Evan Newmark, writing on one of the Wall St. Journal’s blogs on Friday, three days before Monday's vote on the $700 billlion bailout plan:

The public still doesn’t connect their lives to the crisis. But it should.

Because no bailout bill means that:

By the close of the stock market on Monday, the value of Main Street’s IRAs, 401Ks and pension plans will be worth a lot less than on Friday. How much? Hard to say, but a loss of 20% isn’t crazy.

By week’s end, there is a good chance that a raft of large banks will be taken over by federal regulators.

Within two weeks, as the banks hoard cash, the credit lines on most of Main Street’s credit cards will be reduced, foreclosure proceedings accelerated and car-leasing programs suspended.

Within a month, Main Street won’t be able to buy a home, a car or a tractor unless paid for in cash. As the credit markets shutdown, the mortgage, auto and small-business loan markets will nearly disappear. And the economy will grind to a near halt.

Far fetched? Not at all. It is the absence of credit–not too much of it–that causes great economic depressions.

The Dow-Jones average actually lost just under 7% on Monday, falling to 10365.45. It turns out that expecting a 20% decline was a bit crazy. At this moment on Tuesday it has recovered almost half of that, up 3.3% to 10710.56.

We’ll keep watching to see whether the other dire predictions fare any better.

One can oppose the bailout, by the way, and still favor the Fed using open-market operations to prevent a decline in the money stock and thereby to support the volume of bank credit. It was the steep decline in M2 [in a banking system made artificially fragile by government intervention] in 1929-33 that, as Friedman and Schwartz explained, helped turn the recession of 1929 into the opening phase of the Great Depression. It was not the decline in the number of banks. Socializing and losses and perpetuating bad investments by propping up insolvent institutions – the foolish mission of the Hoover-FDR Reconstruction Finance Corporation – did not help recovery. Almost certainly it hindered it.

By the way, too much credit in the 1920s was a chief cause of the intitial downturn: it sowed the seeds for it by distorting interest rates and thereby fostering the malinvestments that came to grief.

Probably not entirely fair--so my apologies in advance--but here goes:

Asking Washington pols to solve the financial market crisis is akin to asking an arsonist to put out his fire.

From an interesting story via KNBC:

Welcome to Oaksterdam University, a new trade school where "higher education" takes on a whole new meaning.

The school prepares people for jobs in California's thriving medical marijuana industry.

For $200 and the cost of two required textbooks, students learn how to cultivate and cook with cannabis, study which strains of pot are best for certain ailments, and are instructed in the legalities of a business that is against the law in the eyes of the federal government.

The only prerequisite for the course is a Politics/Legal Issues 101 class.

In a microcosm of the national vote, the St. Louis Post-Dispatch reports (and illustrates in a "hell freezes over"-themed cartoon) the fact that those voting "NO" on the bailout included both the left-wing Rep. William Lacy Clay (D-Inner City St. Louis) and the right-wing Rep. Todd Akin (R-Well-to-do Suburbs).

TV's talking heads last night were baffled by the failure of the bailout. They blamed it on a "failure of leadership" to ram the measure through. (Or, if they noticed that the mail to Congress was running 30-1 against the bailout, they blamed a failure of politicians to "educate" the public, who obviously didn't understand the gravity of the situation.)

It's pretty simple, really. Republicans who voted no didn't like the fact that $700 billion would be taken from taxpayers. (A few, encouragingly, talked about defending free-market principles.) Democrats who voted no didn't like the fact that it would be going to Wall Street.

During an email exchange with a friend, I suggested that it would be great if Congress were to invoke Psalm 139:6--"Such knowledge is too wonderful for me; it is high, I cannot attain unto it"--when asked how they are going to fix the minute details of the current financial mess, and it would be great if they applied this to policy-making in general. I then sent him a Hayekian adaptation of the serenity prayer:

"God, please grant me the ability to learn the things I don't know, the serenity to accept that there are things I can't know, and the wisdom to know the difference."

By now we've probably all seen a lot of punditry laying the blame for the current financial mess on unfettered capitalism and deregulation (Obama returned to this point a few times during the debate on Friday night). Steven Horwitz offers a brilliant "Open Letter to (his) Friends on the Left" making the case that free markets aren't to blame. His letter should be read and distributed widely.

... says Bill Clinton in an interview with Maria Bartiromo. Self serving? Without a doubt. But mighty interesting, too, because of all the talk that deregulation or lack of regulation is the root cause of the current financial turmoil. Some snips:

MARIA BARTIROMO

Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?

FORMER PRESIDENT BILL CLINTON

No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.

[Bartiromo:] Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?

[Clinton:] Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

"I've got three different technologies that could wipe out the species," said Friedman, a self-professed libertarian who is certain that neither politics nor central planning will avert a possible bad technological outcome.

"I am much more worried about the government making the wrong response and doing damage than I am about the government not protecting me," said Friedman, adding: "It's a mistake to think of the world as if there was somebody in charge. There's never been anybody in charge."

That's David Friedman in a San Francisco Chronicle feature on him and his new book, Future Imperfect.

HT: Jeff Hummell

I was talking about this puzzle with George Selgin, and he suggested I raise it here. Can anyone explain to us Ben Bernanke's theory according to which taxpayer-financed asset purchases can help a troubled asset market get unstuck, i. e. regain its previously high volume? Is that based on any known theory of markets, or any known historical experience? The purchases are supposed to help the market in "price discovery," via some cleverly designed mechanism (as yet unspecified). Bernanke swears it isn't about overpaying for assets to subsidize the institutions selling the troubled assets, only about finding the market a price. But in that case, why would anything close to $700 billions of purchases be needed?

Comments are open.

Tenants of a Brooklyn building say their landlord came up with a new idea for how to kick them out: Let the smell of the cats out of the bag. Dead cats, that is.

The stench from the carcasses did catch the tenants' attention -- but they stayed and sued.

One tenant, Daisy Terry, told a City Hall news conference on Sunday it was so bad she had to hold her nose coming down the stairs.

Terry says the landlord used the dead cats to try to push out rent-stabilized tenants.

Source. Maybe PETA should come out against rent control. HT: Drudge

If you have a student who might be interested in presenting, the deadline for Grove City College's Austrian Student Scholar's Conference is fast approaching (October 1st). DOL friends Ed Stringham and Bob Higgs will be keynote speakers. More information can be found here and the announcement is below the fold.

Read More »

The Sept. 29, 1908 NYT reports on academic eligibility at Yale:

The chances are slim for Arthur Brides, Yale's all-around football star, wearing a uniform this season. Brides was to-day definitely notified that he cannot join the eleven unless he removes the deficiencies in his studies. There is little chance that Brides can fill the demand, but he will pluckily try to do so before the big games. He will not report with the team for weeks, and the football coaches say that they regard him as out of the competition.

Fairly impressive, although it is Yale after all, that before the NCAA promulgated rules concerning academic eligibility, at least one case of enforcement of standards could be found. Likely this is the problem: the fact that Brides's story was such big news indicates that such academic enforcement wasn't that common and thus, eventually, the NCAA will enact its own rules.

Excellent summary of the problems with the various assertions that free markets and deregulation, coupled with greed, caused the recent financial problems. Good use of a quote from Larry White.

I especially like this NY Sun piece.

Below the fold: the transcript of the live chat that occurred at www.commercialappeal.com earlier this evening (posted for my econ 101 students, who have a homework assignment based on the debate due on Tuesday). UPDATE: Apparently, I was only able to copy and paste the first 40 minutes of the chat. The rest is available here: http://www.commercialappeal.com/debatechat/.

Read More »

Two staff writers in the WaPo today:

The critics [of the Paulson plan] can be roughly divided into two camps. One group thinks money should be directly infused into banks, which should allow it to trickle down through the financial system to borrowers. A second group thinks the government should buy individual mortgages, thus helping ordinary Americans more directly, with the benefits trickling up to the banks.

Actually there's a third camp: those of us who think that the government should not be taking the money from taxpayers in the first place. Instead it should let private market participants recapitalize banks (as Mitsubishi Bank just did for Morgan Stanley) and buy distressed assets, at prices set in actual genuine market transactions, to the extent that those risking their own money think warranted. As we discovered in the savings and loan fiasco of the 1980s, and as Japan discovered in the 1990s, propping up insolvent financial firms so they keep operating only makes survival more difficult for healthy firms.

You've got to love bureaucracy, if only for the laughs. Libertarians like to mock government bureaucracy, but private bureaucracy can be just as intransigent and mind-numbing. The key thing about bureaucracy is that it always rolls on, a big, inpersonal machine that grinds all before it. And bureaucrats do what they are tasked to do, regardless of the circumstances.

Here, for example, is the last press release from Washington Mutual, issued September 24, as the company teetered on bankruptcy, one day before the buy-out by JP Morgan - Chase:

WaMu Recognized as Top Diverse Employer—Again
Company ranks in top ten of Hispanic Business’ Diversity Elite and earns perfect score on the Human Rights Campaign’s Corporate Equality Index
SEATTLE, WA (September 24, 2008) – Washington Mutual, Inc. (NYSE:WM), one of the nation’s leading banks for consumers and small businesses, has once again been recognized as a top employer by Hispanic Business magazine and the Human Rights Campaign.

Hispanic Business magazine recently ranked WaMu sixth in its annual Diversity Elite list, which names the top 60 companies for Hispanics. The company was honored specifically for its efforts to recruit Hispanic employees, reach out to Hispanic consumers and support Hispanic communities and organizations.

The Human Rights Campaign, the largest national gay, lesbian, bisexual and transgender (GLBT) civil rights organization, also awarded WaMu its second consecutive 100 percent score in the organization’s 2009 Corporate Equality Index (CEI), which measures progress in attaining equal rights for GLBT employees and consumers. WaMu joins the ranks of 259 other major U.S. businesses that also received top marks in the annual survey. The CEI rated a total of 583 businesses on GLBT-related policies and practices, including non-discrimination policies and domestic partner benefits.

In both surveys, WaMu earned points for competitive diversity policies and programs, including the recently established Latino, African American and GLBT employee network groups, all of which have a corporate executive sponsor and champion.

“Diversity is an integral part of cultivating a welcoming, innovative and dynamic workplace here at WaMu. We are proud to be recognized for the opportunities and benefits we offer to all of our employees, including the specific efforts we have made to engage Hispanics and the GLBT community,” said Steve Rotella, WaMu president and COO. “We are committed to diversity at WaMu and pledge to listen to our customers and work closely with our employees to continue to make progress.”

You can't make this stuff up.

The full release is here. Hat tip to Mark Krikorian at The Corner .

Namely John A. Allison of BB&T, in an open letter to Congress. Money quotes:

There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street. ...

The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. ... Treasury is totally dominated by Wall St. investment bankers. They do not have knowledge of the commercial banking industry. Therefore they cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the entire financial system.

