Houston's Clear Thinkers

February 2, 2010

Running into the abyss

17th century philosopher Blaise Pascal observed in his Pensées 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.

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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.

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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.

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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

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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.

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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?

 

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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.

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June 13, 2009

The Stand-up Economist on the Financial Crisis

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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."

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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.  .  .  .

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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. .  .  .

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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!

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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.

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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:

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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.

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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:

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October 1, 2008

Awkward Loan Interview

The proposed Treasury bailout leads to an awkward loan interview:

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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."

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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.

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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.

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June 23, 2008

Clear thinking to begin the week

 

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June 13, 2008

Cool Graph Friday

H/T Craig Depken

 

 

 

 

 

 

 

 

 

H/T W$J/Josee Valcourt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

H/T Russell Roberts

 

 

 

 

 

H/T James Hamilton

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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.

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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.

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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?

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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.

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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.

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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.

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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!

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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.

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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.

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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.

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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.

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January 14, 2008

More costs of prohibition

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

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December 19, 2007

The pixie dust theory

It has something to do with subsidies for ethanol.

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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.

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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) | TrackBack (0)

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)?

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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.

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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?

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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?

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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) | TrackBack (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) | TrackBack (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) | TrackBack (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.

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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) | TrackBack (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.

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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.

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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) | TrackBack (0)

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) | TrackBack (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) | TrackBack (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) | TrackBack (0)

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) | TrackBack (0)

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) | TrackBack (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.

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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) | TrackBack (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.

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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.

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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.

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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?

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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 Pelé 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.

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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.

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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.

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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."

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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) | TrackBack (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?

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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) | TrackBack (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? ;^)

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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.

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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.

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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) | TrackBack (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.

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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) | TrackBack (0)

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) | TrackBack (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) | TrackBack (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.

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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) | TrackBack (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) | TrackBack (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.

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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? Mark Wangrin of the San Antonio Express-News observes:

Chizik has been more careful in his choice of destinations. Now, though, with the shine off his reputation, he may not have much of a choice. He must decide whether to jump toward a more mediocre program or stay at least another year and try to rehabilitate his reputation as a defensive mind. He must prove this season hasn't exposed his thinking as only working when he has exceptional talent at safety. He must show he can adjust.

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November 23, 2006

Giving thanks to Milton Friedman's bookie

One of the underappreciated contributions of the late Milton Friedman is the impact of his market theories on the explosive development of derivative financial markets, particularly after the Nixon Administration abandoned in 1971 the fixed exchange rates that the Allies had established under the Bretton Woods Accords of 1944.

As Jim Johnston of the Heartland Institute notes here, Nixon Administration Treasury Secretary George Shultz -- a close friend of Professor Friedman's -- led the campaign to remove the fixed exchange rates. As the story goes, part of Secretary Schultz's motivation for removing the fixed exchange rates was Professor Friedman's disappointment that he could not place a bet against the British pound in the financial markets of the late 1960s. As we all know now, replacing regulation of fixed exchange rates by central bankers with markets for foreign exchange futures such as FOREX derivative contracts substantially improved the ability of business interests to hedge risk in currencies. Johnston explains:

Banks initially opposed the [Forex derivative] contracts, calling them the creation of Chicago "crapshooters." Later the banks used the FOREX contracts to hedge the tailored currency guarantees they sold to their customers. The move from regulation to markets was to pave the way for derivative contracts in heating oil, gasoline, crude oil, and natural gas in the order that they were deregulated.

The growth in financial and other derivatives, where speculators meet hedgers, continues even today. Indeed, so much so that the daily volume of trading exceeds trillions of dollars. It would not be unfair to say financial derivative trading is one of the largest institutions in the world.

Just think, it started out by being Milton Friedman's bookie.

Posted by Tom at 4:02 AM

November 22, 2006

The story of the open road

As many of us get ready to hit the road over the holiday weekend, Ralph Bennett in this TCS Daily article provides an excellent overview of the birth of the nation's Interstate Highway System during the Eisenhower Administration. We tend to take the system for granted these days, but it is truly an engineering and economic marvel that is one of our many blessings for which we will give thanks this holiday weekend.

Posted by Tom at 7:35 AM | Comments (0) | TrackBack (0)

November 19, 2006

The Friedman influence

Several clever recent posts reflect the tremendous influence that Milton Friedman has had on economics and politics.

First, Larry Ribstein -- who doesn't touch on politics much but always provides keen insight when he does -- reflects Friedman's view on government interference in markets with this observation about the current political scene:

Senate Democrats, who need 60 votes to anything, have 51, and that includes some diverse agendas (e.g., Joe Lieberman). The House Speaker-to-be got thoroughly trampled by her own party on her first move. The WP quotes Jim Moran as threatening revenge on people who voted against Murtha (who, by the way, thinks ethics rules are "crap"). Meanwhile, the last time I checked, GWB was still President, a lame duck thinking about the history books.

In short, the U.S. government appears to be totally paralyzed for the next two years, incapable of doing much more than impotently holding hearings.

I guess the fact that the stock market has been setting records every day must be just a coincidence.

Meanwhile, the Wall Street Journal's ($) Washington Wire blog passes along this anecdote about Friedman from none other than John Kenneth Galbraith:

[A]t a lunch in Geneva in 1955, India’s statistician mentioned to [Galbraith] that the Indian government had asked several economists, including Milton Friedman, to visit and comment on Indian’s next five-year plan. [Galbraith] replied:

“Asking Milton Friedman to comment on a five year plan is like asking the Pope to comment on the running of a birth control clinic.”

Over at Cafe Hayek, Don Boudreaux recounts Professor Friedman's legendary debating skill:

Mr. Friedman also was a virtuoso debater. When, to endorse conscription over the volunteer military, Gen. William Westmorland said that he did not want to command "an army of mercenaries," Mr. Friedman piped up and asked, "General, would you rather command an army of slaves?"

Mr. Westmoreland replied, "I don't like to hear our patriotic draftees referred to as slaves." To which Mr. Friedman then retorted, "I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher."

Finally, Lawrence Summers does a fine job of placing Professor Friedman's impact on the worlds of economics and politics in perspective in this NY Sunday Times op-ed.

Posted by Tom at 7:39 AM | Comments (0) | TrackBack (0)

November 16, 2006

Milton Friedman, R.I.P.

I cannot improve on the brilliant simplicity of the lead sentence in the Wall Street Journal's article on the death earlier today of Milton Friedman:

Nobel prize winner Milton Friedman, one of the most influential economists of the last century, died today.

OpinionJournal chimes in with this fine tribute to Professor Friedman and the NY Times articles on Professor Friedman's death are here and here, the latter of which is by Austan Goolsbee, a University of Chicago economics professor. The Cato Institute also has posted this excellent online tribute to Professor Friedman from his 90th birthday, and the Hoover Institution's news release on his death is here. The Financial Times' excellent obituary is here, and Professor Friedman's student, Thomas Sowell, has a heartfelt tribute here.

