Archive for January, 2009
Stimulus Haiku
| Peter Klein |
From the great Bob Higgs:
Billions come bursting
From huge hydrants of money
I am stimulatedCredit freeze thaws now
Fed heats pipes until they steam
Winter is lovelyConsumers feel fine
Ready to mortgage their souls
John Maynard Keynes smilesSaving’s so passe
Capital stock may be assumed
Let K be capitalGiant debt you bet
Chinese will serve fine dinner
Children cannot voteLike rose in springtime
Welfare state blossoms anew
Laughter heard in hell
Feel free to try your hand in the comments section below. See also Bob’s reflections on the Inauguration.
Update: See also Morgan Reynolds’s bailout version of “I Fought the Law.”
Chapman on the US Economy
| Peter Klein |
My colleague, coauthor on several forthcoming projects, and former PhD student John Chapman was on Hugh Hewitt’s show last night, talking about the US economy. Like me John blames the Fed, not hedge funds and derivatives markets, for the housing bubble and crash. John’s investment advice: “Short the dollar and prepare for the 1970s.” Listen here (John comes on around 25:10).
Pittsburgh School Superintendent Tackles Absenteeism
| David Gerard |
Those of you that think that a football is round might not be aware that the Super Bowl is taking place this Sunday, where my hometown Pittsburgh Steelers will face the Arizona Cardinals. Every year brings its own story lines, and among the many questions surrounding this year’s game is: what is your favorite public-choice explanation for why Pittsburgh schools are opening late on Monday?
The Pittsburgh Public Schools will operate on a two-hour delay Monday because of the Super Bowl, Superintendent Mark Roosevelt said today. Noting that Sunday’s big game means a “late night,” Mr. Roosevelt said the delay should cut down on student and staff absenteeism.
Of course, not all work places are observing the delay, so this will create a few headaches for working parents who don’t happen to be teachers or staff in the Pittsburgh public school system. Perhaps Superintendent Roosevelt thinks parents will already have headaches Monday morning, so the incremental costs will be low.
Burying the Carbon Issue
| David Gerard |
As noted here, a “small” chunk of the House stimulus package is earmarked for carbon capture and sequestration (CCS) demonstration projects. For a coal-fired electric power plant, CCS entails the separation of the carbon dioxide during the combustion stage, compression into a fluid, and injection into a deep (> 1 km) geological formation where it will remain indefinitely.
Regardless of one’s views on global climate change or the government’s role in addressing it, it seems pretty clear that policy makers are moving us toward a carbon-constrained world. The rationale for CCS in such a world is straightforward. Unlike conventional pollutants, today’s carbon emissions will remain in the atmosphere for close to 100 years. Stabilizing atmospheric CO2 concentrations at current levels will require extraordinary (perhaps 80%+) reductions from current emissions levels. However, carbon or no carbon, it is highly improbable that we can meet our projected energy needs (at least in the near term) without continued reliance on fossil energy sources.
I am involved with the CCSReg project that is developing recommendations for the development of a regulatory framework for CCS if the US legislates reductions in carbon emissions. Earlier this month, we issued an interim report with several preliminary recommendations, including putting money toward demonstration projects (summary).
The potential regulatory issues range from identifying and mitigating environmental and safety risks to addressing public acceptance issues associated with the NUMBY (not under my back yard) syndrome. The property rights issue might interest many in this audience, as it is not clear who owns the underground pore space (if anyone), or how much these owners should be compensated for having CO2 filling it up (if anything). This could be resolved on a state-by-state basis, though many potential sequestration sites are located in multiple states. (more…)
The Hot Hand
| Peter Klein |
Watching UNC beat Clemson in basketball last week — Clemson has lost all 54 games it has played in Chapel Hill, the longest such streak in the nation — I was reminded of the behavioral economics literature on the “hot hand” (Gilovich, Vallone and Tversky, 1985; Camerer, 1989; Brown and Sauer, 1993), a version of the gambler’s fallacy in which people put too much weight on past results in predicting future performance. There is debate about hot-hand effects in sports, where the behavior of players and teams (unlike that of dice or roulette wheels) can certainly be affected by knowledge about past contests. If you’re on a team that has lost every game to a particular opponent, how can you not get nervous down the stretch? But such effects are hard to distinguish, empirically, from random error.
I haven’t seen much on hot-hand effects at the level of the firm, though there is a healthy literature on autocorrelation of stock returns (see Boudoukh, Richardson, and Whitelaw, 1994, for one survey). The business press often describes a firm being on a “hot streak” following a string of successful products or performance results (think Apple, Pixar, Google, etc.). If above-normal performance is anomalous, then investing in such firms is a mistake. If a firm’s hot hand reflects superior resources, strategies, market positioning, etc., and these advantages persist, then its hot hand may be real.