Allison offers his comments in 14 numbered points. 13.5 of them are spot-on. The second half of comment six is only one I'd quarrel with.

...Shannon and I are about to get on the road again. We're headed to Birmingham, where I'll be presenting a paper about Wal-Mart and obesity at UAB on Friday and talking about price-gouging at Birmingham-Southern on Monday. Speaking of which, the Commercial Appeal printed a few letters in response to my article on price gouging and gas prices. In between, we'll be visiting family. On Saturday night, Jacob and I are going to my Dad's house to watch the Bama-Georgia game.

On Friday night, I'll be live-blogging the Presidential debate for the Commercial Appeal from my in-laws' living room. Please feel free to join the discussion.

Next week: Wal-Mart at West Virginia. The following week: corruption and entrepreneurship at Auburn. Then Samford. Then the MVEA meetings in Saint Louis. Then Liberty Fund. Then UA-Little Rock and Central Arkansas. Then Ole Miss. Then...I don't know what. Thanksgiving?

Steve Chapman makes the case well. Let's hope it's not too late.

Capitalism in which AIG never closes down is like American Idol in which Sanjaya never goes home.

From the Sept. 25, 1908 NYT:

A rich New Yorker may have a swimming pool in his yacht, as one of them has planned; he may have a marble bathtub, though porcelain-laid tubs do very well for ninety-nine out of every hundred; he may bathe in cow's milk, goat's milk, or white asses' milk, as the books say some Romans did, but he may not have two doors to his bath room if it is in an apartment house in New York City...

The Tenement House Department has adopted a rule that no bath room shall have more than one door. And so the plans of the west side man for his bathrooms had to be changed.

"Two doors in a bath room," explained Commissioner Butler yesterday, "makes for the accidental collision of persons in the bathroom. It is so easy to forget about locking the door through which you did not come. There doesn't seem to be any good reason why the rule shouldn't be general. I don't know why anybody should want two doors in a bathroom."

Indeed, I am sure Mr. Butler didn't have a clue as to why someone would want two doors to a bathroom. Thus, as is too often the case with the "benevolent social planner," Commissioner Butler's preferences ruled supreme. Yet, did Mr. Butler's lack of knowledge and/or understanding of other people's preferences improve efficiency and social welfare? Hmmm.....

Quote of the day:
"Wall Street loves money but hates free markets, because free markets distribute economic benefits to those who earn them, rather than to those best able to seize them."

See their exchange on YouTube. Rep. Paul's statement on what landed us in the current turmoil is pretty darn good.

Chairman Bernanke's reply (begins at 4:59 of the clip) is notable in several respects.

(1) He agrees that the price-fixing of the New Deal's NRA and AAA harmed economic recovery, and states that a consensus of economic historians thinks likewise. Good to hear!

(2) He denies that the Paulson plan involves similar price-fixing. He claims that the feds will use "market-based" methods to determine the prices of the distressed assets they buy. But how can this be consistent with his thinking that the market for these assets is currently on the fritz? He mentions auctions as one market-based method, but (again) doesn't explain how he imagines having an auction with only one buyer. Does Bernanke favor a real market approach, or a market-socialist approach a la Oskar Lange? As Felix Salmon rightly asks: instead of pondering auction design, how about considering a real market?

(3) He perpetuates the myths that Hoover's Treasury Secretary Andrew Mellon was a liquidationist, and that the Fed in 1929-32 was following Mellon's supposed advice.

If you are interested in the finer points of Austrian monetary theory, see the discussion over at Peter Klein's blog.

Howdy. I grow apples in the Northwest. A few years ago I took advantage of low interest rates and federal farm-loan subsidies to borrow money to clear land and plant apple trees. Trouble is, so did lots of other apple-growers. Now we have so many apple trees out here producing fruit that the price of apples is depressed, and so is the price of my new orchard. I’m not making enough selling my apple crop to cover my loan payments, and I can’t sell my orchard for a high enough price to pay off the loan.

In retrospect, I obviously made a mistake planting those trees. Now what? Until last week I thought my only two options were: I bear the loss and keep up the loan payments somehow, or my lender bears the loss by renegotiating the loan or having it written down for him when I declare bankruptcy. While I’m debating which one of those to choose, and I might go bankrupt, nobody will refinance my other debts at low rates. (Meanwhile my Uncle Freddie, who lent me the money, made a bunch of other bad orchard loans. He made an even bigger mistake than mine. I heard that he's in bankruptcy court now.)

My neighbors Ben and Hank, however, have a third option. They have a different way of looking at the problem. They think the reason that nobody will offer a good enough price for my orchard (and other orchards like it) is that the usual orchard buyers are just temporarily spooked. They think it will pass. They think the three of us should pool our money, set up a new fund, and use it to buy my and other distressed orchards at better than the going price. With the orchard off my own books, they say I can more easily meet the payments on my other loans, and I’ll be able to get new loans. Later our fund will sell the orchards off for what they’re really worth.

Now, I think they’re being foolish. What with all the overplanted trees out there, the apple business and the price of orchards are going to remain depressed for a long while. Barring some unforeseen event that boosts demand for apples, prices will remain depressed until finally enough apple trees have died off to reduce the crop to where it ought to be. I’d be a fool to put any of my own good money into the fund they’re proposing.

But hey, if Ben and Hank can convince some even bigger fool to pay a good price for the orchard I shouldn’t have planted, I’ll cash the check.

I think Richard Epstein's is the best brief summary of the general perception of the current mess:

[O]ur bipartisan consensus is holding true to form. In a system that is chock-full of heavy regulation, they instantly blame the current collapse on the excesses of the free market, for which a still heavier dose of regulation supplies some supposed cure.

I should have read Mike's piece more carefully before making the statement above. His concluding statement, even shorter, complements Epstein: "Things aren't so bad that a panicked bunch of politicians can't make it much, much worse."

Unbelievably funny video off of an Aussie senator discussing an oil spill. I'm told this is true [Update: but it's not], but it seems like an Abbott and Costello routine. Thanks to Pete for the pointer.

More from the "there are no new problems, only our problems" drawer, the Sept. 23, 1908 NYT reports:

"Europeans believe that the world panic of last Autumn was caused by our banking system; that there is no assurance against a recurrence of the trouble until the banking system is reformed. And I agree with Europeans," remarked Jame B. Forgan, President of the First National Bank, upon his return from a trip abroad today. He continued:

"Over there in Europe, when a monetary scare occurs and spreads, there is at once a unanimity of action among bankers. Money begins to flow to the country's financial centre. The Bank of England, for instance, raises its discount rate; it gets gold from everywhere; the monetary resources of the country are laid under contribution for the benefit of the big bank or banks. The people are then shown the strong position of the large institution or institutions, and are calmed thereby.

"Here in the United States we are the victims of a process the direct reverse of that obtaining abroad. when apprehension seizes the Nation our one or two big piles of cash are pounced upon by a myriad of little bankers throughout the country, who make hundreds of piles of them, and who, after getting the money, do nothing but stare at it, having really no use for it.

"In the meanwhile, the cash means of the financial centres are more or less depleted. Their reserves inevitably sink below the 25 per cent limit demanded by the banking law. The newspapers herald this fact, call attention to it, and the panic is emphasized. The people think that the big banks haven't much cash, and wildly conclude that if the important banker is in that condition, what must be the position of the little fellow, not knowing, not understanding, that the crisis has been brought about by the very fact that small bankers want to build little piles of money to look at.

"I haven't the time or the inclination at present to go into the remedial phase of the question - I'm not proposing a central bank, mind you - but I know we cannot go on in the old way with any sort of safety.

"I could not reply to the censure of Europeans simply because I knew that their strictures were fully deserved. i sat there and took it all as a representative of a faulty system must."

Well, it only took 100 years but it would seem that we have come full circle. One wonders whether the reform Mr. Forgan had in mind would have made it harder for his bank to make money. I wager not.

I am not a monetary historian or monetary economist, we have other contributors who fill that role, but from this economist's perspective the crisis of today seems to have been born from the pragmatic politics of the past (whether the pragmatic politics centered on "affordable housing" or blocking "reform" of the quasi-government moral hazard centers).

A little squib of an op ed in the Charlotte Observer this a.m., for your reading pleasure.

The text:

From Mike Munger, a Duke University professor of economics and political science, and the Libertarian candidate for governor.

“The state is the great fiction by which each of us seeks to live at the expense of all of us.” The 19th French economist Frederic Bastiat recognized something that seems to be eluding our wise men in Washington, and Wall Street.

If Bastiat were alive, I can guess his reaction to the bailout: First, we don't know what we are doing, and we are as likely to do harm as help. The desperate hurry comes from electoral politics, and not from any real economic necessity.

Second, we aren't creating value. Government can't create value in financial markets. All we are doing is shifting costs from one group (Wall Street bankers, and mortgage sellers who took enormous and unsupportable risks) and transferring them to another group (taxpayers, who don't know any better).

When you hear someone say “The government bailout of Wall Street,” make a mental substitution: “The taxpayer-funded bailout of Wall Street.” And then remember that we have a federal debt bigger than Jupiter.

Deficits are future taxes. The bailout is simply a way of allowing irresponsible lenders to escape unharmed. If you have a mortgage, and can't pay, then you are responsible. If AIG has debts and can't pay, our leaders want to soak taxpayers for the bill.

The point is that you can't take money away from taxpayers who earned it, give it to the financiers who squandered it, and call that a good policy. There is no danger of another Depression, which was caused by a deflationary monetary policy. We are facing a temporary credit crunch, and it will sort itself out if we leave it alone. Things aren't so bad that a panicked bunch of politicians can't make it much, much worse.

Each can't live at the expense of all. Not even if you are a rich banker.

And....it made "THE CORNER"

When he sees the luxurious residence or the charming country house of a wealthy person, a poor workingman often asks himself: "Why is there such inequality in the world?"

How many volumes have been written about equality among men! How much blood has been spilled for this idea! And yet, in spite of it all, we still have the rich and the poor...

Let us imagine that one day all the inhabitants of the world would assemble to put into effect this sharing of all goods; and that in fact each person, granted that the world is very big, received an exactly equal portion of the wealth existing on earth.

Then what? That very evening one man might say, "Today I worked hard: now I am going to take rest." Another might state, "I understand this sharing of goods well; so let's drink and celebrate such an extraordinary happening." On the other hand, another might say, "Now I am going to set to work with a will so as to reap the greatest benefit I can from what I have received." And so, starting on the next day, the first man would have only the amount given him; the second would have less, and the third would have increased his.

Then what do we do? Start redistributing the wealth all over again?

Even if everybody began to work right away with all his might and at the same time, the results would not be identical for all. There are, in fact, different kinds of work which are unequally productive; nor do all workers enjoy the same identical capacities. This leads to a diversity of results achieved, and consequently to differences in people's profits.

