Published on 13 Dec 2016
This week: Matt Yglesias and Tyler Cowen in a brand new Econ Duel.
Next week: Another Econ Duel! Scott Sumner and Larry White will take on monetary policy.
You’ve no doubt heard it before: the rent is too damn high!
In major cities across the United States, rent prices have been skyrocketing for some time. As a percentage of median income, rent is much higher for those that choose city life over suburbia.
But why are rental prices in these cities so expensive, and what can we do about it?
It’s a classic case of supply and demand: lots of people want to move to big cities because of the opportunities they afford. Naturally, they demand housing. But the supply is often short due to many factors, from geography to regulations. What does economics tell us happens when there’s a lot of demand, but not so much supply? Prices rise. As a consequence, many people are priced out of pursuing the lucrative opportunities available in major cities.
Coastal cities, like San Francisco and New York, have obvious geographical restrictions on building “out.” One way to deal with this problem is to build upwards with more skyscraper housing. This often isn’t feasible due to regulations on building heights, density, parking requirements, etc. But these regulations could be lessened or removed, allowing big cities to become denser and lowering rent prices. Lifelong city-dweller Matt Yglesias discusses this approach in this Duel.
On the other side, Tyler Cowen, who has always lived in the suburbs, argues that allowing cities to become denser may only provide a short-term solution. As more people move in, the cities become more productive with higher incomes for their inhabitants. And the rents rise again.
Of course, we’ve merely skimmed over the arguments here, and you’ll have to watch the Econ Duel to get the full picture! Check it out and let us know in the comments who you think makes a better case.
December 14, 2016
Econ Duel: Why Is the Rent So Damn High?
QotD: Fill-in-the-blank OECD fun
When writing about the Organization for Economic Cooperation and Development, an international bureaucracy based in Paris, my life would be simpler if I created some sort of automatic fill-in-the-blanks system.
Something like this.
The OECD, subsidized by $____ million from American taxpayers, has just produced a new _________ that advocates more power for governments over the _________ sector of the economy.
But this may not be sufficiently descriptive.
So maybe I should create a multiple choice exercise. Sort of like when students take tests and get asked to circle the most appropriate answer.
The bureaucrats at the Paris-based OECD, working in cooperation with union bosses/class-warfare advocates/other tax-free international bureaucrats/politicians, have released a new report/study/paper urging more power/control/authority for governments in order to increase regulation/taxes/spending/redistribution/intervention.
You may think I’m trying to be funny, but this is totally serious.
How else would you describe a bureaucracy that consorts and cooperates with leftist groups like Occupy Wall Street and the AFL-CIO and routinely published propaganda in favor of Obama’s agenda on issues such as global warming, government-run healthcare, so-called stimulus, and class-warfare taxation.
And never forget that American taxpayers finance the biggest chunk of this bureaucracy’s budget.
Adding insult to injury, the bureaucrats at the OECD get tax-free salaries, which makes their relentless support for higher taxes on the rest of us even more obnoxious.
Dan Mitchell, “More Statist Propaganda from the Taxpayer-Funded OECD”, International Liberty, 2015-04-12.
December 12, 2016
Refuting Piketty’s call for revolution, again
Tim Worstall points out that Thomas Piketty has mis-diagnosed the “problem” of rising capital:
The report shows that there were 13 OECD countries in which assets in funded pensions represented more than 50% of GDP in 2015, up from 10 in the early 2000s. Over the same period, the number of OECD countries where assets in funded private pension arrangements represent more than 100% of GDP increased from 4 to 7 countries.
We’re living longer lives these days, we’re working for fewer decades of them and thus people are rationally saving for their expected golden years. Thus capital as a percentage of GDP rises – not to produce inheritances, but to produces incomes in retirement. And rises by potentially at least more than 100% of GDP.
We can’t see that this is a problem and we most certainly cannot see that this is an argument for greater taxation of capital. Quite the reverse in fact, people saving for their old age should be encouraged, not specifically taxed.
So much for the most recent French call for revolution then, eh?
December 11, 2016
Re-negotiating NAFTA (and the Defence Production Sharing Program, too)
Ted Campbell is in favour of bringing NAFTA up-to-date and reminds us that there’s another diplomatic item that could use modernization at the same time:
In my opinion, if Prime Minister Justin Trudeau, or the next Conservative leader is really interested in restoring Canada to a leading position in real, practical, long term peacekeeping then (s)he will abandon the United Nations and, instead, turn Canada into a free trade powerhouse by dropping our remaining protectionist measures, as Maxime Bernier and Colin Robertson both advocate, and making deals with all comers. And it is important to remember that “deals” involve two sides and both sides must gain something which means that both sides probably “give” something, too, and that produces short term “losers” and it is politically important to try to “soften” the transition for those who are bound to lose in the short term. But, in the mid to long term most losses are “covered” by gains in new products and services and the utilitarian goal of “the greatest good for the greatest number” is achieved … most of the time.