PS: When I taught at Georgia I used to know a great Clemson joke. Originally Clemson’s name was simply “Clem,” but it was decided that “Clem University” didn’t sound very distinguished, so they added “s” for chivalry, “o” for honor, and “n” for knowledge.
Update (2 February): Brian McCann notes that, including last night’s game, the NFC has won twelve consecutive Super Bowl coin tosses.
“Beta Culture” and Opportunity Cost
| Peter Klein |
I enjoyed this rant on “beta culture” — the trend toward earlier and earlier releases of hardware and software, before many bugs are worked out — but wish the author understood the concepts of opportunity cost and marginal analysis. I used to assign Gene Callahan’s classic “Those Damned Bugs!” in my introductory classes to explain these concepts. Would it be nice if new products worked perfectly right out of the box? Sure. Is perfection worth the wait? Probably not. That isn’t to say that all new products are launched on the right side of the temporal benefit-cost margin — the BlackBerry Storm might qualify as alpha, not beta — but using the problems of some new products to crusade against early release more generally misses the mark.
Fortunes Even A Hack Can Tell
| Mike Sykuta |
A couple weeks ago, Brad DeLong included me in a list of ethics-free Republican hacks because I was among a number of economists who posted comments on Rep. John Boehner’s website critical of the proposed Democratic “stimulus plan.” To wit, I posted:
History has shown that the Obama team’s proposed ‘stimulus’ is not only going to have little to no effect in the short run, but will create a larger bureaucratic structure, lead to tremendous investments in unproductive political lobbying among ‘stimulus project’ wannabes, and dissuade/delay private investment, recovery and growth.
So imagine my surprise (or lack thereof) to see the headline article of today’s Wall Street Journal. The ink is not even dry on the legislative draft that Congress is expected to vote on sometime today, and lobbyists from stimulus project wannabes such as the concrete and asphalt industries are battling over how we should rebuild and repair roads and bridges; dairy and beef cattle producers are battling over talk of a government program to slaughter dairy cattle and increase milk prices. States are clamoring for bailouts. And the labor unions are singing on their way to the bank with plans for massive infrastructure spending.
In the spirit of Art Carden’s recent post, “Everything is proceeding precisely as I have foreseen.” Ethics-free hack or no.
New Leoni Collection: Law, Liberty, and the Competitive Market
| Peter Klein |
Transaction Publishers and the Instituto Bruno Leoni have just published a new collection of essays by Bruno Leoni, Law, Liberty, and the Competitive Market, edited by Carlo Lottieri. The essays elaborate on Leoni’s distinction between law and legislation, and the analogy between the latter and centralized economic planning, themes introduced in his best-known book, Freedom and the Law. Richard Epstein provides an informative introduction.
Disaster Socialism
| Peter Klein |
As I noted elsewhere yesterday, the “stimulus” bill making its way through Congress is a fine illustration of the Higgs effect, the tendency of government to expand massively in response to “crises,” real or imagined. Naomi Klein’s “Disaster Capitalism” thesis is exactly backward: “disasters” are inevitably followed by huge increases in the public sector at the expense of the private. Anyway, if you have any doubt that the current legislation has precious little to do with economic stimulus, consider the details of the House’s proposed $825 billion package, which includes:
- $1 billion for Amtrak
- $2 billion for child-care subsidies
- $50 million for the National Endowment for the Arts
- $400 million for global-warming research
- $2.4 billion for carbon-capture demonstration projects
- $650 million for digital TV conversion coupons
- $8 billion for renewable energy funding
- $6 billion for mass transit
- $600 million for the federal government to buy new cars
- $7 billion for modernizing federal buildings and facilities (including $150 million for the Smithsonian)
- $252 billion is for income-transfer payments ($81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax)
- $66 billion for education
Now I should state, for the record, that unlike other critics of this particular stimulus package, I don’t favor government “stimulus” packages of any kind. I’m not a Keynesian, after all.
