Saturday, June 30, 2007

What will they think of next?

Today's LA Times (front-page, above the fold) includes ... Billions have been spent on transit-friendly housing, but it appears people aren't leaving their cars behind ... Transit's lack of convenience cited ..."

I could not have said it any better. Well actually, some of us did -- .

Yes, it is not pretty to say I-told-you-so. But the arrogant know-nothings inside LA's beltway (including LA Times writers and including some who still hold public office) have been confused on this issue for years. Their plans have cost billions and, along the way, made traffic much worse. It was exactly the sort of that Hayek wrote about many years ago.

Yesterday the same newspaper (front-page, below the fold) included ... The land of the freeway is poised to become a little less free ..."

What will they think of next?

Friday, June 29, 2007

Confused intellectual

I have not read Amity Shlaes' but had convinced me a long time ago that the New Deal and FDR did much more harm than good.

I also have profound admiration for John Updike. I think that I have read most of his novels and short stories and many have been enjoyable to the point of thrilling. Aside from his skills as a writer, Updike has shown remarkable range and has usually done his research. When he writes about golf, he knows golf; when he writes about Hollywood, he knows Hollywood; when he writes about scientific matters, he generally knows a good bit about the topics at hand.

Updike's of the Schlaes book in the current New Yorker is sufficiently erudite and perceptive. But the man can not get beyond class warfare.

Policies cannot be pro growth or pro economy or pro prosperity; they are just "pro business". And that's just about profit and at the expense people, etc., etc.

Very smart people can be that thick. Consider how the review ends:

My father had been reared a Republican, but he switched
parties to vote for Roosevelt and never switched back. His memory of being
abandoned by society and big business never left him and, for all his paternal
kindness and humorousness, communicated itself to me, along with his preference
for the political party that offered “the forgotten man” the better break.
Roosevelt made such people feel less alone. The impression of recovery—the
impression that a President was bending the old rules and, drawing upon his own
courage and flamboyance in adversity and illness, stirring things up on behalf
of the down-and-out—mattered more than any miscalculations in the moot
mathematics of economics. Business, of which Shlaes is so solicitous, is
basically merciless, geared to maximize profit. Government is ultimately a human
transaction, and Roosevelt put a cheerful, defiant, caring face on government at
a time when faith in democracy was ebbing throughout the Western world. For this
inspirational feat he is the twentieth century’s greatest President, to rank
with Lincoln and Washington as symbolic figures for a nation to live

Thursday, June 28, 2007

Redefining deviancy up

Let's see. Life expectancies keep increasing but the air keeps getting worse. Well the air is actually getting better. But when agencies and budgets and politics are at stake, then the only thing to do is to redefine standards to make a good situation look bad.

That seems to be what the EPA is doing, as so clearly explained by .

When it comes to "the environment" and such, most people do not dig very deeply. So when the EPA declares how bad things (will) have gotten, very few will look to see that their standards have changed quite arbitrarily.

Wednesday, June 27, 2007

Better late than never

I first learned about the World Bank's Rule of Law Index in Reason via a in 2005. In the August/September 2007 issue, Bailey adds a fascinating interview with the World Bank's Kirk Hamilton.

Wealth is mostly about intagibles, especially the quality of institutions that promote enterepreneurial activity.

It all makes good sense but one has to consider the source. The Bank had been foremost in espousing and financing simple-minded infrasrructure mega-investments. It is now seemingly moving in the direction of Peter Bauer -- and Julian Simon and F. A. Hayek and Adam Smith.

The late realization puts the big questions and problems front-and-center. How can the Bank (or anyone) foster beneficial institutions where there had been none? Better late than never.

Monday, June 25, 2007

Too exotic and sinister

Congress' role in local transportation taxing and spending is just a way to expedite porkbarrel politics. Earmarks are now so outrageous that even some pols are almost blushing.

Yet, in the year 2006 AD, the feds discovered and began .

Time-of-day pricing is, of course, the no-brainer "gridlock" remedy that (until recently) only an economist could love. But and New York's Green Bloomberg are now on board.

But, alas, it is still all too exotic and sinister for Los Angeles planners and politicians. This morning's LA Times reports "Bid for federal transit cash is bounced from fast lane ... A proposal by the city of Los Angels and the MTA to curb freeway congestion is rejected after planners failed to do their homework" (excerpted below).