So who said it? Maximilian Kolbe, a Polish priest imprisoned and martyred at Auschwitz. After a prisoner escaped, the Nazis picked 10 prisoners at random to die by starvation. One of the 10 began pleading with the Nazis about his wife and children, and Kolbe volunteered to take the man's place.

HT: Magnificat

CNNSI.com's weekly "conference power ranking" sparked an interesting conversation in the comments thread about the focus on conferences rather than teams. Why do people focus more on conference strength than they used to (if, in fact, they do)? Why is there so much discussion of conferences as opposed to individual teams?

I think a lot of it has to do with changes in geographic mobility and communications technology as well as strength-of-schedule incentives in the BCS era. For previous generations, people who supported Our Team comprised the relevant moral community. In a world that is much more geographically integrated, however, people are much more likely to find themselves around people who didn't grow up with Our Team and its legendary battles against In-State Rival. "Us" and "Them" have gotten bigger: instead of just Alabama versus Auburn, it's the state of Alabama versus the rest of the SEC or the SEC versus the rest of the country.

The strength-of-schedule incentives are fairly clear: it is better for Alabama if the only game LSU loses is to Alabama, the only games Auburn loses are to LSU and Alabama, and so on. Why this matters, though, is probably also a function of increased geographic mobility. As people become more geographically mobile, the regional prominence of Our Team becomes relatively less important than national prominence. If everyone you're around is an Alabama fan or an Auburn fan, then the Alabama-Auburn game is pretty important and the "who is better" question is settled on the field. If you're around people from all over the country, more information is required before a judgment can be reached. Hence, conference strength matters more.

So GA has a something like a $2 billion budget hole and the GA DOT is bumping back projects because of an ostensible lack of funding. So what is GA doing? It's continuing to run commercials/PSAs about a road project (the repaving of the downtown connector in Atlanta) that has been finished more than a week. The PSAs urge people to be patient, choose alternate routes, and to consult a GA DOT website for info on construction delasy.

No, it probably isn't a large amount of money and maybe GA DOT saved money with some sort of bulk media buy, but certainly doesn't look like good stewardship of taxpayer dollars.

From the inbox today:

Dear friends of the Free To Choose Network: Check out this exciting short video on free trade, produced by middle and high school students:

... appears to be growing. Mike Mandel summarizes for Business Week's Economics Unbound blog.

1. Fayetteville was really nice. I had a great time on Friday meeting with members of the economics faculty and presenting Charles Courtemanche's and my paper on Wal-Mart and obesity, and I enjoyed hanging out with Patrick and Sonia Gill (friends from college who just moved to Fayetteville) Friday night and Saturday before, during, and after the game. Next presentations of the Wal-Mart paper: UAB this Friday and West Virginia next Friday. Next live college football game: West Virginia-Rutgers.

2. Alabama is a legitimate contender for the SEC title. p(Alabama is a national title contender|Alabama beats Georgia on Saturday) = 1. p(Alabama beats Georgia) = 0.4.

3. That said, I think that if the Big 12 champion, the SEC champion, and USC go unbeaten, USC has the toughest case to make for inclusion in the title game. That blowout win over OSU might get less and less impressive with every passing week, and there are four SEC teams and four Big 12 teams in the top 10 while the Pac-10 looks like a one-team wonder (the Pac-10 proved last week that it's no Mountain West Conference; this past weekend, Boise State's win at Oregon proved that the Pac-10 is probably no WAC, either). It will be fun to watch.

4. That said, there's always a lot of talk every year about how a playoff would not only ensure a "real" champion, it would make more money. If this is true, though, I wonder which transaction costs prevent efficient Coasean bargains.

5. College sports illustrates a hard-to-measure-but-nonetheless-real improvement in standards of living: the enormous increases in the ornateness and complexity of college football tailgate parties. It seems like every tailgate party has a tent, comfortable camping chairs, mountains of really good food, a giant plastic blow-up mascot, and a flat-screen TV with a satellite hookup. And with only a few exceptions, everybody is pretty friendly mo matter who they're pulling for. It's a great way to spend a beautiful Autumn Saturday.

The Memphis Commerical-Appeal ran my op-ed on gas prices today. An excerpt:

Raising the price is not a cruel attempt by retailers to "stick it" to the helpless. It is an appropriate response to the increase in demand that is reflected in long lines of motorists waiting to fill their tanks at some gas stations. When people begin lining up to get something at the going price, this tells merchants that the price is too low. Raising the price corrects that imbalance and sends consumers an important signal: It tells them to redouble their efforts to conserve the resources that have rising prices.

9/21 update: I had a great time in Fayetteville Friday and Saturday, and I just had time this afternoon to check out the comments on my gas prices article (NB: one thing that's great about the internet is the ability to receive nearly instant feedback; if it weren't for spam management, I'd open comments on DOL more often). A couple of the comments offered the usual canards about being a paid-for oil company shill. I've been called a lot of things, but I think this is the first time I've been called a "knob."

Dude. Harsh. But clever.

The Armchair Economist, Steven Landsburg, makes the best case I've seen for lovers of liberty to support Senator McCain for President.

I love this little discussion of free trade:

"[P]rotectionism, like creationism, requires an extraordinary level of willful ignorance. The consensus for free trade among economists is approximately as solid as the consensus for evolution among biologists, and it is a consensus supported by a solid body of both theory and observation. To ignore that consensus betrays a degree of anti-intellectualism that frightens me.

"McCain is quite good on this issue, not just in terms of rhetoric (which I've known for a while) but in terms of voting record (which I've just recently researched). Obama, by contrast, promises to be our first explicitly protectionist president since Herbert Hoover."

Landsburg's bottom line: he, "support[s] John McCain. With trepidation."

Joe Biden has rightly taken flak over his remark that paying higher taxes is the patriotic thing for high income people to do.

Perhaps surprisingly, I'm going to come to ole Joe's defense--sort of. Biden's comment might at least allow for the possibility that people actually own the income they earn even if patriots should pay higher taxes. By contrast, Biden's running mate seems to believe that instead of people owning the income they earn but the government does:

Because the truth is, what Senator McCain said yesterday fits with the same economic philosophy that he's had for 26 years. It's the philosophy that says we should give more and more to those with the most ...

The notion that letting people keep more of what they earn is "to give more and more to those with the most" implies that Obama thinks the government owns all income that people earn and that any income after taxes is a gift from that government.

Biden's patriotic duty bit isn't appealing but I'll take it over Obama's coercion.

Justin Ross just might have started a new meme with his response to this news snip:

For elementary and middle school students, only homework grades "that raise a student's average" will be recorded.

As for me, I've been wondering about accommodations for students with learning disabilities. I don't question learning disabilities existence per se, but what I can't figure out is why students with disabilities always get time and half for exams as an accommodation. Shouldn't there be some variation across students? Maybe some with time and a half, but others with double time or only time and a quarter.

That's the title of my contribution to September's issue of The Freeman.

The issue also contains articles from Howie Baetjer, John Stossel, and Don Boudreaux (he writes so well he just has to be the Louisiana branch of the Bastiat family).

We now have a clearer idea of the MMMF guarantee plan. The now-announced idea is not (as I previously imagined) to guarantee that shareholders will get what their shares are worth. It is to guarantee that they won't get less than $1 even when their shares are worth less than that (evaluated in the usual way by dividing a fund's asset portfolio value by the number of shares) and thus the fund would have to "break the buck".

Should this plan go forward, the next time you go into a bank that has a desk for its mutual-fund affiliate, you may as well take along a Sharpie and cross out the warning that used to read: "Notice: These funds are not insured and may lose value."

The Treasury seems to have overlooked the fact that many MMMFs free of buck-breaking risk are already available. They are the MMMFs that invest only in default-risk-free Treasury bills. No such fund has ever had to break the buck. Many of the worried MMMF shareholders who in recent days have cashed out of other MMMFs have already moved the funds into such T-bill MMMFs.

The $1-floor guarantee has value to shareholders who want a T-bill MMMF's safety but aren't willing to accept its lower yields to get it. But why should we indulge such a preference to eat one's cake and have it too at someone else's expense?

This is much like the old question: why should we have FDIC coverage on bank deposits above $10,000, when any saver who wants a government-guaranteed haven for $10,000 can simply buy a T-bill?

The Treasury plans to charge covered mutual funds a fee, size yet unspecified. Why not let the market determine the proper price of safety, by simply letting MMMF investors sort themselves between T-bill MMMFs and other funds that invest in somewhat riskier securities? If the Feds set the guarantee fee on MMMFs too low (and they have no way of getting it right), then the guarantee system will foster moral hazard. Much like insured bank depositors, insured MMMF share investors will gravitate toward funds that carry riskier portfolios, because the upside potential remains while Uncle Sam absorbs the downside risk.

Bloomberg.com quotes one commentator as saying: "This has got moral hazard written all over it, but as has been the case throughout the crisis, now is not the time to worry about moral hazard. " On the contrary, the moment when new guarantees are being proposed is exactly the time to worry about moral hazard.

No word yet on what new portfolio restrictions will be imposed on participating funds.

The Wall St. Journal on the yet-sketchy Paulson rescue plan:

A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies.

Uh-huh. Now explain to me how an “auction facility” works when there’s only one buyer.

Krugman:

this could turn into the wrong kind of rescue — a bailout of stockholders as well as the market, in effect rescuing the financial industry from the consequences of its own greed.

I’d say that the probability is 100% that it will turn into the wrong kind of rescue. There is no immaculate conception for bailout legislation. There is no non-distorting rescue when the costs are being externalized to taxpayers.

On greed, let me repeat: If unusually many airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. And let me add: This isn’t a morality play. What we’re seeing are the consequences of monetary-policy distortions of interest rates and regulatory distortions of incentives, amplified in some degree by private imprudence, not the consequences of blackheartedness.

Today’s U.S. political system isn’t going to follow Andrew Mellon’s infamous advice to Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

This is the spurious "quote" that refuses to die, apparently because it offers such a convenient caricature. To summarize: the words in quotation marks are words that Herbert Hoover twenty-three years after the fact attributed to Mellon, in a transparent effort to picture himself by contrast as an enlightened hands-on policy-maker. There is no other source. The sentiments of the “infamous advice” are inconsistent with Mellon’s actual (public) statements expressing anti-liquidationist views before and after 1929, and with the policies he supported as Treasury Secretary.

Ambrose Evans-Pritchard in the Telegraph.co.uk:

We are dangerously close to a $3.5 trillion collapse of America's money market fund industry. "It's an incredibly serious issue. A tipping point in this crisis would be when you have a run on money markets, and we are right on the cusp of that," said Paul McCulley, PIMCO's portfolio chief.