Professor Friedman's writings are one of the primary reasons that I studied economics in undergraduate school and his wisdom and wit frequently blessed this blog over the past three years. Here are a few examples of Professor Friedman's remarkable ability to communicate complex principles with engaging simplicity:

On the progress of free markets in the world after World War II:

"After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas (though no such battle is ever won permanently); we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course. We are still far from bringing practice into conformity with opinion."

On the fundamental problem with government spending:

"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you're doing, and you try to get the most for your money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government. And that's close to 40% of our national income."

Answering a couple of questions on Social Security:

Q: If Social Security is such a terrible program, why is it the most popular government program in American history?

Friedman: "Well, because why does a Ponzi game work? It's easy to understand why it's popular. So far, on the average, retirees have gotten more out of the system than they put into it. "

Q: What about the fact that Social Security has reduced poverty among the elderly?

Friedman "Well, what it has done is transfer a lot of income from the young to the old. It is certainly true it has made the old people of the United States the best treated old people in the world."

Q: But why is that a bad thing?

Friedman: "Oh, it's not a bad thing for them, but what about the young?"

On rent controls and his influence in local political debates:

When Professor Friedman moved to San Francisco in the 1970's, the city was debating rent control. So he wrote a letter to The San Francisco Chronicle declaring: "Anybody who has examined the evidence about the effects of rent control, and still votes for it, is either a knave or a fool."

In a subsequent San Francisco Chronicle article, Professor Friedman was asked what happened after he sent his letter?

"They immediately passed it," Friedman laughed.

On a key difference between private firms and government:

"[A] private firm that makes a serious blunder may go out of business. A government agency is likely to get a bigger budget."

On competition from foreign companies that are subsidized by their government:

"Another source of "unfair competition" is said to be subsidies by foreign governments to their producers that enable them to sell in the United States below cost. Suppose a foreign government gives such subsidies, as no doubt some do. Who is hurt and who benefits? To pay for the subsidies the foreign government must tax its citizens. They are the ones who pay for the subsidies. US consumers benefit. They get cheap TV sets or automobiles or whatever is that is subsidized. Should we complain about such a program of reverse foreign aid?"

On government health care systems:

"Two major arguments are offered for introducing socialized medicine in the United States: first, that medical costs are beyond the means of most Americans; second, that socialization will somehow reduce costs. The second can be dismissed out of hand -- at least until someone can find some example of an activity that is conducted more economically by government than by private enterprise. As to the first, the people of the country must pay their costs one way or another; the only question is whether they pay them directly on their own behalf, or indirectly through the mediation of government bureaucrats who will subtract a substantial slice for their own salaries and expenses."

On the best protection for workers:

"The most reliable and effective protection for most workers is provided by the existence of many employers. As we have seen, a person who has only one possible employer has little or no protection. The employers who protect a worker are those who would like to hire him. Their demand for his services makes it in the self-interest of his own employer to pay him the full value of his work. If his own employer doesn't, someone else may be ready to do so. Competition for his services -- that is the worker's real protection."

On free markets and international relations:

"The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences."

On conservative versus liberal economists:

"I never characterize myself as a conservative economist. As I understand the English language, conservative means conserving, keeping things as they are. I don't want to keep things as they are. The true conservatives today are the people who are in favor of ever bigger government. The people who call themselves liberals today -- the New Dealers -- they are the true conservatives, because they want to keep going on the same path we're going on. I would like to dismantle that. I call myself a liberal in the true sense of liberal, in the sense in which it means pertains to freedom."

On evaluating governmental policies:

"One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions. The people who go around talking about their soft heart -- I share their -- I admire them for the softness of their heart, but unfortunately, it very often extends to their head as well, because the fact is that the programs that are labeled as being for the poor, for the needy, almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have."

This OpinionJournal post also includes a number of Professor Friedman's thoughts on a variety of issues.

Finally, when you have a few minutes, take a moment to watch this remarkable Open Mind video (other videos of Professor Friedman are here and here) from over 30 years ago of Professor Friedman discussing principles of economics and limited government. The entire video is about a half hour, but if you watch nothing else, take a moment to watch the beginning of the interview in which Professor Friedman brilliantly responds to a somewhat inflammatory opening question from the interviewer, who suggests that Professor Friedman lacks compassion for his fellow man. Professor Friedman calmly refuses to take the bait and turns the question around to question the motives of those who advocate the cure-all of government intervention.

Now, that's an expert witness I would have liked to have put in front of any jury!

Posted by Tom at 1:42 PM | Comments (1) | TrackBack (1)

November 7, 2006

Houston's hot real estate market

While many U.S. real estate markets are cooling off, this Wall Street Journal ($) article reports that the Houston real estate market continues to march forward:

This sprawling city missed the real-estate boom that sent home prices soaring on the East and West coasts. Now, with much of the nation's housing market in retreat, it has yet to feel even a tremor.

In September, local sales of single-family homes and condominiums were up 17.7% from a year earlier, logging their 32nd straight month of increase, according to the Houston Association of Realtors. The median price of an existing single-family home: $143,400, up 3%.

By contrast, nationwide sales of residential real estate fell 14.2% in September, according to the National Association of Realtors. Home prices nationally were down 2.2%, retreating in such former hot spots such as Washington, Boston and San Francisco. The national median sales price for September for existing single-family homes was $219,800, according to the Houston Association of Realtors.

Houston's gains are nothing like those seen in the past decade in the Northeast and California, but that may be the secret to Houston's success and the reason a bubble is unlikely to develop here. Land here is abundant, and the city has some of the least-restrictive land-use and construction rules in the nation. Those factors help supply to keep pace with demand and keep prices within reach of a broad range of potential buyers.

"We haven't had a bad year in the past decade," says Lorraine Abercrombie, chairwoman of the local Realtors group and marketing director for Greenwood King Properties.

Houston's model is in stark contrast to cities such as Boston and San Francisco, which have strict zoning, exacting building codes and laws governing historical preservation. Some economists, including Edward Glaeser of Harvard University, say excessive regulation in such cities has slowed construction to the point where demand has outstripped supply, fueling a run-up in home prices.

In the once-sizzling markets where home prices are falling, housing costs are double, triple or even quadruple those of Houston. The danger, says Dr. Glaeser, is such places have priced out today's highly skilled "knowledge workers," forcing them to live in a more affordable locale where their contribution to the economy might not be as great. "These are places where only the elite can live," Dr. Glaeser says.

Not so Houston. Confined by neither oceans nor mountains, the Houston metropolitan area has plenty of room to spread out. What is more, the city has no zoning, weak historical-preservation rules and few tools to preserve open space.