It appears that even the offer of a bribe to at least take pricing seriously in their proposal for federal aid, the locals could not bring themselves to do so. It is just too strange for the locals.

In May 2006, the federal government published a call to arms
for traffic-ridden cities across the country.

The feds — their big wallet loosened to the tune of $1.2
billion — asked cities to propose novel ways to ease congestion. One of the key
requirements for being considered for funds was that cites include a proposal
for "tolling," or "congestion pricing."

Congestion pricing has become an in-vogue term in
transportation circles and is already in use on the 91 Express Lanes in Orange
County. It's the practice of charging a toll, but with a twist: The price
changes as traffic increases. As the price goes up, the theory holds, fewer
motorists will use the road. Several government entities in Los Angeles County —
including the city of Los Angeles and the Metropolitan Transportation Authority
— submitted a joint application. Nationwide, nine of the 27 cities that applied
were named semifinalists earlier this month, but the local effort was bounced
from the competition.

Why? Having reviewed the 30-page application, we offer this
easy two-step guide to blowing a chance at millions of dollars in federal

1) Don't follow instructions. Whereas other cities actually
proposed tolling and congestion-pricing programs, the local application stated
only that it would study the concept.

2) Use suspect spelling. The sixth sentence on the
application's cover sheet read: "For this effort, Los Angeles County partners
will bee seeking [the Department of Transportation's] technical support on

Thursday, June 21, 2007

Better baseball

is one of many areas that I do not manage to keep up with. But that never stops me. I have just seen a write-up of some amazing new technology developed by at MIT. It seems that video search (of baseball game video recordings, for example) can now be done with the help of better-than-ever video search software. The report says that it can tell a home run from a long foul into the stands.

Will baseball eventually get better? Will there be better defense? Better offense? Who knows? We do know that smart people are developing new ways for AI to reach into ever more areas.

Wednesday, June 20, 2007

Theme park developers opportunities

Most U.S. cities are run by people who love industrial policy. (And why not?) This is why so many projects are ludicrous and wasteful. This morning's WSJ includes "A Streetcar Named Aspire: Lines Aim to Revive Cities" (excerpted below).

At best, these things are tourist attractions (see punchline at the end of the story). The Disney people are much better at this but seem to be missing the opportunity to contract with city development and transit agencies around the U.S.

As usual, if all this is a way to spend large amounts of taxpayers' money and if there exists rhetoric that can associate these things with "economic development" (or anything "green" or anything "sustainable") then watch out.

Just a week ago, the WSJ wrote about the "successful development" prompted by Transit Oriented Development (TOD) plans and projects. Seldom mentioned is the fact that any development near these places tends to be subsidized and/or favored in the approvals process. And most people that move in keep and use their autos. So what's the point?

TAMPA, Fla. -- As a transportation system, this city's $63
million streetcar line is a dud.

Since the project opened in 2002, its financial losses have
exceeded expectations. Last year ridership declined 10% to its lowest level yet.
And the vintage system spans only 2.4 miles between the edge of downtown and a
historic district called Ybor City.

"It goes from no place to nowhere," says Hillsborough County
Commissioner Brian Blair, an opponent of the project.

But proponents say Tampa's Teco Line Streetcar System has
delivered on another front: helping to spur development. Some $450 million in
residential and retail space is complete along the route, most of it in the
Channel District, a once-languishing maritime neighborhood. With another $450
million in development underway and $1.1 billion in the planning stages, local
officials expect the district to be home to as many as 10,000 residents within
the next decade.

Out-of-town visitors make up more than half of all the riders
on Tampa's streetcar line.
Like stadiums, convention centers and aquariums,
streetcars have emerged as a popular tool in the effort to revitalize downtowns
in the U.S. About a dozen cities, from Madison, Wis., to Miami, are planning
lines. But while research shows that big-ticket projects such as ballparks
largely fail to spawn economic development, evidence is mounting that streetcars
are indeed a magnet.

Streetcar systems are slower, less expensive and smaller than
light rail, with cars that carry a maximum of 125 people and the average line
2-3 miles long. The cars are powered by electricity and run on tracks, which
developers tend to favor because they suggest a sense of permanence, unlike bus
routes, which can be changed overnight.