Department of Irony, Cass Sunstein Edition
| Peter Klein |
Harvard’s Cass Sunstein has been tapped by Obama to head the Federal Office of Information and Regulatory Affairs (to be “regulation czar,” in the vernacular). One of his main tasks, presumably, will be to sell the new financial-market and related regulations accompanying the “stimulus” bill. I hope Sunstein will re-read his recent working paper with Richard Zeckhauser, “Overreaction to Fearsome Risks”:
Fearsome risks are those that stimulate strong emotional responses. Such risks, which usually involve high consequences, tend to have low probabilities, since life today is no longer nasty, brutish and short. In the face of a low-probability fearsome risk, people often exaggerate the benefits of preventive, risk-reducing, or ameliorative measures. In both personal life and politics, the result is damaging overreactions to risks. We offer evidence for the phenomenon of probability neglect, failing to distinguish between high and low-probability risks. Action bias is a likely result.
Cass, will you please explain “action bias” to the President and Congresssional leaders before they completely restructure the US economy in response to the current economic downturn?
Incentives Burlesque
| Lasse Lien |
Speaking of incentives, here is an anecdote you probably don’t need to know. In Norway prostitution is illegal, but the ban has until recently been only on the seller side. Now, new legislation has also made buying illegal. Since this most likely will destroy much of the market, one political party (actually a member of the government coalition) suggested that the government pay severance packages to prostitutes that are forced out of business. My question is why only prostitutes? Shouldn’t all criminals that are forced to change careers because of government action be duly compensated?
The Heath Brothers on Incentives
| Peter Klein |
Dan and Chip Heath worry that incentive plans backfire because of focusing illusion — managers place too much weight on a single variable in the incentive contract, ignoring the likely side effects. I don’t disagree that this is possible but Chip and Dan seem to be knocking down a pretty feeble straw man. The drawbacks of single-variable, quantitative incentive schemes are well known in the organizational design literature, spawning oodles of studies of multi-tasking, the use of multiple performance measures, the benefits and costs of subjective evaluation criteria, and the like. (There’s a nice overview in BSZ chapter 16.)
What Drives Traffic Fatality Risks?
| David Gerard |
Does the inclement weather have you worried about sliding off the road to an icy death? If so, I’ve got some good news for you. On a per-mile driven basis (or per-trip or per-minute traveled), winter is actually the least likely time to get killed behind the wheel. Summer drivers have a risk of 1.24 fatalities per 100 million miles driven compared with 1.01 during the winter. For males behind the wheel of an SUV, those summer and winter numbers are 1.39 and 0.87, respectively.
That’s what we discovered when we teamed with the AAA Foundation for Traffic Safety to develop TrafficSTATS — an interactive website that merges traffic fatality and personal travel information to generate risk estimates. The site generates risk estimates for combinations of age, day of week, month of the year, gender, hour of the day, drivers, passengers, and vehicle types. Did you know that a man behind the wheel is 80% more likely to get killed than a woman? Or that 16-20 year-old drivers have about the same fatality risk as 75-84 year-olds?
Although our estimates are a simple ratio generated by merging federal fatalities and personal travel behavior databases, we believe that our risk estimates frame risk in a far superior fashion than using fatalities or other risk proxies. For example, one common metric is deaths per registered vehicle. By this measure it looks like SUVs are more dangerous than cars. Adjusting for the fact that SUVs are driven more miles and carry more passengers than cars do provides a much different picture — SUVs are a lot safer (0.85 SUV and 1.02 passenger car fatalities per 100 million passenger miles traveled). Not only that, we also found that even the rollover risk for SUVs and cars are virtually the same for 25-50 year old drivers, and the divergence in rollover risks stems predominantly from high fatality risks for young and old drivers (PowerPoint and paper).
One caveat, the site was developed with MS tools and works best in Internet Explorer. What was that post about path dependence? Aaack.
The Economics and Sociology of Stonehenge
| Peter Klein |
Recent research on Stonehenge recognizes that its construction was not just a massive technological undertaking, but a huge organizational challenge as well. Here’s a recent item from American Scientist (via 3quarks):
Although many people might straightforwardly conclude that an undertaking on the scale of Stonehenge must have been an expression of concentrated power within Neolithic society, the claim cannot be conceded without thinking about the long processes of inspiration, discussion, mobilization of labor and periodic reenergizing of all those involved that must have accompanied such enterprises and indeed made them possible. The challenge for archaeologists can slide from simple detection of the presence of power to analysis of the ways in which social preeminence could be asserted and maintained for what was all too often just a brief interval.
So research into the ways in which monuments “worked” is crucial. How did people approach and move around these great assemblies of earth, timber and stone? Did they do so freely, or were they directed? What did interventions in nature on this scale signify, and what meanings could be projected by the materials used in their construction? How were tradition and innovation respectively regarded? Leaders or would-be leaders must have had tricky paths to negotiate.
I’m waiting for the pop-management book, Leadership Lessons from the Stonehenge Builders.