University of Houston economics professor Bart Smith is Houston's leading expert on the local economy, and he has made the point for years that Houston's energy-based economy has traditionally been countercyclical to the national economy. This characteristic has lessened over the past 20 years or so as the local economy diversified in light of the relatively low energy prices over much of that period. But the the continued strong local real estate market indicates that at least certain Houston markets remain countercyclical to U.S. markets generally even though Houston's overall economy now tends to track the national economy to a much greater extend than in the past.

Posted by Tom at 4:32 AM | Comments (1) | TrackBack (0)

October 30, 2006

Markets are the darndest things

Over the past two decades, feral hogs have been a hugely destructive force in rural Texas as they relentlessly tear up productive farm and ranch land. Moreover, with few predators, the hogs have multiplied exponentionally to the point where they are now commonly seen in suburban areas around Texas' large cities. So, what's the solution to controlling these feisty beasts?

According to this NY Times article, it's markets -- namely demand for feral hog meat in restaurants -- that offers the most promising solution yet:

[Feral hog meat] has also become lucrative as Europeans and an increasing number of Americans clamor for wild boar. Mr. Richardson [a hunter of hogs] said he made $28,000 last year selling live feral hogs.

“I think it’s a great health-conscious niche market,” said Dick Koehler, one of Mr. Richardson’s customers and the vice president of Frontier Meats, based in Fort Worth. “It has real potential for growth.”

Mr. Koehler said that about 60 percent of the processed hog meat from his plant ended up on the tables of fancy restaurants in Europe, but that its popularity was growing in the United States. Each year, his company ships more and more hog meat to American restaurants and specialty supermarkets to feed the demands for organic food, Mr. Koehler said.

A certain nephew of mine is going to be very interested in this news.

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October 26, 2006

The Godfather of Microcredit

Don't miss this Connie Bruck/New Yorker article on Muhammad Yunus, the Bangladesh banker and economist who was awarded this year's Nobel Peace Prize for his development of microcredit, which is simply the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans (a recent WSJ ($) op-ed by Yunus is here). Interestingly, an unexpected force is competing with microcredit:

[Microcredit promoters] say that the biggest obstacle to commercialization of the sector is philanthropic capital. They say that it distorts the market—not only by filling channels that might otherwise draw commercial investors but also by keeping unsustainable programs alive.

On the other hand, philanthropy is also a key source of capital for microcredit:

The idea of reaching billions of the poor by achieving “scale”—a word invoked ceaselessly in the microfinance community—has enticed foundations, rich individuals, even investors into channelling millions into microfinance. The $1.2-billion Michael and Susan Dell Foundation—established by the founder of one of the world’s largest computer manufacturers—has begun making grants to microfinance institutions in India, a country of 1.1 billion people, most of whom have no access to financial services. In October, 2005, Google established a philanthropic entity called Google.org, with seed money of about a billion dollars, to fight disease, global warming, and poverty; microfinance is expected to be a key component of its poverty portfolio. And last April the Bill and Melinda Gates Foundation announced that it would devote an undisclosed amount of money to expanding financial services for the poor in developing countries. Dr. Rajiv Shah, who oversees the new Gates program, said of microfinance, “This can reach hundreds of millions of people, and do so in a way that helps them move out of poverty and that sustains over time.”

Hat tip to Tyler Cowen for the link to the New Yorker article.

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September 22, 2006

Steven D. Levitt on gangs and crack cocaine

In this clever and lively lecture, University of Chicago Economics Professor Steven D. Levitt of Freakonomics (Morrow 2005) fame explores his research into the economics of gang members selling crack cocaine. Levitt's description of the way in which some gang members added the correct answer to the initial multiple choice question that the field researcher posed to them is priceless.

Hat tip to Greg Mankiw for the link to Levitt's lecture.

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September 15, 2006

Milton Friedman on limited government

Russell Roberts over at Cafe Hayek points us to a remarkable Open Mind video from over 30 years ago of Milton Friedman discussing principles of economics and limited government. The entire video is about a half hour, but if you watch nothing else, take a moment to marvel at Professor Friedman brilliantly responding to an inflammatory opening question that suggests he lacks compassion for his fellow man. Professor Friedman calmly refuses to take the bait and turns the issue around to question the motives of those who advocate the cure-all of government intervention:

INTERVIEWER: Professor Friedman, I wonder if I might begin the program by saying that you're a kind gentleman, yet you're identified by many with those who seem -- to those who make that identification to want us not to do kind and gentle things -- perhaps not provide for the poor, perhaps not provide for the aged -- and I wonder how you'd reconcile these phenomena and whether you feel it's fair to characterize you as a conservative economist.

FRIEDMAN: Well, let me start at the end of that first. I never characterize myself as a conservative economist. As I understand the English language, conservative means conserving, keeping things as they are. I don't want to keep things as they are. The true conservatives today are the people who are in favor of ever bigger government. The people who call themselves liberals today -- the New Dealers -- they are the true conservatives, because they want to keep going on the same path we're going on. I would like to dismantle that. I call myself a liberal in the true sense of liberal, in the sense in which it means (inaudible) and pertaining to freedom.

Now, that brings me to your second point. One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions. The people who go around talking about their soft heart -- I share their -- I admire them for the softness of their heart, but unfortunately, it very often extends to their head as well, because the fact is that the programs that are labeled as being for the poor, for the needy, almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have.

INTERVIEWER: As an example, what are you referring to?

FRIEDMAN: Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors -- there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. [. . .]

[T]he minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills. That's what the law says. The law says here's a man who would -- has a skill which would justify a wage rate of $1.50, $2.00 an hour. You can't, you may not employ him. It's illegal. Because if you employ him you have to pay him $2.50. Well, what's the result? To employ him at $2.50 is to engage in charity.

Now there's nothing wrong with charity. But most employers are not in a position where they can engage in that kind of charity. Thus the consequences of minimum wage rates have been almost wholly bad, to increase unemployment and to increase poverty. Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by minimum wage laws are the blacks. I've often said that the most anti-Negro law on the books of this land is the minimum wage rate. And so I think the real answer to your question is that you must not judge a bottle solely by its label. You have to look at what's inside and see what the law or the measure produces.

Indeed, Professor Friedman's analysis with regard to the minimum wage applies equally well to eviscerate this local government boondoggle.

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September 5, 2006

Costly assumptions

Tory Gattis over at Houston Strategies continues to do a great job of analyzing Houston Metro's proposed Richmond (or is that Westpark?) rail line (see here and here). However, I continue to be amazed by the Houston mainstream media's myopia in failing to take a look at the rail experience of Los Angeles, an area that shares many characteristics with the Houston metro area, but is much more densely-populated, which is normally a requirement for making an urban rail line successful.

