Posted by Tom at 12:00 AM | Comments (0) |

July 2, 2010

Rational Optimism

Matt Ridley supplies a dose of good end-of-the-week vibes with this article based on his new book, The Rational Optimist (Harper 2010):

When I set out to write a book about the material progress of the human race, now published at The Rational Optimist, I was only dimly aware of how much better my life is now than it would have been if I had been born 50 years before. I knew that I have novel technologies at my disposal from synthetic fleeces and discount airlines to Facebook and satellite navigation. I knew that I could rely on advances in vaccines, transplants and sleeping pills. I knew that I could experience cleaner air and cleaner water at least in my own country. I knew that for Chinese and Japanese people life had grown much more wealthy. But I did not know the numbers.

Do you know the numbers? In 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.

We invent new technologies that decrease the amount of time that it takes to supply each other�s needs. The great theme of human history is that we increasingly work for each other. We exchange our own specialised and highly efficient fragments of production for everybody else�s. The �division of labour� Adam Smith called it, and it is still spreading. When a self-sufficient peasant moves to town and gets a job, supplying his own needs by buying them from others with the wages from his job, he can raise his standard of living and those he supplies with what he produces. [.  .  .]

So ask yourself this: with so much improvement behind us, why are we to expect only deterioration before us? I am quoting from an essay by Thomas Macaulay written in 1830, when pessimists were already promising doom:

�They were wrong then, and I think they are wrong now.�

Posted by Tom at 12:00 AM | Comments (0) |

June 14, 2010

Stuff happens

In this NY Times op-ed, Richard Thaler picks up on a theme that Ken Rogoff and James Hamilton raised last week � the similarity between the miscalculation of risks relating to the Gulf of Mexico oil spill and the Wall Street financial crisis:

AS the oil spill in the Gulf of Mexico follows on the heels of the financial crisis, we can discern a toxic recipe for catastrophe. The ingredients include risks that are erroneously thought to be vanishingly small, complex technology that isn�t fully grasped by either top management or regulators, and tricky relationships among companies that are not sure how much they can count on their partners.

For the financial crisis, it has become clear that many chief executives and corporate directors were not aware of the risks taken by their trading desks and partners. Recent accusations against Goldman Sachs suggest the potential for conflicts of interest among banks, investors, hedge funds and rating agencies. And it is clear that regulators like the Securities and Exchange Commission, an agency staffed primarily with lawyers, are not well positioned to monitor the arcane trading strategies that helped produce the crisis.

The story of the oil crisis is still being written, but it seems clear that BP underestimated the risk of an accident. Tony Hayward, its C.E.O., called this kind of event a �one-in-a-million chance.� And while there is no way to know for sure, of course, whether BP was just extraordinarily unlucky, there is much evidence that people in general are not good at estimating the true chances of rare events, especially when human error may be involved. [.  .  .]

How can government reduce the frequency and the severity of future catastrophes? Companies that have the potential to create significant harm must be required to pay for the costs they inflict, either before or after the fact. Economists agree on this general approach. The problem is in putting such a policy into effect.

Suppose we try to tax companies in advance for activities that have the potential to harm society. First, we have to have some basis for estimating the costs they may inflict. But before the recent disasters, companies in both the financial and oil drilling sectors would have claimed that the events we are now trying to clean up were, well, one-in-a-million risks, suggesting a very low tax.

Alternatively, an offending party could be made to pay after the fact, by holding it responsible for the costs it imposes. BP has volunteered that it will pay for all damages it considers �legitimate,� but we can expect a fight over how to define that word.

.   .    .  Suppose a company worth only $1 billion was responsible for this accident. It would go bankrupt and we would be unable to collect. And if we aren�t careful, we will encourage companies that have enough money for collection to leave the drilling to those that don�t. [.  .  .]

We are left in a difficult place. Neither the private nor the public sector seems up to handling these kinds of problems. And we can�t simply wait for the next disaster, because, as people might say if they had to use G-rated language, stuff happens.

Professor Hamilton zeros in on the group dynamic that leads to the underestimation of risk:

I think part of the answer, for both toxic assets and toxic oil, has to do with a kind of groupthink that can take over among the smart folks who are supposed to be evaluating these risks.

It's so hard to be the one raising the possibility that real estate prices could decline nationally by 25% when it's never happened before and all the guys who say it won't are making money hand over fist.

And this interacts with the forces mentioned above. When the probability of spectacular failure appears remote, and moreover it hasn't happened yet, it's hard to set up incentives, whether you're talking about a corporation or a regulatory body, in which the person who makes sure that the risks stay contained is the person who gets rewarded. When everyone around you starts thinking that nothing can go wrong, it's hard for you not to do the same. It can become awfully lonely in those environments to try to be the voice of prudence.

Finally, Cato's Gerald O'Driscoll, Jr. notes the futility of reacting to the oil spill by implementing even more regulation:

What is the missed lesson from all this? When President George W. Bush had his Katrina moment, the federal government's bumbling response was blamed on him, on the Republicans, and on conservatives. Now it is President Obama's turn. His administration's faltering response to the disaster in the Gulf is attributed to his personal failings, staff ineptitude, communication failures, etc. And, of course, the two administrations have shared responsibility for the poor handling of the financial crisis.

A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.

In the case of financial services, virtually all the proposed regulatory reform offers more of the same. Additional regulations will be added to existing ones without addressing why existing ones failed to prevent the crisis. The same process will likely happen with respect to offshore drilling.

The oil spill has triggered an important debate about the value of off-shore drilling, and that debate might conclude that off-shore drilling generates more harm than benefit.

But despite the nightly photos and videos of the oil spill on television, it�s important to remember that drilling produces benefits in addition to its costs. Deep-sea drilling has been ongoing for decades with relatively few incidents that even come close to the current spill.

So, while this spill may reveal that deep-sea drilling is too risky, it�s also quite possible that this incident was simply the result of poor decision-making combined with bad luck, and that there is a nominal chance that it will reoccur.

And it is very difficult to regulate bad decision-making and bad luck.

Stuff happens, indeed.

Posted by Tom at 12:01 AM | Comments (3) |

June 2, 2010

Obfuscation is government’s secret weapon

Over the past couple of years, Bill King has done a great job (and see generally here) of explaining how Houston�s unfunded public pension obligation represents a horrific burden on the city government�s financial condition.

Given that such obligations are clearly unsustainable, why does the city government continue to provide them?

Edward L. Glaeser provides the following particularly lucid explanation of the dynamic that leads to such profligacy:

On Friday, The New York Times ran a front-page article about pensions that took note of a 44-year-old retired police officer who receives an annual pension of $101,333 despite never having earned more than $74,000 a year in base pay. The article reported that in Yonkers alone �more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working� and that �about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes.�

The emotional response of many people is to vilify the retirees, but that�s a mistake. The individual police officers and firefighters were following the rules. They have jobs that require them to risk their lives in service of their communities, and large pensions are one payoff for accepting those risks and accepting relatively lower wages up front. I�m sure many of them are no less impatient than the rest of us and would have preferred to get more money in their 20s and less in their 50s.

The fault lies in the political process that makes their negotiating partners � state and local governments � more impatient than their employees. State and local governments don�t want to face the short-term consequences of paying higher wages, so they structure compensation in ways that defer the costs of each new deal for years.

Politics doesn�t just favor delayed compensation; it also favors forms of compensation that are particularly hard for people to evaluate. Governments almost always love obfuscation. The appeal of Fannie Mae and Freddie Mac was that they could subsidize homeownership without appearing to cost the taxpayers anything. Of course, they ended costing us plenty, just like hard-to-evaluate pension promises.

The rest of Glaeser�s post is here.

Sort of reminds one of this, this and this, eh?

Posted by Tom at 12:01 AM | Comments (1) |

May 20, 2010

Is freedom possible without wealth?

From the fine HBO John Adams mini-series, Thomas Jefferson and Alexander Hamilton debate the relative importance of the creation of wealth to American society. Amazingly, the debate lives on today.

Posted by Tom at 12:00 AM | Comments (0) |

April 18, 2010

Our troubling tax system

Another first rate Cato Institute video on the horrific cost of our overly complicated taxation system.

Posted by Tom at 12:01 AM | Comments (0) |

April 16, 2010

That health care overhead

Following on this post from earlier in the week on the adverse impact that the third party payer system of health care finance has had on controlling health care costs, check out this Catherine Rampell post that passes along the graph on the left and the following startling observation:

�For every doctor, there are five people performing health care administrative support.�

And we are about to implement changes in the health care finance system that increases the third party payer element that requires much of this administrative support? While dramatically increasing the number of people covered under such a third party payment scheme with no provision for increased supply of medical services to meet that additonal demand?

What possibly could go wrong?

Posted by Tom at 12:01 AM | Comments (1) |

April 15, 2010

Milton Friedman on poverty

Posted by Tom at 12:01 AM | Comments (3) |

April 1, 2010

De Vany on PED’s, Diet and Exercise

When you have a free hour, don�t miss Russ Roberts� fascinating EconTalk interview of Clear Thinkers favorite Art De Vany.

Performance enhancing drugs resulted in new records in baseball? Pure conjecture. More likely the records are simply the result of outliers.

The more exercise, the better? Nope. Intensity and randomness is the key to an effective exercise regimen. Forget the jogging.

We�re healthier than our ancestors? Not really, unless you�re watching your diet and controlling your insulin levels.

Provocative stuff.

Posted by Tom at 12:01 AM | Comments (0) |

March 24, 2010

Longhorns Inc.

More than a few tongues are wagging around Texas Longhorn athletic circles this week over this blistering Texas Observer op-ed on the UT football program authored by UT professor Tom Palaima, who just happens to serve on the UT Faculty Advisory Committee on Budgets and is UT�s representative on the Big 12 steering committee of the Coalition on Intercollegiate Athletics. Here�s a flavor of the article:

The NCAA program at the University of Texas at Austin generated $138 million in revenue last year, $87 million from football. Yet its profit margin is less than $2 million. The program�s cumulative debt and debt service are in the high-risk neighborhood.

Longhorns Inc. has wrapped its tentacles around the now-hemorrhaging academic budget. The athletics department gave a $2 million raise to head football coach Mack Brown as colleges across the university are laying off staff. In foreign languages alone, $1.6 million was cut. The head of the student union recently announced the closure of the Cactus Caf�, a historic music venue, to save just $66,000 over two years.

Worse, the university has ceded trademark and royalty revenues. Longhorns Inc. keeps 90 percent of this income, roughly $10.6 million last year. The yearly debt payment on building bonds for the nearly $300 million in stadium expansions since 1998 is $15 million. The debt run up by the athletics department has risen from $64.4 million in 2004-05 to a staggering $222.5 million in 2008-09.

Unfortunately, Palaima main criticism is how well the UT athletic department and its personnel are doing financially in comparison to the UT academics, whose average salary has increased by �only� 30 percent over the past 20 years or so.

Somehow, however, Palaima utterly misses the most corrupt aspect of big-time intercollegiate athletics. That is, the perverse and discriminatory regulatory scheme that restricts compensation to the players � mostly young black men � whose talent actually generates most of the wealth for the athletic departments.

As I�ve noted many times, big-time college football and basketball is an entertaining form of corruption. Too bad that someone as bright as Professor Palaima fails to understand the true nature of that corruption.

By the way, below is a video of a lively debate between Professor Palaima and longtime UT Law professor Lino Graglia over college football in which Palaima is actually the defender of the entreprise (a colleague asked Palaima �DeLoss Dodds must have given you priority seating at [Darrell K. Royal-Memorial Stadium]�. The transcript of the debate is here.

Posted by Tom at 12:01 AM | Comments (2) |

March 23, 2010

Thoughts on health care finance reform

Inasmuch as America�s fractured health care finance system has been a common topic on this blog since early 2004, many friends and readers have asked my thoughts about the health care reform legislation that was passed yesterday. So here goes.

The legislation is fundamentally flawed because it imprudently foists a top-down reorganization plan on something as complex and disparate as financing health care. But frankly, I have no idea whether it will result in a worse finance system than the current one, which is pretty bad.

My biggest criticism with both the current system and the one contemplated by Obamacare is that the patient is not the customer, at least as it relates to non-catastrophic illness and injury. Without cost control � and customer decision-making is the most efficient one available - neither the current system nor Obamacare will be able to maintain delivery of high-quality care to an increasingly aging population.

However, the reality is that we now have two solid generations of Americans now who enjoy having someone else pay for their health care. So, it�s unrealistic to think that such a societal shift is going to change anytime soon. But it�s still important to understand how we got to this point.

Employer-based health insurance became popular during World War II because it was initially exempted from gross income as a way to circumvent wartime wage and price controls. After the war, marginal income tax rates were high and individual medical expenses were tax deductible, so at least some rational incentives were returned to the medical marketplace.

But all this changed in 1986 when the Reagan Administration made concessions to achieve bipartisan tax reform. Individual medical expenses were no longer deductible until they reached 7.5% of gross income, which virtually eliminated individual incentives in the medical marketplace. Not surprisingly, everyone was incentivized after tax reform to move all medical expenses to third-party-payor health insurance. As a result, individual out-of-pocket expenses in the health care market dropped from 22% in 1985 to less than than 10% of the market now.

So, in essence, the Reagan Administration horse-traded personal tax deductibility of medical expenses away, but figured that was acceptable because at least employer health insurance remained tax-free benefit. I�m sure if we could ask him now, President Reagan would tell you that he expected a future Congress would fix such perverse incentives after the dust settled on the benefits of tax reform. But alas, that never happened.

What happens now? The only certainly is that special interests will be descending upon Washington in droves to do their bidding over the transfers of wealth that will occur under the new legislation. At least it will be entertaining to watch who wins and loses.

But there are two big points that everyone should remember as we embark on this new world of health care finance.

First, the Obama Administration�s rationalization of future cuts in Medicare spending as a funding source for the health care legislation is utterly disingenuous, as Arnold Kling artfully explains:

Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.

The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.

Second, as Greg Mankiw notes, projected Medicare cuts in payment rates for physician services portend the rationing of medical services that the promoters of the current legislation contend won�t occur. Because few consumers actually pay for their health care, most folks don�t realize that Medicare and Medicaid payment rates for physician services have already been cut by around 30% since the late 1990�s. That has led many doctors to limit substantially the number of Medicare and Medicaid patients who they are willing to treat in their practices. In my view, that trend is likely to continue under the new legislation. Who will tend to the medical needs of consumers who elect to rely on such insurance in the future?

Supporters of Obamacare generally argue that the legislation offers more equality through expanded insurance and redistribution of benefits. But the wealthy will always find ways to get around the rationing and other restrictions of a government-run health care system. On the other hand, the poor will have no choice but to accept the government health care, which is unlikely to be as high a quality as what the rich folks obtain from their private doctors. Accordingly, although the distribution of health care may be a bit more equal in the short term, I'm not sure that means more equality in health care in the long run.

Which leads me to this question: How long will it be before the federal government requires physicians, as a condition to being allowed to engage in private practice, to accept a certain number of patients under government-sponsored insurance plans that limit payments to the physicians far below what the physicians would otherwise accept?

Posted by Tom at 12:01 AM | Comments (12) |

February 13, 2010

Roberts on the bailout

Don't miss George Mason University economic professor Russ Roberts' lucid, four minute statement to a House Committee condemning the federal government's bailout of large financial institutions. The written statement is here. As I've been saying all along, it's not rocket science.

Posted by Tom at 12:00 AM | Comments (0) |

February 12, 2010

Milton Friedman on freedom, capitalism and colonialism

Got to love the way Friedman ignores the contentious introduction to the questions and maintains the integrity of intellectual discourse. H/T Almost Chosen People.

Posted by Tom at 12:01 AM | Comments (0) |

February 2, 2010

Running into the abyss

17th century philosopher Blaise Pascal observed in his Penses that we run heedlessly into the abyss after putting something in front of us to stop us seeing it.

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, observed something similar in his quarterly report regarding the troubled TARP program:

The government's bailout of financial institutions deemed "too big to fail" has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.

The Troubled Assets Relief Program, known as TARP, has not addressed the problems that led to the last crisis and in some case those problems have festered and are a bigger threat than before, warned Neil Barofsky, the special inspector general at the Treasury Department.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Barofsky wrote the $700 billion financial bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they steer their ships nearly aground.  .   .   .

None of what Barofsky reports is a surprise to regular readers of this blog. It was not rocket science.

Posted by Tom at 12:01 AM | Comments (0) |

November 10, 2009

Too Big Even to Consider Failing

As with many folks in the financial and legal world, I'm finishing up Andrew Ross Sorkin's entertaining new best-seller, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves (Viking 2009). Clear Thinkers favorite Arnold Kling has the best analysis of the book that I've read to date:

Reading the book leads me to ponder the differences between Chauffered America--Hollywood, investment bankers, and high government officials--and Strip Mall America--people who launch businesses like restaurants, hair salons, and other small enterprises. [.  .  .]

The obvious sociological point is that the top finance people live in a bubble, with secret entrances, isolated offices, chauffered automobiles, and private jets. Even the top government officials inhabit this world. Sorkin describes Geithner arriving at the airport in DC and losing it over not being met by a driver. Forced to take a taxi, Geithner turns to his colleague and says that he has no cash. Perhaps this would have been a moment to teach the head of the New York Fed how to use an ATM. [.  .  .]

I do not see how reading this book can help but reinforce a Simon Johnson/James Kwak view of Washington captured by Wall Street. Paulson seems to have no use for anyone who is not a Goldman Sachs alumnus. Geithner seems to have no use for anyone who is not a CEO of a large financial institution. Both of them view the collapse of major Wall Street firms as Armageddon.

The "regulatory overhaul" promised by the Obama Administration is still the same-old, same-old. Chauffered America will be restored to its exalted status, with a few new rules and regulations thrown in.