One of the things Colin Robertson mentioned was shipbuilding and it leads me to consider that one of the things we want to renew if or when we must renegotiate NAFTA is the Defence development sharing agreement between Canada and the United States of America. The stated objective of the existing (since 1963) agreement are:
- To assist in maintaining the Defense Production Sharing Program at a high level by making it possible for Canadian firms to perform research and development work undertaken to meet the requirements of U.S. armed forces.
- To utilize better the industrial scientific and technical resources of the United States and Canada in the interest of mutual defense.
- To make possible the standardization and interchangeability of a larger amount of the equipment necessary for the defense of United States and Canada.
The Defence Production Sharing Program is, too often, hamstrung by US (and Canadian) protectionist measures and it needs to be brought more fully into the area of bilateral free trade. I am not suggesting that the Pentagon would ever let, say, a significant shipbuilding contract to a Canadian yard but it must be possible for Canadian shipyards and factories and service providers to bid on US defence contracts on at least a “near equal” basis and vice-versa, of course. This, free(er) trade in defence materiel and services is one area where we, North Americans, can learn from the Europeans. I am not suggesting that Canada should abandon the idea of having a national defence industrial base but, rather, that we should have a base that fits, neatly, into a larger continental base that is, somehow, connected to other allied defence production systems.
So, broadly, when (if) President elect Trump says he wants to renegotiate NAFTA we should, indeed, say “bring it on!” But we should go into negotiations with our eyes wide open, prepared to surrender some “losers,” as good bridge players do, in order to finesse some winners for ourselves.
December 8, 2016
The History of Paper Money – VI: The Gold Standard – Extra History
Published on Nov 5, 2016
Even as the use of paper money grew, ties to the gold standard remained… and remained challenging. From the First Opium War to the Great Depression, events around the world stretched the capacity of bullion based economics. So what – and who – finally abandoned it?
December 7, 2016
QotD: Turning ordinary recycling into a vast revenue enhancement tool
… we know that ubiquitous RFID tags are coming to consumer products. They’ve been coming for years, now, and the applications are endless. More to the point they can be integrated with plastic products and packaging, and printed cheaply enough that they’re on course to replace bar codes.
Embedded microcontrollers are also getting dirt cheap; you can buy them in bulk for under US $0.49 each. Cheap enough to embed in recycling bins, perhaps? Along with a photovoltaic cell for power and a short-range radio transceiver for data. I’ve trampled all over this ground already; the point is, if it’s cheap enough to embed in paving stones, it’s certainly cheap enough to embed in bins, along with a short-range RFID reader and maybe a biosensor that can tell what sort of DNA is contaminating the items dumped in the bins.
The evil business plan of evil (and misery) posits the existence of smart municipality-provided household recycling bins. There’s an inductance device around it (probably a coil) to sense ferrous metals, a DNA sniffer to identify plant or animal biomass and SmartWater tagged items, and an RFID reader to scan any packaging. The bin has a PV powered microcontroller that can talk to a base station in the nearest wifi-enabled street lamp, and thence to the city government’s waste department. The householder sorts their waste into the various recycling bins, and when the bins are full they’re added to a pickup list for the waste truck on the nearest routing — so that rather than being collected at a set interval, they’re only collected when they’re full.
But that’s not all.
Householders are lazy or otherwise noncompliant and sometimes dump stuff in the wrong bin, just as drivers sometimes disobey the speed limit.
The overt value proposition for the municipality (who we are selling these bins and their support infrastructure to) is that the bins can sense the presence of the wrong kind of waste. This increases management costs by requiring hand-sorting, so the individual homeowner can be surcharged (or fined). More reasonably, households can be charged a high annual waste recycling and sorting fee, and given a discount for pre-sorting everything properly, before collection — which they forefeit if they screw up too often.
The covert value proposition … local town governments are under increasing pressure to cut their operating budgets. But by implementing increasingly elaborate waste-sorting requirements and imposing direct fines on households for non-compliance, they can turn the smart recycling bins into a new revenue enhancement channel, much like the speed cameras in Waldo. Churn the recycling criteria just a little bit and rely on tired and over-engaged citizens to accidentally toss a piece of plastic in the metal bin, or some food waste in the packaging bin: it’ll make a fine contribution to your city’s revenue!