That myopia is leading to a dangerous dynamic in the rail transit debate that USC urban economics professor Peter Gordon notes in commenting on this LA Times story regarding extension of the LA region's rail system. Professor Gordon observes that, despite irrefutable evidence that the LA rail system has been a boondoggle of massive proportions, the LA Times article does not even bother to address the threshold issue of whether more money should be dumped into the black hole rail transit system in the first place. Rather, the article assumes that the money will be spent and then simply addresses the issue of where it will go. Professor Gordon notes the incongruity of it all:

Three light-rail lines have been added to L.A. county's transit system in the last 20 years. Together, these cost $2.5 billion in capital costs, they serve about 125,000 passengers per day and account for a fiscal loss of approximately $252 million per year -- if one acknowledges that capital costs are real, something that transit operators and boosters often neglect.

If one wants to believe that there are external benefits, a variety of optimistic assumptions on auto trips replaced, cuts the loss to "only" $245 million/year. These are simple spreadsheet calculations that anyone can do. Further, no one alleges that the three lines have had any impact on L.A. area traffic conditions. In fact, complaints about "gridlock" are a staple -- and the pricing cure is still deemed too esoteric and/or sinister. In fact, there are no correlations known to man or woman to show that projects like this relieve traffic.

None of these simple facts made it into [the LA Times article] . . . Billions of dollars are at stake and a know-nothing debate is respectfully cited -- when it is simply about which part of town and which politician gets first run at the trough.

The recent LA Time article follows another one from a couple of months ago that declares that "California's highways, once the gold standard of the interstate system, are today some of the busiest, most dilapidated and under-financed roads in the country." That article then goes on to describe the failing highway system without even mentioning the fact that diversion of billions from that formerly great highway system to an unsuccessful rail transit system largely explains the mess.

As noted here and here over a year ago, Houston is at the stage of spending "merely" hundreds of millions on its dubious light rail system, but we can already see the same dynamic developing here that has been so costly for the Los Angeles region -- huge investment of public funds in an inflexible rail transit system, poor return on that investment, unwillingness to admit mistakes with regard to that investment and continuation of expensive mass transit policies that only get worse over time. Here's hoping that a few statesmen emerge among City of Houston elected officials who take a look at the evidence from the LA experiment and move the Metropolitan Transit Authority toward a more realistic and productive public transit system that is tailored for the Houston metro area. However, given the typical quality of the City of Houston's investment decisions, count me as pessimistic that any such re-evaluation will occur.

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August 27, 2006

Taking stock in New Orleans

The NY Times continues today with another installment in its excellent The Katrina Year series focusing on the status of the rebuilding of New Orleans. To the surprise of no one who has ever been involved in the interplay of business development nad government bureaucracy, the re-development of areas of the city that are most attractive for investment has actually gone reasonably well, while the areas in which government subsidies are necessary to induce private capital to invest have lagged. Also not surprising is the fact that local governmental entities still have not been able to put together a plan for providing basic governmental services for redevelopment. So it goes.

As noted in posts here and here last year in the immediate aftermath of Hurricane Katrina, one of the biggest problems confronting redevelopment of the New Orleans area was the storm's destruction of small businesses, which on an aggregate basis was the largest provider of jobs in the New Orleans area. This NY Times article reports on the struggles that small businesses in New Orleans have confronted in attempting to stay afloat in the year after Katrina and how many of the pre-Katrina small businesses have little hope of coming back.

Update: In this Opinion Journal editorial, the Wall Street Journal editorial board eviscerates the federal government's handling of the enormous amount of federal aid thrown at New Orleans in the year since Katrina.

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August 4, 2006

A $43 million limousine service

Anne Linehan and Kevin Whited, and Tory Gattis continue to do a good job of covering Houston Metro Rail's ever-present expansion plans, which seem to be impervious to whether the expansion is actually needed. Previous posts on the boondoggle of rail systems in cities such as Houston are here.

Although not as slick as a trendy Metro economic report analyzing the projected benefits of an expansion of the light rail system in Houston, this Bill Schadewald/Houston Business Journal ($) op-ed describes his rather compelling analysis of Metro Rail's ridership on one portion of the existing rail line:

As Yogi Berra once observed, sometimes you can see a lot just by looking. Neighborhoods can change character in a just a year.

Today I'm revisiting the outer Texas Medical Center area with a stroll down Fannin past Reliant Stadium along the light rail line.

It's half-past five on a Tuesday afternoon. The walk from South Braeswood to the end of the line is about a mile, give or take. . . .

A Metro train passes, whistle wailing. The trains regularly come and go in opposite directions every few minutes.

I'm focused on heart rate and rock, not paying much attention to the rhythm of the rails. Then I happen to look over. Staring back is a single solitary face on an entire train.

The cell phone says a quarter to six. Just one rider? During rush hour? It doesn't make sense.

I change the radio station and find a traffic report. Traffic is in bumper-to-bumper gridlock and slowed to a crawl on every major freeway for miles on end. Nothing unusual there. It's a typical weekday afternoon.

I decide the first train must have been a fluke. The next one will be chock full of rail commuters happy to be without cars.

The next train is empty. No passengers. Nada. Zip.

I start checking ridership on each train and keep a running total. The math isn't hard. After 20 inspections the cumulative body count is only 32. Even if I missed five who were bent over tying their shoes, it's still below two per train.

The rail cars may be packed from downtown to the Medical Center, but South Braeswood is the end of the line for all but an average of less than two.

It's a mystery why Metro went the extra mile. This ghost spur owes existence to a Super Bowl, a seasonal Reliant Stadium, and a now-defunct seasonal Astroworld.

In post-Super Bowl Houston, trains are crammed with cowboy hats for a few weeks of rodeo festivities early in the year. Red pom-pons and Texans T-shirts fill the seats on Sundays in the fall. . . .

So a mile of the seven-mile system built at a cost of $300 million is now primarily a $43 million limousine service on tracks for livestock lovers and football fanatics.

The depressing sight of so many empty cars bringing down Metro's ridership statistics is turning my walk into a bummer.

Schadewald goes on to recommend that Metro attempt to increase ridership by using its excess capacity of rail cars in a bumper car attraction next to the Dome. Not a bad suggestion, actually.

Posted by Tom at 5:52 AM | Comments (2) | TrackBack (0)

July 11, 2006

L.A.'s urban boondoggles

Houston's metropolitan area shares many characteristics with Southern California, so it's always interesting to review assessments of Los Angeles' urban boondoggles for guidance on how to avoid the same mistakes here.

In this L.A. Times op-ed, urban economics expert Joel Kotkin (previous posts here) explores the latest initiative to allow L.A.'s white elephant -- the downtown convention center -- to feed at the public trough. Despite the fact that the center has been a chronic money-pit despite a $500 million city expansion investment 17 years ago, the city is now proposing $300 million in loans, tax breaks and fee waivers for a $750-million, 54-story complex — including a 876-room Marriott Marquis, a posh 124-room Ritz-Carlton and 216 luxury condos — across from the Convention Center (sound familiar?). Despite the huge public outlay of public funds for the downtown convention center, Kotkin reports the following:

L.A. is still not on the list of the nation's top 10 convention cities and has little prospect of competing successfully against Las Vegas, New York and Orlando, which have far more attractions. According to one trade publication, L.A. hosted fewer major conventions last year than Indianapolis and Rosemont, Ill. But there's a bigger problem here.