Instead, somebody should be asking the deeper question about Chauffered America. If Chauffered America were to disappear, would the rest of us miss it? Or could Strip Mall America get along just fine without the big-time bankers and their friends in government?

One comes away from the book with the conclusion that the primary purpose of the government and corporate leaders involved in resolving the crisis was to maintain the elitist culture of Wall Street with regard to financial matters, while at all times making sure that the government protected the maximum number of the folks making the bad bets from ever having to endure the true extent of the risk that they took in placing those bets. That's why things like this happened.

As I noted after the demise of Lehman Brothers last fall, resolving the crisis was not rocket science. Sorkin's book establishes that the leaders who were calling the shots were never going to let on that such was the case.

Posted by Tom at 12:01 AM | Comments (1) |

October 7, 2009

Fat chance

A couple of interesting health care-related items caught my eye today.

First, I went by my internist's office for my annual physical and noticed that another group of doctors had leased a much larger office across the hall from my doctor's office.

I peaked inside the new doctors' office window and noticed that the reception area was nicely furnished with plush leather sofas and chairs, flat screen TV's, handsome hardwood flooring and tasteful Persian rugs.

The opulence of the office prompted me to find out what kind of doctors were apparently doing so well, so I grabbed one of the doctor's cards from the reception area. It read (not the real name):

"John Smith, M.D., Laparoscopic Obesity Surgery"

Meanwhile, this NY Times article reveals the utterly unsurprising fact that New York City regulations requiring fast food restaurants to post the caloric content of their food did not induce obese consumers from eating less:

A study of New York City’s pioneering law on posting calories in restaurant chains suggests that when it comes to deciding what to order, people’s stomachs are more powerful than their brains.

The study, by several professors at New York University and Yale, tracked customers at four fast-food chains — McDonald’s, Wendy’s, Burger King and Kentucky Fried Chicken — in poor neighborhoods of New York City where there are high rates of obesity.

It found that about half the customers noticed the calorie counts, which were prominently posted on menu boards. About 28 percent of those who noticed them said the information had influenced their ordering, and 9 out of 10 of those said they had made healthier choices as a result.

But when the researchers checked receipts afterward, they found that people had, in fact, ordered slightly more calories than the typical customer had before the labeling law went into effect, in July 2008.

The findings, to be published Tuesday in the online version of the journal Health Affairs come amid the spreading popularity of calorie-counting proposals as a way to improve public health across the country.

“I think it does show us that labels are not enough,” Brian Elbel, an assistant professor at the New York University School of Medicine and the lead author of the study, said in an interview.

"Labels are not enough?" Makes one wonder what regulation Professor Elbel will suggest next -- maybe governmental rationing of fast food?

The argument in favor of these types of absurd governmental intrusions into our lives is that government subsidizes medical insurance, so government should attempt through regulation to decrease obesity, which unfairly heaps a portion of health-care costs relating to obesity on tax-paying citizens who are not obese.

But putting aside for a moment the debatable notion of whether obesity really increases health-care costs all that much, the far more effective regulation to decrease obesity would be to provide a financial incentive for citizens to lose weight. Namely, reduce the governmental subsidy of medical insurance for those who choose to remain obese.

Fat chance of that happening.

Posted by Tom at 12:01 AM | Comments (2) |

September 29, 2009

Why pay even more?

In addition to being quite frustrating from a purely football standpoint, attending Houston Texans games is incredibly expensive. And as ESPN.com's Lestor Munson points out, if the NFL has its way in the American Needle case currently pending before the U.S. Supreme Court, then professional franchises will have virtual carte blanche to coordinate high prices with other clubs in their leagues.

A group of sports economists led by Roger Noll have filed the brief below with the Supreme Court explaining how the NFL position in favor of an exemption from anti-trust laws will likely result in a loss of consumer welfare. In short, the economists argue that economic research provides a firm basis for distinguishing between collaborative activities of league members that enhance economic efficiency and benefit consumers, on one hand, from collusive activities that are not essential for the efficient operation of a league and that simply benefit league members by reducing competition among teams.

The owners of professional sports leagues have already received a dramatic financial benefit from the billions of dollars of public financing for stadiums that local governments have thrown their way over the past generation. Providing an unnecessary anti-trust exemption that will provide anti-competitive incentives for league members while providing no economic benefit to the members' customers will only make matters worse.

Food for thought as Houston leaders prepare to gift-wrap another dubious public subsidy for the owners of a professional sports franchise.

Sports Economists Amicus Brief in American Needle Case

Posted by Tom at 12:01 AM | Comments (0) |

July 22, 2009

Rationing and health care finance reform

The video below (H/T Professor Bainbridge) of a Milton Friedman lecture on the health care finance system is as timely now as it was in 1978 when he gave it at the Mayo Clinic. I was reminded of the Friedman lecture when a doctor friend of mine passed along the following front-line observations triggered by this article reporting on the recentt death of a young British man who died while waiting on a liver transplant:

Unless we, as a society, decide that we are going to pay for everything for everybody, there will have to be some form of rationing of health care services. And, into the 21st century, we now can do so much (with some having questionable efficacy) that we can no longer afford to do everything for everybody.

We can ration by age -- this is what Obama was suggesting when he said that "maybe you're better off not having the surgery, but taking the painkiller". No more knee or hip replacements if you're over a certain age. Perhaps the first step toward a "Soylent Green" society?

Or we can ration by disease, which is what happened in the UK to the fellow who died awaiting a liver transplant and here we get into morals and away from science. It's kind of like the game we played in psychology courses in high school or college -- you're stuck on a desert island with a bunch of folks who represent a cross culture of society, so who do you choose to get on the life raft? Medical care actually was easier when we did not have the technology to do things like liver transplants. Folks such as this guy just died. 

Now, as a society, with the finite resources we are willing to spend on health care, we have to decide if we want to spend $250K to give this guy a new liver (which he may or may not trash through further drinking), to which is added the $25K per year for his follow up care and (very expensive) anti-rejection drugs. Or, do we decide that it would be better to treat 1,000 people who have hypertension by giving them cheap generic meds for $250 per year each?  Who is more deserving of a "second chance", as the referenced patient's mother asks -- the one or the thousand?  There are no right or wrong answers, but remember, it's now a zero-sum game. When you spend money on one group of patients, there will be less to spend on others.

Posted by Tom at 12:01 AM | Comments (2) |

July 15, 2009

The Money Pit

Casey Mulligan's clever post below reminded me of the classic Onion News segment that follows:

In 2008, we were told that each American taxpayer had to spend thousands on bank bailouts in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

In early 2009, we were told that each American taxpayer had to spend thousands on fiscal stimulus in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

Now we are told that each American taxpayer has to spend thousands (? amount to be unveiled later) on government health care in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

We are lucky to have the White House to save us from so many disasters!

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Posted by Tom at 12:01 AM | Comments (1) |

June 15, 2009

Will Obama address this key health care finance issue?

Marginal Revolution's Tyler Cowen penned this insightful NY times op-ed over the weekend that addresses the problem of the elephant in the parlor in regard to Obama's proposed reform of America's dysfunctional health care finance system:

MEDICARE expenditures threaten to crush the federal budget, yet the Obama administration is proposing that we start by spending more now so we can spend less later.

This runs the risk of becoming the new voodoo economics. If we can’t realize significant savings in health care costs now, don’t expect savings in the future, either.

It’s not the profits of the drug companies or the overhead of the insurance companies that make American health care so expensive, but the financial incentives for doctors and medical institutions to recommend more procedures, whether or not they are effective. So far, the American people have been unwilling to say no.

Drawing upon the ideas of the Harvard economist David Cutler, the Obama administration talks of empowering an independent board of experts to judge the comparative effectiveness of health care expenditures; the goal is to limit or withdraw Medicare support for ineffective ones. This idea is long overdue, and the critics who contend that it amounts to “rationing” or “the government telling you which medical treatments you can have” are missing the point. The motivating idea is the old conservative chestnut that not every private-sector expenditure deserves a government subsidy.

Nonetheless, this principle is radical in its implications and has met with resistance. In particular, Congress has not been willing to give up its power over what is perhaps the government’s single most important program, nor should we expect such a surrender of power in the future. There is already a Medicare Advisory Payment Commission, but it isn’t allowed to actually cut costs. [. . .]

Those cuts alone will not solve the fiscal problem, but if we aren’t willing to take even limited steps to conserve resources, we shouldn’t be spending any more money elsewhere. [.  .  .]

The demand for universal coverage sounds like a moral imperative to “take care of everybody,” but in reality it would make only a marginal difference when it comes to the overall health of the American population. The sober reality is that universal coverage is another way to spend money, which may or may not be a good idea.

The most likely possibility is that the government will spend more on health care today, promise to realize savings tomorrow and never succeed in lowering costs. It is rare that governments successfully cut costs by first spending more money.

Mr. Obama has pledged to be a fiscally responsible president. This is the biggest chance so far to see whether he means it.

Read the entire op-ed. Any reform of the U.S. health care finance system will not be successful in controlling costs unless or until a consensus is reached on a fundamental issue that most Americans do not even want to discuss -- that is, what is the basic level of health care that every individual in the U.S. is entitled to receive regardless of cost? For example, what level of care is an insolvent, uninsured, illegal immigrant entitled to receive? How much care should we be willing to subsidize to extend the life of a seriously-ill 90 year-old?  A terminally-ill 50 year-old? These are thorny issues, but they must be addressed if we are ever going to achieve a coherently-financed health care system.

As Arnold Kling has been saying for years, many of us live under the delusion that we cannot possibly afford health care if we pay for it individually, but of course we can afford it if we pay for it collectively. For those of you who think that the government can magically make health care more affordable, just remember what happened after the government directed Fannie Mae and Freddie Mac to make home ownership more affordable.

Update:Charles Kenny makes a good point that better health care is not necessarily expensive.

Update II: Steve Chapman chimes in with a timely observation:

There are only three ways to pay for this expansion of health insurance coverage: increased taxes, reduced benefits, or shiny gold ingots falling out of the sky. Voters emphatically prefer the latter option, so that is the one most likely to be embraced by Congress and the administration.

Update III: Arnold Kling notes the problems with Obama's "dessert now, spinach later" approach.

Posted by Tom at 12:01 AM | Comments (3) |

June 13, 2009

The Stand-up Economist on the Financial Crisis

Posted by Tom at 12:01 AM | Comments (0) |

May 18, 2009

Bad regulation vs. deregulation

Clear Thinkers favorite Niall Ferguson provides this timely reminder to those who believe that the financial turmoil of the past couple of years is the result of lax regulation of financial markets:

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. [.  .  .]

.  .  . Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Stated another way, it's not that rules are unnecessary for markets to perform efficiently. But what type of rules are better?

Rules that politicians enact and government bureaucrats enforce generally are far less efficient than rules that emerge as a result of the voluntary interactions of millions of individuals and companies. The successes and mistakes of those individuals and companies pursuing their own interests create rules that are the product of competition and personal responsibility. When those rules become sufficiently important in the fabric of a market economy, they become formalized as common law and precedent by courts. The distinction between inefficient government-imposed rules and the decentralized rules that facilitate productive market economies is an important one to understand as we wade through this current financial crisis.

The rules that the government is currently making up on the fly in connection with the Chrysler bankruptcy are a good example of rules that are destined to allocate resources inefficiently.

Posted by Tom at 12:01 AM | Comments (1) |

May 9, 2009

Cruising the Houston Ship Channel

The oil and gas industry is synonymous with Houston, but many folks do not know that health care and the Port of Houston are huge economic drivers in the local economy, too. Check out this time lapse video by Lou Vest on a ship leaving the Port of Houston along the Houston Ship Channel. Here is a similar video that Vest did last year during the daytime. Enjoy.

Posted by Tom at 12:01 AM | Comments (0) |

April 20, 2009

Clear Thinking to begin the week

Former Cardinals and Pirates outfielder Andy Van Slyke from this recent interview ($) in Baseball Prospectus:

"Well, [former Astros pitcher] Mike Scott, to me, is the best pitcher to ever pitch in the big leagues. I went 1-for-38 against him.  .  .  . Mike Scott, when he was at the apex of his career, was actually cheating very well. When he threw that forkball, and he scuffed it all up... he threw 97-98 mph, and then he'd throw a forkball that was in the 90s and I just couldn't hit him."

Q: Were there a lot of guys "cheating very well" in your era?

"I think there was more of it going on back then than there is today. You don't really see guys scuffing balls—you don't see guys with sandpaper—but it was very prevalent when I came to the big leagues. The guys... everybody knew who was doing it. It was just hard to catch them."

Arnold Kling on an upcoming debate that he will be having with Robert Kuttner regarding health care finance:

The debate should be about how the cost-benefit trade-offs and rationing will take place. I will argue that most health care spending should be paid for out of pocket, with insurance reimbursement only for very large expenses over a multi-year period. With consumers paying out of pocket, they will take price into account in making their choices, and they will self-ration. The alternative is to have government officials make the choices about what treatments people are to obtain. I do not think that this is a one-sided debate, in which one position is clearly better than the other. But I hope that Kuttner and I can have this debate, rather than go off into red herrings like drug company profits.

The Financial Times' Clive Cook chimes in on America's intractable but nonsensical drug prohibition policy ($) (other posts on drug prohibition are here):

How much misery can a policy cause before it is acknowledged as a failure and reversed?

The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm. [.  .  .]

Strict enforcement,  .   .   .  has reduced drug use only modestly – supposing for the moment that this is even a legitimate objective. The collateral damage is of a different order altogether. Violence related to drug crimes has surged in Mexico and in US cities close to the border, giving rise to renewed interest in the topic.  .  .  . [.  .  .]

Few policies manage to fail so comprehensively, and what makes it all the odder is that the US has seen it all before. Everybody understands that alcohol prohibition in the 1920s suffered from many of the same pathologies – albeit on a smaller scale – and was eventually abandoned. [.  .  .]

Is an outbreak of common sense on this subject likely? Unfortunately, no. Only the most daring politicians seem willing to think about it seriously.  .  .   . [.  .  .]

Somebody in the White House should take a look. This national calamity is no laughing matter.

And finally, Mark Steyn notes the insidious nature of encroaching government regulation over citizens:

The proper response of free men to the trivial but degrading impositions of the state is to answer as [gun owner] Pierre Lemieux did. But it requires a kind of 24/7 tenacity few can muster - and the machinery of bureaucracy barely pauses to scoff: In an age of mass communication and computer records, the screen blips for the merest nano-second, and your gun rights disappear. The remorseless, incremental annexation of "individual existence" by technologically all-pervasive micro-regulation is a profound threat to free peoples. But do we have the will to resist it?

Posted by Tom at 12:01 AM | Comments (0) |

April 1, 2009

The Postrel Health Care Finance Articles

Clear Thinkers favorite Virginia Postrel (previous posts here) is well-known in health care finance circles for her authorship of a reasoned critique of one-payor, centralized health care plans back in the 1990's. She now writes for The Atlantic.

Over the past year or so, Virginia has been experiencing serious health care issues, so she has recently penned two extraordinary articles in The Atlantic (here and here) chronicling her personal experience with America's Byzantine health care finance system. Both articles are must-reads for anyone interested in these important issues, but here are a couple of snippets from the second article that are representative of the wisdom that Virginia provides:

Mr. Daily [a critic] shares a common belief, expressed less dramatically in other letters, that there is somewhere a pot of money dedicated to “health care” which “society” divides between winners and losers. In the United States, at least, there is no health care pot, any more than there is a pot for housing or education or magazine subscriptions. There is simply an economy, which includes health care among other goods, and the amount we spend on health care grows out of the largely decentralized decisions made by individuals and organizations. As productivity increases and prices drop in some areas—food, clothes, entertainment—we can afford to spend more on health care (even without overall economic growth or increased health-care efficiency). [.  .  .]

.  .  . We do not currently treat health care as a right. That we don’t is, in fact, what most letter writers are objecting to. Neither do we regard it exactly as a privilege, to be allocated to the worthy few or even to be limited to those who can afford to pay for it, directly or indirectly. Rather, it is a good, produced and purchased in a complex marketplace through a combination of individual, organizational, and political decisions.

Even this formulation is misleading, however. Health care isn’t a single good, nor, like food, is it easily defined in terms of a minimum to sustain life. Studying other countries’ supposedly universal systems only demonstrates how fraught the concept of “health care” is: one bundle of services in British Columbia and a less-generous one in Nova Scotia, one in England and another in Scotland, one in New Zealand before the election and another afterwards. Arguably the U.S. already has universal care, in the sense that everyone can get some care—if only from an emergency room—for some things, and that citizens (a critical word in this context) without money are covered by Medicaid.

The real issue is how you define “health care.” What gets included is a matter not only of medicine and economics but of culture and politics.

What limitations on health care are Americans willing to accept in return for universal coverage? That is one of the core issues that those who are currently crafting health care finance reform are assiduously avoiding. But true reform will never occur without addressing that issue.

Posted by Tom at 12:01 AM | Comments (1) |

March 12, 2009

The real March Madness

As I've noted many times, big-time college sports in the U.S. is structured in a corrupt manner, but it's an entertaining form of corruption that makes reform difficult (how would reform affect my team?).

That reality rears its rather unsavory head each March as the nation looks forward to the NCAA Basketball Tournament, in which predominantly young black males entertain us in return for legally-sanctioned, below-market compensation. Most of the players do not make it into the high-dollar dream world of the less-compensation restricted forms of professional basketball (the NBA and the other professional leagues), and many of the players do not even receive a real college education or graduate. Many end up with little other than a life of dealing with the after-effects of serious injuries.