Charles Stross, “The Evil Business Plan of Evil (and misery for all)”, Charlie’s Diary, 2015-05-21.
December 6, 2016
Alex & Tyler’s Economist’s Christmas
Published on 5 Dec 2016
This week: Let’s get in the holiday spirit! What would an economist do about Christmas gifts?
What do you really want for the holidays? And how can you be sure you’re giving the perfect gift to someone else?
Of course, you want to get your loved ones something they will appreciate, but you face a knowledge problem: you don’t know everything about their wants and needs. You also have an incentive problem: oftentimes people aren’t quite as careful choosing a gift for others as they would be if buying something for themselves.
We’ve all received a present that we didn’t really want. When that happens, the value that we place on the gift can be less than its cost. According to research by economist Joel Waldfogel, gift givers spend an average of $50 on gifts that recipients only value at $40. Given that Americans spend around $100 billion on Christmas gifts, we’re wasting $18-20 billion every holiday season!
Is there a solution to this costly problem? Well, you can always give cold, hard cash! Many gift recipients would prefer it. But if you know the recipient’s tastes very well, you do have the opportunity to give them a non-cash present that they’ll love and that creates value by lowering their search costs.
There are, of course, occasions where the gift of money doesn’t make sense. Perhaps you want to signal that you care in a different way, or maybe there’s a custom you want to follow. You’ll just have to risk it in these situations.
Around the holidays, there’s also a spike in charitable giving. If you face knowledge and incentive problems in giving gifts to loved ones, you can imagine that these issues increase when you’re giving to someone you’ve never met. To combat this problem, some charities, such as GiveDirectly, give cash to people in need so that they spend charitable donations however meets their needs.
The efficiency of an economist’s Christmas may feel less warm and fuzzy, but the value creation is no less generous!
December 5, 2016
The History of Paper Money – V: Working out the Kinks – Extra History
Published on Oct 29, 2016
The first question of paper money is not how much you can print, nor even what its value is – but who prints the money? When every bank started to print their own bank notes, it caused confusion and frustration. Enter the Central Bank.
December 3, 2016
The History of Paper Money – IV: Lay Down the Law – Extra History
Published on Oct 22, 2016
What happens when you really try to put paper money doctrine into practice? And why would you put a gambler, womanizer, and fugitive criminal like the ironically named John Law in charge of running it?
December 2, 2016
India’s bold experiment in self-inflicted economic wounds
Shikha Dalmia explains why Indian Prime Minister Narendra Modi suddenly decided to kneecap his country’s money supply and cause massive economic disruption:
Modi was elected in a landslide on the slogan of “Minimum Government, Maximum Governance.” He promised to end babu raj — the rule of corrupt, petty bureaucrats who torment ordinary citizens for bribes — and radically transform India’s economy. But rather than tackling government corruption, he has declared war on private citizens holding black money in the name of making all Indians pay their fair share.
Tax scofflaw behavior is indeed a problem in India. But it is almost always a result of tax rates that are way higher than what people think their government is worth. The enlightened response would be to lower these rates and improve governance. Instead, Modi is taking his country down what Nobel-winning political economist F.A. Hayek called the road to serfdom, where every failed round of coercive government intervention simply becomes an excuse for even more draconian rounds — exactly what was happening in pre-liberalized India.
[…]
About 600 million poor and uneducated Indians don’t have bank accounts. Roughly 300 million don’t have official identification. It’s not easy to swap their soon-to-be worthless cash, which is a catastrophe given that they live hand to mouth. It is heartbreaking to see these people lined up in long queues outside post offices and banks, missing days and days of work, pleading for funds from the very bureaucrats from whose clutches Modi had promised to release them.
Modi hatched his scheme in complete secrecy, without consulting his own economic advisers or the Parliament, lest rich hoarders catch wind and ditch their cash holdings for gold and other assets. Hence, he could not order enough new money printed in advance. This is a massive problem given that about 90 percent of India’s economic transactions are in cash. People need to be able to get money from their banks to meet basic needs. But the government has imposed strict limits on how much of their own money people can withdraw from their own accounts.
[…]
This is not boldness, but sheer conceit based on the misguided notion that people have to be accountable to the government, rather than vice versa. Over time, it will undermine the already low confidence of Indians in their institutions. If Modi could unilaterally and so suddenly re-engineer the currency used by 1.1 billion people, what will he do next? This is a recipe for capital flight and economic retrenchment.
The fear and uncertainty that Modi’s move will breed will turn India’s economic clock back to the dark times of pre-liberalized India — not usher in the good times (aache din) that Modi had promised.