... Still, streetcars face considerable odds because they vie
for the same money as transportation projects designed to serve the suburbs.
This has been particularly true at the federal level, where funding has long
depended on how quickly projects can move people from one point to another.
Streetcars, which average under ten miles per hour, are at a distinct
disadvantage. By contrast, light rail moves at 20 to 60 miles per

.... While streetcars lack speed and mobility, proponents say
the role they play in urban development makes them a worthy transportation
choice. They argue that by helping to draw development to urban areas such as
downtowns, and by providing a transportation link in those areas, streetcars
reduce the need for extra lanes of highways to the suburbs and limit the need
for cars in and around downtowns.

.... Still, Tampa's streetcar line is still largely a tourist
attraction, drawing 389,770 riders last year, more than half of them out-of-town
visitors. A $4.75 million endowment set up to operate the streetcar system for
10 years is losing about $1 million a year. ...

Tuesday, June 19, 2007

Nobel Peace Prizes

The idea of a "global warming consensus" is now firmly a part of the conventional wisdom. So the more the reason to highlight eminent dissenters, of which there are many. Here is that I just found. Many good comments are attached to the link.

This is all to prepare for the coming award of the Nobel Peace Prize to Al Gore.

Speaking of Nobels, Yassir Arafat's has gone missing because looters emptied Arafat's Gaza compound. In fact, also reports that they made off with Suha Arafat's expensive shoes and wardrobe.

What a topic to bring up, just as elite opinion here and abroad is embracing the idea of more aid to the Palestinian Authority.

Sunday, June 17, 2007

Indulging racists

describes racially and ethnically (and other) seperate graduations at UCLA. My own university indulges the same.

Around the world, seperatists are killing each other. Name a conflict and the odds are overwhelming that it is over some ancient blood-grudge.

And we in America still do better assimilation than most other countries.

These two factoids are more than enough for me to suggest that universities not indulge these graduations. If people want to celebrate with their own selection of friends after the ceremonies, great and that's their choice.

Housing and employment laws discourage racial separation. And the same people that back these laws lack the spine to nix graduation racism.

Thursday, June 14, 2007

The plot thickens

Cities around the world have been decentralizing for as long as we have data. The reasons are fairly simple and obvious but there is some controversy over the role of policies. Some, who look at suburbanization in the U.S., link it to peculiar U.S. policies (special tax treatment of homeownership, low gasoline prices, interstate highways, etc.).

Others point to similar suburbanization in other countries with vastly different policies and conclude that preferences trump policies. My colleagues and I have looked at and found similar decentralization trends compared to the U.S.. has visited probably all the major cities of the world and found same.

Now comes Nathanial Baum-Snow's "Did Highways Cause Sububanization" (). He finds that, "had the interstate highway system not been built, instead of declining by 17 percent, the aggregate [U.S.] central city population would have grown by 8 percent." He finds that his econometric results are robust.

The plot thickens.

Wednesday, June 13, 2007

Paris Hilton

The Paris Hilton (no link necessary) incarceration has incited no small amount of commentary but none of it touches on the problem of crowded jails and the economics thereof.

provides the economic thinking.

"Give each prosecutor a budget of, say, 350 jail-years per
month. In a given month, the proescutor would not be allowed to request
sentences totaling more than his budget. We can add some flexibility
by allowing the prosecurot to 'borrow' jail-years from each other and pay them
back in future months.

A prosecutor who asks for long jail sentences in one case
ought to know that he does so at a cost in terms of future cases. You migh
argue that it is wrong to let one case affect another. I reply that one
case already affects another because of the finite resources available in the
prison system. The problem is to make the prosecutor aware of the cost and
give him an incentive to respond to it.

Prosecutors, like jurors, judges and criminals, are subjet to
the universal law of human behavior: when they're not held responsible for their
actions, their actions are likely to be irresponsible. With better
incentives, we can have better justice." (pp 103-4)

And this would have saved Sheriff Baca the trouble of his involvement. And Paris would be back in her natural habitat, clubbing and doing all the other things that are her claim to fame.