To make matters even worse, as Andrew Zimbalist notes in this WSJ op-ed, most academic institutions lose their shirt attempting to compete in this entertaining form of corruption:

The annual three-week orgy of basketball, involving the nation's top 65 college teams, is once again upon us. March Madness they call it, and madness it is. [.  .  .]

So, a captivated national audience, a massive television deal and dozens of corporations drooling to get a piece of the action must all add up to a financial bonanza, right? Not quite.

There are a few winners. The National Collegiate Athletic Association, for instance, makes out quite well. Last year, Madness brought in $548 million from TV rights and an additional $40 million from ticket sales and sponsorships, together representing an eye-popping 96% of all NCAA revenue.

Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal.

The most successful programs, of course, will do better (the top 10 basketball teams had revenues of more than $11 million), but even these programs frequently lose money when the accounting is done properly. Why?

Most of the 300-plus Division I schools aspire to make it to the March tournament. To do so, they have to spend big. Since they can't go to a free-agent market to hire the best high-school players, they attempt to attract them in other ways. First, they spend lavishly to court the players during the recruitment process.

Next, they attempt to provide state-of-the-art arenas and training facilities, complete with luxury suites, Jumbotron scoreboards and spacious locker rooms. They invest in academic tutoring facilities, costing as much as $15 million, to help the athletes stay eligible for competition. Then they hire well-known coaches with a reputation for sending an occasional player to the NBA.

And the coaches don't fare too shabbily either. In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. These figures exclude extensive perquisites, including free use of cars, housing subsidies, country-club memberships, access to private jets, exceptionally generous severance packages, handsome opportunities for outside income, and more.

These guys are making almost as much as NBA coaches, even though their teams' revenues generally are below one-tenth those in the senior circuit. The trick, of course, is that the players aren't allowed to be paid, so the coaches, in essence, get the value produced by their recruits. It doesn't hurt that college sports benefit from state subsidies and federal tax exemptions, and that they have no stockholders looking for quarterly profits.

There is a better way.

Posted by Tom at 12:01 AM | Comments (1) |

March 6, 2009

Insightful thoughts to close the week

Writing in 1951 about popular attitudes toward income inequality in "The Ethics of Redistribution," Bertrand de Jouvenel observed the following (H/T WSJ):

The film-star or the crooner is not grudged the income that is grudged to the oil magnate, because the people appreciate the entertainer's accomplishment and not the entrepreneur's, and because the former's personality is liked and the latter's is not. They feel that consumption of the entertainer's income is itself an entertainment, while the capitalist's is not, and somehow think that what the entertainer enjoys is deliberately given by them while the capitalist's income is somehow filched from them.

In arguably the best financial blog post to date in 2009, the Epicurean Dealmaker analyzes the skewed dynamics that led to the Merrill Lynch high-level executive bonus pool and observes, among other things:

It would not be outlandish to consider the Merrill executives' bonus pool as the latest and largest campaign gift toward Mr. [Andrew] Cuomo's 2010 gubernatorial run.

Meanwhile, Andrew Morris wrote the following in a letter to the WSJ editor (H/T Don Boudreaux):

At first, when I read your headline “States give gambling a closer look” (Mar. 3) I thought you were reporting on yet another “stimulus” or “bailout” bill in which politicians played games of chance with taxpayers’ money. Hardly news -- just another “dog bites man” story.

Then I realized it was just a story about allowing ordinary people to risk their own money  --  now that’s a “man bites dog” story!

Along the same lines, the WSJ's Notable and Quotable series provided the following excerpt from Friedrich A. Hayek's "The Constitution of Liberty" (1960) on the illusory nature of progressive taxation and large increases in governmental spending:

Not only is the revenue derived from the high rates levied on large incomes, particularly in the highest brackets, so small compared with the total revenue as to make hardly any difference to the burden borne by the rest; but for a long time . . . it was not the poorest who benefited from it but entirely the better-off working class and the lower strata of the middle class who provided the largest number of voters.

It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

And Jason Kottke noted the technological irony of the week:

Now you can go to the iTunes Store to buy the Kindle app from Amazon that lets you read ebooks made for the Kindle device on the iPhone.

Finally, legendary Houston trial lawyer Joe Jamail passes along this anecdote about the late, great Houston criminal defense lawyer, Percy Foreman:

In the early 1980s, Jamail represented his courtroom idol, Houston criminal defense attorney Percy Foreman, whose neck was injured when his car was rear-ended by a commercial truck. On direct examination, Foreman testified that he had not experienced any neck problems before the accident, and that he was entitled to $75,000 for lost income due to the injury.

But on cross-examination, the defense revealed that Foreman had been hospitalized nine times for neck problems prior to this accident.

“The jury looked at me, expecting me to give them an answer,” says Jamail. “So I told them that Percy had been a great lawyer throughout his life, but that he was now just an old man and was growing senile.”

At that moment, Foreman jumped up and yelled out across the courtroom, “You goddamned son of a bitch!”

“See what I mean,” Jamail immediately told jurors. “He doesn’t even know where he is right now.”

The jury awarded Foreman the sum of $75,004. Jamail says he never figured out why the extra $4.

Posted by Tom at 12:01 AM | Comments (0) |

February 25, 2009

Greed in perspective

In market economies, people who create jobs and wealth often generate great wealth personally. During periods of market unrest, those wealthy folks are often demonized as being greedy.

During a period of economic malaise in1979, the late Milton Friedman counsels Phil Donahue on the vacuity of demonizing greed. Enjoy.

Posted by Tom at 12:01 AM | Comments (5) |

February 21, 2009

Quotes of the Week

Emanuel Derman:

"The market wants Churchill and they keep tossing it Chamberlains."

John Nash (via David Henderson) on his progress out of mental illness in the late 1980's:

"Then gradually I began to intellectually reject some of the delusionally influenced lines of thinking which had been characteristic of my orientation. This began, most recognizably, with the rejection of politically-oriented thinking as essentially a hopeless waste of intellectual effort."

Dick Armey:

"In reality, no one spends someone else's money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it."

Posted by Tom at 12:01 AM | Comments (0) |

February 14, 2009

An unintended consequence of drug prohibition

While this post from earlier in the week highlighted the historical backdrop to the United States' failed drug prohibition policy, this Telegraph.co.uk article passes along an unintended consequence of that policy that should put to rest any concerns about reconsidering it:

The Home Office has admitted that the street price of both cocaine and heroin has fallen by nearly half in the last ten years, making the most dangerous illegal drugs cheaper than they have ever been.

That means a line of cocaine can cost as little as £1, with an average price per line of between £2 and £4.

The average price of a pint of lager is around £2.75, although some pub chains have reacted to the credit crunch by cutting the price of a pint as low as 99p. A glass of wine typically costs £3.50.  .  .  .

Posted by Tom at 12:01 AM | Comments (3) |

February 11, 2009

Interesting historical perspectives

Cato Unbound points us to a couple of articles that provide insightful observations on two of the crises that are swirling around us these days.

First, William Niskanen cautions us regarding the fear-mongering that supporters of the Obama Administration's fiscal stimulus plan are using to justify emergency passage of the plan:

This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster. [.  .  .]

The only coherence in this plan is political, not whether it is an effective or efficient method to stimulate the economy.   .   .  .  Again, as in the four prior episodes, there is every reason not to rush to approve a program of such magnitude.

The primary reason for the current financial crisis is that many banks cannot evaluate their own solvency or that of their current or potential counter-parties, primarily because of the difficulty of valuing mortgage-backed securities and other complex derivatives, and neither TARP nor the fiscal stimulus plan addresses this problem.

Our political system, unfortunately, is strongly biased to try to protect people against the effects of a crisis without addressing the causes of the crisis. To Congress: Slow down. Make sure you understand the causes of the financial crisis and the potential solutions before you burden your children and your grandchildren with another trillion dollars of federal debt.

Your present course is best described as fiscal child abuse.

Meanwhile, as Texans continue to watch nervously to the south as the Mexican government teeters on the brink of losing control of large sectors of the country to drug kingpins, Dale Gieringer reminds us that the main cause of this crisis -- U.S. drug prohibition -- is the result of dubious public policy:

This week marks the centennial of a fateful landmark in U.S. history, the nation's first drug prohibition law.  On February 9, 1909, Congress passed the Opium Exclusion Act, barring the importation of opium for smoking as of April 1.  Thus began a hundred-year crusade that has unleashed unprecedented crime, violence and corruption around the world —a war with no victory in sight.

Long accustomed to federal drug control, most Americans are unaware that there was once a time when people were free to buy any drug, including opium, cocaine, and cannabis, at the pharmacy.  In that bygone era, drug-related crime and violence were largely unknown, and drug use was not a major public concern. [.  .  .]

Early 20th-century Americans would be astounded to see what a problem drugs have become since the establishment of drug prohibition. Every year, two million Americans are arrested and 400,000 imprisoned for drug offenses that did not exist in their time.  Drug laws are now the number-one source of crime in the U.S., with one-half of the entire adult population having violated them.

Long gone are the days when Americans were free to keep opium in their closet; today, even gravely suffering patients are denied pain-killing narcotics by their doctors out of fear of federal prosecution. While smoking opium has faded from the scene, the country is now rife with more potent and lethal narcotics, which are widely sold on the illegal market. 

Seen in retrospect, drug prohibition ranks as one of the great man-made disasters of the 20th century. .  .  .

Posted by Tom at 12:01 AM | Comments (1) |

November 19, 2008

Progress on the bailout front?

So, less than two months after this previous post noted that chapter 11 reorganizations with possible government financing of reorganization plans were the best tools to shake out the current financial crisis, even the NY Times (here and here) is promoting that approach for restructuring the Big Three automobile companies.

I guess that's a sign of real progress.

Funny how the way we typically handle such things in the civil justice system usually is the most efficient solution to the problems.

It sure beats having this bunch fumble around looking for an alternative solution.

By the way, I've mentioned this before, but it merits passing along again. One of the best ways to keep up on developments in regard to the current financial crisis is to check in frequently on the following sites: Clusterstock, Dealbreaker, and Felix Salmon.

The blogosphere rules!

Posted by Tom at 12:01 AM | Comments (0) |

November 18, 2008

Thinking about markets

Now that folks have had at least a bit of time to reflect on the financial crisis on Wall Street, some good historical perspectives are starting to pop up, such as this Niall Ferguson Vanity Fair piece (previous posts on other Ferguson works are here). Toward the end, Ferguson makes an excellent point about market economies that is not widely understood:

The modern financial system is the product of centuries of economic evolution. Banks transformed money from metal coins into accounts, allowing ever larger aggregations of borrowing and lending. From the Renaissance on, government bonds introduced the securitization of streams of interest payments. From the 17th century on, equity in corporations could be bought and sold in public stock markets. From the 18th century on, central banks slowly learned how to moderate or exacerbate the business cycle. From the 19th century on, insurance was supplemented by futures, the first derivatives. And from the 20th century on, households were encouraged by government to skew their portfolios in favor of real estate.

Economies that combined all these institutional innovations performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.

Yet money’s ascent has not been, and can never be, a smooth one. On the contrary, financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes. The excesses of the Age of Leverage—the deluge of paper money, the asset-price inflation, the explosion of consumer and bank debt, and the hypertrophic growth of derivatives—were bound sooner or later to produce a really big crisis.

In short, markets are imperfect and sometimes quite messy. But they have stood the test of time in proving more efficient than the alternatives. Don't give up on them just yet.

Posted by Tom at 12:01 AM | Comments (0) |

October 23, 2008

Stossel's Politically Incorrect Guide to Politics

If you didn't have the opportunity to watch or record it last Friday, then watch the following six YouTube segments of John Stossel's Politically Incorrect Guide to Politics when you have the time (the other five segments are below the break). The program is television at its best presenting and analyzing key issues involving government regulation of business and the impact of that regulation on the creation of jobs and wealth. Enjoy:

Posted by Tom at 12:01 AM | Comments (1) |

October 14, 2008

Refracting Enron myopia

One of the more entertaining aspects of the current Wall Street financial crisis has been reading how some of the business columnists have been interpreting it.

Take, for example, Houston Chronicle business columnist, Loren Steffy. You may remember him from his acerbic coverage of the trial of former Enron executives, Jeff Skilling and the late Ken Lay, or his perpetuation of the Enron Myth regardless of the circumstances.

Dismissing me as an Enron apologist, Steffy regularly disputed my long-held theory that the run-on-the-bank that felled Enron could well happen to any trust-based business.

Apparently confused by the fact that what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses impacted by the current credit crunch, Steffy reaches for insight from one of the fellows who set the stage for this mess:

Investigators are poring over the failed firms, looking for signs that executives misled shareholders. Some evidence may be found, but Sam Buell, the former prosecutor who led the effort to indict Enron's Jeff Skilling, doesn't think we'll see widespread prosecutions.

"It's not a conspiracy if everybody's in on it," said Buell, who's now a law professor at Washington University in St. Louis. "In order to have a fraud conspiracy, you've got to have some effort by one group to deceive another group."

In this case, individual investors may not have understood what Wall Street bankers were doing with complex debt securities, but those charged with safeguarding the marketplace were certainly aware.

Regulators knew and approved. So did credit rating agencies. And auditors, both internal and external. With a mouse click, investors could find public documents that described the debt instruments with hundreds of pages of detail. [.   .   .]

"If everybody's in a bubble mentality, if they're betting the price of real estate will keep going up, disclosure doesn't address the problem of what happens when all those assumptions turn out to be wrong," Buell said. "Everybody knows what they're doing. They're just making bad decisions."

Yes, you read that correctly. Buell implies that Skilling was guilty of criminal conspiracy because not "everybody" was "in on it" at the time Enron was making its supposedly opaque disclosures. However, since "everybody's in on it" now, Buell doesn't think there will be widespread prosecutions because "[i]t's not a conspiracy if everybody's in on it."

With such reasoning, is there any doubt now why this outfit generated this record?

For the record, I actually hope Buell is right this time that few businesspeople are prosecuted for misjudging business risk. But for a more rational explanation of how financial regulation fits into the current crisis, check out these Larry Ribstein posts here, here and here and this masterful one by Arnold Kling.

Posted by Tom at 12:01 AM | Comments (1) |

October 9, 2008

Say what?

As noted earlier here and here, the lack of leadership involved in the current credit crisis and related Treasury bailout really has been appalling. You don't think so? Check this out:

Posted by Tom at 12:01 AM | Comments (1) |

October 1, 2008

Awkward Loan Interview

The proposed Treasury bailout leads to an awkward loan interview:

Posted by Tom at 12:01 AM | Comments (0) |

September 30, 2008

This is leadership?

I've already said my piece on the proposed Treasury Bailout of Wall Street, so I won't belabor that view.

In the meantime, there are much better places to keep up with the minute-by-minute political developments on the proposed bailout -- for example, check out Clusterstock, DealBreaker and Felix Salmon for astute and up-to-the-minute analysis.

However, one point from my previous post deserves further review -- that is, circumstances such as this provide us with a revealing view of our political leaders. Do they inspire positive and collaborative action in difficult times for the better good of society? Or do they attempt to generate support for their political position through fear-mongering and demagoguery?

In my view, President Bush's handling of the negotiations over the proposed bailout has been abysmal. As Jeff Matthews points out:

The President’s unfortunate choice of words—"this sucker could go down"—carry the same deer-in-headlights quality as his televised speech to the American people last week, in which he used the word “panic,” as we recall. At a minimum, it makes you nervous; at a maximum, it makes you want to throw up first and sell everything second.

What happened to the heroic, forward-looking rhetoric great leaders are supposed to provide in times of crisis?

FDR gave us “We have nothing to fear but fear itself.”

Churchill gave us “We shall fight on the beaches.”

George Bush cruises in with “This sucker could go down.”

We wonder: has a more irresponsible sentence been uttered, by anyone, during this entire crisis?

John Carney reports that President Bush wasn't any better today in responding to the House's rejection of the proposed bailout:

"We put forth a plan that was big because we got a big problem," Bush just said, sitting in a chair placed before a fireplace in the White House. He's meeting with advisers, he said. "I'm disappointed with the vote in Congress," the president said.

Was that his version of FDR's famous fireside chats? Bush looked annoyed he was being bothered with this stuff.

This from a President who failed to persuade more than a third of his own party members in the House for his position in response to a financial emergency?

Meanwhile, proving that dubious leadership is bipartisan, Democratic House Speaker Nancy Pelosi provided us with a lesson on how not to win support for a position:

Finally, Tina Fey didn't even need to change any of Sarah Palin's words to drive home the point that John McCain certainly didn't bolster his lack of financial and economic acumen with his running mate selection:

Update: More "leadership."

Posted by Tom at 12:01 AM | Comments (6) |

July 28, 2008

Glaeser on the State of the City

Harvard urban economist Ed Glaeser's NY Sun op-ed last week on Houston's success in maintaining an affordable standard of living generated a lively debate among the blogosphere's urban policy wonks, both for and against. So, Glaeser tees up the Houston debate again yesterday at the end of this Wall $treet Journal interview regarding the state of the city:

If you think about the lifestyle of ordinary Americans living on the fringe of Houston or Dallas, for example, compared to what their lifestyle would be in an older European city -- living in a walk-up apartment there compared to a 2,500-square-foot house here they bought for $130,000 with a 24-minute commute -- it's extraordinary in the low-cost areas of this country what a $60,000 family income gets you.

There's a reason Atlanta, Dallas, Houston and Phoenix are our four fastest-growing areas. They offer an astonishingly high standard of living for ordinary Americans.

New York City is a great place to be really rich and not a terrible place to be really poor, but it's a pretty hard place to live on $60,000 a year. You don't experience anywhere near the basic standard of living you would in Houston on the same income.

Ryan Avent is still not convinced.