The simple truth is that convention centers are rarely a good public investment. A definitive national study by the Brookings Institution, released last year, found that they frequently operate at a loss, including the recently expanded centers in Washington and St. Louis. In most cases, their much-ballyhooed effect on the local economy — new private investment, more jobs and increased levels of tourism — "has simply not occurred," reported Heywood Sanders, the study's author.

One problem is the convention business itself, Sanders noted. Overall attendance at the 200 largest trade shows — the critical market for large convention centers — has not grown measurably since 1993. Yet 44 cities — including Boston, Houston, Atlanta, Phoenix, Philadelphia, Washington and San Diego — were building or expanding convention centers, some by subsidizing the construction of a convention hotel, a development Sanders compared to an "arms race" among cities.

Stagnant trade-show business coupled with a convention center glut translates into more white elephants subsidized by taxpayers. Some cities such as Washington are already offering deep discounts to conventioneers to keep their buildings occupied. The L.A. Convention Center faces ever more cutthroat competition in such an environment. Unfortunately, the evidence suggests that a flashy hotel nearby may not increase the center's allure, especially because other cities, including Denver and Phoenix, are planning similar investments.

So, if the investment of public funds doesn't generate jobs and other economic benefits for a city's core, then who is benefitting from the public largesse?:

So if the hotel subsidy doesn't make economic sense, who benefits from the largesse? The biggest winner from the new public investment stands to be billionaire Phil Anschutz, whose $2.5-billion, 27-acre L.A. Live project — billed as "Times Square West" — is slated to be built adjacent to Staples Center. The refracted prestige of a new Ritz Carlton and luxury condos in the neighborhood would add luster to Anschutz's project, the proposed home of the West Coast headquarters of ESPN and a Grammy Award museum.

Meanwhile, urban economics expert Robert Bruegmann (previous post here) authors this LA Times op-ed in which he explains that L.A.'s urban sprawl is a reflection of its economic success and that its mobility problems largely stem from expectations generated from that success. Bruegmann suggests that it's time to think outside the box:

Unhappily, the fixation on sprawl has also detracted attention from the scenarios that might, over the long run, help build effective new public transportation systems. It is quite likely that this will need to involve the replacement of both the train and the gasoline-fueled automobile in the years ahead. Both are, after all, 19th century means of transportation, and very inefficient ones at that.

There is no technical reason that we couldn't have, not too far in the future, personal rapid transportation capsules running both on rails and rubber wheels, using alternative fuel sources and operating either on their own over short distances or linked together for longer distances on guideways that would allow speeds of hundreds of miles per hour. Such a system could vastly increase the capacity of existing right of way and go far toward reducing pollution.

Because cities are so dynamic, it is difficult to know whether our future urban areas will be lower or higher in density than today's. In either case, new modes of transportation that combine the adaptability and personal comfort of the auto with the efficiency of the train or bus are more likely, in the long run, to satisfy the needs of most Americans than forcing everyone back into high-density cities so they can ride trains.

We can do it, and we can enhance mobility for everyone. But only if we can put aside for a while the old and not-terribly-helpful battles over sprawl.

Hat tip for the links to Peter Gordon, who notes ruefully in his latest post:

Not to beat a dead horse, but today's LA Times includes a front-page feature, "Roads at Breaking Point" which begins this way: "California's highways, once the gold standard of the interstate system, are today some of the busiest, most dilapidated and under-financed roads in the country ..."

Nowhere does the article mention that the 30-year old crackpot idea (cheered by the Times at every turn) of diverting funds from roads to transit explains the mess.

Is Houston's Metropolitan Transit Authority listening?

Posted by Tom at 5:44 AM | Comments (0) | TrackBack (0)

July 5, 2006

The big problem with Mexico

The presidential election in Mexico garners more interest in Texas than many places because of the increasing problems that the state faces in regard to the influx of immigrants and violence on the border. Calderon's apparent victory is almost certainly better economically for Mexico, and Opinion Journal's Mary Anastasia O'Grady observes that the handling of the election is a hopeful sign for Mexico's emerging multi-party political system. However, the Washington Post's Robert Samuelson identifies in this column the problem that continues to vex Mexico's economic development -- inefficient big businesses that are protected by the government and vibrant small businesses that are threatened by it:

[Mexico's] economy consists of two vast sectors, each slow to adopt better technology and business practices.

One sector involves large, modern firms in semi-protected markets that limit the pressure to improve efficiency or lower prices. "Mexico's business sector is risk-averse. It's never had to operate in a true competitive environment," says Pamela Starr, an analyst for the Eurasia Group, a consulting firm. "It's operated with monopolies and oligopolies encouraged by the government."...

The other part of the economy is usually called the "informal sector." It consists of thousands of small firms -- street vendors, stores, repair shops, tiny manufacturers -- that theoretically aren't legal, because they haven't registered with the government and often don't pay taxes or comply with regulations on wages and hiring and firing. Almost two-thirds of Mexico's workers may be employed in the informal sector, according to one rough estimate by the International Monetary Fund.

The sector's size might suggest great entrepreneurial vitality. The trouble is that these firms are virtually compelled to remain small and inefficient. Because they're technically illegal, they can't easily get bank loans and can't grow too large without being forced to pay taxes or comply with government regulations.

Read the entire column.

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June 14, 2006

Best house deals are in Aggieland

This James Hagarty/Wall Street Journal ($) article reports on a recent analysis that ranks the Bryan-College Station area -- home of Texas A&M University -- as the most "undervalued" housing market in the country during this year's first quarter. In fact, eight out of the ten most undervalued markets are in Texas (Dallas and Ft. Worth are second and third, and Houston is fourth). Although such studies are usually accompanied by some hand-wringing from those who are concerned about the value of their home, the reality is that the availability of relatively cheap housing is one of the main drivers of Texas' economic growth over the past generation. Here's hoping that it continues.

Posted by Tom at 5:58 AM | Comments (1) | TrackBack (0)

April 30, 2006

John Kenneth Galbraith, R.I.P.

John Kenneth Galbraith died Saturday night at the age of 97 in Cambridge, MA. The NY Times' lengthy story on Galbraith's remarkable life is here and the well-done Boston Globe story on Galbraith's life is here.