Evans-Pritchard and McCulley are talking nonsense. A mutual fund (financed 100% by equity shares) is unlike a bank (typically with well under 10% equity, the rest financed by deposits and other debt liabilities) or other debt-based intermediary. Withdrawals from MMMFs, of which the US has reportedly seen about $90 billion in the last week (about 2.5% of $3.5 trillion), are not run-like either in cause or effect. They can't be caused by a me-first problem because the fund cannot have too little to cover all shares at their current values. Unlike a run on a bank that causes “fire sale” losses, withdrawals from a mutual fund cannot cause the fund to become insolvent. There is no "tipping" phenomenon to be on the cusp of.

Hat tip: Chandran K.

Bob says in his recent interview:

Ultimately people get the economic system they vote for. The problem is that neither political party is all that committed to allowing more economic freedom.

Here is the question and results from the current CNN.com Quick Vote:

Is more intervention by the federal government needed to help the U.S. economy?
Yes 61% 9562
No 39% 6237

To add to what Bob said, the problem also is that voters apparently aren't all that committed to wanting more economic freedom. But, I guess that shows that the two parties listen to their customers.

I should revise my headline: at least the majority of people don't think the earth is flat.

I just did an interview for the Politics 2000 blog about the EFW index. ATSRTWT.

S.E.C. Temporarily Blocks Short Sales of Financial Stocks

“Lemon Socialism” is the failed policy of nationalizing failed firms, pioneered by France and the UK. The Paulson-Bernanke takeover of the failed AIG outdid previous examples in the US. I almost wrote “the federal government’s takeover,” but the legislative branch has been completely passive as the Fed and Treasury have stepped well beyond any reasonable interpretation of the scope of their statutory authorities. (Will anyone challenge them in court?)

This morning comes news that at 10am EST Treasury Secretary Paulson will announce two further steps down the road to Financial Lemon Socialism: a “one-year” guarantee fund for Money-Market Mutual Funds, and a proposal described as “moving troubled assets from the balance sheets of American financial companies into a new institution”.

The idea of a guarantee fund for Money-Market Mutual Funds is baffling. Exactly one money-market fund has suffered losses this week large enough to “break the buck”, i.e. impose losses on its shareholders. That little-known fund got into trouble because it was holding too much Lehman Bros. debt. There were large withdrawals from some other funds, but by construction (all equity shares, no debt) withdrawals cannot cause mutual funds to fail. The guarantees are therefore completely without benefit. They will carry a cost, however, if they come with taxes on MMMFs to finance the guarantee fund or binding restrictions on how MMMFs may invest.

The new institution for “cleansing” the balance sheets of financial firms would buy assets that nobody in the market will buy, or that will nobody will buy at the price the seller hopes for. One portfolio manager has aptly described it as “a giant dumpster for illiquid assets”. Proponents suggest that it would be (kinda, sorta) like the Resolution Trust Corporation that liquidated failed savings and loans after 1989. But the RTC only acquired assets from closed thrift institutions in liquidation. It did not subsidize ongoing institutions, and did not buy dubious assets. Once the assets were sold for whatever they would fetch, the RTC closed up shop. The newly proposed institution is a very different animal. It is hard to imagine how that institution -- given its mission --could be designed so as not to subsidize Wall St. imprudence at taxpayer expense, and thereby foster rent-seeking and moral hazard on a colossal scale.

ADDENDUM: Arnold Kling at EconLog has nicely explained one of the in-built problems facing a federal illiquid-asset purchaser.

Spiraling gas prices led an Indiana drug dealer to levy a fuel oil surcharge on customers purchasing cocaine, according to investigators. Anthony Salinas, 18, tacked on the gasoline surcharge when he sold a confidential police source coke on two occasions in June. While arranging one buy, Salinas told the source that a quarter-ounce of cocaine would cost $240--$215 for the drug itself and "$25.00 for gas money to deliver the cocaine" ...

Source.

A classic clip from a classic episode that we will use in our discussion of trade in econ 101 today:

Justin Ross cites a paper by Joel Slemrod about the differences between VATs and retail sales taxes. We usually teach that they are equivalent--that "who writes the check" doesn't matter for tax burden. Slemrod argues that who remits the tax does matter "in the presense of avoidance and evasion."

Haven't read the paper, but I have recently done a lot of thinking about this issue and this is very true.

From an enforcement point of view, VATs are almost "self-enforcing" while retail sails taxes are not. Under a VAT, when an intermediate purchase is made, the buyer must remit the full tax to the government, but is allowed to write off the sellers' costs and sellers' VAT payments. The seller gives the buyer an accounting of his costs and proof of his VAT payments. If a seller had failed to pay his VAT, then the buyer would not be able write off the sellers' previous VAT payments and he'd be on the hook for it. Thus what happens is that if a buyer finds out that a seller hasn't paid his previous VAT payments, he will turn in the seller to the government. Of course, the seller knows this, and so, he pays his VAT in full.

With the retail sales tax, all it takes to avoid the tax is a wink and a nod between the buyer and seller.

Just another reason to like the retail sales tax over the VAT?

From the Center for the Advancement of Capitalism (hey, sounds good so far) comes a blog post by one Nicholas Provenzo (9-16-08 entry). The first paragraph reads:

Like many, I am troubled by the implications of Alaska governor and Republican Vice Presidential candidate Sarah Palin's decision to knowingly give birth to a child disabled with Down syndrome. Given that Palin's decision is being celebrated in some quarters, it is crucial to reaffirm the morality of aborting a fetus diagnosed with Down syndrome (or by extension, any unborn fetus)—a freedom that anti-abortion advocates seek to deny.

Now, I am anti-abortion and, to the horrors of many libertarians, Catholic to boot. But I also consider myself libertarian. What has bugged the crud out of me for many years is the strident belief by many libertarians (Reason magazine seems to tilt strongly in this direction, or at least it did when I subscribed to it a year ago) that anyone religious is a backwards boob secretly or overtly determined to submit everyone who isn't hip to theocracy to an Inquisition.

My own thought, and I have read counter-arguments to my opinion, is that in normal situations a new human being begins when the full genetic blueprint for a new person is created, at conception. I don't see how, after the two haploids become a diploid, this being is anything but human, and thus deserving of the rights any other human has. So, in that sense, abortion violates the nonaggression axiom that virtually all libertarians profess. Sure, some humans are born with genetic defects just as some are born with attached earlobes, but to me that makes them no less human. But Provenzo would kill 'em all, even those with no genetic problems, and call it moral. I feel like I have to take a shower just typing that sentence.

Regardless, I don't see how a blog post such as Provenzo's would make an ideological fence-sitter say "well, heck yeah, gimme some more o' that capitalism then! I now think price controls and universal health care are wrong!" I get the same queasy feeling when obvious potheads call themselves libertarians just so they can get their drugs cheaper.

I realize this strain of thought is due to Rand's anti-religious bigotry, but I don't understand why these folks can't realize that a love of liberty and religion are not mutually exclusive. Heck, even higher-ups at the Vatican acknowledge that belief in God and in evolution can be compatible. Until this sect of libertarianism stops acting so fundamentalist, I'll continue to be slightly embarrased to admit my libertarian leanings.

About a month ago, I saw this article on an open access bike program and sent one of my students who is interested in such programs an email saying, "This looks like an old fashioned open access program—how long do you give it?"

Well, the answer appears to be about a week:

Less than a week after the Southern Miss Office of Sustainability launched its free-share Eco Eagle Bike program, most of the 17 bicycles are missing.

Thanks to Shawn R. for the pointer. What's sustainable about trashing 17 bikes in a week?

BTW, my student and I are trying to catalog attempts (and successes if there are any) at open access bike share programs. Info on programs would be most appreciated (efstephenson[at]berry[dot]edu).

Refreshingly, there is much wisdom in the recommendations of the Shadow Financial Regulatory Committee, released on Monday.

The SFRC notes that under the Federal Deposit Insurance Corporation Improvement Act of 1991, the FDIC needs approval from the Federal Reserve and the Treasury Secretary before it covers uninsured bank deposits. It then is required to recoup the cost by an assessment on all commercial banks. In that way the losses are not loaded on ordinary taxpayers, and healthy banks have an incentive to oppose the bailout (unless they really think that giving the uninsured a haircut threatens spillovers to healthy banks).

If the Fed and Treasury are now giving a de facto guarantees to the creditors of investment banks (as in the Bear Stearns intervention), why not require the Fed or Treasury to recoup the cost through an assessment on all investment banks? That would insulate ordinary taxpayers, and it would give healthy investment banks an incentive to oppose unnecessary bailouts. Ditto for guarantees to the creditors of insurance companies (as in the AIG nationalization).

It is a bad idea to extend federal guarantees to the creditors of investment banks and insurance companies. First-best is to let those industries organize their own cross-supports (on the model of pre-Fed bank clearinghouses) if they think it worthwhile. But extending federal guarantees to an industry at a zero price, subsidized by ordinary taxpayers, is the worst idea of all.

Discussing justifications for the AIG bailout, two Washington Post reporters write:

[AIG’s] short-term debt is held by institutions all over the world, including money-market mutual funds, and its overnight collapse could have caused big losses in those funds, perhaps even risking a run on them.

These reporters need a refresher coure in Financial Institutions. Mutual funds have only shareholders, no debtholders. When a mutual fund incurs big losses, shareholders simultaneously lose some of their share value. Since the total value of the shares always adds up to the total value of the assets, there cannot be too little to go around for repaying shareholders, and those who cash out sooner do not get more than those who cash out later. There is no sense in any shareholder running to cash out. There is no "me first" situation.

Money-market mutual funds are somewhat unusual, it is true, in that they pledge to keep share price fixed at $1 per share (and distribute net earnings as increases in each customer’s number of shares). But a MMMF legally can, if necessary, break that pledge and reduce share price below $1 (or equivalently reduce the number of shares). There is still no prospect of a run. Even if all shareholders did seek to cash out, they all could.

I read a great quote from Cathy Young, who is criticizing the current Feminist Establishment. Young is a contributing editor at Reason Magazine and her article appeares in Monday's Wall Street Journal.

Young is replying to New York Times' columnist Judith Warner's complaint that Republican V.P. candidate Sarah Palin is "subordinate to a great man," claiming that Palin relies too heavily on her husband's care for the family while she pursues her political career. Warner feels that Palin should instead be speaking out in favor of more federal programs that watch the kids when mothers choose to work outside the home.

Referring to the image Palin projects to women, Young writes: "Perhaps the message was a brilliant reversal of the old saw that behind every man is a great woman: Here, the great woman is out in front and the great man provides the support. Isn't that real feminism? Not to Ms. Marsh, who insists that feminism must demand support for women from the government." (Note: Italics are in the original text.)

[Bear Stearns] ---> [Fannie Freddie] ---> [AIG]

Today there was an extraordinary taking of private property when the Fed forced AIG into bankruptcy and wiped 99% of stockholder value off the books. New York times story here. The Fed is assuming control of an 80% stake hold in exchange for loans of $85 billion.