Posted by Tom at 8:08 PM | Comments (0) |

Another innovative California industry

The New Yorker's David Samuels reports on how medical marijuana is changing a popular California industry:

Since 1996, when a referendum known as Proposition 215 was approved by California voters, it has been legal, under California state law, for authorized patients to possess or cultivate the drug. The proposition also allowed a grower to cultivate marijuana for a patient, as long as he had been designated a “primary caregiver” by that patient. Although much of the public discussion centered on the needs of patients with cancer, AIDS, and other diseases that are synonymous with extraordinary suffering, the language of the proposition was intentionally broad, covering any medical condition for which a licensed physician might judge marijuana to be an appropriate remedy—insomnia, say, or attention-deficit disorder. [.  .  .]

In 2003, the California State Legislature passed Senate Bill 420. The law was intended to clear up some of the confusion caused by Proposition 215, which had failed to specify how patients who could not grow their own pot were expected to obtain the drug, and how much pot could be cultivated for medical purposes. The law permitted any Californian with a doctor’s note to own up to six mature marijuana plants, or to possess up to half a pound of processed weed, which could be obtained from a patients’ collective or coöperative—terms that were not precisely defined in the statute. It also permitted a primary caregiver to be paid “reasonable compensation” for services provided to a qualified patient “to enable that person to use marijuana.” [.  .  .]

A drug-policy analyst named Jon Gettman recently estimated that in 2006 Californians grew more than twenty million pot plants. He reckoned that between 1981 and 2006 domestic marijuana production increased tenfold, making pot the leading cash crop in America, displacing corn. A 2005 State Department report put the country’s marijuana crop at twenty-two million pounds. The street value of California’s crop alone may be as high as fourteen billion dollars. [.  .  .]

I recently spent six months, off and on, with ["Captain"] Blue [a pot broker] — at his apartment, in private homes, on farms, in pot grow rooms, and in other places where “medical marijuana” is produced, traded, sold, and consumed in California. During that time, I saw thousands of Tibetan prayer flags. The flags identify their owners with serenity and the conscious path, rather than with the sinister world of urban dope dealers, who flaunt muscles and guns, and charge exorbitant prices for mediocre product. For Blue and tens of thousands of like-minded individuals, Proposition 215 presented an opportunity to participate in a legally sanctioned experiment in altered living. The people I met in the high-end ganja business had an affinity for higher modes of thinking and being, including vegetarianism and eating organic food, practicing yoga, avoiding prescription drugs in favor of holistic healing methods, traveling to Indonesia and Thailand, fasting, and experimenting with hallucinogenic drugs. Many were also financially savvy, working long hours and making six-figure incomes.

Read the entire article. Meanwhile, take a moment to read about one of the many costly reminders of the misguided nature of American drug prohibition policy.

Posted by Tom at 12:01 AM | Comments (0) |

June 23, 2008

Clear thinking to begin the week

In three and a half minutes, Richard St. John explains the keys to success.

The late Milton Friedman explains the folly of the prohibition policy against drugs.

Posted by Tom at 12:01 AM | Comments (0) |

June 13, 2008

Cool Graph Friday

H/T Craig Depken

H/T W$J/Josee Valcourt

H/T Russell Roberts

H/T James Hamilton

Posted by Tom at 12:01 AM | Comments (2) |

April 29, 2008

Fueling food riots

Peter Gordon observed the other day that "politicians are better at creating problems than addressing them. Schools, housing, health care, transportation and others suffer from too much political attention."

Echoing that idea, Clear Thinkers favorite James Hamilton writes about one of the underlying economic reasons for food riots that are occurring in developing nations in some parts of the world:

As a result of ethanol subsidies and mandates, the dollar value of what we ourselves throw away in order to produce fuel in this fashion could be 50% greater than the value of the fuel itself. In other words, we could have more food for the Haitians, more fuel for us, and still have something left over for your other favorite cause, if we were simply to use our existing resources more wisely.

We have adopted this policy not because we want to drive our cars, but because our elected officials perceive a greater reward from generating a windfall for American farmers.

But the food price increases are now biting ordinary Americans as well. That could make those political calculations change, and may present be an opportunity for a nimble politician to demonstrate a bit of real leadership. I notice, for example, that although Senator Barack Obama (D-IL) was among those who voted in favor of the monstrous 2005 Energy Bill that began these mandates, Hillary Clinton (D-NY) and John McCain (R-AZ) were among the 26 senators who bravely voted against it.

Wouldn't it be refreshing if one of them actually tried to make this a campaign issue?

Sigh. Read the entire post.

Posted by Tom at 12:01 AM | Comments (0) |

April 13, 2008

The block of the chip passes away

Arnold Kling of EconLog has long been a Clear Thinkers favorite, particularly in the area of health care finance. That was the subject of this recent post regarding Arnold's coordination of health care for his elderly father, Merle Kling, who passed away on Tuesday.

Take a moment to read Arnold's touching post on his father, who was quite a remarkable fellow. Arnold is a chip off a very solid old block.

Posted by Tom at 12:01 AM | Comments (0) |

March 20, 2008

The ignorance of costs

I don't particularly like the distraction of talking on a cell phone while driving, so I avoid it as much as possible. It's also not enjoyable avoiding other drivers who are not paying full attention while chatting on the cell phone.

However, I also recognize that cell phone usage while driving has facilitated beneficial communication exponentially. Thus, whenever I see creeping paternalism such as this, it gets my attention:

West U. eyes ban on calls while driving
Cell phones in school zone lead to 'near misses'

Houston-area officials are watching West University Place as elected officials there consider banning cell phones in the school zone near the community's lone elementary campus.

The move would put the affluent suburb on the map as the first Houston-area municipality to take a stand against drivers talking on their phones as children travel to and from school. The community is following in the footsteps of Dallas and several North Texas suburbs that have recently approved bans. [.  .  .]

West University proposed the ban earlier this month after conducting a study to determine how often drivers were spotted chatting on their cell phones in active school zones. Over three weeks in February, police counted 297 drivers on their phones.

Six of the drivers violated traffic laws by creeping into intersections while children and crossing guards were present, West University police Lt. Thad Olive said.

Although neither Olive nor HISD police officials could recount an incident when a child was seriously injured in a school zone because of a driver on a cell phone, they said this type of ordinance could prevent tragedy.

"There's been a lot of near misses," Olive said. "It definitely has distracting effects. If I can take one element of risk away from the children in that school zone, then it's a good thing." [.  .  .]

Kenneth Jones, who oversees HISD's crossing guard department, said he'd love to see the ban enacted citywide.

"If you've got that phone in your hand, I don't think you have your mind 100 percent on driving," he said.

Kelli Durham, an assistant superintendent in the Cypress-Fairbanks school district, was one of several educators to suggest widening the ban to include all drivers, regardless of whether they're in school zones.

"If cell phones shouldn't be used for safety reasons in school zones, should they be used anytime on our streets and highways?" Durham asked.  .  .  .

So, if "one element of risk" can be taken away from children in a school zone, then that's sufficient justification for regulation of a hugely beneficial communication device? Does this mean that the next initiative will be to ban conversation between a driver of a car and a passenger while in a school zone? That's also distracting, perhaps even more distracting than talking on a cell phone. Should we also ban distracting billboards, signs, automobiles and lights while we're at it?

What is most disturbing about all this is the utter ignorance of the bureaucrats proposing these regulations of the cost of the regulation relative to the benefit. Wouldn't it be prudent at least to perform a meaningful cost-benefit analysis of the probable impact of outlawing a valuable improvement in communications before foisting yet another regulation on the public?

Posted by Tom at 7:44 PM | Comments (2) |

March 17, 2008

"America’s booming opportunity city"

Each time local politicians in Houston engage in bad policy initiatives such as the ones noted here, my wish is that they would be required to read this fine Joel Kotkin/The American op-ed entitled Lone Star Rising -- How a combination of ambition, entrepreneurship, trade, and tolerance made Houston America’s booming opportunity city. Kotkin has been studying Houston over the past several years and he provides a perceptive outsider's view on why Houston grew into such a vibrant place:

First appearances—then and even now—often didn’t help. Early visitors were struck by the settlement’s largely shack-like housing. And in those days, long before air conditioning, there was the Houston weather, which often combined scalding temperatures with soupy humidity.  .  .  . Yet the Allen brothers had not really chosen so badly. Houston possessed powerful assets. It sat on an enormous fresh-water aquifer, which today guarantees a water supply in a way that other growing cities, such as Phoenix and Las Vegas, can only dream about. The area also abounded in natural resources such as timber and rich soil that was ideal for growing cotton. And when oil drillers hit a gusher in Spindletop, about 90 miles from Houston in East Texas, in 1901, Houston suddenly found itself positioned as the nearest city to some of North America’s richest oil and gas reserves.

None of this, however, adequately explains Houston’s ascendancy. Other cities enjoy better locations for shipping, richer agricultural resources, or similar proximity to oil fields. The answer, I have come to understand as I have worked in Houston as a reporter and consultant, echoes something that the late Soichiro Honda once told me: “More important than gold and diamonds are people.” This critical resource, more than anything, accounts for Houston’s headlong drive toward becoming not only the leading city of Texas and the South, but also a player on the global scene: it is emerging as one of the world’s great cities.

Read the entire op-ed and learn a lot about what makes Houston such a special place to live.

Posted by Tom at 6:46 PM | Comments (1) |

February 27, 2008

Dick Armey on immigration

I must admit, I never thought that former House Majority Leader Dick Armey would sound like a statesman to me. I was wrong. Watch the video to find out why.

Posted by Tom at 12:10 AM | Comments (0) |

February 25, 2008

Rate Congress on free trade

Check out this excellent Cato Institute website that allows you to evaluate the voting record of each member of the past six sessions of Congress on free trade issues.

Posted by Tom at 12:00 AM | Comments (0) |

February 21, 2008

Hope for a hog solution?

Texas' feral hog problem has stymied many a smart scientist over the years, but it appears that the Aggies may have discovered a possible solution(H/T: Craig Malisow)

If you're a land owner and animals such as coyotes or wild pigs are driving you hog wild, help may soon be on the way to control their numbers in a humane way - in the form of a birth control pill for animals being developed at Texas A and M University's College of Veterinary Medicine and Biomedical Sciences. The concept would be to get it to wild animals through baited food, researchers say. [. . .]

n Texas, feral hogs have become a severe nuisance to farmers and ranchers, and the state has an estimated 3-4 million feral hogs, by far the most in the country.

Gig'em Ags!

Posted by Tom at 12:00 AM | Comments (0) |

February 4, 2008

A birthday wish

Don't miss Greg Mankiw's birthday wish:

My birthday wish is for all of us to stop asking what the government can do for us today. Instead, we should focus on what we can do together to prepare the economy for our children and grandchildren. That means getting ready to care more for ourselves in old age, perhaps by retiring later, perhaps by saving more. I hope that when I celebrate my 100th birthday in 2058, my descendants won�t look upon Grandpa and his generation as the biggest economic problem of their time.

Read the entire op-ed. Salient thought for a political season.

Posted by Tom at 12:05 AM | Comments (0) |

January 22, 2008

Birds of a feather?

Perhaps coincidentally, I came across the following two news reports consecutively yesterday morning. First from this BBC article:

Venezuelan President Hugo Chavez has threatened to nationalise farms, in an effort to tackle food shortages.

Government controls keep food prices low in shops to help even the poorest Venezuelans feed themselves.

But some farmers prefer to sell their produce in neighbouring countries where prices are higher, leading to shortages of bread, milk, eggs and meat.

In his weekly television show, Mr Chavez said farmers doing this should have their farms "expropriated". [. . .]

On Saturday, Mr Chavez threatened to nationalise banks which did not give enough low-interest loans to farmers.

Banks are not allowed to charge farmers interest higher than 15% - even though inflation last year ran at 22.5%.

"The bank that fails to comply must be sanctioned, and I am not talking about a little fine," he said. "The bank that does not comply must be seized." [. . .]

Critics say complying with government policy could drive some businesses into bankruptcy.

Then, a little closer to home, came this NY Times article on Democratic Party Presidential candidate Hillary Clinton's views on government control of the economy:

Senator Hillary Rodham Clinton said that if she became president, the federal government would take a more active role in the economy to address what she called the excesses of the market and of the Bush administration.

. . . Mrs. Clinton put her emphasis on issues like inequality and the role of institutions like government, rather than market forces, in addressing them.

She said that economic excesses � including executive-pay packages she characterized as often �offensive� and �wrong� and a tax code that had become �so far out of whack� in favoring the wealthy � were holding down middle-class living standards. [. . .]

�If you go back and look at our history, we were most successful when we had that balance between an effective, vigorous government and a dynamic, appropriately regulated market,� Mrs. Clinton said. �And we have systematically diminished the role and the responsibility of our government, and we have watched our market become imbalanced.�

She added: �I want to get back to the appropriate balance of power between government and the market.� [. . .]

�We�ve done it in previous generations,� she said, alluding to large-scale public projects like the interstate highway system and the space program. �But we�ve got to have a plan.� [. . .]

�Inequality is growing,� Mrs. Clinton said. �The middle class is stalled. The American dream is premised on a growing economy where people are in a meritocracy and, if they�re willing to work hard, they will realize the fruits of their labor.�

So, on one hand, Chavez is demonstrating that, even with the economic benefit of having high-priced oil to export, a government can still lower the living standards of its citizens if it tries hard enough.

On the other hand, Hillary does not appear to recognize that her proposals are quite capable of accomplishing the same thing within the world's most dynamic economy.

Posted by Tom at 12:10 AM | Comments (0) |

The Thompson plan

Last week, Ironman over at Political Calculations reviewed the Giuliani income tax simplification plan. This week, he tackles the even more impressively simple tax simplification plan advocated by GOP Presidential candidate, Fred Thompson.

Of course, as if on cue, Thompson dropped out of the GOP race today.

Posted by Tom at 12:00 AM | Comments (0) |

January 16, 2008

What's missing in the tax debate

Wouldn't it be nice if at least one of the Presidential candidates would embrace the basic reform that is really needed in the U.S. tax system? Simply simplification. Previous posts on tax simplification issues are here. Interestingly, one of my least favored Presidential candidates -- Rudy Giuliani -- has the best tax simplification proposal that I've seen so far during the campaign.

Posted by Tom at 12:00 AM | Comments (2) |

January 14, 2008

More costs of prohibition

Geez, could legalization and regulation really be worse than this?

Posted by Tom at 12:00 AM | Comments (0) |

December 19, 2007

The pixie dust theory

It has something to do with subsidies for ethanol.

Posted by Tom at 12:00 AM | Comments (0) |

December 13, 2007

Putting $14 trillion in perspective

Mark Perry provides this creative map that places the enormous size of the U.S. economy in a useful perspective.

Posted by Tom at 12:05 AM | Comments (0) |

December 12, 2007

It could happen here

This earlier post noted that a not very flattering analysis of the economic debacle that is the San Jose, California light rail system might very well describe Houston's light rail system in a few years if we don't come to our senses. Following up on those thoughts, this Randal O'Toole post reviews a San Jose Mercury News newspaper article that reports on the state of the San Jose transit system on the 20-year anniversary of light rail there. It's not a pretty picture:

Santa Clara County taxpayers pay as much or more for transit, yet their transit system carries fewer riders, than almost any system with light rail in the country. �The heavy tax commitment to transit,� the article notes, �means fewer dollars for road upgrades.� Especially since a half-cent sales tax that voters approved of for roads was hijacked by the transit agency in 2000. [. . .]

�The light-rail system should be considered a 100-year investment,� says San Jose�s director of transportation planning. That shows how shallow planners are: within another 20 years, that investment will be completely worn out and San Jose will have to decide whether to scrap it or spend another few billion replacing it.

. . . [the] Silicon Valley, with its jobs spread out more thinly than almost anywhere else in the country, was unsuited for large-bus transit service. So to go from buses to light rail, which requires even more job concentration to work, was a mistake. Having made that mistake, VTA now wants to build BART, which requires even more job concentration. . .

Light rail was the wrong solution for San Jose in 1987, it is the wrong solution today, and it still will be the wrong solution in 2027. We can only hope that San Jose�s leaders and opinion makers, including the Mercury-News, come to their senses by then and decide to junk the whole thing.

Meanwhile, in Houston, as our local "leaders" continue planning to spend upwards of $4 billion on expansion of a light rail system that relatively few citizens of the area will use, alternative transit projects that make much more sense are relegated to discussion in the blogosphere.

The Houston area is a big place with a vibrant and resilient economy. But Metro's light rail system is the one urban boondoggle going right now that has the potential to become a serious economic drag on the local economy in the not-to-distant future. It's far past time that our local leadership noticed and started taking actions to hedge this risk.

Posted by Tom at 12:10 AM | Comments (2) |

November 20, 2007

A real insurance fraud

I've been meaning to pass along this James Q. Wilson/WSJ ($) op-ed that lucidly describes the crisis that has developed in property insurance markets along the Gulf Coast as a result of the litigation risk and attendant cost of clearly inapplicable claims being asserted against property insurance policies:

When Hurricane Katrina hit our southern coast, it was the worst natural disaster in American history, killing 1,800 people, forcing more than a million to evacuate the area, and putting four-fifths of New Orleans under water. In the struggle to recover from this event, people turned to their insurance companies for help. Thousands of claims were handled, but for some people there wasn't any coverage. The problem was they were not insured against flooding.

Insurance companies' policies are quite clear on this, and state insurance departments, including the ones in Mississippi and New Orleans, have approved these rules. The homeowners' policy issued by State Farm, for example, says that water damage from a flood, waves, tidal waves, or a tsunami are not covered. . . .

The reason for the exclusion of water damage is quite clear: Hardly any insurance company wants to encourage people to build or occupy structures in places where such damage is likely. If they did allow this, either the company would go bankrupt from losses it could not pay or it would have to charge a premium so high that hardly anyone could afford the insurance. Even without water-damage coverage, insurance companies paid out around $40 billion to Katrina victims. [. . .]