Tuesday, June 12, 2007

Household economics must-read

Donal Cox writes about "The Biological Basics and the Economics of the Family" in the Spring 2007 issue of the Journal of Economic Perspectives (gated; here is the ) -- as part of the JEP's fine symposium on household economics.

"The biological basis for why one relative might make sacrifices on behalf of another has its origins in a puzzle that took over 100 years to solve. Charles Darwin argued that the living world is a select set of progeny whose ancestors managed to survive and reproduce. However some phenomena, such as the honeybee's suicidal defense and its hive seemed to contradict the Darwinian dictum. Hamilton's rule ... is a straightforward but far-reaching argument about the biological foundations of familial altruism. Hamilton focused on the gene rather than the individual. The honeybee's heroism could be optimal from the 'gene's-eye view': though the altruist's genetic code is lost, even more of the same code can prevail within rescued relatives." (p. 93)

P.J. O'Rourke, when asked, how and when he became a conservative supposedly answered that it was the day he became a parent.

Monday, June 11, 2007

Another reason to like "gridlock"

I have no idea whether Washington will do anything about immigration. And if they do, it is not clear that it will make a difference. The status quo is fairly efficient and will probably remain so in light of what the politicians will or can possibly do.

That is the gist of Prof Gordon Hanson's analysis (as summarized in The Economist of June 2, excerpted below). And this is why we like "gridlock."

The uncomfortable economics of immigration

The Economist

... a low-skilled worker can
make $9.34 an hour in America, compared with just $2.56 in Mexico. [This] ... also
assumes that migrants depress the wages of low-skilled Americans by 5%—a widely
cited estimate. Thus Mexican workers gain dramatically by moving north, whereas
low-skilled Americans lose out slightly at worst. To justify opposing
immigration, the blog concludes, you must attach at least 20 times more weight
to the well being of a native-born American than to a Mexican.

Such calculations will not trouble America's politicians, who
are busy trying to solve the “problem” of illegal immigration. Congress's fix
promises a sorely needed path to citizenship for the 12m or so people already in
the country illegally. But it could prove worse than the status quo for future
migrants and native-born Americans alike.

The “compromise plan”, hashed out by a bipartisan group of
senators, offers would-be illegals—the 500,000 or so low-skilled workers who
sneak across the border every year—a legitimate route into America, through a
temporary guest-worker programme. Guest-worker visas would last for two years
and could be renewed up to three times. The idea is that if the front door is
ajar, no one will feel the need to break in at the back.

Unfortunately, the senators' plan ignores the economics of
illegal immigration. Its laws of motion are set out in a recent paper
by Gordon Hanson of the University of California, San Diego. He points out that unskilled labour is increasingly
scarce in America. Since 1960 the share of native-born workers with less than a
high-school diploma has fallen from 50% to 12%. In response, illegal immigration
has proved to be a fairly efficient system for matching willing workers with
eager employers. Some 24% of farm workers, 17% of cleaners and 14% of
construction workers are foreigners doing their jobs illicitly.

This workforce is geographically mobile, and sensitive to
economic conditions in America or at home. One study in the 1990s showed that a
10% drop in Mexican pay relative to American wages prompted a 6% increase in
attempts to steal across the border. More recently, the incentives have shifted
the other way. A slowdown in remittances to Mexico and other Central American
countries suggests the housing bust, and home-building slump, may have reduced
the pace of illegal immigration.

Such efficiency is sadly absent from Congress's guest-worker
scheme. The senators' original compromise envisaged some 400,000 visas a year,
not far off the estimated figure for illegal entrants. But the number has
already been slashed to 200,000 and will not vary with economic conditions.
Employers will have to prove that they cannot find a willing American worker
before they apply for the visas. And would-be migrants must undergo background
checks and a medical exam before they arrive. Changing employers once in America
involves more bureaucratic hoops.

In short, neither American employers nor would-be migrants are
likely to find the guest-worker channel as appealing as the illegal routes they
already ply. Not surprisingly, therefore, the senators want to make illegal
immigration less appealing. The compromise bill promises some 6,000 extra border
guards, hundreds of miles of new fencing and a huge database for checking
workers' legal status.