It's been a busy and fun start to the semester. On Saturday we took the Notorious J.H.C. to the Cooper-Young Festival here in Memphis. There were a few booksellers, so I picked up a couple of interesting things. Some of what is listed below is listed for commitment purposes: I said publicly that I would finish this book/circulate this paper/etc., therefore, I must.

1. Donald A. Norman, The Design of Future Things. I haven't read Norman's The Design of Everyday Things, but I've really found this book fascinating because of the changing structure of the human capital economy, the rapid increases in computing power, my addiction to TED, and the fact that I spend almost all day every day working with stuff that presents serious design difficulties. Norman argues for a more conversational approach to design, noting that the design of many gadgets and gizmos has created a blinking, beeping cacophonic kaleidoscope that can be far more frustratiing than it needs to be. I look forward to finishing it, and I'll have a lot more to say about it later. I've started contributing a bi-weekly column to Lifehack.org, so I'll probably say a few things about Norman's insights there.

2. Michael S. Berliner (ed.), Letters of Ayn Rand. I didn't know this existed and was delighted to get it for five bucks. Correspondence can be illuminating, and from the introduction and the preface this looks like a great way to look deeper into how Rand formed her ideas. It looks especially interesting in light of Brian Doherty's Radicals for Capitalism.

3. Johan Norberg, In Defence of Global Capitalism. This arrived today and I sampled parts of it. It's broken into very short chapters on different topics, and it looks like a really good reference and starting point for those who would defend the free market. I doubt I will be able to read it from cover to cover, but I'm sure I will refer to its treatment of different issues frequently. It will have a place on my shelf next to Jagdish Bhagwati's In Defense of Globalization.

4. "The Skinny on Big Box Retailing: Wal-Mart, Warehouse Clubs, and Obesity" (with Charles Courtemanche, UNC-Greensboro). I know, I've already blogged about this, but apparently it has gotten a bit of attention. I'm presenting it at the University of Arkansas this Friday, at UAB next Friday, and at West Virginia the following Friday, and we're in the process of collecting additional data on Target and K-Mart locations. Wal-Mart Watch disses us (especially my co-author, for some reason) here.

5. Review essay on Naomi Klein, The Shock Doctrine. This is finally finished, and it ended up being a touch longer than I wanted it to be. I'm waiting for comments and it needs a thorough revision, then I will circulate it. For now, here's Will Wilkinson on Klein.

6. Review of Stephen T. Ziliak and Deirdre N. McCloskey, The Cult of Statistical Significance for Economic Affairs. This is an excellent book that should be read by anyone who does empirical research. If I can get permission, I will post it.

7. A couple of articles about gas prices. Here's one for the Mises Institute and another for the Independent Institute. I'll be writing for LvMI on a pretty regular basis; they usually run my articles on Mondays. I'm also now a regular contributor to The Beacon. Co-blogger Tim Shaughnessy and I have a piece on the economics of charity forthcoming. I mentioned in class today that price controls are kind of a shooting-fish-in-a-barrel issue for economists. "Price gouging" laws remain popular, though, and states around the South are prosecuting thousands for "gouging" in Ike's wake.

In my inbox this morning from a friend at UNC Chapel Hill:

Are you curious about important economic concerns that are often ignored or poorly explained by the media? Come hear what some experts in the field think about the growing inequality gap, the impact that national debt may have on your future, and why our health care system is so costly yet according to the World Health Organization compares poorly to other developed nations and even some developing nations.

Date: Wednesday, September 24, 2008
Time: 6:00pm - 8:00pm
Location: Pleasants Room- Wilson Library

Guest Speakers will include:
Dr. Neal Caren, Assistant Professor in the Sociology Department
Dr. Arthur Benavie, Emeritus Faculty in the Economics Department
Dr. Pam Silberman, President of the NC Institute of Medicine

I guess all the current econ faculty were too busy?

The 2008 edition of the Economic Freedom of the World report is out today. The Fraser Institute released it this morning in Hong Kong [video here (7:28)].

You can follow the news clippings here as they come in.

The press release we sent out from Auburn is below the fold:

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On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today's stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”

If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, we’ve had a strengthening of the Community Reinvestment Act, which has encouraged banks to make mortgage loans to borrowers who previously would have been rejected as non-creditworthy. And we’ve had the imposition of Basel II capital requirements, which have encouraged banks to game the accounting system through quasi-off-balance-sheet vehicles, unhelpfully reducing balance sheet transparency.

No more edifying are the statements of Noriel Roubini of NYU in a video interview that had top billing on Yahoo’s entry page this afternoon. The accompanying text story is headlined “Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act”.

In the interview Roubini says that “right now there is actually [a] slow-motion run on retail banks around the country”. This is both conceptually and factually wrong. A slow-motion run, where people do not roll over their time deposits, is not a run at all. It allows the bank to shrink in a more orderly fashion, without losses from overly hasty asset sales. A run is where checking account depositors seek to empty out their accounts. Neither a run nor a slower exodus from retail banks is in fact underway. Total checkable deposits (seasonally adjusted), as tracked by the St. Louis Fed’s FRED data base, are not shrinking (comparing the latest weekly observation, 2008-09-01, to three weeks, six weeks, or three months earlier).

Here is how the text story reports a subsequent Roubini claim:

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

What the heck would it mean for Congress to “recapitalize” an institution that has $50 billion in net worth? Roubini fails to note that the FDIC already has, as was made explicit when the FDIC came close running out of funds in 1991, an unlimited line of credit from the US Treasury. If the FDIC starts running out of money, the Treasury will lend it however much more is needed to keep insured bank depositors whole. In the worst case imaginable, the Fed will print however much money the Treasury needs. (At that point we’d need to distinguish depositors’ nominal wholeness from their purchasing-power wholeness.) Failing to note the FDIC's Fed-backed credit line, Roubini's contrast between the size of the FDIC's current fund to the size of worst-case draws on the fund misleadingly exaggerates the nominal risk to depositors.

Roubini’s interviewers do not provide any balance. Instead they add to the confusion by conflating the risky liabilities of investment banks and brokerage firms (which are not runable because they are not demand-deposit liabilities) with the (runable but insured) deposit liabilities of commercial (retail) banks.

Situation: I'm out yesterday to catch some of the Bengals game at Buffalo Wild Wings (N.B. Fire Marvin Lewis now!) and hit the Kroger grocery store on the way home. The car is in between 1/8 and 1/4 tank, and the grocery store normally has cheap gas, so I figured I'd fill up too.

Problem: They didn't raise their prices and were out of gas. So thanks for nothing Kroger.

Solution: I found gas for $4.55/gal. (the beemer takes premium) at a price gouger about 2 miles out of my way.

Russ Roberts has a very interesting, very timely conversation with Robert Shiller on current conditions in financial markets. One segment gave me pause (literally; I listened to the segment again and paused it so I could write this post). According to Shiller, one of the root causes of the current unhappiness is the fact that people were encouraged to put their life savings in leveraged, real estate investments in single cities. Shiller's representative investor had a portfolio consisting of two assets:

1. San Francisco real estate (highly leveraged).
2. Social Security.

This illustrates, in Shiller's words, "failure to apply the basic principles of risk management." I'm an economist and Shannon is a CPA; we tell people that for all of our fancy education the most important thing we've learned is that markets are generally efficient--therefore, most attempts to earn above-normal returns over the long run are doomed to failure. Therefore, we maintain a balanced portfolio that is very heavy on stock market index funds and which we will re-balance toward bonds and cash as we get older. When people ask, I generally recommend targeted retirement funds that automatically rebalances toward less-risky assets as time goes by. I'm convinced that the social returns to greater basic financial literacy are enormous; to this end, I will be writing a few personal finance articles for Lifehack.org in the coming months.

From his vantage point in the Fisher-Price bouncy seat next to the desk, Jacob seems generally agitated, but he's nonplussed by today's news about Lehman Brothers, Merrill Lynch, and AIG. He carries a diversified portfolio of colorful outfits, picture books, stuffed animals, and things that make noise, but he's planning to move toward interesting shapes, stuff with interlocking parts, and foam rubber sports equipment over the next couple of years. We expect these to contribute to human capital development and provide the kinds of long-run returns he'll need to prosper in the twenty-first century.

There are a couple of minutes left in the first half and the Alabama-Western Kentucky game is turning into a beatdown. I now believe "Alabama is a serious contender for the SEC title" with p = 0.85. The ease with which the Tide is beating the Hilltoppers is only part of the story: the fact that Tulane almost beat the VT- and WVU-vanquishing East Carolina Pirates makes last week's uninspired showing against the Green Wave look a lot better.

It's halftime. On tap after Jacob finishes his bottle: a family outing to Buffalo Wild Wings to watch the rest of this game and a handful of others.

1. Feeding a baby is a contact sport. JHC's flailing arms, legs, and head strike true with astonishing regularity--there are few things that will re-focus your attention quite like being punched squarely in the throat by an infant.

2. The supply curve has shifted, so I'm moving along my demand curve for gas: I would go to the office this morning, but you know, gas prices. So I'm working from home. But this means that instead of gas to get to the office, I'm paying for electricity to power my computer, coffee pot, and air conditioner. So maybe I should work with a pen and paper and lay off the coffee. But pens and paper require resources to produce and I'd just have to retype it later anyway, and no coffee means lower productivity. It doesn't look like I can win, so maybe I should just turn everything off, crawl back into bed, and cry myself to sleep.

3. This is the first Saturday I'm not going to a college football game so far this season. I went to the Ole Miss-Memphis game in Oxford (the hidden gem of the mid-South) a few weeks ago and to the Memphis-Rice game last weekend. I must say the Southern Heritage Classic between Jackson State and Tennessee State at the Liberty Bowl looks tempting in light of news coverage of the pregame tailgating festivities. I plan to resume my consumption of live college football next Saturday in Fayetteville at the Alabama-Arkansas game.

4. Speaking of football, tailgating culture looks like a great research setting for scholars interested in social capital, networks, the politics/economics/sociology of identity, etc. It's a great way to spend a crisp autumn Saturday. Every school's fanbase has its share of liquor-soaked idiots, but in my experience LSIs are the exception rather than the rule. Warren St. John's excellent book "Rammer Jammer Yellow Hammer" offers an inside look at the RV tailgating culture of Alabama football; the book has special meaning for me because the season he covered in the book was my junior year at the Capstone (and the only season during my time at Alabama that wasn't an unmitigated disaster).

Picking Palin certainly made things more interesting. She will likely help shore up pro-life votes for her side, since McCain can be faulted for wanting embryonic stem-cell research (which hasn't demonstrated any medical benefits, while adult stem cells have). Add that to the dual gaffes that both Pelosi and Biden have made on when life begins, which brought a united front of US bishops objections, and I think the McC-P side picks up most cultural conservatives, Dem or Rep.