Not content with these policies and rules, trial lawyers and politicians in Mississippi demanded that insurance companies should be required to pay for flood losses even though they were not covered by the policies. Richard "Dickie" Scruggs, a veteran of class-action suits, and Mississippi Attorney General Jim Hood worked together to create a lawsuit that would retrospectively ban the flood exclusion rule. (Mr. Scruggs was a major source of campaign money for Attorney General Hood.) At the same time, Rep. Gene Taylor from Mississippi urged Congress to require a retroactive payment of flood insurance. Never mind what the homeowners' insurance policies said or what their coverage was, demanding money to which they were not entitled became "good public policy." [. . .]

In time some measure of sanity was restored. A federal district court judge upheld the flood exclusion in insurance policies, a view that was affirmed by the Court of Appeals for the Fifth Circuit. More recently, the Fifth Circuit has affirmed that there is no coverage when an excluded peril (such as flooding) and a covered one (such as windstorms) both contribute to the same damage. A Louisiana state judge agreed that policies not written to provide flood insurance did not, in fact, provide it. . . .

But the return of sanity was of short duration. In June Mr. Scruggs filed a lawsuit against State Farm saying that it engaged in racketeering, and Attorney General Hood filed a new civil lawsuit -- and then followed up with another grand jury investigation contrary to his prior agreement with State Farm. One wonders how its claims adjusters feel when they are told that they are no better than members of the Mafia.

In light of all this, State Farm announced earlier this year that it would no longer sell new homeowners' policies in Mississippi, not to punish people there but because politicians had made it impossible to do business in an orderly way. In response, Attorney General Hood demanded that the governor order State Farm to write new policies. Gov. Haley Barbour replied, quite reasonably, that he does not have the authority to tell a private company that it must do business in his state. There will no doubt be congressional investigations of the insurance business because it did what it told people it was doing.

And Hood calls himself a public "servant" (see earlier post here)?

Posted by Tom at 12:10 AM | Comments (0) |

November 19, 2007

Transit survey raises more questions than it answers

Isn't it interesting the different reactions that Anne Linehan, Charles Kuffner and Tory Gattis had to the 2007 Houston Area Survey regarding transit options? The Chronicle and other light rail enthusiasts immediately seized upon the survey as evidence that Houston-area residents want to dump more money into the light rail money pit.

But the problem with such surveys is that they generally ask people questions in a vacuum and do not address Peter Gordon's three elegantly simple questions regarding economic choices:

1) At what cost?

2) Compared to what? and

3) How do you know?

For example, assume for a moment that the persons surveyed were informed of the fact that the average urban freeway lane costs about $10 million per mile and that the average light rail line costs about $50 million per mile while carrying only one-fifth as many people as the freeway lane. And these are only average figures -- as Randal O'Toole recently pointed out, Seattle's recently rejected light rail expansion was projected to cost $250 million per mile, a whopping 125 times more expensive at moving people than a freeway.

Moreover, let's also assume that the persons surveyed are informed that the expenditure of a billion or so of public money on expanding a poorly-used light rail system has real consequences, such as leaving inadequate funds to make improvements to Houston's infrastructure that would dramatically decrease the risk of death and property damage from flooding. Or whether the billion or so being flushed down the light rail drain would be better used to fix various area traffic "hotspots" where accidents or bottlenecks occur with high frequency.

No one knows for sure, but my bet is that the survey results would be dramatically different if the foregoing costs and alternatives were included as a part of the survey. It's a shame that neither the City's current leaders nor the mainstream media are asking the simple questions set forth above that would generate a meaningful cost-benefit analysis and ensuing well-informed debate regarding continued investment in expensive public works projects such as Metro's light rail system.

Instead, we get this:

Metro executive vice president John Sedlak led off [a presentation to the Transportation Policy Council, a group of elected officials and agency staffers that sets priorities for transportation spending in the 13-county Gulf Coast planning region] with a slide show describing the [proposed Metro University light rail line] project and told the panel its approval was needed so Metro could get federal funding and start engineering work.

If there was a short delay, Holm asked, "What would be the consequence?"

Sedlak replied that the project is on "an aggressive schedule" and that a delay "would send a message to Washington that there are issues with our overall program."

Holm asked why Washington would think there were issues and not just loose ends to tie up.

"They watch every activity that takes place very carefully," Sedlak said. "The federal government is aware we are having this meeting today."

Holm asked what the application deadline was. Sedlak said it was "in the month of December."

"If the delay was just a few days, would it jeopardize the funding of the entire program?" Holm asked.

"I truly believe it could," Sedlak replied.

Kemah Mayor Bill King had questions, too.

How many more passengers would the rail carry than the buses on Richmond do now?

Sedlak said he did not know, but Metro could get him the answer.

King asked how the line would impact traffic on Richmond.

Sedlak said there would be some negative effects, but the finished line should "take vehicles off the street." Numerical estimates are in the line's environmental impact document, he said.

Holm spoke again, her voice a little shaky.

"There are cities," she said, "that have never been turned down for a funding request. It's not because they agree on everything they want. It's because they do their due diligence and they do their battles at home.

"We need to still build consensus in this community. We need to be able to walk hand-in-hand in supporting a project," she said.

Update: As usual, Tory Gattis has additional insightful thoughts.

Posted by Tom at 12:05 AM | Comments (2) |

November 16, 2007

The nation's worst-managed transit system

Tom Rubin is an accountant who has audited many transit agencies and is an expert in transit system accounting. Randal O'Toole channels a Rubin presentation in describing the nation's worst-managed transit system:

Participants in the Preserving the American Dream conference were encouraged to ride [the] light-rail line to one of the conference events. What they saw was not a pretty picture. Trains were infrequent (one of the supposed advantages of rail is that they run so frequently that riders don�t need to consult schedules), the in-street tracks are dangerous (one conference goer slipped on a rail and fell into a curb), and the fellow patrons are not always people you want to be around (several conference goers were treated to the scene of someone becoming violently ill on board, leading one of our members to say, �So that�s what they mean by �vibrant streets��).

Beyond these impressions, Rubin observes that [the light-rail system] has �the worst operating statistics of any American transit operator.� The reason for this, he says, is that [the area] � being built mostly after World War II � is one of the most spread-out urban areas in the country. Not only are people spread out, but jobs are spread out, with no job concentrations anywhere.

This makes large buses particularly unsuitable for transit because there is no place where large numbers of people want to go. So what was [the transit system's] solution when its bus numbers were low relative to other transit agencies? Build light rail � in other words, use an expensive technology that requires even more job concentrations.

Now it has one of the, if not the, poorest-patronized light-rail systems in America. So what is its solution? Build heavy rail, a technology that requires even more job concentrations.

What transit system are O'Toole and Rubin describing? Well, it sure sounds like it could be Houston's, but it's not. They are talking about San Jose, California's system.

But how long do you think it will be until Houston's light rail system is in similar shape?

Posted by Tom at 12:00 AM | Comments (0) |

October 22, 2007

Continuing to rationalize a boondoggle

The big transit news in these parts last week was the announcement that the Metropolitan Transit Authority's board Metro's board approved the final route for the east-west University line and decided to deploy the much more expensive light rail rather than bus rapid transit in four other transit corridors. Kevin Whited, Lou Minatti and Tory Gattis were among the local bloggers commenting on this development.

What is perhaps most galling about all of this is the sheer lack of any perspective from the local mainstream media regarding the dubious nature of Metro's urban economics. The Chronicle article on Metro's announcement is typical of the vacuity of media coverage of Metro -- the fact that light rail systems are notoriously uneconomic and underused relative to cost is not even mentioned. Meanwhile, Metro continues to insist upon investing billions of tax proceeds in an inflexible light rail system that will cost millions in additional annual tax proceeds to subsidize. To make matters worse, the money that Metro is throwing away on what will be a underutilized and expensive light rail system would go a long ways toward dramatically ameliorating the Houston area's flood control problems and traffic hotspots, two public works projects that would provide far more benefit for far more Houston area residents than the light rail project. In short, wasting huge amounts of public funds on a boondoggle simply does not occur in a vacuum. Such waste will negatively impact more pressing public works projects in Houston for decades.

Transit expert Randall O'Toole recently published this Cato Insitute policy analysis, Debunking Portland (related blog posts here and here), on the failures of Portland�s light rail system, which was built in a far more densely-populated area than Houston and is often touted by light rail advocates as an example of one of the rare successful systems. As O'Toole points out, the Portland system has not been a success. 9.8% of Portland-area commuters took transit to work before the region built its light rail system, while today, just just 7.6% of the area commuters use the system. The fact that Portland�s light rail system led to billions of dollars in economic development is largely a ruse -- such development received billions of dollars in subsidies and, before the city started offering those subsidies, not a single transit-oriented development was built along the Portland light rail line. Finally, light rail cost overruns forced Portland to raise bus fares and reduce bus service.

As O'Toole observes, that�s considered a success?

Posted by Tom at 12:05 AM | Comments (0) |

October 18, 2007

Kling on GMU Economics

Arnold Kling provides this interesting TCS Daily op-ed on the innovative George Mason University Economics Department, whose members have done a remarkable job over the past several years promoting the understanding of economics issues through the blogosphere. As Kling noted earlier here:

I like to put it his way: at [the University of] Chicago, they say "Markets work well. Let's use markets." At MIT, they say "Markets fail. Let's use government." At GMU, they say "Markets fail. Let's use markets."

Posted by Tom at 12:00 AM | Comments (0) |

September 25, 2007

Selling a house?

University of Chicago economist Austan Goolsbee provides common sense advice on sellling a house:

So by being hung up about whether your condominium will sell for what you paid for it, you aren�t just driving yourself crazy trying to get a buyer. You may be threatening the very performance of the economy and driving up the unemployment rate � provided that many others behave in a similar way.

What is to be done? Well, if you are holding out for an above-market price to recoup your losses, perhaps you would do well to hear the advice that Professor [Christopher] Mayer gives his own family members.

�If you want to sell your house then you list it at the market price and you sell it,� he said. �If you don�t really want to sell then don�t put it on the market. But don�t say you want to sell and then set the price so high that you spend the year cleaning up every morning, having people walk through your living room and look in your medicine cabinets and reject you. That�s just painful � and expensive.�

His research offers a simple lesson for everyone out there waiting for a high price to push them back into the black: Get real.

The folks over at Political Calculations take Goolsbee's advice one step further and provide a handy calculator for determining the true value of a house.

Posted by Tom at 12:05 AM | Comments (0) |

September 4, 2007

DeLong on the rise from poverty

Yeah, things might be a bit testy lately in the credit markets, but Brad DeLong does a magnificent job of reminding us just how much better we have it than folks who lived not all that long ago:

. . . in 1905 an anonymous American college professor--"G.H.M."--wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is his salary: he claimed that the "average college professor�s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about $2,000" in the dollars of that day, 1900. Yet Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year (or $451 taking account of the hazards of unemployment): $2,000 was four times average of GDP per worker at the turn of the century. In order to match turn-of-the-century professors in terms of income relative to the national average, a professor today would have to make an academic salary of $300,000�a height rarely attained, and far above any average.

There is much more, so don't miss it. DeLong's chapter is a vivid reflection of the power of compounding economic growth. Sort of makes you wonder about those folks who advocate shaving a bit of economic growth here and there to promote some special interest. Over a century, compounding that small loss of economic growth can have a huge impact.

Posted by Tom at 12:15 AM | Comments (0) |

You don't say?

This NY Times article reports on more research that goes into the "who needs a research project to prove that?" category:

. . . the broader question � whether police officers in some towns are motivated by fund-raising as well as safety when writing traffic tickets � has been examined systematically by others. Michael D. Makowsky, a doctoral student in economics, and Thomas Stratmann, an economics professor, both at George Mason University, studied the issue in a recent paper, �Political Economy at Any Speed: What Determines Traffic Citations?�

They examined every warning and citation written by police officers in all of Massachusetts, excluding Boston, during a two-month period in 2001 � over 60,000 in all. Their conclusion wasn�t shocking to an economist: money matters, even in traffic violations. They found a statistical link between a town�s finances and the likelihood that its police officers would issue a speeding ticket. The details are a little sticky, but they show that tickets were issued more often in places that were short on cash, and that out-of-towners received tickets more often than drivers with local addresses.

Posted by Tom at 12:00 AM | Comments (0) |

August 31, 2007

On the Billable Hour

A couple of interesting posts recently on the scourge of the business community -- the billable hour -- gives me the opportunity to pass along the cartoon on the left from the always-insightful Stuart M. Rees of Stu's Views.

First, local law school blawger Luke Gilman provides a compendium of links and analysis to his comprehensive review of the state of the billable hour. Meanwhile, Peter Lattman over at the WSJ Law Blog provides this post on the breaking of the heretofore sacrosanct $1,000-an-hour billing rate, which includes local attorney Steve Susman's classic observation that he charges in excess of a grand per hour "to discourage anyone hiring me" on an hourly basis.

Me, I continue to subscribe to the theory that I won't charge an hourly rate that is higher than I could afford to pay if I need to hire an attorney. ;^)

Posted by Tom at 12:15 AM | Comments (0) |

Property rights, economics and AIDS

Peter F. Schaefer explains how economics and property rights in African nations combine to facilitate the proliferation of the AIDs virus:

However no one in the US government and few in the anti-AIDS community are dealing with a major issue in the transmission of AIDS called "property stripping." Since the cure for property stripping is cheap, technically quite easy and would have an enormous secondary impact on economic growth (poverty is a hidden vector of AIDS) it would seem like a sure thing for attention. But it is virtually ignored.

On World AIDS Day two years earlier Dr. Jim Yong Kim - [head of World Health Organization's HIV Division, Kevin] De Cock's predecessor - said,

"In sub-Saharan Africa almost 60 percent of AIDS sufferers are women [and] in some settings ... we are finding ... that the number one risk factor for women in becoming infected with HIV is marriage. [And] married women have the highest rates of HIV infection. We have to take on some of the most fundamental and difficult cultural and social issues that are definitely affecting the way this epidemic is spreading. And ... if we can take on things like for example, property rights [so] women can inherit the property of their husband if [he] dies, that really reduces the likelihood of them getting into sex work for example. If we can ... change laws, change fundamental beliefs and culture by [getting] people the right kinds of prevention messages we will have done a lot not just for HIV AIDS but for issues like gender equity that have been with us forever."

In the scholarly literature, the traditional practice of the husband's family inheriting all his property after he dies is called "property stripping." In normal times, this had some logic; the husband's family had responsibility for the widow and her children, a brother often taking her as a second wife and so assuming responsibility for his nieces and nephews.

But things have changed. In the time of AIDS, the widow is likely also infected with the HIV virus, though not yet sick since her husband often gets it first and the disease is less advanced in her when her husband dies. So even if her brother-in-law hasn't died from AIDS himself, he is not willing to marry someone infected with HIV. And often the brother-in-law himself is sick or dead. Nevertheless, the family often still follows custom and seizes her house and farm and so she has no recourse but to turn to menial jobs, begging or prostitution. And since she was infected later, she may have years to spread her illness to her sex partners which are commonly many a day.

[A] Washington Post editorial by Richard Holbrooke . . . noted that increased testing and detection efforts was the "only effective prevention strategies can stop the spread of AIDS." He goes on to point out that "...monogamous women [are] thrown out of their homes for a disease they got from their husbands."

Read the entire article, which is another reminder that there are few simple solutions to this terrible disease.

Posted by Tom at 12:05 AM | Comments (1) |

August 9, 2007

An easy prediction

Buried in the Chronicle's article on the Metropolitan Transit Authority's latest propaganda release regarding the proposed University light rail line is the following snippet:

The study estimates say the Cummins-Wheeler-Elgin combination is the least expensive of the routes considered, at $715 million, compared with $836 million for the Southwest Freeway-Alabama combination.

Prediction: Both routes will cost substantially more than the estimates and the revenue generated from the ridership will not come close to meeting the operating expenses of the line.

Posted by Tom at 12:00 AM | Comments (0) |

August 6, 2007

In praise of credit snobs

Earlier posts here and here noted Alex Tabarrok's clever characterization of folks who criticized development of new lending vehicles for folks with low incomes or bad credit. Thus, this Economist article about a recent study on making loans to the poor caught my eye. Check out the conclusion of the study:

Contrary to the fears of the credit snobs, the readier access to credit did not tempt the new customers into a debt trap. Over 15-27 months, those reconsidered for a loan were more likely to have a formal credit score. And this score suffered no harm as a result of their easier borrowing.

Overall, the study suggests that profit-seeking lenders do not deserve the fate Dante reserved for them. Far from tempting the poor into unpayable debt, they help them keep their jobs, put food on the table, and build up a credit history. The authors show that poor people can make good use of borrowed money, even if they sometimes struggle to demonstrate this creditworthiness to lenders. If not hell, that is a kind of purgatory.

Read the entire article.

Posted by Tom at 12:05 AM | Comments (1) |

August 4, 2007

Latest on the Las Vegas Monofail

With the crunch worsening over the past several weeks in the credit markets, the bankruptcy reorganization forces are gearing up and eyeing potential debtors. Well, in this Heartland blog post, Thomas A. Rubin predicts one of the probable debtors that will need serious reorganization -- the Las Vegas Monorail Company (prior posts here):

In short, the Las Vegas Monorail appears headed straight down the path to bankruptcy by approximately the year 2010 with nothing on the horizon that could prevent it � other than, perhaps, an ill-conceived government bailout or the absolute dumbest group of investors/suckers in recent financial history.