Although Galbraith won world-wide recognition throughout his life as a liberal economist, a consultant to presidents, an active ambassador and a prodigious and witty author regarding America's affluence, my sense is that his foremost legacy is as a wonderful teacher. During his long and distinguished career at Harvard, his lectures were among the most well-attended of any professor, prompting Harvard colleague Henry Rosovsky to pass along the now well-known anecdote that even his car mechanic had heard about Galbraith's formidable teaching talent. Galbraith's death comes about a year after the publication of Richard Parker's seminal book about his life, John Kenneth Galbraith: His Life, His Politics, His Economics (Farrar, Straus 2005), reviewed here by Robert Skidelsky.

As noted in this earlier post, Parker in his book notes how the late President Lyndon Baines Johnson's rejection of one of Galbraith's speeches prompted the following hilarious observation from LBJ about economics and economists:

"Did y’ever think, Ken, that making a speech on ee-co-nomics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else."

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April 23, 2006

LBJ on Ee-co-nomics

Thanks to Arnold Kling for pointing out this Robert Skidelsky review of Richard Parker's new book, John Kenneth Galbraith: His Life, His Politics, His Economics (Farrar, Straus 2005), which contains the following earthy observation on economics from the late Lyndon B. Johnson, made to Galbraith while Johnson was throwing away a Galbraith-authored draft of a speech:

"Did y’ever think, Ken, that making a speech on ee-co-nomics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else."

Posted by Tom at 6:29 AM | Comments (1) | TrackBack (0)

March 26, 2006

Thomas Sowell is a wise man

Thomas Sowell (previous post here) is the Rose and Milton Friedman Senior Fellow of The Hoover Institution at Stanford University, where he has written yet another book, On Classical Economics (Yale 2006).

Although Professor Sowell's preference for free markets and disdain for governmental planning has often resulted in him being labeled as a leading black conservative (whatever that means), this Jason L. Riley/weekend WSJ ($) interview of Professor Sowell provides an interesting insight regarding that label:

Free-market economics, a legacy of the classical school, is thought of as an old conservative doctrine. But Mr. Sowell explains that it was in fact one of the most revolutionary concepts to emerge in the history of ideas. Moreover, "the thinking of the classical economist was not only a radical break from landmark intellectual figures like Plato and Machiavelli, but also from mainstream thinking to this day." The notion of a self-equilibrating system -- the market economy -- meant a reduced role for intellectuals and politicians, [Sowell] says.

"And even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging."

Update: Following on the Sowell interview, this NY Sunday Times op-ed by Orlando Patterson, John Cowles Professor of Sociology at Harvard University, is a thoughtful and timely piece on the plight of young black men in America. He argues that academicians have an affinity for socioeconomic explanations and too often dismiss cultural explanations. As he notes: "Too much is at stake for us to fail to understand the plight of these young men."

Posted by Tom at 12:00 PM | Comments (4) | TrackBack (0)

February 19, 2006

The Vegas monorail boondoggle

Tory Gattis of the smart Houston Strategies blog has been doing his typically excellent job of covering developments on the proposed expansion of the Houston Metro light rail line. Neither an over-the-top advocate nor a grizzled pessimist about urban rail systems, Tory takes a refreshingly measured view that such systems should attempt to maximize usefulness while being a part of an integrated urban mobility plan that doesn't place all urban mobility eggs in one transit-type's basket.

The wisdom of Tory's approach is reflected by what is currently playing out in Las Vegas, where Sin City's new $650 million, 4.4 mile monorail project just experienced the worst monthly ridership in the system's 18-month history (earlier post here). Although comparing Houston's light rail system to the Las Vegas monorail is bit akin to comparing apples and oranges, it is noteworthy that the poor performance of the Vegas monorail has contributed mightily to the junk bond rating of the Las Vegas Monorail Co. bonds that were used to finance the system. Now, the Vegas transit authority finds itself unable to sell bonds at a realistic price in order to finance construction of logical expansions of the system, such as an extension to McCarron Airport.

Read the entire article because it is a wonderful reminder to us of how financial logic and constraints are abandoned in the face of such governmental boondoggles. For example, what do you think the Vegas transit authority did in the face of a system that is generating less than half of the amount necessary to pay operating expenses and debt service, lost $20 million last year, and is generating far fewer riders than projected?

The transit authority increased its base one-way fare from $3 to $5.

But wait, pointed out a spokesperson for the transit authority, that cool move generated an almost 24% increase in monthly revenues from a year ago even though 18% fewer riders used the system. Thus, even though the system needs over a 50% increase in monthly revenues to approach break even status, the transit authority's spokesperson reasoned that an anecdotal month's worth of higher revenue indicates that a drastic ridership increase won't be needed to break even. According to the transit authority, all that is needed is a quadruple increase in the monorail's marketing budget in order to attract more riders, presumably high-rollers who enjoy moving from casino to casino. Often.

So, how long do you think it will take for the Vegas monorail to be converted into Vegas' newest rollercoaster attraction? ;^)

Posted by Tom at 7:42 AM | Comments (8) | TrackBack (0)

February 13, 2006

Two interesting interviews

Economist Milton Friedman (previous posts here, here and here) and former General Electric CEO Jack Welch are the subject of a couple of recent interviews and, as usual, both of them have interesting observations to pass along. First, Friedman:

"The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences."

The US Treasury debt is held mainly by China, Japan and South Korea. Is the huge foreign balance of payments deficit a problem for the US and world economy?

"I don’t think so. It may well be a statistical mirage. If you look at the balance sheet, the US is heavily in debt. If you look at the income account—the amount of interest the US pays abroad—it is almost exactly equal to the amount of interest that it receives from abroad. American assets held abroad are earning a higher rate of return than foreign assets held here.

That is understandable because what is most attractive about the US to people and countries with wealth is that it can provide security, insurance really, against political instability. Nobody is afraid that the money they place in the US is at risk of expropriation or of in some other way being taken away. For this safety, the wealth holders of the world are willing to accept a lower rate of return. US assets abroad, in contrast, are riskier and thus yield a higher rate of return.

This explains why there is a rough balance in real terms. It is not clear there really is a debt. It looks like the imbalance concerns are misleading. It doesn’t worry me a bit that China and Japan hold so much US debt. In a way, it seems foolish for them to do it because they get lower returns than they might elsewhere. But that is their business."

Does the large US fiscal deficit worry you?

"Not at all. It is the spending that got us there that worries me. If the US government spends 40 percent of the nation’s income, as it does through either borrowing or taxes, that income is not available for people to spend. The deficit is an indirect method of taxation. Of course, politicians prefer to borrow instead of tax because then someone down the road has to deal with the consequences.

If anything, at the moment, the large deficit has a positive effect of holding down further spending. In that sense, it is a good thing. But it is not a good thing if produced by more spending."

And then Welch, who was interviewed by Wall Street Journal columnist, Holman Jenkins:

Mr. Welch seems frequently to get razzed about "rank and yank," a term popularized by Enron. But he tells audiences that GE's method of systematically evaluating and weeding out employees involved a lot more coaching, and never involved dropping the hammer unexpectedly. OK, but was he really comfortable having those conversations in which he had to tell the laggards they weren't making the grade? "Totally," he says emphatically -- "because I never surprised them."