Is all this policing and picketing worth it? Illegal
immigration, after all, is a boon to the economy as a whole, much as freer trade
yields a net economic gain. An influx of low-skilled workers may squeeze the
wages of their competitors, but it benefits the businesses who hire them, and
profits consumers, who get their lawns mown and children minded at lower

Set against this economic gain is a fiscal cost, as
immigration's opponents are quick to point out. Illegal migrants, with their low
skills and large families, are likely to consume more in government services,
such as education and health care, than they pay in taxes. The exact fiscal
impact is controversial. The federal government is probably a net winner,
whereas states, which pay a bigger share of schooling and emergency health care,
lose out. Today's taxpayers may suffer—they must pay for educating the children
of illegal immigrants. But tomorrow's may gain—these first-generation Americans
will likely earn far more than their parents, adding to the pot of taxes in the
future. ...

Sunday, June 10, 2007

Not flat at all

I have not read Tom Friedman's The World is Flat but I thoroughly enjoyed Ed Leamer's review essay "The Flat World, a Level Playing Field, a Small World After All, or None of the Above?" in the March 2007 Journal of Economic Literature (gated).

Leamer quickly makes the point even if there are forces that seemingly point to a more level playing field, there will always be clustering. Texts in urban economics usually begin with the thought that in a featureless-plain world, there would still be cities as long as there are agglomeration economies. The range and the ambit of these economies may change but they still determine (for example, as per Leamer) how many Hollywood's there are and how much of the world they serve.

And relationships must still be formed because they facilitate transactions. " ... Friedman misses the distinction between markets and relationships, and thus misses the potential for policy measures that might facilitate the formation of long-term relationships between workers and employers. We economists do a linguistic disservice when we call a relationship-free, frictionless outcome "perfectly competitive." The Luddites had it right when they complained thet there is nothing oerfect about the outcome at all. Frictions are our friends. Frictions give us the peace of mind thst we will still have our jobs when wake up tomorrow. Frictions reduce the chances that one party will try to 'hold up' the other, absconding with the lion's share of mutual benefits. Frictions give us the confidence to make relationship-specific investments from which great returns can flow. It's the friction we call 'falling in love' that allows the human species to flourish." (p. 123).

The essay elaborates many related points and will surely (I hope) show up on many syllabi -- even if it will not be the best-seller that the book is.

Friday, June 08, 2007

No consensus

Just as George W. Bush has joined the right-thinking Europeans on global warming (or outfoxed them, according to the WSJ's Kimberly Stroessel, June 8, p. A16), the Heartland Institute has released its .

There is (gasp) a diversity of views (as with most good science), befitting an extremely complex set of questions.

Most of 530 the scientists from 27 agreed that there is global warming but majorities also agreed that 10-year of 100-year predictions are not possible. The full set of responses to the 99 questions posed are worth looking at -- especially in light of the smug and widespread contention that the discussion is over. The latter has been the standard position of true believers for centuries.

Wednesday, June 06, 2007

Just read it

Reports of poor quarterly productivity growth came out today. But who believes this? First, we all have eyes and can easily spot new and better products at lower prices (think cameras, digital music, anything electronic). Second, if you require a reminder, have a look at Chris Anderson's

I thought that I knew all about the long tail (it's very many niches and not just a few hits anymore) but there is much more to it and Anderson assembles and tells it beautifully.

"The secret to creating a Long Tail business can be summarized in two imperatives: 1. Make everything available. 2. Help me find it." (p. 216)

Amazon, Netflix, eBay, iTunes, and many others must do both. Along the way, the winners develop "hyper-efficient supply chains." And much more. The author shows that few parts of our lives are not impacted -- for the better. Just read it.

Tuesday, June 05, 2007

Post-9/11 cities

The decentralization of jobs from city centers is a very old story. New NBER research (abstract below) offers evidence that the post-9/11 threat of terrorist attacks add to these tendencies. Findings like this probably apply only to the few downtowns in the U.S. such as Chicago, the site of the case study. More studies are probably on the way.

has investigated residential markets near Los Angeles' LAX (published in a book with which I am associated) and reports that there had been no notable post-9/11 effects. These findings also require corroboration before firm conclusions can be drawn.

But if both results hold, jobs will spread further into residential areas -- perhaps even providing the mixed land uses that urban planners now seek. But this was not planned.