This result should come as a surprise to no one. Over the last several decades, I know of only one U.S. rail transit system, or quasi-transit system, that has come remotely close to covering its operating costs out of fares and other operating revenues (the Seattle Monorail), and none that have made any contribution what-so-ever to capital costs. However, the Las Vegas Monorail promoters assured everyone that operating revenues would not only cover operating costs, but would also cover all the debt service costs of the bonds sold to pay for the construction of the Monorail. [. . .]

One hopes that someone, somewhere, in a public sector decision-making capacity will tell the various casinos along the right of way that, if they want to see it continue to operate, well, it is all theirs.

Read the entire post, which lays out the public risks involved in even a privately-financed boondoggle of this nature. Meanwhile, this clever Political Calculations post comes up with an entertaining solution to achieving the same benefits of a light rail system at a far cheaper cost.

Posted by Tom at 12:26 AM | Comments (0) |

July 16, 2007

Fair tax?

Greg Mankiw provides this particularly lucid analysis of the current status of the progressive U.S. income tax system. Keep it handy when listening to the demagoguery over tax rates that will take place during the upcoming 2008 Presidential campaign.

Posted by Tom at 4:05 AM | Comments (0) |

July 15, 2007

Katrina evacuees and the enduring nature of poverty

In the summer of 2005, tens of thousands of citizens from the New Orleans area relocated to Houston and other cities in the aftermath of Hurricane Katrina, most of whom never returned to their former home. A substantial number of those evacuees were poor and largely unemployed in the depressed New Orleans-area economy that existed even prior to the destruction of Katrina. Thus, the hope was that those evacuees would be able to improve their living standard by starting anew in economically vibrant areas such as Houston.

Unfortunately, that has not been the case. As this Jacob Vigdor post notes, research on the Katrina evacuees is indicating that the syndrome of poverty is extremely difficult to change:

Should governments help residents of depressed regions move towards more prosperous areas? Evidence from Katrina evacuees suggests that such efforts are likely to fail. The fortunes of long-term evacuees are almost completely unrelated to the characteristics of the cities to which they relocated. [. . .]

What can the world learn from the experiences of Hurricane Katrina evacuees? As indicated in other recent research carefully examining the impact of residential location on employment, moving a poor, undereducated citizen from a declining urban area to the middle of a vibrant economy is not likely to be a quick, cheap way to find him or her a job. While participants in a voluntary relocation programme would almost certainly be exposed to less personal trauma than Katrina evacuees, the survival instinct alone appears to be insufficient to guarantee success. Particularly in nations with social welfare systems more generous than the American model, the result of any such programme seems quite likely to increase, rather than assuage, drains on the public budget in the short-to-intermediate term.

Posted by Tom at 12:41 AM | Comments (3) |

July 6, 2007

The Absorption Nation

In this TCS op-ed, Don Boudreaux points out an incongruity in the current political debate over immigration:

In the Declaration of Independence, Thomas Jefferson complained that King George III "has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands."

In a related blog post, Professor Boudreaux asks the following:

Why is it that today, the wealthiest time in our history, so many Americans fear immigration? Why do so few Americans today share Jefferson's understanding that more free people in America mean an even more prosperous America?

Read the entire op-ed.

Posted by Tom at 4:20 AM | Comments (3) |

July 5, 2007

EZ-Tag, EZ-Increase

So, according to this NY Times article about MIT economist Amy Finkelstein's research, EZ-Tags for electronic payment of tolls along tollroads makes it easier for government to increase the tolls (Tyler Cowen provides further analysis).

Everywhere but Houston, that is.

Posted by Tom at 4:15 AM | Comments (0) |

July 2, 2007

Will Houston learn from L.A.'s mistakes?

As noted earlier here and here, the Houston metropolitan area shares many of the same characteristics of the Los Angeles metro area, albeit with far lower density of population. Although rail transit is typically inefficient in areas of relatively low density of population, that has not stopped Houston's Metropolitan Transit Authority from spending enormous sums on inefficent light rail for Houston and proposing even more. One of the common rationalizations used by Metro for such boondoggles is that the transit lines will promote development of more densely-populated housing around the rail lines that will ultimately generate enough mass transit users to justify the enormous cost. Someday.

So, given the L.A. region's greater density of population, has rail transit generated such housing along the rail lines there? Well, not according to this front page Los Angeles Times article entitled "Near the rails but still on the road -- Research casts doubt on the region's strategy of pushing transit-oriented residential projects to get people out of cars":

In Los Angeles alone, billions of public and private dollars have been lavished on transit-oriented projects such as Hollywood & Vine, with more than 20,000 residential units approved within a quarter mile of transit stations between 2001 and 2005.

But there is little research to back up the rosy predictions. Among the few academic studies of the subject, one that looked at buildings in the Los Angeles area showed that transit-based development successfully weaned relatively few residents from their cars. It also found that, over time, no more people in the buildings studied were taking transit 10 years after a project opened than when it was first built.

To which USC urban economics professor Peter Gordon replies:

I could not have said it any better. Well actually, some of us did -- over 30 years ago.

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 fatal conceit that Hayek wrote about many years ago.

Yesterday, the same newspaper (front-page, below the fold) included "Will traffic-weary L.A. heed the toll call? ... The land of the freeway is poised to become a little less free ..."

What will they think of next?

Will Houston's leaders listen? Incidents such as this do not make me optimistic that they will.

Posted by Tom at 4:45 AM | Comments (0) |

June 21, 2007

Want a season ticket? Take out a mortgage

Conde Nast's Megan Barnett reports on how the lion's share of the new Yankee Stadium is apparently going to be financed. The idea is that the seats in the new Yankees Stadium will be sold in advance to investors who will own them in perpetuity. Morgan Stanley and its partner, a start-up entity called Stadium Capital Financing Group, are hoping that their structure becomes the accepted way of privately-financing sports stadiums. They have even applied for a patent regarding the concept, which seems like a stretch. Here's how it would work:

Fans would buy seats for a designated period of time and finance them much like a mortgage. Pricing mechanisms can vary, but the most appealing option for buyers might be a 30-year loan with an annual payment equal to the current price of a season ticket. In exchange, the seat becomes real property, equivalent to, say, a condominium. The team (or university or other owner) receives the principal amount of the loan up front, to put toward construction costs. This arrangement is different from seat licensing, which gives the holder the right to buy a season ticket for a specific seat. . . . Under [the] system, people own seats, not shares of a team. Say, for instance, the current price of a season baseball ticket is $3,240. A 30-year loan at 6 percent interest with an annual payment of $3,240 results in a principal amount of $45,000. Even if the price of the seat doubles in the next 20 years, the seat owner still pays $3,240. Investors will have the option of making annual payments over 30 years, paying the entire amount up front, or something in between. Owners can also sell their seats at any time for market value, but rest assured�the team will get a cut of any profits.

At least one expert on financing stadiums, though, does not believe the financing technique will be all that earth shattering:

Roger Noll, a Stanford University economics professor who has written extensively about stadium financing, says that such an approach might make a dent in required public funding but will never replace it. Noll points out that most teams can't afford to sacrifice future revenues in order to pay for their ball fields. "At the end of the day, stadiums are not good investments," he says. "This isn't going to be a revolution."

H'mm, think this might work to defray the cost of this proposed boondoggle?

Posted by Tom at 4:15 AM | Comments (0) |

Saving for a boondoggle

Buried in this Chronicle article about increasing tolls on the Harris County toll roads and congestion on the Westpark Tollroad is the following nugget about yet another of the Metropolitan Transit Authority's decisions that is contrary to its purpose of improving mobility in the Houston metro area:

Six months after the four-lane Westpark Tollway opened in 2004, traffic backups began occurring in certain areas, said Peter Key, toll road authority deputy director. Congestion has worsened since then.

The toll road authority would have preferred building a six- or even eight-lane tollway, Key said. The Metropolitan Transportation Authority, which owned the land in the area, was willing to sell only enough for a four-lane tollway, he said. Metro wanted to keep the remaining land in case it builds a commuter rail line along the tollway, Key said.

Metro vice president John Sedlak said Metro has considered using the corridor for rail for several decades and may build a light rail line along parts of the corridor, from the Hillcroft Transit Center to an undetermined distance east of the West Loop.

As noted in this previous post, Metro's bias in favor of inefficient rail lines is a costly bet for Houstonians. Those who are driving the Westpark Tollroad on a daily basis are finding out that such costs far exceed even the formidable expense of building inefficient rail lines.

Posted by Tom at 4:12 AM | Comments (0) |

June 12, 2007

Thinking about traffic snarls

Clear Thinkers favorite -- USC Urban Economics Professor Peter Gordon -- is one of the participants in this Wall Street Journal Econoblog from earlier this year, in which the subject is one near and dear to most Houstonians -- that is, the cost of traffic congestion, the problems that such congestion poses for urban areas and the policy options that are effective in dealing with the problems. The discussion is a very good overview of the policies and the problems involved in implementing them.

Posted by Tom at 4:00 AM | Comments (0) |

June 5, 2007

Texas' medical licensing logjam

The number of insurance companies offering medical malpractice insurance policies has dramatically increased and malpractice insurance premiums have substantially decreased since the 2003 legislation enacting medical malpractice caps in Texas, but the med mal caps have contributed to at least one unanticipated problem:

. . . about 2,250 license applications await processing at the Texas Medical Board in Austin. The wait could be as long as a year for some of the more experienced doctors because it takes longer to review their records.

The fear is that some doctors will give up on Texas and go elsewhere instead of waiting. A $1.22 million emergency funding request was approved during the last days of Texas legislative session for the Texas Medical Board, which licenses physicians. That is on top of the $18.3 million regular biennial appropriation, said Jane McFarland, the board's chief of staff.

The board plans to add nine new employees to its 139-member staff, seven of which will help chop away at the backlog of license applications.

Posted by Tom at 4:05 AM | Comments (0) |

May 23, 2007

More on that little boondoggle

Charles Kuffner has an interesting post about the John Lopez column noted earlier here that suggested that the $80 million or so in public financing for the proposed downtown soccer stadium is a political payback to the minority groups that have given certain civic leaders a pass for supporting the two more expensive downtown stadiums, Minute Maid Park ($286 million) and the Toyota Center ($250 million). Kuff goes on to observe about the location of the proposed stadium:

If it's going to be in Houston and not Sugar Land or the Woodlands, then I think downtown is fine. It will be both more convenient and more attractive than Robertson Stadium, where I presume they're at least drawing enough of a crowd to be viable. I just think they ought to pay for that downtown stadium themselves.

Norm Chad, as an aside to his funny column regarding the Dodgers' stadium seats that come with free food, makes the following observation about the number of folks who are really watching MLS soccer:

Column intermission: "Beckham Fever" is contagious. This month, MLS games have attracted throngs of 7,426 in Kansas City, 7,802 in New York and 9,508 in New England. One fan in Houston even thought she sighted David Beckham, but it just turned out to be a good-looking grad student from Rice wearing a Subway sandwich board.

Come to think of it, has any civic leader bothered to ask how many folks are attending Dynamo games?

Posted by Tom at 4:05 AM | Comments (1) |

May 21, 2007

Rationalizing the latest boondoggle

Houstonians are currently enduring the rationalizations of a couple of boondoggles, a big one and a relatively small one. The Chronicle is always a good source for these rationalizations, such as this romantic interlude from Chron soccer writer Glenn Davis regarding the proposed downtown soccer stadium:

[A] downtown stadium will be an unparalleled vehicle for promoting soccer. Stadiums out in the hinterlands in MLS are still trying to prove them-selves as a magnet for fans.

Fans migrating to stadiums located in the inner city can become a part of a ritual.

When I was growing up in New Jersey, my father used to take me to sporting events at Madison Square Garden in the heart of New York. The ritual began as we left the house.

Take the train from the suburbs to Hoboken, N.J., then jump on the Path train (subway) under the Hudson River. As we exited the Path and scrambled up the steps to the street, a whole new world opened up.

The streets of Manhattan were alive with vendors, scalpers hawking tickets, and fans of the New York Rangers or Knicks. The air crackled with competition and excitement.

For a kid from the suburbs, this was like going into a new world. To this day, these impressions are indelible in my mind. Whether going to Madison Square Garden or to Giants Stadium to watch Pel� and the New York Cosmos, I always felt that sense of anticipation.

[Dynamo CEO Oliver] Luck has told me his ritual with his father was taking public transportation to go to Cleveland Indians games.

Stadiums in the U.S. have in many cases become soulless, with their flight to the suburbs and attempts to woo fans more for the buildings and their amenities than why they were built in the first place.

Stadiums should be a meeting place for like individuals from all ethnic and cultural backgrounds who come together with the common bond of a sport.

I almost broke into a solo of Kumbaya over that one. At least Chronicle sportswriter John Lopez is more realistic, if not more persuasive, of the real basis for public financing of another downtown stadium:

The predominantly white fan base that follows the Astros got theirs. The largely white and black fan base of the Rockets got theirs, too.

What about Dynamo fans? What about the fan base that has been estimated at roughly 45 percent Hispanic, 45 percent white and 10 percent Asian? [. . .]

On paper, yes. It has to make sense. But in the eyes of many, it's also about getting the same things the Astros, Rockets and Texans fans got. Acknowledgment.

Or, as Kevin Whited muses: "So, we need a new soccer stadium downtown so that Houston can be more like Manhattan, and so that fans of what is a minor-league sport in the United States won't cry racism?"

Meanwhile, Dennis Coates, a professor of the University of Maryland Baltimore County, provides the following persuasive analysis of the lack of any economic merit to a similar initiative to build a downtown arena in Baltimore:

Studies like that done by KPMG about a new arena for Baltimore have been thoroughly discredited by independent observers. They are much like the predictions of psychics. While a psychic's predictions of the future are rarely assessed for their accuracy, the predictions of stadium benefits have been thoroughly scrutinized by a wide array of independent researchers. There is almost no support for any of the predictions made by the stadium and arena benefit psychics when those predictions are compared to data on what actually happened. The bottom line is the feasibility studies are more a PR process than a fact finding one. I urge you to not buy into the PR as if it is objective science.

Thus, the local debate regarding another downtown stadium is off to an inauspicious start. If proponents of the stadium deal admit in campaigning for the deal that the economic benefits of the deal are questionable, but that the intangible benefits to the community override the financial risk of the deal, then most reasoned opponents of such deals would at least be satisfied with the debate of the issues. They might not be persuaded to support the deal on that basis, but at least they would have the comfort that the public's assessment of the deal would be based upon an honest presentation of the issues. As it stands now, the presentation of the economic issues in most stadium campaigns is muddled by highly questionable assertions of direct economic benefits derived from such deals. Here's hoping that the Chronicle will at least promote truth in advertising in regard to the debate over the downtown soccer stadium deal.

Posted by Tom at 4:02 AM | Comments (2) |

May 14, 2007

The real New York squeeze play

One of Houston's many alluring qualities is the depth and variety of affordable housing, so those local businesses or institutions in competition with New York entities for employees should take note of this recent NY Times article:

As the [New York City] apartment-hunting season begins, fueled by college graduates and other new arrivals, real estate brokers say radical solutions among young, well-educated newcomers to the city are becoming more common, because New York�s rental market is the tightest it has been in seven years. High-paid bankers and corporate lawyers snap up the few available apartments, often leading more modestly paid professionals and students to resort to desperate measures to find homes.

While young people in New York have always sought roommates to make life more affordable, they are now crowding so tightly into doorman buildings in prime neighborhoods like the Upper East Side that they may violate city codes. [. . .]

. . . The rents for one-bedroom apartments in Manhattan average $2,567 a month, and two-bedrooms average $3,854 a month, . . . but rents tend to be far higher in coveted neighborhoods like the Upper West Side and TriBeCa.

Because landlords typically require renters to earn 40 times their monthly rent in annual income, renters of those average apartments would need to earn at least $102,680, individually or combined, to qualify for a one-bedroom and $154,160 to afford a two-bedroom.

Posted by Tom at 4:00 AM | Comments (0) |

May 7, 2007

Comparing economic development

In this NRO op-ed, Greg Kaza compares the economies of Texas and Arkansas over the past generation and concludes that talent and capital really do react logically to choices:

State Line Road is the boundary that separates the Arkansas and Texas sides of Texarkana, a border town that is sometimes described as �the Gateway to the American Southwest.� State Line, to the casual observer, is merely another road separating two states. But for those in the neighborhood, the road represents something of a great divide.

Of course, on the cultural side of the ledger, we have the date that will live forever: December 6, 1969. That�s when the top-ranked Texas Longhorns edged the second-ranked Arkansas Razorbacks, 15-14, in a dramatic college football game witnessed by President Richard M. Nixon and George H.W. Bush, a congressman at the time. �The Game,� as it is known locally, is still talked about on both sides of State Line Road.

But in terms of economic growth, the divide is much more lopsided: Employment growth in Texas has been significantly higher than in Arkansas during periods of economic expansion. The population in Dallas has nearly tripled in the post-WWII period, while the population in Little Rock has barely doubled in size. Per capita personal income in Texas is 94 percent of the U.S total. In Arkansas it�s 77 percent of the nation�s total, a level that has hardly budged since the 1970s.

The list of statistical disparities is long, and there�s a good reason why: While Arkansas and Texas share a common border, each taxes income and capital in radically different ways.

Arkansas has a top income-tax rate of 7 percent, the highest among the bordering states. Texas, however, does not impose an income tax. The imbalance is the same for capital gains: Arkansas taxes them. Texas does not.

As a result, we can see a very basic economic principle at work: Talent and capital always will flow toward higher returns.

Read the entire piece.