[Welch] maintains that a real manager has to be comfortable having such conversation [about "rank and yank"], but too many aren't because of a misguided sensitivity to their underlings' feelings. "That's the cruelest form of management," he continues. "You carry these people along. They get to be 50 years old. You have a recession. You say let's cut costs 10%, and you walk down the hall, 'Holman, you're going home.' 'Why me?' 'Because you weren't very good, Holman.' And Holman's reaction is: 'I've been here 25 years. Why didn't you tell me?'"

[Welch] was 13 years into his own career at GE before he learned what he now preaches as the key lesson of leadership--it's no longer about your success, but about the success of others. He discovered this only when he gave up running GE Plastics to run a whole group of GE businesses.

"I realized I couldn't run those businesses myself. I didn't know anything about them. It was up to me to get great people. When I was running my own business, I was way too much of a meddler. I didn't get it," he says.

Now he got it. Seven years later, he was tapped to become [GE's] CEO.

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February 10, 2006

The trade deficit ruse

This WSJ ($) article reports ominously that the U.S. trade deficit widened by over $100 billion last year to $726 billion from $618 billion in 2004.

In this TCS Central article, Don Boudreaux lucidly explains why we shouldn't worry much about it.

A far greater problem than the trade deficit is the widespread misunderstanding of it that often results in demagogic appeals for counterproductive protectionist policies.

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February 1, 2006

Are you sure that's not for an apartment?

This article notes that the same amount of monthly rent that would get you a nice apartment in Houston would get you something nice in Manhattan, too -- a parking space!:

Keeping a car at Time Warner Center across from Central Park runs about $550 to $600 a month. One- bedroom rentals are available for $500 to $600 in Greensboro, North Carolina; Austin, Texas; Cincinnati; and Oklahoma City, . . . Space is at a premium in Manhattan, home to about 1.56 million people, as outdoor lots and garages are converted into housing and new construction eats up what little land is available.

That opens a door for some building owners to tout their parking services. At 170 East End Avenue, architect Peter Marino designed parking spots as "couture homes for your car," with each space planned and presented to the buyer in the building's sales office, . . .

At One Beacon Court across East 59th Street from Bloomingdale's, where available apartments sell for $5.9 million to $17 million, residents have access to valet parking at a nearby garage, with their cars delivered to the building's entrance.

Rates are $600 a month, $700 for an oversized vehicle.

And I thought that $7 charge at the Civic Center Parking Garage for a couple of hours of parking last week was stiff! ;^) Hat tip to Craig Newmark for the link.

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December 26, 2005

Comparing urban boondoggles

Tory Gattis asks the right questions regarding Houston's latest proposed urban boondoggle, but it's at least somewhat comforting to know that other cities are pondering even bigger boondoggles.

In Chicago, Mayor Richard Daley is floating a plan to build a new $1 billion dollar domed stadium to attract a second NFL team, the Super Bowl, the 2016 Olympic Games, the NCAA Final Four, and perhaps an unending string of monster truck shows to the Windy City. Brad Humphreys over at the Sports Economist comments on the absurdity of this proposal:

For those with short attention spans, Soldier Field, home of the NFL's Chicago Bears, underwent a $365 million dollar publicly financed renovation in 2002. But someone forgot to enlarge Soldier Field and build a roof during the renovation. Its 61,500 seat capacity is second smallest in the NFL, and too small to host the opening and closing ceremonies at the Olympics.

Daley's plan appears to have a few minor flaws. First, the expansion is news to the NFL, which currently has zero franchises in mega media market Los Angeles and the itinerant Saints franchise to deal with. Second, the plan appears to also be news to the Bears, who might have a vested interest in maintaining a monopoly in the Chicago market. Note to hizzonor: next time check the NFL expansion regs before making plans to acquire a new football franchise.

Of course, part of the justification for this new stadium is - wait for it - a fountain of economic benefits flowing from the proposed facility. According to one of the mayor's aids, among the expected economic benefits flowing from the new stadium would be "thousands of new jobs and new infrastructure." Unfortunately, there is not one shred of evidence that sports facilities generate tangible net economic benefits like more jobs.

In fairness, Houston does have even bigger potential boondoggles than its latest relatively small one, and even has an existing one in the black hole that is Metro. However, at least Houston's pouring of money into that bottomless pit is downright economic compared to the money that Seattle residents are tossing into theirs:

The light-rail system, as now projected, will have far fewer stations, be far shorter, take years longer to build, and cost billions more than originally promised. What experts already knew--that light rail is unsuited to cities where tunneling and water crossings are necessary--is now apparent. Big engineering problems have arisen. Yet [local politicians] have kept big money flowing to the project.

Washington state law provides that transit agencies and regional transit authorities may operate rail service where it is competitive in cost with bus, bus rapid transit and other technologies. . . [however] Both Sound Transit's light rail and its intercity Sounder service have cost far more than alternatives, the prices of which were not presented.

Rail Madness came via ballot measure--the form of direct democracy tailor-made for willful, well-financed single-issue and single-interest coalitions to get what they want. Local law firms, financial institutions, unions, consultants, architects, builders and others who receive project-related public funds have formed a strong alliance with local politicians who keep those rails a hummin'. Taxpayer funds even pay for print and broadcast ads hyping the projects.

While Rail Madness prevails, more urgent transportation priorities are not being met . . .

Can Rail Madness reach those levels in Houston? You better believe it.

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December 20, 2005

Ed Prescott on playing politics with tax rates

2004 Nobel Laureate Edward Prescott is a Clear Thinkers favorite, and his work on Social Security reform reflects (here and here) a remarkable ability to present economic principles in a clear manner. In this Wall Street Journal ($) op-ed, Mr. Prescott criticizes playing politics with tax rates on capital gains and dividends, and -- in so doing -- provides this astute reasoning on the adverse economic effect of taxation:

So what are good tax rates? It's useful to begin with consideration of a simple principle: Taxes distort behavior. From this powerful little sentence comes the key insight that should inform our thinking about setting tax rates. Any tax, even the lowest and the fairest, will cause people to consume less or work less. Taxes that are inordinately high only exacerbate this reaction, and the aggregate accumulation of these individual decisions can be devastating to an economy.

Good tax rates, then, need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. (This assumes that a lower rate is politically impossible.)

These taxes are particularly cumbersome because they hit a market economy right in its collective heart, which is its entrepreneurial and risk-taking spirit. What makes this country's economy so vibrant is its participants' willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality.

Americans aren't risk-takers by nature any more than Germans are intrinsically less willing to work than Americans. The reason the U.S. economy is so much more vibrant than Germany's is that people in each country are playing by different rules. But we shouldn't take our vibrancy for granted. Tax rates matter. A shift back to higher rates will have negative consequences.

Read the entire piece.