Of course, the beauty pageant that is the US Presidential election will probably show the Obamessiah ascending, with the help of the press. They don't really need to worry about anything until two weeks before November anyway, since our attention spans won't remember or care about anything that happens now. And who cares about the prospect of nationalizing the US health care industry when you look so good on the beach?

Bottom line: Bush fatigue + McCain being an old fart + Obama rockstardom = Obama victory + Tim looking at the EFW index to find a country more free than where we will regress to.

Don't care enough to have one. Sorry.

I think Bob's prediction is close, but I still give the edge to Obama. Here's why--OH is almost certainly going to shift to Obama (though I'm not sure it'll yield as big a margin for Obama as Bob predicts--it probably depends on the def of big margin). A poll at RCP does have McCain up 2.2% in Ohio, but I think it's unlikely to be correct and/or sustained. The flipping of OH holding all else constant would give Obama a 272-266 Electoral College Victory.

As for other states, I think they are, on net, more likely to shift to Obama than away from Obama. While McCain may pick up NH, his next best hopes are probably places like MI, PA, and MN all of which are pretty Democrat states. By contrast, Obama is currently ahead in polls in CO and NM and also has a chance at VA.

As for events, momentum, etc--I'm guessing this might be something of a high water mark for McCain. I expect some of the Palinmania to subside (too bad--anyone who supported Steve Forbes in 1996 is off to a good start in my book); we may also get more gloomy (or at portrayed by the media as more gloomy) economic news. Or Cindy McCain may buy another house.

I realize I'm going against the current Intrade odds (53-46 in favor of McCain). I'm also going against my ever so slight preference (because gridlock is good!) for McCain.

It's time all DoL bloggers to put up or shut up. Who's gonna win the big race for Dictator President?

I'll start, and I'll be specific:

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Searching in Tokyo's mammoth Tower Records for Japanese "eleki" ('60s instrumental rock n' roll) and contemporary Japanese surf bands, I discovered that CDs were organized alphabetically by band name, as usual, but alphabetically according to the Japanese alphabet. Bands whose names are in English beginning with R (e.g. the Royal Fingers) were shelved together bands whose names are in English begin with L. Apparently the same Japanese character is used for both R and L. That may explain the stereotypical conflation of the two sounds in English spoken by native Japanese speakers. (If I'm way off on this, please let me know.)

Senator Chuck Schumer (D-NY) and three other senators are asking Fannie Mae's and Freddie Mac's receivership execs to have the bankrupt firms lose yet more money by delaying foreclosure proceedings. Last chance to use the them for home ownership subsidies!

Dani Rodrick has a paper on a old idea that I've seen popping up here and there recently.

I provide evidence that undervaluation of the currency (a high real ex- change rate) stimulates economic growth. This is true particularly for devel- oping countries. There is also some evidence that the operative channel is the size of the tradable sector (especially industry). These findings suggest that tradable goods suffer disproportionately from the government or market fail- ures that keep poor countries from converging towards higher-income levels. I present two categories of explanations as to why this may be so, focusing on (a) institutional weaknesses, and (b) product-market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.

Before people jump on the "devaluation leads to growth" theme, read carefully. Why do countries that have undervalued currencies grow more rapidly? The answer is that undervaluation compensates for the bad government policies. His tests confirm that undervaluation has no real growth benefit in countries with decent policies. (He also talks about various nebulous "market failures" being a possible culprit but admits there is little real evidence on this front.)

I understand that Rodrick is just doing positive analysis here and isn't necessarily advocating a policy of undervaluation. At most, he suggests undervaluation as a second best. The first best soluation being to fix the government (and supposed market) failures. But I worry about two things. First, it would be bad if policy makers began to think of undervaluation as a substitute for real economic reform. Second, there are unintended consequences to undervaluation--namely the threat of monetary instability and high inflation down he road which is a known problem for growth in its own right.

To me this looks like another example of a miracle drug that is so potentially toxic that we should put it on the shelf and label it too dangerous to take.

The headline from today's local fishwrapper:

"ACT scores up, black enrollment down in freshman class"

I might comment more but I don't want to get fired because of a blog post.

Frostburg State President Jonathan Gibralter does his best best Helen Lovejoy impersonation in the comment section of Inside Higher Ed today.

One reader asked what the cost of programs are to deal with the alcohol issue at Frostburg State University. My response is simply that the cost of losing even one student cannot be associated with money. We will spend whatever it takes to save student’s lives. We cannot afford not to spend it.

Repeat after Thomas Sowell people: There are no solutions, only trade-offs. (Whether college presidents like it or not!)

CNET reports:

About this time a decade ago, Google CEO Eric Schmidt was praying that the U.S. Justice Department would file an antitrust lawsuit against Microsoft.

"I've competed against Microsoft for years, but I never quite appreciated how big Microsoft has become, not just as a company, but as a brand and as part of the national consciousness," Schmidt said in 1998, four months before the suit was filed. "It's the products, the Microsoft marketing juggernaut, Bill Gates's wealth, all those magazine cover stories. It's everything."

It's comin' around, Eric.

One of my friends from college recently took at job with Wal-Mart in Bentonville, and he forwarded me an issue of the Wal-Mart Daily News that links to an article at Portfolio.com about my paper with Charles Courtemanche about Big Box retaliers and obesity. The comments thread is especially interesting. Chuck is presenting the paper at UNCG on Friday, I'm presenting it at Arkansas next Friday and at West Virginia in a few weeks, and then we plan to get it under review.

Update: the paper has been re-uploaded to SSRN with a new title, per the recommendation of one of our colleagues.

Apparently some folks think that a young woman (Sarah Palin's daughter) who is five months pregnant could have given birth to a child who is less than five months old (Palin's youngest child). Here (via James Taranto) is the transcript of a question posed by Pacifica Radio to former Alaska Sen. Mike Gravel:

"Sen. Gravel, let's turn to another matter, one that's caused a great deal of buzz here in St. Paul today at the Republican convention, and that is the announcement that Gov. Palin's 17-year-old daughter is pregnant, that she is not married to the young man who is purportedly the father, and that this is being brought out now because there was so much buzz around on various blogs that indeed Gov. Palin herself may not have been the mother of a Down syndrome child but it might have been the same daughter that was the mother of that child. ... How do you think it's going to play?"

Trig Palin was born April 18th; it was announced on Sept. 1 that Bristol Palin was five months preggers meaning that she conceived around April 1st.

*The co-blogger who gave me some good natured ribbing about using Shakespeare in the title of my last post will be pleased to see me using lyrics from "Animal House" atop this post.

I'm trying to grind down one of the stacks of stuff in my office, and I just came across a couple of notes I wrote about household measures of inequality a few months ago. A speaker at Rhodes pointed out that high-income households have very high net worths while lower-income households have much lower net worths (for some proportion of the income distribution, it's actually negative net worth). At first glance, this sounds shocking and perhaps worrying, but it isn't an apples-to-apples comparison: it's comparing Shannon's and my household to our parents. We're both a few years removed from school and a little over a year into our first mortgage. By comparison, our parents are in their prime earning years, their houses are largely paid for or paid off, and they've had a few decades to accumulate retirement savings. Drawing policy conclusions from apples-to-oranges comparisons like this can be dangerous; if anyone can point me to better inequality data, I would be grateful.

A headline at AJC.com: Bush to host Babs at the White House.

I'm in Tokyo for the Mont Pelerin Society meetings. Myron Scholes has given the most enlightening talk so far. But I've also learned something about Japanese pro baseball. I knew that the Nippon Ham Fighters are not "Ham Fighters" but rather "Fighters" sponsored by Nippon Ham, but it's news that all the teams are sponsor-branded. Seibu Lions are sponsored by Seibu, a major private railway company [correction: department store]. The funniest is Yakult Swallows. I thought they were only named after the bird (which is their emblem), but it's also a play on words: coin-op drink machines reveal that Yakult is a beverage company. Swallows, get it? Well, at least I hope it's an intentional play.

Here's some more brand equity. Bob, his student Kate Sheehan, and I just had a paper analyzing David Beckham's affect on MLS attendance accepted for publication; here's the abstract:

In January 2007, Major League Soccer (MLS) announced that international soccer sensation David Beckham would be joining the league playing for the LA Galaxy. This paper examines Beckham’s effect on MLS ticket sales for the 2007 season. Depending on specification, our results indicate that Beckham increased ticket sales as a share of stadium capacity by about 55 percentage points. We then use these results to evaluate MLS’s Designated Player Rule and to perform a back-of-the-envelope calculation of Beckham’s benefit to the LA Galaxy.

Basically Beckham's playing fills a stadium that would otherwise be roughly half full. The $400k MLS contribution to his salary doesn't come close to covering his spillover benefit for other teams. Even at something like $10m per year from the Galaxy, hiring Beckham looks to have been a shrewd move by the Galaxy.

Fun project--thanks to Kate for a cool idea and to Bob and Kate for inviting me to join in.

If you're reading this from George Mason, my co-author Lisa Verdon will be presenting our paper "Economic Growth and the Entrepreneurial Environment" as part of the Public Choice Center Seminar series tomorrow. More details (and a link to the paper) are here.

Mary Theroux has a blog post about the various Depression-era Western apologists for communism. Heck I remember such apologists in my college days in the 1980s among fellow students as well as professors.

Her post reminded me of a recent conversation with a small group of people including a somewhat prominent mainstream economist.

We were talking about the Georgia-Russia war, and someone compared Russia's actions with the Nazis. I kinda chuckled and told a story about a poster I had in college. It had a swastika, a hammer & sickle, and picture of Stalin and Hitler. The caption read "Two Faces. One Ideology." I just loved that poster! It used to infuriate my commie-pinko leftist friends in college, which is precisely why I liked it so much.

Anyway, after a momentary pause, this prominent economist says, "Gee, I don't know if that's fair. I think they [i.e., the communists] meant well."

WTF? They meant well?!? They meant well?!?

For the record:
(1) No they didn't!
(2) Even if they did, that's no excuse!

A state appeals court recently struck down a portion of the Ohio's Commercial Activity Tax that applied to retail grocers and food wholesales. Buckeye Institute academic advisor and Auburn University economics professor Dr. Robert Lawson provided the court with an analysis of the tax on behalf of the plaintiffs. He joins David Hansen on BuckeyeVoices.

Today's Mises.org Daily Article. Here are ungated earlier versions of a couple of papers on the Katrina Aftermath, one published in the International Journal of Social Economics and the other forthcoming in the Journal of Business Valuation and Economic Loss Analysis.

A nifty interview with co-blogger and NC gubernatorial candidate Mike Munger is here.

1. Yard work in the jungle that is our backyard is strangely relaxing--it's like bonzai gardening for the undisciplined. I cleared some brush and cut down a small tree this morning (yawp!); the negative externality (reduced air quality) is offset by the positive externalities (reduced probability that Memphis gets destroyed by a wildfire, our yard is presumably more pleasant for our neighbors to look at).