The Impact of Terrorism on the Office Real Estate

Alberto Abadie and Sofia Dermisi

"After 9/11 office properties in the three main Chicago
landmark buildings and the surrounding areas experienced more severe increases
in vacancy rates than office properties not located in the vicinities of
landmark buildings."

The 9/11 attacks drastically increased the perceived risk of
large-scale terrorist attacks in Central Business Districts and placed
particularly large pressures on major financial centers, like New York, London,
and Chicago. From the point of view of an economist, the increased threat of
large-scale terrorist attacks in Central Business Districts has profound
potential implications, given the crucial role of Central Business Districts in
economic activity.

In "Is Terrorism Eroding Agglomeration Economies in Central
Business Districts? Lessons from the Office Real Estate Market in Downtown
Chicago" (NBER Working Paper No.
), economist Alberto Abadie and real estate
analyst Sofia Dermisi investigate the economic impact of an increase in the
perception of terrorist risk induced by the 9/11 attacks on the office real
estate market, using data from do! wntown Chicago. The Central Business District
of Chicago - the authors explain - "provides the perfect laboratory to
investigate the effects of an increase in the perceived risk of terrorism on a
major financial center." The attacks of 9/11 reduced drastically the available
office space in New York's financial district. Unlike New York City, the city of
"Chicago was not directly affected by the destruction of the 9/11 attacks.
However, the 9/11 attacks induced a large increase in the perception of
terrorist risk in the Chicago Central Business District, which includes the
tallest building in the U.S. (Sears Tower) and other landmark buildings."
Therefore, the case of Chicago allows the authors to separate the impact of an
increased perception of terrorism threat in Central Business Districts after
9/11 from the direct impact of the destruction caused by terrorist attacks on
available office space.

To investigate the effect of an increase in the perception of
terrorist risk in Chicago after 9/11, Abadie and Dermisi compare "the evolution
of vacancy rates at the three main landmark buildings of Chicago (the Sears
Tower, the Aon Center, and the Hancock Center) and other nearby office buildings
within a "shadow" area of 0.3-mile around each landmark building to the
evolution of vacancy rates of office buildings located outside the shadow areas
of the three landmark buildings." The authors select the Sears Tower, the Aon
Center, and the Hancock Center as "anchor" buildings because their landmark
stature makes them preferred targets of terrorism. The authors' choice of a
0.3-mile radius for the shadow areas is motivated by the spread of the massive
debris fields created by the collapse of the World Trade Center on 9/11.

The study employs quarterly data on vacancy rates and other
building characteristics for a sample of high-end office buildings in the
downtown Chicago area ! during the period 1996-2006.

The results of the article show that before 9/11 vacancy rates
in the three main Chicago landmark buildings and the surrounding areas had
evolved similarly to vacancy rates for buildings not located in the vicinities
of the three main Chicago landmark buildings. The data show also that in the
wake of the 9/11 attacks office vacancy rates increased in downtown Chicago.
Most importantly, office properties in the three main Chicago landmark buildings
and the surrounding areas experienced more severe increases in vacancy rates
than office properties not located in the vicinities of landmark buildings.
Then, Abadie and Dermisi repeat the analysis using alternative measures of the
susceptibility of each particular office building to terrorism attacks, finding
identical results: in the post-9/11 era vacancy rates increased more for
buildings with a high perceived vulnerability to large-scale terrorist attacks
than for buildings that are not perceived as preferred targets for terrorist

Moreover, Abadie and Dermisi argue that the larger increases
in vacancy rates in the shadow areas of trophy buildings after 9/11 cannot be
explained by an increase in the supply of office space there. In fact, after
9/11 the increase in total rentable office area in the vicinities of trophy
buildings was smaller than away from those buildings. Given those facts, Abadie
and Dermisi interpret the results of their investigation as evidence that "the
9/11 attacks created centrifugal forces that influenced the location decision of
high-end office tenants in downtown Chicago."