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November 8, 2005

The effect of failed urban economics on the French riots

Joel Kotkin is an Irvine Senior Fellow at the New America Foundation, the author of The City: A Global History (Modern Library, 2005) and a friend of Houston Strategies' Tory Gattis. Mr. Kotkin came to my attention recently for his insightful writings on urban planning (here and here) during the aftermath of Hurricane Katrina.

In this OpinionJournal op-ed, Mr. Kotkin addresses the unintended consequences in France of governmental policies such as high taxation, the welfare state and the economic barriers to entry caused by excessive regulation:

The French political response to the continuing riots has focused most on the need for more multicultural "understanding" of, and public spending on, the disenchanted mass in the country's grim banlieues (suburbs). What has been largely ignored has been the role of France's economic system in contributing to the current crisis. State-directed capitalism may seem ideal for such American admirers such as Jeremy Rifkin, author of "The European Dream," and others on the left. Yet it is precisely this highly structured and increasingly infracted economic system that has so limited opportunities for immigrants and their children. In a country where short workweeks and early retirement are sacred, there is little emphasis on creating new jobs and even less on grass-roots entrepreneurial activity.

Read the entire piece.

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October 25, 2005

In defense of urban sprawl

Robert Bruegmann is a professor of architecture, art history and urban planning at the University of Illinois at Chicago, where he is chair of the art history department. He is also a well-regarded author on the issue of suburban growth and is the author of the recent book Sprawl: A Compact History (UChicago Press 2005). In this LA Times op-ed (free reg required), Professor Bruegmann challenges the conventional wisdom that Los Angeles is the epitome of urban sprawl run amok and that the northeastern metro areas are paragons of sound urban planning:

Los Angeles is not a particularly good example of urban sprawl. Take the part about being unplanned. The truth is that New York, Chicago and most of the older American cities had their greatest growth before there was anything resembling real public planning; the most basic American land planning tool, zoning, did not come into widespread use until the 1920s.

L.A., by contrast, was one of the country's zoning pioneers. It has had most of its growth since the 1920s, during a period when planning was already important, and particularly since World War II, when California cities have been subject to more planning than cities virtually anywhere else in the country.

Professor Bruegmann proceeds to point out that the density of the Los Angeles region has increased dramatically in the post World War II era as the density of the northeastern U.S. metro areas has plummeted, and that such increase in density has occurred during a time when Los Angelinos were becoming more automobile dependent rather than less. In fact, Professor Brudgmann notes that the growing congestion in the Los Angeles region is not so much a result of urban sprawl, but of increasing density of population coupled with too few miles of freeway per capita in L.A. compared with most other U.S. urban areas. He concludes by observing why these facts often do not make a dent in the conventional wisdom:

Of course, none of these objections to standard wisdom are likely to sway many highbrow critics of sprawl. Their desire to see L.A. as sprawl and therefore as not truly urban is based less on rational analysis than on subjective aesthetic judgments and class resentment.

But there are major problems with their position. First, there is considerable room for doubt that sprawl is necessarily the major problem that many anti-sprawl crusaders believe it to be. But, in any case, Los Angeles is not a good model of sprawl. The urban area of New York or Boston, for example, each surrounded by a huge low-density penumbra, would make a better poster child for sprawl than the dispersed but relatively dense and compact Los Angeles.

Read the entire piece. Hat tip to Peter Gordon for the link to Professor Bruegmann's op-ed.

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October 24, 2005

The economics of deferred obligations

Chronicle business columnist Loren Steffy wrote this interesting column over the weekend that includes excerpts from an old interview with business restructuring expert Steve Miller, who is currently managing the reorganization of Delphi as its CEO.

The reorganization of Delphi is considered a precursor of the almost inevitable larger reorganization of its former parent General Motors and other large American companies -- not to mention the federal government's Social Security and Medicare programs -- that are burdened with huge unfunded pension and retiree health care costs. Mr. Miller sums up the basic problem well in describing the similar problems that he confronted in one of his former reorganization projects, Bethlehem Steel:

In 1960, when [Bethlehem Steel] adopted a lot of its benefit programs, the company had 100,000 workers and about 12,000 retirees. Promising them pensions and health care benefits for life seemed, at best, a distant worry.

More than 40 years later, Bethlehem, by then in bankruptcy, had 12,000 employees and 130,000 retirees and dependents. The math no longer worked.

Read the entire article.

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October 21, 2005

A truly scary thought -- Metro morphs into real estate developer

The Chronicles Nancy Sarnoff writes in this article about the Metropolitan Transit Authority's latest venture to do something other than what it is chartered to do, which is to provide a flexible and effective mass transit system for citizens of the Houston metropolitan area:

[Metro] has selected Houston-based Transwestern Commercial Services to build [a $105 million building above the transit center on Fannin near the Medical Center], which could include condominiums, a hotel, office and retail space in the Texas Medical Center.

Metro hopes the project will increase ridership, create a neighborhood-friendly sense of place and generate revenue from its real estate assets.

"We want to do things where people can live, work and play that enhance their quality of life," said Todd Mason, vice president of real estate services for Metro.

The development plan calls for a 175-room hotel, 30 condominiums, 35,000 square feet of shops 168,000 square feet of medical office space and a 15,000-square-foot wellness center.

Transwestern and Metro will spend the next year looking for a hotel operator and tenants to fill the space.

Chip Clarke, president of Transwestern's southern region, said the project details are "fluid" and that its ultimate uses will be driven by the market.

Construction, which could take three years to complete, is expected to begin in the second half of 2006.

The article goes on to describe how Metro plans similar projects for other parts of the light rail line.

H'mm. We already know that Metro does not perform particularly well at that which it is chartered to do. In view of that, it's not a good idea for Metro to be getting into the notoriously speculative real estate development business, where it can lose even more money. Indeed, our local government already has a dubious record of boondoggles in that area. Finally, given Metro's governmental subsidy for this project, how on earth are private developers -- who risk their investment based on market conditions -- supposed to compete with such projects when they must rely on higher-cost private financing?

Consequently, count me as skeptical that this approach to spurring development along Metro's rail line makes sense. When this type of thing gets started, we're not very far from having to deal with this even bigger problem.

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October 11, 2005

Nobel Laureate Thomas C. Schelling

Former University of Maryland economics professor Thomas C. Schelling was named the winner of the Nobel Memorial Prize in Economic Science yesterday along with Israeli economist Robert J. Aumann for their work in game theory, which essentially attempts to explain the choices that competitors make in situations that require strategic thinking. Mr. Schelling was the mentor of Marginal Revolution's Tyler Cowen, so don't miss Tyler's excellent overview of Professor Schelling's career and extraordinary contributions to economics, foreign policy and clear thinking. Tim Harford of the Financial Times also chimes in. Enjoy.

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October 3, 2005

The latest urban boondoggle

Houston's light rail system is a depressing <