, who often challenge's Landsburg on the topic, discusses one of his amusements in the "science vs. religion" debates.

Friday, April 19, 2013

When it comes to justifying economic development initiatives and incentives, public officials and those seeking favorable treatment from state and local government generally find it easy. And the most common drumbeat is “Jobs! Jobs! Jobs!” But I’ve noticed a trend where it seems the economic profession’s criticisms are affecting a positive change. Alas, I believe the change is chimerical.

We now hear the champions of economic development talking the talk that “not all economic development is created equal” and “there are some developments that are just not worth the price”. But I think this is a sales pitch to quiet the dissent without actually making a change. The mantra is still JOBS!, but now we hear of “primary” or more desirable jobs versus “secondary” or less desirable jobs. The definition of these two alleged distinct types of jobs shows some fundamental misunderstandings of economic analysis.

Here is the idea. Suppose you are an economic planner representing a regionally large, nationally small but important city. Oklahoma City is a good example. Two prospective firms are each considering a new location in one of a few cities, and Oklahoma City has made the short list for both firms. You know what each wants, say it is a ten-year tax break that amounts to $5,000,000, but the problem is because your city operates under strict balanced budget accounting, you are only authorized to give up to $5,000,000 in tax incentives away. That amount may go up or down in a year, but for now that is all you can agree to. Both firms want it, and you know with high certainty that either firm will take it and choose your city but without it the firms will go elsewhere. You want the jobs (because, after all, it is JOBS!); so you must decide to which firm to extend the incentive.

  • Firm A is a call center that will have 100 employees who will take calls from around the world to solve computer technology problems for a fee.
  • Firm B is a high-end automotive mechanic service employing 100 who will compete with local dealerships to offer high quality auto repair. The customers base is expected to be nearly 100% local.

The average wage and distribution of wages is the same between the two firms.

To the economic planner Firm A is offering “primary” jobs while Firm B is offering “secondary” jobs. Never mind the fact that jobs are not a good but a cost—there is a reason people aspire to retirement and Garfield hates Mondays. Firm A is “bringing in wealth” by exporting the service calls and importing the customers’ payment for service. Firm B is “moving around wealth” by selling auto repair for payment all within the locality. The preference is intuitive since in Firm A’s case revenue is flowing into the city rather than just revolving around the city as with Firm B. But the intuition here is a deeply flawed economic analysis. It stems from fundamentally misunderstanding the economics of exchange.

When a firm adds value to society, it does so by using less resources than it provides. The measure of this is profit. But profit in the case of both firms flows to the owners who may or may not reside in your community. Because you as economic developer are trying to grow quality jobs, you must consider which jobs are more desirable--remember, you only can give the incentive to one firm. Firm A gives up call center services exporting them outside of the community in exchange for money from outside the community which is partially used to pay the 100 employees' wages. Firm B gives up auto repair services for money all of which remains in the community. Firm B is retaining all of the benefit within the community while Firm A is sending away half of the benefit.

To make this clearer we should remove the monetary component, which serves to muddy the analysis. Ultimately, money is a proxy for what it can buy. At its essence exchange is still a bartering process; it's just that half of the barter is anything you want it to be (anything money can buy--so not love, Dr. McDreamy). Let's replace money with food. Perhaps now we can see it clearly: Firm A is sending computer services out of the community in exchange for food while Firm B is facilitating people within the community exchanging auto services for food. Both exchanges are mutually beneficial to the parties involved. But if you are going to prefer the local society over the society at large since you're the local economic developer, then you should prefer Firm B because that firm is retaining all the benefits (goods and services along with gains from trade) within the community.

Thursday, April 18, 2013

Greed versus Envy

The White House put out a budget just a couple months late of when it is supposed to, which is a rather good record in comparison to the Senate who hasn't passed a budget in four years. Contained within it was an interesting proposal--capping the amount a person can save for retirement through tax-deferred accounts such as traditional IRAs where taxes are paid only once distributions begin, which is usually during retirement.

The maximum a person could set aside in an IRA would be $3 million--an amount Obama feels is plenty enough. Just when you thought we were doing all we could to punish saving and reward consumption, we get this to up the ante. Here is a voice of concern about the implications for tax-deferred savings accounts in general. Here is another. Seems there might be unintended consequences from the government deciding for us how much deferred consumption is enough.

But you see, deferred consumption amounts to deferred taxation. And that is where the greed angle comes in. Obama would have us believe that greed is good in this case--the greed the government has for tax revenue now rather than later. Yet there are two facts that make me doubt that greed is the true motive here:

  1. The proposal is estimated to generate a negligible amount of $9 billion in tax revenue over the next decade--about 3% of 1% of what the federal government plans to spend over that time. 
  2. If this were really about accelerating tax payments from the future to the present, then part of the proposal would include allowing unlimited Roth IRA contributions where taxes are paid up front. 
The absence of the second component in the budget makes me think this is more about envy than greed.