Abadie and Dermisi call their conclusion "particularly
unsettling," given the critical role that most analysts assign to cities as
engines of economic growth. On the other hand, the authors explain that their
analysis focuses on a period during which the perceived threat of terrorism in
Central Business Districts was particularly elevated. They conjecture that "if
the perception of terrorist risk in cities were to return to the pre-9/11
levels, the long-run growth of cities would not be affected by the 9/11

-- Matt Nesvisky

Monday, June 04, 2007

Nothing new

Paternalism bothers me and I believe in slippery slopes. The "new" paternalism does nothing to help. Prof. Mario Rizzo, writing in (June 18), makes the point very nicely. The "new" may look better than the despicable old paternalism but not by much.

Russia's new leaders look a lot like the those of 20 years ago. I imagine that the new (and improved) paternalism would be administered by the same cast of characters that have been there all along applying the older version.

Trust Us
by Mario J. Rizzo

Some of us remember the Spice Girls in the 1990s asking, "So
tell me what you want, what you really, really want." Today, some economists
have decided to take this one step further. They intend to tell us what we
really, really want. I call these economists, and those who embrace their ideas,
the New Paternalists.

Old-fashioned paternalists impose restrictions on behavior,
like mandating bicycle helmets or outlawing marijuana, because they believe
they're good for you, period. By contrast, New Paternalists coerce or manipulate
behavior because they believe it's what you would really want if you were
thinking straight. They are not deciding for you, they say, but rather, simply
making it easier for you to do what you want to do at some deep level, but

Easier said than done. For example, in surveys people say they want
to save more. Most firms that have 401(k) savings plans require employees to
actively choose to enroll. Disorganized procrastinators don't sign up for years.
The New Paternalists, such as University of Chicago professors Richard Thaler
and Cass Sunstein, have a plan to help the procrastinators. They want employers,
either voluntarily or by legal requirement if necessary, to automatically enroll
people. Employees can opt out later if they choose. Their own inertia will
further employees' interests, goes the thinking. People will enroll sooner and
save more.

But there's a problem with that reasoning. In a study
Jagadeesh Gokhale, Laurence Kotlikoff and Todd Neumann show that for some
workers the 401(k) may not be a good choice. They conclude that a young, low- to
moderate-income household may raise its lifetime taxes and reduce its lifetime
expenditures by saving in a 401(k) program. This has to do in part with the fact
that because such people are in a low tax bracket, they don't get much benefit
from the 401(k) deduction now, yet the 401(k) withdrawals years later can raise
the share of their Social Security benefits that are subject to taxation.
Besides, people have more liquidity needs when they are getting started in life.
High-income households do get tax benefits from a 401(k).

Conclusion: An enrollment default is regressive. Is this what non-enrollees, who are mainly
young and low-income, really, really want? Perhaps they are rational, after

Some New Paternalists advocate a "fat tax" on junk foods that
are high in salt and fats, like potato chips. These foods can make you chubby
and hike your risk for heart disease. If only people had greater foresight and
willpower, goes the reasoning, they would resist these snacks. In other words,
this is what people would really, really want if they could see the Fritos bag
with a clear eye. How much should the tax be? If the optimal chip consumption
amount is zero, then it should be very high indeed.

But do people really want to give up all this junk-food
enjoyment in the hopes of a better life later? It is unclear what optimal
willpower and foresight imply in terms of behavior, especially given the
differences among individuals. What about the 100-pound triathlete? Should she
pay, say, a 30% tax on her bag of chips? Or the rail-thin 14-year-old boy who
eschews sweets but likes a savory treat once in a while?

People already exercise self-control to different degrees and
in different ways. Should those who are highly self-controlled pay the same tax
as those who are less self-controlled? If so, it is quite possible that a fat
tax will cause the former to eat too few chips in terms of what they really,
really want.

The basic problem for the New Paternalists is this: They do
not know what people really want. To get clear-cut policy goals or standards
they will have to either explicitly impose their own values, reify the values of
some Orwellian authority or go with what the rent-seekers, like mutual fund
companies or health advocates, come up with.

Thus, to quote a line from yet another song (by The Who):
"Meet the new boss, same as the old boss."

Saturday, June 02, 2007

Look good, say little

This confirms what most have suspected. In politics (and most other fields), looks matter much more than message. Likeable candidates with a sunny disposition have an edge. Talk of substance and policy positions add very little. Here is the NBER reporter's summary.