2. JHC and I discovered during a 6:00 AM feeding that they've brought back Teenage Mutant Ninja Turtles. Jacob was unimpressed. P(Cardens get a TiVO) remains unchanged.

3. Speaking of JHC, he took in his first sporting event last night, a Rhodes soccer game that the mighty Lynx were winning by a score of 6-2 when we left with a couple of minutes to go in the second half. We enjoyed sitting with Michael Leslie, a colleague in the English Department and an experienced parent who has probably forgotten more about the finer points of the Beautiful Game than I will ever know. A good time was had by all, and at a price of $0.00 you get a lot of bang for your (non-)buck.

4. Recent Reading: Richard Florida, The Rise of the Creative Class. When I say "recent reading," I usually mean "recent sampling/skimming" rather than "recent detailed word-for-word reading." I read an interesting lesson in this for local development officials: adhere to principles rather than "planning." Instead of taxing people to pay for stadiums (which are net drags on local economies) and regulating land use in such a way as to create the appearance of authenticity, pursue a more hands-off, evolutionary strategy in which you allow people to experiment. Florida would probably propose a little more activism than this, but as a cultural Hayekian I don't think there's a way that a City Council or County Commission is going to have the specialized knowledge necessary to create a thriving music or art scene.

4. Recent Reading: Michael Heller, The Gridlock Economy. I'm reviewing this for The Freeman, and I'm about halfway through it. It's a provocative book, so far. When everybody owns something, nobody does, and if patents and other rights give everyone veto power over particular innovations, the pace of innovation slows down. Unaddressed so far is the role of the state as a monopoly provider of property rights and dispute resolution, but I look forward to seeing how these issues are addressed in the rest of the book. For now, here's Stephan Kinsella's argument against intellectual property.

At last week's GOP Convention, much attention was focused on John McCain's heroic life and the personal sacrifices he has made in defense of his country. It is easy to forget just all that Senator McCain has been through - this is a man who can no longer lift his arms over his head, as a result of the tortures he suffered in Vietnam - as Fred Thompson said, in a moving speech, Senator McCain, "can no longer salute the flag of the country he loves."

I am moved by Senator McCain's story as much as anyone - I have always said that he is a true American hero.

In his acceptance speech, Senator McCain explained that he "fell in love" with the United States during that time as a prisoner in Vietnam. Why did he finally fall in love with America? "[F]or it's decency, for its faith in the wisdom, justice and goodness of its people. I loved it because it was not just a place, but an idea, a cause worth fighting for."

What's missing there? The decency of America, and the wisdom, justice and goodness of its people are all things I believe in, and reasons why I love this country. But I cannot imagine that if I were asked "what do you love about the United States," my answer would not begin with, "freedom." "Freedom" didn't make Senator McCain's list.

By this I don't suggest that Senator McCain doesn't value freedom. Clearly he does. Senator McCain closed his speech by saying that he "fight for the ideals and character of a free people" (good, although I didn't ask John McCain to fight for my "character," and I'm not quite sure what that means. If he meant he was going to stand up for my own character, well, that's one he forfeited long ago). Perhaps "freedom" is what he meant by the "idea" of America that he vaguely referenced. He did warn us of the "threats to peace and liberty." But there were no other uses of "free," "freedom," or "liberty" in his speech.

It is, perhaps, a telling omission that "freedom" did not make this list of core values, in a speech that must have been reviewed umpteen times to get every word just right.

I sent my econ 101 students a riddle this morning. I'm blogging from my home computer and prepping for my seminar at the University of Memphis this afternoon. At the exact same time, I'm fixing the plumbing in our kitchen. How is it possible to do both at once (hint: the computer isn't in the kitchen)?

"UN says wealthy failing the poor."

I'm barely versed in the literature on foreign aid, but from what I've read, giving gobs of money to poor countries usually a) doesn't do much, b) doesn't do anything, or c) makes things worse. But the UN is chastising rich countries for not giving $18 billion to poor countries (why rich countries agreed to this in the first place, besides the good PR, is beyond me).

The UN report on progress towards the millennium development goals says this is threatening targets for drastically reducing world poverty by 2015.

Adam Smith wrote in 1776 how we could drastically reduce world poverty, and the UN hasn't done much to promote his ideas of free trade.

"We are already in the second half of our contest against poverty," [Ban Ki-moon] continued. "We are running out of time".

I'm not really sure what he thinks will happen when we run out of time, or what delineates the first from the second half of the poverty contest.

But, the last line got me to laugh: Against a backdrop of gloomy economic news, food shortages and high fuel prices, the UN's argument that more should be done to help the world's poorest could be difficult to sell.

No kidding. Does anyone else think the UN is basically electric football in a big building? It makes a lot of noise, the participants move around a lot but don't really go in any particular direction or accomplish anything.

Much will be made of the unemployment rate's jump to 6.1% and of the 84,000 reduction in jobs, but here's another bit:

Job losses at all private employers -- not including government -- came to 101,000 in August.

Some simple math--I didn't even need "The Diff"--indicates government employment expanded by 17,000 jobs. Maybe the private employment situation would be a bit rosier if taxes (explicit or deficit financed) regulations, and the bureaucrats that enforce them stopped increasing.

Cuyahoga Falls takes over ownership of old plaza Ohio.com POSTED: 07:28 p.m. EDT, Aug 29, 2008

Cuyahoga Falls is a landlord now that it officially owns the ailing State Road Shopping Center.

That is, until the center is demolished — most likely in the first quarter of next year.

The city closed on its purchase of the plaza at State Road and Portage Trail today, having agreed to buy it this year from State Road Associates for $10.2 million.

City officials are now seeking proposals for redeveloping the 26-acre parcel into a mix of retail, office and residential uses.

Yes, they're demolishing without knowing how much builders will want to redevelop there. They're even kickin out The Goodwill:

Goodwill Industries hopes to keep its store in the plaza open until the end of the year, said Beth Galambos, marketing and public relations manager.

''We're planning to stay as long as we can and we are doing our best to look for a new location,'' she said. ''We're hoping to stay in the Cuyahoga Falls community because it's been a very successful store for us.''

Local and Internet-based businesses are cranking out Sarah Palin products -- from "Palin Power" maternity T-shirts to "Wonder Palin" thong underwear.

Source. HT to MR for the MIE concept.

1. "Big Boxes and Smaller Waistlines? Wal-Mart, Warehouse Clubs, and Obesity" (with Charles Courtemanche, UNC-Greensboro). This is a revised version of a paper originally titled "Risky Business? Wal-Mart and Risky Health Behaviors." The abstract:

We estimate the impacts of Wal-Mart and warehouse club retailers on height-adjusted body weight and overweight and obesity status, finding robust evidence that non-grocery selling Wal-Marts reduce weight while grocery-selling Wal-Marts and warehouse clubs either reduce weight or have no effect. The effects appear strongest for women, minorities, urban residents, and the poor. We then examine the effects of these retailers on exercise, food and alcohol consumption, smoking, and eating out at restaurants in order to explain the results for weight. Most notably, the evidence suggests that all three types of stores increase consumption of fruits and vegetables while reducing consumption of foods high in fat. This is consistent with the thesis that Wal-Mart increases real incomes through its policy of "Every Day Low Prices," making healthy food more affordable, as opposed to the thesis that cheap food prices make us eat more.

2. "Truthiness and Torture in The Shock Doctrine" (provisional title, with Bob Lawson and Josh Hall). I'm presenting an extremely preliminary version of this paper at the University of Memphis tomorrow. This is the first in a couple of papers on ths subject; if you would like to read/comment on the very preliminary version, please let me know. The abstract:

In her 2007 book The Shock Doctrine , Naomi Klein argues that human rights abuses are necessary for economic liberalization. Using data from the Economic Freedom of the World Project and from the CIRI Human Rights Data Project, we estimate the effect of human rights abuses on economic liberalization and show that contrary to Klein’s claims, human rights abuses inhibit economic liberalization.

3. "Labor Day and Freedom" (Mises.org Daily Article). A firm in Tennessee decides to offer its workers--over half of whom are Somali Muslims--a Muslim holiday in lieu of Labor Day. Predictably, a lot of poeple went berserk. But who are we to judge?

4. "Sex, Violence, and the Culture War" (Mises.org Daily Article). This is based in part on a study by Clemson University's Todd Kendall in which he argues that internet access (and presumably, access to internet porn) caused drops in sex crimes. The implication for stewardship is that people who are trying to fight crime by fighting porn are fighting the wrong battle. The comments thread on the Mises blog is pretty interesting. Incidentally, it's the first thing that comes up if you Google (Mises sex).

5. "Southern Economic Development" (for the Oxford Handbook of Southern Politics). This isn't due until the end of next summer, but I've been asked to write a paper on the development of the Southern economy for the Oxford Handbook. It will be a good way to get back into my Southern economic history work (some of which has been crowded out by Wal-Mart and other projects).

6. "Does My Vote Matter?" (Debate at www.opposingviews.com). I take the "No" side and argue that people shouldn't vote against the candidate they like the least but should vote for the candidate they like the most.

In today's WSJ, Harvard's Jeffrey Liebman writes that "Barack Obama is proposing large middle-class tax cuts to reward work, encourage wealth accumulation, and stimulate economic growth." Sen. Obama does offer up some refundable tax credits (Trojan horse welfare) that reduce average tax rates. But incentives for work, saving, and economic growth are driven by marginal tax rates, and this chart by Alex Brill and Alan D. Viard shows that two-earner, two-child families face higher marginal tax rates over most of the income range from $25,000 to $125,000. No favorable incentives for middle-income earners here.

This couple better hope the sex tax doesn't come about:

Some women give their husbands clothes or gadgets for their birthday.

Charla Muller surprised her husband with a gift of sex — every day for an entire year.

The CEO of Chesapeake Energy has taken to the tube in support of T. Boone Pickens rent seeking scheme to use government subsidies and mandates to switch cars from oil to natural gas. Any guesses about what commodity Chesapeake Energy produces? You got it--natural gas. Oink.

I linked this earlier, but here's my piece on Pickens Slim Economics.

Ed's concern about boob jobs being a sagging lagging indicator, reminded me an article I came across when I was digging around on teen employment earlier this summer. A snip:

According to the American Society for Aesthetic Plastic Surgery, the number of women 18 and younger who have had breast enlargements has risen nearly 500 percent over the past decade — a sharper climb than the 300 percent increase in breast augmentations among all age groups.

This is just one of several tidbits consistent with my view (some previous posts are here) that declining teen summer employment has more to do with decreased labor supply from teens than with reduced demand from employers. Folks affluent enough for elective cosmetic surgery are probably affluent enough to do something other than flip burgers or mow lawns during the summer.