Posted by Tom at 4:10 AM | Comments (0) |

April 21, 2007

How to fix Houston traffic

Both surprisingly and refreshingly, the L.A. Times runs this insightful piece on several experts' proposals to address various Los Angeles area traffic problems. The experts are a level-headed bunch, including Joel Kotkin, James E. Moore, Donald Shoup and Ted Bakalar. Inasmuch as the Houston region shares many of traffic characteristics with the L.A. area, several of the suggestions are equally applicable to local traffic. My favorite is by Kotkin:

What Los Angeles needs is a transit system that better reflects what it is � a sprawling mid-density city. So build the world's easiest-to-use bus system. This network should expand such transit innovations as the MTA's Metro Rapid buses, which run in dedicated lanes, and Rapid Express buses, which make few stops. These systems are far less expensive to build than light rail or a "subway to the sea."

Posted by Tom at 12:01 PM | Comments (2) |

April 6, 2007

The connection between coaching salaries and making book

The questionable nature of the NCAA's regulation of intercollegiate athletics has been a frequent topic on this blog, and two recent posts point out a couple of the perverse effects of that regulatory scheme.

First, in this Sports Economist post, Berri points out that the exorbidant salaries being paid to coaches at the top levels of college football and basketball are a direct result of the NCAA's regulation of player compensation:

The research of Robert Brown and Todd Jewell indicates that a future NBA first round draft choice will generate more than $1 million in revenue each year in college (and this was based on data from 1996, so the $1 million figure understates the revenue generation occurring today). Clearly this sum greatly exceeds the cost of a scholarship. Because the NCAA does not compensate the players for the money being generated, this money has to go elsewhere. It seems reasonable that much of this money is currently flowing into the pockets of the coaches. But if the players were paid, the money would not be available to the coaches, and consequently wages paid to coaches would decrease.

Meanwhile, in this Wages of Wins post, Stacey Burke points out that the NCAA's restriction on player compensation also promotes point-shaving, even at such remote outposts as the University of Toledo!:

I think it is a shame that any player (college or pro) shave points or fix games, but the real shame is on the NCAA. College athletes � like men�s basketball and football � who generate large sums of money for their schools are not receiving a salary for their time and effort. This lack of payment occurs so that the NCAA can maintain the appearance that college games are amateur contests. Who does the NCAA think they are fooling? If the NCAA was willing to allow paying college athletes this would substantially reduce the incentive of point shaving.

Again, for decades, university presidents have been easy money for the owners of professional football and basketball teams, who have foisted the risk of capitalizing a minor league system for developing players on the colleges. This appears to be changing somewhat in basketball, where several minor professional leagues are now competing with the colleges for players. But the situation is not going to change for good until the colleges do one of two things -- either embrace professional sports and manage the AAA minor league teams as owners do in the baseball minor leagues or convert intercollegiate football and basketball to the college baseball model and force the owners of professional football and basketball teams to capitalize their own parallel minor league systems.

Frankly, I don't really care which approach the university presidents choose. I just want them to get on with it by showing the courage and leadership to turn their back on the antiquated hyprocrisy of the currently bloated NCAA regulatory scheme.

Posted by Tom at 4:14 AM | Comments (0) |

Metro Development Corp.

Kevin Whited over at blogHouston.net picks up on the latest boondoggle of the Metropolitan Transit Authority -- providing kickstart financing for a couple of blocks of commercial property along the Metro light rail line in Midtown.

The entire deal is really preposterous for a transit authority to be getting into. Metro bought the blocks from the developer for $7.2 million with "the expectation" that the developer is going to buy the blocks back and build a bunch of condominiums (in an already overbuilt market) that will supposedly house 1,000 happy light rail riders. According to the developer, everything is really O.K. because -- get this logic -- it could have been worse!:

[Developer Robert H.] Schultz said Metro may join in developing a parking garage on the site that could be used by rail riders but that the agency chose not to invest in other parts of the project.

"They didn't want to extend that kind of money. They wanted to be much more conservative until they could see this thing was going to happen," he said.

[Metro real estate vp Todd] Mason agreed, saying, "Metro does not want to be a developer and take on a lot of risk, but we want to be an enabler of projects like this one."

As noted earlier here, Metro isn't good enough in doing what it was chartered for to be taking flyers on financing speculative real estate deals. Where is that type of activity described in Metro's charter?

Posted by Tom at 4:13 AM | Comments (1) |

March 27, 2007

That's one heckuva garage

This post from awhile back noted that what it costs to rent a parking space in New York City could rent a nice apartment in Houston. But if you think that's pricey for a parking space, you haven't seen anything, yet.

At 200 Eleventh Avenue -- a new 16 unit condo project in Manhattan (HT Felix Salmon) -- the developers are offering an "en-suite garage" for a prospective owner's automobile in 14 of the units. The website has a simulation that shows how the owner would drive his or her car into the building and into an elevator, which then takes the car to the owner's unit, where they then drive into their 300 square foot "en-suite garage." The cheapest unit in the development costs $4.7 million for 2,353 square feet, so that en-suite garage costs a cool $600,000, which would buy one very nice entire condo in downtown Houston.

I wonder if the developers throw in a workbench with that garage? ;^)

Posted by Tom at 4:15 AM | Comments (0) |

March 20, 2007

"Middle-class people are great, too"

I swear, you can't make this stuff up. This NY Times article reports on subsidized housing, Santa Barbara-style:

Next time you sit down to write your monthly mortgage or rent check, consider this: In Santa Barbara, about 90 miles northwest of Los Angeles, a public-private partnership is planning to build a subsidized-housing development for some families earning as much as $177,000. �It does sound unusual,� admitted Rob Pearson, the executive director of the city�s Housing Authority, which helped broker the deal for the development, to be called Los Portales. �But Santa Barbara is getting Gucci-fied. If we don�t do something, we�ll lose our middle class.� [. . .]

City officials say they�ve worked to provide affordable homes for lower-income residents; about 12 percent of local housing stock falls into this category, much of it subsidized with public money. But with the average median home price in the Santa Barbara area hovering around $1.2 million, many well-employed citizens are finding it tough to buy a home.

�It�s even problematic for people like doctors,� says Martha Sadler, a housing reporter for The Santa Barbara Independent weekly newspaper. [. . .]

�This is good for Santa Barbara� Sadler says. �Rich people are great, and it�s interesting to live with C.E.O.�s. But there are middle-class people who are great, too.�

But not too middle class, right? ;^)

Posted by Tom at 4:20 AM | Comments (0) |

March 15, 2007

Boom Town, USA

Maybe it's because I cut my teeth in business law during a prolonged recession in the Houston area in the mid-to-late 1980's that followed a boom cycle earlier in the decade, but these kinds of articles always worry me a bit:

Galvanized by the record profits at energy companies, this city, the center of the country�s energy industry, has shaken off the effects of the Enron implosion six years ago and is enjoying its strongest resurgence in more than 20 years, business officials and real estate developers say.

Some energy companies are expanding and putting up new buildings. Others, like Citgo, Schlumberger and Halliburton, have moved their headquarters to Houston. Oil and natural gas companies have helped reduce office vacancy rates to 15 percent, a five-year low, according to Grubb & Ellis, a real estate company. Job growth is double the national average � 97,400 jobs were created in 2006. The National Association of Realtors says the housing market in Houston is one of the strongest in the country.

�The increase in the oil business has made Houston,� said Randall Davis, a Houston condominium developer. �It feels a touch like the 1980s � everyone is out, the restaurants are full, the bars are full. It�s like New York.�

The good news extends across the city. The port recently opened a $1.4 billion container terminal to tackle soaring traffic. In 2006, it handled 1.6 million 20-foot containers, up 29 percent from 2003. At the Texas Medical Center, hospitals and universities are investing billions in new facilities. Residential and mixed-use developments are going up downtown.

Read the entire article here. Houston in 2007 is a very different place than the Houston of 1985, particularly with regard to the more diversified local economy now than back then. But the energy industry remains the primary driver of the economy, although competition for that industry appears to be the bigger risk now than the price risk that has prompted the local economy's boom and bust cycles through the years. This week's announcement that Halliburton is moving its corporate headquarters from Houston to Dubai is a definite wakeup call for Houston's leaders. Just as many Midwestern energy companies abandoned Tulsa for Houston over the past couple of decades, the same thing could happen to Houston as big energy concerns leave for greener pastures overseas.

Posted by Tom at 4:10 AM | Comments (0) |

The Law of Unintended Consequences

According to this Bloomberg article, it's alive and well in Switzerland:

Switzerland entered a treaty with the European Union to import workers, seeking more bankers, managers and academics.

What it got was an influx of prostitutes.

The number of people offering sex for money has risen by a third in Zurich and 80 percent in Geneva since Switzerland opened its borders to workers from the 15 EU-member states at the start of 2004, police estimate. Some lawmakers predict prostitution will grow even more after the government last year removed work restrictions for residents from 10 newer EU countries as well.

Posted by Tom at 4:01 AM | Comments (0) |

March 8, 2007

The magic of innovation and markets

FeedDemon is a highly-popular RSS aggregator that I have used for several years. Nick Bradbury developed FeedDemon, and he passes along the interesting story of how development of this elegant product came about:

I used to rely on email, but it's almost useless to me now.

Funny thing is, if it weren't for spam, I might not have created FeedDemon. As I've mentioned before, after spam and anti-spam filters made it impossible for me to communicate with customers by email, I dumped email and started using my blog and its RSS feed to communicate instead.

And that led to the creation of FeedDemon, which I'm having a blast working on. So I actually benefited from spam. Go figure.

Posted by Tom at 4:44 AM | Comments (0) |

February 27, 2007

Barack Obama's questionable economics

The exceedingly clear thinking Thomas Sowell (earlier posts here and here) is reviewing Democratic Party Presidential candidate Barack Obama's positions on economic policy and doesn't much like what he sees:

Senator Barack Obama recently said, "let's allow our unions and their organizers to lift up this country's middle class again."

Ironically, he said it at a time when Detroit automakers have been laying off unionized workers by the tens of thousands, while Toyota has been hiring tens of thousands of non-union American automobile workers. [. . .]

Senator Obama is being hailed as the newest and freshest face on the American political scene. But he is advocating some of the oldest fallacies, just as if it was the 1960s again, or as if he has learned nothing and forgotten nothing since then. [. . .]

Senator Obama is not unique among politicians who want to control prices, as if that is controlling the underlying reality behind the prices. [. . .]

The underlying reality that politicians do not want to face is that here, too, prices convey a reality that is not subject to political control. . .

One of the hardest things for politicians to resist is indulging most voters' tendency to believe economic fallacies. Unfortunately, most politicos do the easy thing and give the voters what they want to hear. That is probably a good approach to getting elected, but it's a lousy one for governing.

Posted by Tom at 4:01 AM | Comments (0) |

February 21, 2007

Cool graphs

From the latest report of the Congressional Budget Office. HT to Greg Mankiw.

Robert Samuelson on the Stubborn Welfare State and the shifting priorities of the federal budget.

Finally, Nielson Media Research's television ratings for the post-season college football games from this past season. HT to Wizard of Odds.

Posted by Tom at 4:20 AM | Comments (1) |

February 19, 2007

Mississippi channels Venezuela

We all knew that it was just a matter of time before this would occur in Venezuela under Hugo Chavez's dubious economic leadership.

But, as Ted Frank explains, how were we to know that Mississippi AG Jim Hood, plaintiff's lawyer Dickie Scruggs and Senator Trent Lott would accomplish much the same thing in regard to insurance for the citizens of Mississippi? Or that AG Hood would take the preposterous position that the state can force State Farm Insurance Co. to continue to underwrite policies in the state (Larry Ribstein has more)?

Maybe Hood could persuade Chavez to underwrite some cheap insurance for Mississippi consumers?

Posted by Tom at 4:30 AM | Comments (0) |

February 14, 2007

The fading allure of the "Superstar Cities"

Urban economics expert Joel Kotkin (previous posts here) reports on the myth of the "superstar cities" in this WSJ ($) article and he sums up the bullish prospects of cities such as Houston in comparison to supposed superstar cities such as New York, San Francisco and Boston:

Economic and demographic trends suggest that the future of American urbanism lies not in the elite cities but in younger, more affordable and less self-regarding places.

Over the past 15 years, it has been opportunistic newcomers -- Houston, Charlotte, Las Vegas, Phoenix, Dallas, Riverside -- that have created the most new jobs and gained the most net domestic migration. In contrast there has been virtually negligible long-term net growth in jobs or positive domestic migration to places like New York, Los Angeles, Boston or the San Francisco Bay Area.

What as much as anything distinguishes elite places -- what Wharton real-estate professor Joe Gyourko calls "the superstar cities" -- are their absurdly high real-estate prices. New York, Boston, San Francisco and Los Angeles have long been more expensive than, say, Dallas, Houston or Phoenix -- but in recent years the difference in price, he calculates, has increased beyond all reason. San Francisco prices since 1950, for example, have grown at twice the national rate for the 50 largest metropolitan areas.[. . .]

This perhaps explains why the largest companies -- with the notable exception of Silicon Valley -- have continued to move toward the more opportunistic cities. New York and its environs, for example, had 140 such firms in 1960; in 2006 the number had dropped to less than half that, some of those running with only skeleton top management. Houston, in contrast, had only one Fortune 500 company in 1960; today it is home to over 20. Houston companies tend to staff heavily locally; this is one reason the city was able to replace New York and other high-cost locales as the nation's unchallenged energy capital. Another example of this trend is Charlotte's rise as the nation's second-ranked banking center in terms of assets, surpassing San Francisco, Chicago and Los Angeles, indeed all superstar cities except New York.

Houston's own urban policy wonk, Tory Gattis, has more of the Kotkin article and provides his own series of posts on why young cities such as Houston are well-positioned to take advantage of opportunities that are not rich enough for the superstar cities. Not a bad position to be in, folks.

Posted by Tom at 4:15 AM | Comments (0) |

February 12, 2007

"It's nice to have a train car to myself"

About a year ago, this post noted the boondoggle status of Las Vegas' then new $650 million, 4.4 mile monorail project. As is typical with such boondoggles, passage of time does not make the problem any better:

Donna Washington loves riding the Las Vegas Monorail, but not for a reason that would cheer its owners.

�In my town, the trains are always jam-packed, so it�s nice to have a train car to myself here,� said Ms. Washington, 44, a Chicagoan vacationing here. �I do wonder, though, where all the people are.�[. . .]

. . . ridership numbers for the Disney-inspired system, which stops at nine hotel-casinos and the Las Vegas Convention Center, are falling amid a lackluster marketing campaign, technical problems and revenues so far below projections that Wall Street fears that a default on its bonds could occur by the end of the decade.

December was the monorail�s worst month, with 18,197 riders per day, far below the 53,000 predicted by studies used to sell the bonds to investors and to persuade public officials to give up public right of way. Despite a management shakeup in mid-2005 that purged the company of its founding executives, the system�s average ridership plunged 31 percent in 2006, to 19,219 per day.

The company�s new chief executive, Curtis L. Myles III, said that drop was somewhat anticipated after fares were raised in December 2005 to $5 a ride from $3. That move increased revenues by 4 percent, to $31.4 million for the year, still far short of the $44.9 million needed to break even. The total cost of the system per year is about $61 million; the monorail receives about $16 million in advertising revenues from companies like Sprint, which is about to start providing wireless Internet access on the trains and has a 15,000-square-foot store at the convention center stop.

Mr. Myles acknowledged in an interview that the company�s cash reserves, estimated by Fitch at about $89 million, would run dry by 2010 if revenues did not improve. To break even, he said, the monorail would need to increase ridership by about 50 percent.

And can you guess the Las Vegas Monorail Company's proposed solution? Of course, double-down on the monorail bet -- a $500 million expansion!

Read the entire article. And yes, a similar thing could happen here.

Posted by Tom at 4:43 AM | Comments (6) |

February 9, 2007

Milton Friedman's introduction to economics

James Hamilton passes along Stanford University Professor John Taylor's touching tribute to Milton Friedman, which includes this anecdote about Friedman's participation in an entry level economics class:

[Professor Friedman] was always willing to be a guest lecturer in my Economics 1 course, speaking to hundreds of Stanford students. He would start off telling the undergraduates that two major things the government is involved in are a mess -- education and drugs -- and that would set off a lively round of questions with his memorable answers impressing both those on the left and the right.

Along those same lines, Professor Friedman would agree with this cogent this Jacob Sullum/Reason op-ed that cogently explores the dubious nature of the government's Prohibition on internet gambling and the recent governmental assault on a legitimate foreign business, Neteller PLC.

Posted by Tom at 4:54 AM | Comments (0) |

February 7, 2007

Institutionalized fanaticism

If your friends or co-workers who follow college football closely are acting a bit stressed out today, then it's quite likely that the source of their anxiety is a 17 or 18 year old who they have never met.

Yes, today is that day of the absurd dubbed "National Signing Day" when we are deluged with the rather odd spectacle of grown men fawning over high school football players to induce them to come take advantage of their university's resort facilities rather than their competition's resort facilities. And, oh yeah, if they can earn a few "tips" from well-heeled alums while enjoying those resort facilities, then that's alright, too.

Indeed, this NY Times article already suggests that the University of Illinois' inexplicably strong recruiting class this year may be the result of cheating. With the proliferation of the blogosphere over the past couple of years, a host of blogs follow the recruiting wars closely and often with keen wit. The following are a few of the interesting posts on this year's recruiting season that I've stumbled across:

The Wizard of Odds explains why all of this competition over the quality of recruiting classes is largely meaningless;

The Sunday Morning QB examines the strange system in which all of this has evolved;

The House that Rock Built explores the ripple effect of recruiting decisions;

Every Day Should Be a Saturday reveals how recruiting foretold Rex Grossman's mediocre Super Bowl performance (just kidding);

A widget that displays a map reflecting where a school's recruits are coming from; and

The College Football Resource page has more information than you should ever want to know about this year's top recruits and where they are going.