TV Appearance and Electoral Success

Forget the campaigns. Disregard the position papers and attack
ads. One of the best ways to tell who's going to win an election is to see the
candidates on TV, watching them for 10 seconds and keeping the sound off. That's
how more than 260 Harvard undergraduates, watching gubernatorial candidates in
58 races, compiled a rather impressive record of forecasting elections. They
picked the winner an average 58 percent of the time, according to Thin-Slice
Forecasts of Gubernatorial Elections (NBER Working Paper No. 12660). The
students were more accurate than any economic measure that the paper's
co-authors, Daniel Benjamin and Jesse Shapiro, tested. They were far more
accurate than the Harvard students who actually heard what the candidates had to

If this gut-level, insta-pick method seems disturbing, take
heart. At least Americans aren't alone in skin-deep politics. A study of the
1996 presidential race in Romania found that people could predict the outcome of
the first round of voting based merely on photographs and video clips of the
candidates. A study last year of Finnish elections found that ratings of
candidates' physical attractiveness predicted their success better than ratings
of their competence.

Following these foreign and other similar U.S.-based studies,
the NBER paper offers several new insights. It quantifies how much of a role
personal appeal plays in relation to other economic and political factors. It
tries to single out the quality behind such appeal. It suggests, strikingly,
that theless one hears a candidate, the better one can assess his or her chances
of winning. That last finding "may help to explain why expert forecasters, who
are highly informed about and attentive to policy matters, are often found to
perform no better than chance in predicting elections," the authors

The thrust of the NBER research was to ensure that the
subjects knew as little as possible about the candidates they were seeing. None
of the 264 students in the study were shown videos of candidates from his or her
home state. Since virtually all of the students were from Harvard, all
Massachusetts races were eliminated as well. The authors dropped responses from
any student who recognized a particular candidate.To minimize any bias from
lighting or staging, the researchers used 10-second videos of opposing
candidates from the same televised debate. Sometimes these clips included full
sound; sometimes the sound was purposely muddled (so students could make out the
candidates' tone but not their words). Most of the videos were

The results were consistent. Students who saw silent videos
picked the right candidate 58 percent of the time, whereas those viewers who
heard full sound or muddled sound were only right 52 and 48 percent of the time,
respectively, no better than the results of random guessing. Moreover, the
predictions from the no-sound videos closely mirrored the results of the actual
elections. So, the larger the majority of students that a candidate "won," the
larger the share of voters heor she was likely to have won at the ballot
box.Their forecasts were far more accurate than elections based on various
economic measures of voter well-being, such as per capita income, unemployment,
or state fiscal health. Even when such state and local data was significantly
better or worse than national trends, the predictive power of economics was

But if it's not "the economy, stupid" -- if, indeed, Bill
Clinton was wrong about the key to a winning campaign message -- then what
winning quality were the Harvard students detecting when they picked winning
candidates?The authors looked at the influence of candidates' race, gender, and
height to see if students were swayed by these factors. Gender and race weren't
a factor, since students were just as accurate predicting races involving two
white males as they were in the races overall. Height played a small role but
was statistically insignificant. So were qualities such as likeability and
physically attractiveness. Candidates the students judged to be good leaders had
a slightly better chance of winning than those not rated as good leaders, but
the correlation was marginal. Finally, the researchers looked into whether a
candidate's confidence influenced students. But in the 22 races that were
considered close, where presumably the two candidates were equally confident
(and where there were more than 30 student raters, constituting a large sample),
the students' accuracy in picking winners was roughly on par with the overall

Thus, the research suggests that some factor beyond the
students' own preferences or the vagaries of a particular race -- the authors
call it candidate charisma or personal appeal -- is communicable, even during a
10-second silent video clip.Two political factors turned out to be more accurate
than the students' picks. One is incumbency, which accounted for about 23
percent of the voting outcome compared with about 20 percent for the student
predictions. Campaign spending was even more accurate, accounting for about33
percent of the outcome.

These findings come with their own chicken-and-egg complexity.
If good fundraising causes election success, then candidates' charisma plays a
smaller though still significant role in predicting their success. But if good
fund-raising is caused by other factors, as other researchers have found, then
charisma may play a larger role than this research suggests. The same dilemma
conundrum applies to incumbency. The best that can be said is that charisma and
ballot box success are related in ways that economic factors cannot come close
to matching.

-- Laurent Belsie

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