November 24, 2016
Solutions to Moral Hazard
Published on 23 Sep 2015
What are some solutions to moral hazard? We could try to make information less asymmetric — meaning both parties have similar information, making it harder for one party to exploit the other. We could also try to reduce the incentive of the agent to exploit their information advantage. Online ratings and reviews on Yelp, Angie’s List, or Amazon, for instance, incorporate both of these solutions. The reviews give you more information about a product or service and close the information gap between buyers and sellers. In addition, sellers’ incentives change, as they now have to think about their reputation. They likely won’t want to exploit you if they know it will result in a negative online review.
What are some other approaches to modifying the incentives of those with an information advantage? One approach is to split the diagnosis of a problem from the actual work that needs to be done — for instance, home inspectors don’t fix the problems they identify during their inspection. Another approach is to alter the payment structure to change incentives. For instance, a lawyer is less likely to run up their hours when payment is contingent on winning your case as opposed to the number of hours they work on the case. Ethics also plays a role. Doctors swear to the Hippocratic Oath, which provides them an incentive to not exploit their information advantage. As you can see, there are many solutions to addressing moral hazard.
QotD: Black hats and white hats
When considering the major failures of recent American governance – the 2008-09 financial crisis, the catastrophe that is U.S. policy in the Mideast – the one thing that any honest-minded person must conclude is: Nobody meant for things to turn out this way. It is impossible to make precise predictions about the effects of government policy; that is the nature of systems characterized by high levels of complexity. It’s one thing to predict that it’ll be colder during the winter, but another thing to predict down to the millimeter how much snow will fall on a particular acre in rural Maine on the third Wednesday in February, which is really what we expect from our public policy.
Classic cowboy movies, in contrast, are not complex at all: The good guys wear white hats, the bad guys wear black hats, all hats remain firmly affixed to all heads at all times, and that’s that. You can pretty much always predict how an old Western is going to turn out.
But that isn’t how the real world works.
On Tuesday, I had a conversation about Elizabeth Warren and Wall Street, pointing out that the popular version of that story – Senator Warren vs. Wall Street – is so oversimplified as to be not merely useless but misleading. The reality is that there are people working on Wall Street who dislike Senator Warren – investors and bankers, mainly – and people who adore her – notably Wall Street lawyers, who are reliable donors to her campaign and to those of other Democrats. My naïve interlocutor said: “Hopefully, it’s the lawyers that fight against Wall Street,” as though there were such a thing, as though there weren’t nice progressive lawyers in Manhattan who jokingly refer to their yachts as the SS Dodd-Frank.
Spend any time writing about this sort of thing and you’ll hear angry and panicked denunciations of derivatives-trading from people who pretty clearly do not know what a derivative is, just as you’ll hear paeans to Glass-Steagall sung by people who don’t understand the difference between a commercial bank and an investment bank, who don’t know how Goldman-Sachs makes its money or what it is that Standard & Poor’s does.
But they’re quite sure they know who is wearing the black hats.
Kevin Williamson, “Black Hats and White Hats”, National Review, 2015-04-15.
November 23, 2016
The History of Paper Money – III: Barebones Economy – Extra History
Published on Oct 15, 2016
Poor England. First Charles I and civil war, then losing to the French, then the Great Fire of London in 1666. Luckily, Nicholas Barbon comes along to help. And make obscene amounts of money. Who says you can’t do both?
November 17, 2016
Deregulation’s return
I rarely say nice things about Jimmy Carter’s term as president, but he should get more credit for the deregulation that happened under his administration — the lifting of restrictive and obsolete rules over things like railroads, long-distance trucking, and (most important to drinkers) enabling the rebirth of craft brewing — many of the economic benefits were later attributed to Reagan, but Carter did the heavy lifting on several important issues. It’s a hopeful sign that S.A. Miller says Congress and the Senate may be in a deregulatory mode after Trump’s inauguration:
Sen. Rand Paul said Wednesday that he expects a flurry of repeals of Present Obama’s regulations by the next Congress and President-elect Donald Trump.
“You’re gong to find that we are going to repeal a half dozen or more regulations in the first week of Congress, and I’m excited about it because I think the regulations have been killing our jobs and making us less competitive with the world,” the Kentucky Republican said on MSNBC’s Morning Joe program.
Mr. Trump, whose surprise win over Democrat Hillary Clinton sent shock waves across the Washington political establishment, pledged on the campaign trail to tackle over-regulation by the Obama administration.
The federal government has imposed more than 600 major regulations costing Americans roughly $740 billion since Mr. Obama took office in 2009.
Mr. Paul said he viewed many of the regulations under Mr. Obama to be unconstitutional because they were issued without Congress’ approval.