Meanwhile, as university presidents continue to dither over this fundamentally flawed system of regulating rents, this post from a couple of years ago suggests that a better system is readily available so long as the colleges forsake being the NFL's free minor league system, a position with which Malcolm Gladwell agrees. As noted earlier here, big-time college football as presently structured is hopelessly corrupt, but it's a pretty darn entertaining form of corruption. Adopting a structure much closer to college baseball would likely minimize the corruptive elements of college football while not affecting the entertainment value of the sport much. But it's going to take leadership and courage from the top of the universities to promote and implement such a reform.

What are the chances of such leadership emerging? Probably about the same as Rice knocking off Texas next season in Austin.

Posted by Tom at 4:25 AM | Comments (0) |

February 1, 2007

Romanticizing boondoggles

This recent NY Times article caught my attention because it extols the virtues of Portland, Oregon's pretty new Aerial Tram mass transit project despite the fact that it's quite expensive relative to the number of folks who will regularly use it. These fatuous media reports that ignore the dubious underlying economics of such projects are a consistent element of urban boondoggles.

Turns out that some other folks noticed the Times story, too. Wendell Cox wrote the following letter to the NY Times editor about the article:

Re: City that Loves Mass Transit Looks to the Sky for More (January 28)

Now The New York Times has been taken in by the Portland transit hype. The �city that loves mass transit� shows it by not using riding very much. Today, the share of workers using transit to get to work is less than before the first light rail line was built. Today, little more than two percent of travel in the Portland area is on transit and 98 percent of motorized travel is by car. That is really not much different than automobile champion Kansas City, where the figure is above 99.5 percent. The kind of cheerleading in this article may warm the hearts of urban elites, but only serves to muddle and mislead.

Meanwhile, Houston's own urban policy wonk -- Tory Gattis -- provides a balanced analysis of the Portland mass transit system in this post about a recent lecture that he attended by a fellow who was instrumental in the planning of the Portland system. The NY Times report on the Portland system reads like an advertisement in comparison to Tory's post.

Posted by Tom at 5:17 AM | Comments (5) |

January 16, 2007

The Power of Choice

Greg Mankiw passes along that PBS has announced that it will broadcast The Power of Choice, a documentary about Milton Friedman, on January 29th.

This promises to be a special show and one that should not be missed by anyone who is interested in the course of economics and capitalism in American society. The preview for the show is up on YouTube and can be viewed here.

Posted by Tom at 4:36 AM | Comments (0) |

January 5, 2007

Lou Dobbs' misunderstanding of the trade deficit

CNN's financial news anchor Lou Dobbs is arguably the highest-profile critic of the U.S. trade deficit, which demagogues often use as justification for increased regulation of free trade. Cafe Hayek's Don Boudreaux has written extensively on how the U.S. trade deficit is really no big deal, and in this Christian Science Monitor op-ed, he takes on Dobbs over his complaints about the trade deficit. It's not a fair fight:

Perhaps you miss this fact because you are misled by familiar trade jargon. In your book, "Exporting America," in your columns, and on your television show you complain vigorously and often about America's trade deficit. You call it "staggering," and wonder how long America can continue to run such deficits.

Admittedly, the word "deficit" sounds ominous. In fact, though, America's trade deficit is evidence of its economic vigor and promise. Here's why:

When Americans buy foreign-made goods and services, foreigners earn dollars. The only way America would run no trade deficit is if foreigners spent all of these dollars buying goods and services from Americans. Instead, though, foreigners invest some of their dollars in America. They buy American corporate stock, they build their own factories and retail outlets in the US, they lend dollars to Uncle Sam, and they hold some dollars in reserve as cash.

Aren't you proud that so many people the world over eagerly invest their hard-earned wealth in America?

As an American, I'm proud and optimistic. Foreigners invest in the US so readily because its economy is so strong. And even better, these investments strengthen the economy by creating more capital for American workers. These investments raise workers' productivity and wages.

Remember: A trade deficit is not synonymous with debt.

I'm writing this letter on a new Sony computer that I bought with cash. I owe Sony nothing. If Sony holds the dollars it earned from this sale, or if it uses these dollars to buy stock in General Electric or land in Arizona - that is, as long as Sony invests its dollars in America in ways other than lending it to Americans - the US trade deficit rises without raising Americans' indebtedness.

Americans go more deeply into debt to foreigners only when Americans borrow money from foreigners. Uncle Sam, of course, borrows a lot of money, from both Americans and from non-Americans. I share your concern about the reckless spending and borrowing practiced by politicians in Washington.

Foreigners, however, are not to blame for this recklessness. Indeed, I'm grateful that foreigners stand ready to help us pay the cost of our overblown government. Fortunately, Washington's spending binges are not serious enough to cripple America's entrepreneurial economy. If they were, foreigners would refuse to invest here.

If you're still skeptical that America's trade deficit is no cause for concern, perhaps you'll be persuaded by Adam Smith, who wrote that "Nothing, however, can be more absurd than this whole doctrine of the balance of trade."

Smith correctly understood that with free trade, the economy becomes larger than any one nation - a fact that brings more human creativity, more savings, more capital, more specialization, more opportunity, more competition, and a higher standard of living to all those who can freely trade.

Posted by Tom at 4:11 AM | Comments (0) |

December 31, 2006

Uncommon common sense to close out the year

Several items making uncommonly good sense in financial matters caught my eye on the final day of the year.

First, Don Boudreaux noticed the following letter to the Financial Times from Larry Ribstein's colleague at the University of Illinois College of Law, Andrew P. Morriss. Professor Morriss was responding to this earlier article:

Sir,

Bono is following up on his hug of German Prime Minister Angela Merkel at Davos last January and with a visit to Germany to launch �a series of debates with German thinkers on African development and the role of the west.� (�Geldof and Bono take G8 campaign to Germany,� Dec. 27). What is to debate? Only entertainers and politicians could be unaware of the straightforward starting points for solving Africa's many problems: free trade and governments that neither murder their citizens nor steal their property. The role of the west in implementing these solutions is equally clear: cut tariffs and other barriers to trade with Africa and eliminate official toleration (including foreign aid, official recognition, arms sales, etc.) of murderous regimes like Sudan's and kleptocratic ones like Zimbabwe�s.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law
University of Illinois, College of Law

Meanwhile, the Wall Street Journal editors provided this timely editorial in which they point out that it is no coincidence that the current growth and relative stability in financial markets has coincided with the enormous growth in the use of financial innovations such as securitizations and derivatives:

One of the things that has changed over the past 30 years is the extraordinary extent of financial innovation. When it comes to the decline of risk premiums and financial stability, securitization and the use of derivatives have both played an unsung role. [. . .]

The sum of a myriad of these transactions over the economy means that everything moves a little faster. Credit becomes marginally cheaper and more plentiful. Risk is dispersed to those who feel they can better afford it. Thus does the supposedly non-productive financial sector of the economy provide fuel for future growth. Seemingly obscure transactions lower the cost of capital to businesses and consumers and spread risk in a way that decreases the danger of catastrophic financial accidents.

None of which means financial accidents won't happen. Market players sometimes bet wrong--there are always two sides to a transaction, and one party can always miscalculate its ability to withstand an adverse event. . . [. . .]

But these are not reasons to fear derivatives and other financial innovations. Risk is still out there. But as we leave a successful financial year and enter a new one, take comfort in the fact that all that buying, selling, swapping, trading and securitization of risk has actually made the financial system less risky.

Good point, which makes the WSJ's support of the lynching of one of the men responsible for a substantial amount of that financial innovation all the more troubling.

Finally, not to be outdone, Professor Ribstein analyzes the latest ongoing media rationalizations regarding Steve Jobs' involvement in backdating options at Apple:

Apple�s internal investigators, including directors Al Gore and Jerome York, ignored the funny odor and expressed �complete confidence in Steve Jobs and the senior management team.�

But NYU�s David Yermack says: �They have pretty much admitted that [Jobs] was directly involved in a fraud. If he had directly participated in altering depreciation schedules, or booking revenue that wasn�t yet earned, would they have full confidence in him?�

Terrific question Professor Yermack. Suppose, for example, we�re talking about Bernie Ebbers or Jeff Skilling? At least, with Al Gore on the case, we won�t be hearing, as we did with Enron, about Steve Jobs� Republican friends.

It looks like former GC Nancy Heinen, who may have participated in the improper documentation, might take the fall. Meanwhile, Gregory Reyes of Brocade, who did not receive any backdated options, is facing criminal charges. Apple�s story seems to be that Jobs, possibly unlike Reyes and Heinen, didn�t �appreciate the accounting implications.�

Just to summarize the emerging blackletter law: It's ok to commit �fraud� (which is what we are repeatedly told backdating is) if (1) you are a media darling who produces fancy products that everybody loves; (2) you can get Al Gore to sign off (I guess this particular truth isn't too inconvenient); and (3) you can get somebody else in your company to do the dirty work.

There's also an anecdote here about actual effect of backdating on companies: Apple�s stock sank 5% after it looked like Job's job might be on the line, but then rose the same amount when the board committee made it clear he wasn�t going to be fired. Does this mean that the market doesn�t care about the fraud, but just about the governance turmoil the media frenzy wreaks on companies?

Posted by Tom at 6:37 AM | Comments (1) |

December 17, 2006

The University of Houston Master Plan

The University of Houston has been making some big plans recently, and this Matt Tresaugue/Chronicle article reviews them:

UH leaders intend to transform the campus with more housing, more restaurants, more shops and other places to be outside the classroom.

The goal, campus leaders said, is to create an environment that attracts the best scholars and encourages them to stick around. [. . .]

The plan also calls for doubling the usable square footage of classroom and office space, replacing parking lots with garages and closing part of Cullen to create a tree-lined pedestrian walkway by 2020.

What's more, the campus would meld with the surrounding Third Ward while reducing blight and encouraging more retailers to move in. University officials already are talking with private developers about a "town center" with shops and restaurants on both sides of Scott between Holman and Alabama.

Campus leaders do not know how much everything would cost but estimate the first five-year phase at $300 million, and largely at the university's expense. The redevelopment plan will be a key piece of an upcoming fundraising campaign, officials said.[ . . .]

The new plan would establish five themed precincts on campus, reflecting the "smart growth" trend elsewhere, with dense housing, retail and office space in village configurations.

The interior of the campus would be almost untouched.

To the north, campus leaders envision an arts village with a sculpture garden, outdoor amphitheater, cafes, galleries and housing, including loft apartments, on what are now parking lots.

About 1.6 million square feet of academic buildings and housing for graduate students would be added to the so-called professional precinct, to the east of the campus core.

Another area, the Wheeler precinct, would be devoted to undergraduates, with plans calling for low-rise residence halls to blend with the nearby University Oaks neighborhood.

To the west would be a Robertson Stadium precinct with 1.9 million square feet in new academic buildings, housing and retail near two proposed Metro light rail lines.

The University's summary of its master plan -- with renditions and video -- is here.

Despite the story on the ambitious UH master plan, the Chronicle still ignores the more important story about UH. As noted in this this previous post, UH in many ways is the most remarkable major public university in Texas. Started in 1927 as a junior college, UH grew quickly during its infancy while being endowed entirely with philanthropic contributions from generous Houstonians, which was made all the more remarkable by the fact that, at the same time, Houstonians were also contributing substantial amounts to the Rice University endowment. Inasmuch as bustling UH did not even become a state university until 1963, UH has received only a fraction of the endowed capital that the state has provided to its two older public university systems, the University of Texas and Texas A&M University. As a result, UH provides a comparable contribution to Houston and the state as UT and A&M while operating with far less capital than those two institutions, which prompted my earlier observation that UH provides "more bang for the educational buck" than either UT or A&M.

With the recent expansion of the MD Anderson Library into the centerpiece of the central campus, along with the development of innovative programs such as the Honors College, UH has already become an increasingly attractive choice for Texas students. Implementation of the master plan is the next logical step in that evolution. It's good that the local newspaper is noticing that, but it makes one wonder how much more benefit UH could contribute to Houston and the state if its endowed capital were on par with that of UT or A&M? That's a story that needs to be examined, and here's hoping that the Chronicle eventually tackles it.

Posted by Tom at 4:57 AM | Comments (1) |

December 14, 2006

Ed Prescott's five macroeconomic myths

2004 Nobel Laureate Edward Prescott in this WSJ ($) op-ed lays out five macroeconomic myths and observes as follows:

The sky is not falling. No need to panic and start playing around with all sorts of policy responses. Despite the impression created by some economic pundits, the U.S. economy is not a delicate little machine that needs to be fine-tuned with exact precision by benevolent policymakers to keep from breaking down. Rather, it is large and complex, with millions of people making billions of decisions every day to improve their lives, the lives of their families and the health of their businesses.

On the one hand, it's difficult to screw up all these well-intentioned people by crafting bad policy, but, on the other hand, it is of course entirely possible to do so. And once things are broken, they are much harder to fix. For example, all those doomsayers predicting a recession will get their wish if taxes are suddenly raised, new productivity-strangling regulations are enacted, the U.S. turns against free trade, or some combination thereof. Otherwise, we should expect 3% real growth, based on 2% increases in productivity and 1% population growth. This economy is fundamentally sound.

So we have to be careful that we don't believe everything we read in the papers. Things are never as bad as the last data that was released, nor are they as good. Likewise, policy should not be revised at every turn, nor rules changed by political whim. Meaning, we should be careful about accepting conventional wisdom as, well, being wise. One of the great disciplines of economics is that it challenges us to question status quo thinking.

In other words, it's hard to screw up something as big and complex as the U.S. economy, but we're eminently capable of doing it with unnecessary and ill-advised policy moves. And it's much harder to correct the bad policy than to screw up in the first place. That's a good reason to support this.

Posted by Tom at 4:55 AM | Comments (0) |

December 5, 2006

Keep those buses handy

Wendell Cox reports on a little problem that occurred in St. Louis recently that ought (but probably won't) give the Houston Metropolitan Transit Authority pause:

Buses Replace Light Rail in St. Louis

A large ice storm hit the St. Louis area last night and power is out to nearly one-half of the area. The area�s light rail line, Metrolink, has suspended service for much of its alignment and is providing substitute bus service.

Meanwhile, there appears to be no instance of light rail providing replacement for buses anywhere in the metropolitan area --- for that matter probably never in history, anywhere. Another demonstration of the flexibility of urban rail.

The enormous cost relative to usage and inflexibility of most rail systems reminds me of something that Peter Gordon observed awhile back about the political forces that support these boondoggles. Some are disingenous promoters seeking to profit from the rail lines, some pose as high-minded environmentalists and many are simply ignorant of the inefficiency and inflexibility of such systems. As Professor Gordon wryly points out:

"It adds up to a winning coalition."

By the way, Anne Linehan over at blogHouston.net continues to follow another cost of the Houston light rail system that Metro doesn't much like talking about.

Posted by Tom at 4:12 AM | Comments (0) |

November 28, 2006

More Friedman anecdotes

The fine remembrances of the late Milton Friedman continue unabated.

In this post, Professor Friedman's son, David Friedman, explains how Time Magazine came to misquote Professor Friedman's comment that �We are all Keynesians now.�

Then, in this WSJ ($) letter to the editor, Professor Marina v.N. Whitman of the University of Michigan passes along a fun story about cocktail party chatter with Mr. Friedman:

Nearly 30 years ago, my husband and I were guests at a dinner party . . . Among the other guests were Milton Friedman and his wife, Rose. Milton was having a fine time baiting the wife of the dean of the Business School, a feminist whose conviction was unleavened by any sense of humor, by proclaiming the foolishness of affirmative action.

"If businesses are forced to hire and train young women, many of whom will leave for marriage and family," he proclaimed, "they should at least be allowed to discriminate in favor of homely women, whose opportunities for marriage are below average." As the dean's wife reddened with fury, I leaned over and said softly, "Thank you, Milton. I've always wondered what accounted for my professional success. Now I know." Milton, always the courtly gentleman where women were concerned, was speechless.

By the way, Professor Friedman's class television show -- Free to Choose -- can be viewed here.

Posted by Tom at 4:45 AM | Comments (0) |

Chizik leaves Austin for Ames

Let me see if I've got this straight.

Iowa State University has hired former University of Texas defensive coordinator, Gene Chizik, as its new head football coach to replace my old friend Dan McCarney, who resigned under pressure a couple of weeks ago despite being the most successful coach in Cyclone football history.

Chizik is essentially the same age as McCarney was when ISU hired him in 1995. Moreover, Chizik's background is basically the same as McCarney's was at the time that ISU hired him, except that McCarney had far superior experience to Chizik in the Midwestern recruiting areas that are key to the ISU program.

Chizik�s deal is worth a guaranteed $6.75 million over six years � with incentives that could increase that to as much as $10 million over those years � while McCarney's contract was worth about $4.4 million, but only $780,000 guaranteed, through 2010.

More notably, however, is that ISU is guaranteeing Chizik $1.5 million annual budget for compensating his assistant coaches, which is one of the highest of such budgets among Big 12 Conference members. On the other hand, McCarney constantly requested ISU throughout his 12-year tenure for a budget sufficient to pay for the best assistants available on the market, but he was continually rebuffed by ISU's athletic administration. As a result, McCarney's budget for paying his assistants was in the lower tier of such budgets among Big 12 Conference members.

My question is this � why didn't ISU simply increase McCarney's assistant coach compensation budget, and then avoid the extra money and risk involved in hiring Chizik? Maybe this all works out, but it sure looks to me as if ISU has taken a huge risk where a much smaller one would have been more likely to continue the most successful era in ISU football history.

By the way, UT's defense gave its two most uninspired defensive performances of Chizik's two seasons in Austin during losses to Kansas State and the Texas Aggies in its final two games of this season. Did Chizik's distraction with negotiating a deal with ISU have anything to do with that? Mar