Symposium on Alfred Chandler
| Dick Langlois |
I just discovered that Business History Review published a special issue this summer in memory of Alfred Chandler. The papers are mostly short, hagiographic, and written by relatively big names — all as it should be. Tom McCraw mentions one detail I had never known: Chandler was dyslexic.
Another Voice in the (Contracts) Wilderness
| Mike Sykuta |
I have always been a bit reticent when it comes to blogging, as Peter (and my friend Thom Lambert over at Truth on the Market) can attest. But I’ve come to realize not everyone posts at the (obviously OCD-induced) rate that Peter does, and as a guest there is certainly less pressure to keep up with the Joneses . . . or the Kleins anyhow. Thanks, Peter, for your persistence and continued offer to join in the fun. I have long enjoyed lurking around O&M and posting an occasional comment or two.
As Peter mentioned, I am the Director and one of the co-founders of the Contracting and Organizations Research Institute (CORI). CORI was formed in 2000 as a collaborative effort with my colleague Steve Ferris in Finance and former colleague Bob Lawless in (ironically) the Law School. The purpose was to provide a forum for interdisciplinary discussion and research on issues of law, economics, and organization. Since then, we’ve been able to bring in additional faculty positions related to CORI and help recruit other new faculty with aligned interests to create a fairly large group of scholars with complementary, and in some cases congruent, research interests. (more…)
Introducing Guest Blogger Mike Sykuta
| Peter Klein |
I’m delighted to introduce my friend and colleague Mike Sykuta as our newest guest blogger. Mike is Director of the Contracting and Organizations Research Institute (CORI) here at the University of Missouri. Mike and CORI played a big role in attracting me to Missouri in 2002 and we’ve worked closely together on many projects since then.
Mike got his Ph.D. in economics at Washington University in St. Louis and identifies with the Coase and North branch of the new institutional economics. (He is sympathetic to Williamsonian TCE but has not yet drunk the Kool-Aid.) Mike is co-editor of SSRN’s NIE Abstracting Journals, along with Mary Shirley, and is involved with ISNIE and ESNIE. He works on contracting, corporate governance, and the political economy of regulation. He teaches an MBA/MS-level course on the economics of transactions and contracting, doctoral seminars on firm and industry organization, and the capstone undergraduate strategy course in the agribusiness management program. Mike is almost as much a Luddite as Nicolai — he acquired his first mobile phone just a short while ago — and I’m glad he’s finally decided to give some 21st-century technology a try. Welcome, Mike!
Sociology Beats Economics — Again!
| Peter Klein |
This was only the beginning. Now I learn from this paper, summarized by Henry Farrell (who supplies the graph below), that economists rank dead last among social scientists in RateMyProfessors.com’s “hot or not” ranking system. Sociologists are right up there near the top. How can this be?
As Henry points out, all the academic disciplines have “hotness quotients” below zero, meaning more likely “not” than “hot.” I’m tempted to ask commentators to supply their favorite counter-examples, but would prefer not to encourage lawsuits.
Technological Change
| Peter Klein |
You Macophiles may get a kick out of Larry Magid’s 1984 LA Times review of the original Mac (now celebrating its 25th anniversary). Packed with 128K RAM, a 400K floppy drive, a 9-inch monitor, and something called a “mouse,” it wowed the critics from the get-go. Magid was particularly impressed with the MacWrite software, which “can vary the size and style of your type on the screen and on paper. . . . You can vary the type size from 9 point (about the size used in most newspapers) to 72 point headlines. You can also change your type style, selecting an Old English font or one of the more common type styles. Your type can be in bold, italic, underline or even shadow print.” Wow!
Magid doesn’t say anything about speed, which concerned me the first time I saw one in person (yes, back in 1984; I’m that old). The old IBM-compatible PCs running command-line MS-DOS were much faster for basic word processing, database, and spreadsheet applications than the pretty WYSIWYG design popularized on the Mac.
Keynesian Economics in Four Paragraphs
Courtesy of Robert Barro:
[A]ssume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.
The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.
What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.
Barro thinks a multipler of zero is a more plausible baseline assumption. Of course, if GDP is adjusted for quality, the multipler is most likely negative, as resource allocation is directed by government officials, not consumer demands. In prior work Barro has estimated wartime multiplers of 0.8, but this seems high based on Robert Higgs’s important work [1, 2]. More important, there the Austrian point that resources are heterogeneous, and the additional goods and services financed by government spending will tend to be in the “wrong” place in the economy’s intertemporal structure of production. Keynes rejected the idea of capital heterogeneity, so this problem was lost on him.
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