Will Wilkinson links to a response by Deirdre McCloskey to critics of her book The Bourgeois Virtues. It's an interesting exercise in three types of discourse as represented by three of her critics: McCloskey responds to a civilized disagreement, a another review that is "amused and silly," and finally to a diatribe by a critic who apparently admits that she did not read McCloskey's book carefully. ATSRTWT.

You want to see some bullish signs on the economy? Yes, there is the 2nd quarter 3.3% GDP growth. Now jobless claims have fallen for three straight weeks. A million more people have health insurance than a year ago. Oil is down to around a hundred bucks again, with much pressure to continue falling from both fundamental and bubble-like forces. Gasoline futures (October) are now at $2.73 a gallon, which is still up 33% on the year but still somehow doesn't look bad. Even corn prices are falling.

These are all good signs for the survival of the "great moderation" phenomenon, of which Phil Gramm was possibly thinking when he said this recession is in our heads. The great moderation describes the general decrease in economic volatility over recent decades. Ben Bernanke has a well known speech on this. The NBER business cycle data show that recessions have become less frequent, of shorter duration, and not as severe. Unemployment is at 5.7% for July. Not so bad, some would say.

Perhaps it's no surprise then, to see a new womens facial cream with a price tag of---ahem---one thousand dollars. Sold in 1.7 ounce containers, La Prairie's Platinum Rare is a skin cream that is infused with real platinum. (Shh. Don't tell the Chinese or Indians, else the price of platinum will really skyrocket!). Like cosmetic surgery, isn't a high-end, superior good like this supposed to be procyclical. With a greater demand elasticity, shouldn't these goods be the first to go when consumers are tightening belts? Yet revenues on cosmetic surgeries in 2007 were up 8% to over $13 billion.

I'm not saying there aren't bad things going on. But one of them is how much mental stock people put into whether we're "in a recession" or not. And hey! Where is the paper on the macro effects of cosmetic surgery? I just hope boob jobs are leading rather than lagging indicators.

This paper examines the impact of a strict product liability standard on the accident rate in the general aviation (GA) industry. Liability expenses increased by 775% between 1976 and 1986, reducing the sales of new GA aircraft by 90% and increasing the age of the GA fleet. Using both aggregate and model-specific data, our results indicate that the increase in the age of the GA fleet increased the accident rate by 25%–35% during 1981–2000. In addition, the higher price of GA aircraft boosted sales of homebuilt planes, which have higher accident and fatality rates than GA aircraft.

That's the abstract of an Economic Inquiry paper by Randy A. Nelson and James N. Drews. I looked for an ungated version but did not find one.

Steven J. Dubner, the co-author of Freakonomics, proposes a federal tax on sex. With tongue firmly planted in his cheek, he justifies this proposal on the grounds that such a tax would have many desirable attributes:

1) Bipartisan Receptiveness: "It has been observed that Democrats are generally in favor of taxation and Republicans are generally opposed to unnecessary sexual activity."
2) Mitigates Negative Externalities: "The unintended costs of sexual activity are unacceptably high, particularly in the political arena," and "is also extremely costly beyond the political realm, in terms of lost productivity, unwanted pregnancies, sexually transmitted diseases, and ruined marriages."
3) Encourages Positive Externalities: Tracking the rate of sexual activity would require "Taxpayers (to) create a sexual paper trail," that would make "the typical I.R.S. audit become considerably more interesting for the auditor," resulting in "a much-needed incentive to attract and retain qualified I.R.S. employees."
4) Historical Precedence in the Canon of Great Literature: "The writings of one Jonathan Swift, who in his acclaimed work Gulliver’s Travels, noted that in a place called Laputa, 'The highest tax was upon men who are the greatest favourites of the other sex, and the assessments according to the number and natures of the favors they have received; for which they are allowed to be their own vouchers.'”

Hmm... Potential fodder for your public finance class?

I got an email this morning saying that our paper "Rationality in 'Cost and Choice' and 'The Sensory Order'" is now #1 on the list of all-time downloads for the "Public Choice and Collective Decision-Making: Social Choice; Clubs; Committees; Associations" topic on SSRN.

It's a good start to a busy semester. Ill be presenting papers and speaking at Memphis, Arkansas, UAB, West Virginia, Samford, Birmingham-Southern, Arkansas-Little Rock, and Central Arkansas over the next couple of months. I'll have more details as events warrant.

Here is the key passage from Feldstein’s op-ed in last week’s Financial Times:

I have proposed a programme of “mortgage replacement loans” that I believe would stop the downward spiral of house prices. The basic idea is to provide an incentive to stop defaults among those who now have positive equity but are vulnerable to a further price decline. The federal government would offer every homeowner with a mortgage the opportunity to replace 20 per cent of that mortgage with a low interest government loan – up to a loan limit of $80,000 (€55,000, £44,000) – that reflects the government’s lower borrowing rate. Creditors would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same 20 per cent. That mortgage replacement loan would not be collateralised by the house but would be a loan that the government could enforce by lodging a claim on an individual who does not pay.

Let’s assume that few creditors would be coerced by the pay-down, because nearly all mortgages allow partial prepayment (I don’t know what percent don’t). Even so, there are at least two major objections one might raise to the proposal.

(1) It takes a huge chunk of the intermediation business out of private markets and turns it over to the federal government. The Feds have never been X-efficient at that running that kind of business. Inappropriate in itself, and a bad precedent for the future of private financial markets. If it makes sense for the Feds to partially oust private lenders from the home mortgage market, why not fully? Why not from all financial markets?

(2) Given that the federal government is not a lower-cost intermediary, there is no free lunch here. If the Treasury lends to homeowners at a lower rate than private mortgage lenders did, when those lenders already aren’t charging enough to cover the percentage of borrowers who default, then the Treasury will lose money. (Even if it wants to be stricter than private lenders in enforcing repayment of its loans, and there will be political pressure not to be, the Treasury can't get blood from a stone.) Instead of losses being borne by the shareholders of private financial intermediaries, the losses will now be borne by taxpayers. Looking at it from the other side of the intermediation: the fact that the Treasury can borrow at a lower rate to fund homeowner loans than private mortgage lenders only reflects the implicit liability for covering its loan losses that the Treasury is imposing on taxpayers.

Greg Mankiw has criticized Feldstein’s proposal, but on puzzling grounds:

Sounds like a free lunch? As far as I can tell, his "mortgage replacement loan" scheme involves tricking homeowners into accepting a deal that is not really in their self-interest. For very little in return, they give up the option of future default. So count me as skeptical.

Feldstein’s proposal makes it optional for a homeowning couple to take the “mortgage replacement loan”. On my reading, it doesn’t require trickery to get them to accept the loan, because look what it offers them: a lower interest rate, and the partial removal of a lien on their house. Yes, it removes the option of default on the refinanced part of their debt (if we assume, contrary to what's likely, that the Feds can and will compel repayment more effectively), but it lowers the probability that the homeowners will have to default on the mortgage and lose the house, which is an “option” that most homeowners want to avoid. The problems with Feldstein’s proposal lie elsewhere.

...if you're the kind of person who is likely to find yourself needing a hammer to open a bottle of wine, should you really be buying expensive wine? Steve Levitt offers evidence that could help us answer a better question: should you be drinking expensive wine at all?

Nonetheless, I find the idea inspiring. I'm the last person you would want to ask about wine, but instead of all the convoluted advice that you would get from an outlet like Wine Spectator or Bon Apetit, I propose the following parsimonious formula for willingness-to-pay for wine. The formula relies on proxy variables that should be highly correlated with individual type:

Willingness to Pay = f(time it takes to find your hammer, time it takes to find your corkscrew)

WTP is an increasing function of the amount of time it takes you to find your hammer and a decreasing function of the amount of time it takes you to find your corkscrew. If you could find your corkscrew blindfolded but aren't sure where to find a hammer (or aren't sure you even own one), you're probably a good candidate for expensive wine. If you know exactly where your hammer is but aren't sure where your corkscrew is (or if you even own one), you're probably better off saving your money. In either case, according to the research cited by Levitt, most of us who don't have extensive training probably can't distinguish between high- and low-quality wine.

If you're me, the formula breaks down because while I know where to find our hammers and while I think I know where our corkscrew is, I'm more or less incompetent with both. Therefore, I stick with coffee.

The Onion covers the emerging Joad Cressbeckler campaign. One supporter says she is "voting for a man [she] can imagine drowning a bag of cats," but I have to take issue with his trade policy.

Old, Grizzled Third-Party Candidate May Steal Support From McCain

The Ohio 10th District Court of Appeals today unaimously reversed the trial judge's decision in the case about the unconstitutionality of Ohio's Commercial Activities Tax (CAT) [update] as it applies to the sale of food [/update]. I was an expert witness for the plaintiff and took the position that the CAT was an excise tax on food (and therefore unconstitutional under Ohio's Constitution.) The trial judge rejected my argument and ruled against the plaintiff in summary judgment. Among the arguments cited today, the District Court echoed my view explicitly in paragraphs 21 and 25:

{¶21} Even setting nomenclature aside and focusing on the operation of the CAT, we reach the same conclusion. Though appellee suggests the CAT is a franchise tax and is not equivalent to a sales or transactional tax, by its very operation when applied to gross receipts derived from the sales of food, a transactional tax is precisely what the CAT becomes. This is so because the tax is measured solely by gross receipts and is based on aggregate sales, including those from the sales of food. Because the CAT is not based on each transaction or each individual sale, appellee contends the CAT is constitutional. However, though not based on individual sales at the time they are made, the CAT is merely based on the aggregate of all sales within a specified time frame. If the legislature is prohibited from collecting a tax on the individual sale, it logically follows the legislature would be prohibited from collecting a tax on the aggregate of those same sales.

{¶25} However, while in these cases it was deemed permissible to include certain tax exempt properties and incomes when determining an entity's tax liability, it is important to note that the tax exempt property or income was not the only measure of tax liability since the tax liability was based on an entity's net worth. Here, the sole factor being used to determine tax liability is gross receipts, which is simply a group of individual sales or transactions. A tax exempt transaction is not just a factor being considered to determine tax liability, rather before us, a tax exempt transaction is the only factor being used to determine tax liability. Though the United States Supreme Court has upheld franchise taxes "measured by a yardstick" which includes tax-exempt income or property, in the case sub judice, the "yardstick" is comprised solely of transactions that include food sales that are constitutionally prohibited from being taxed.

[Update: Governor Strickland's office says the state will appeal.]

I highly recommend the following article (ungated here)from the Summer 2008 issue of the Journal of Economic Perspectives:

Jonathan Guryan, Erik Hurst, and Melissa Kearney,"Parental Education and Parental Time with Children," Journal of Economic Perspectives 22(3): 23-46.

Very interesting throughout. They find that higher-educated parents spend more time with their children. For example, college-educated women spend approximately 4.5 more hours per week taking care of their children than women with a high school diploma or less.

Where does this time come from? In part, it comes from less leisure and in part from less home production. As they report,

Working women with more than a college degree spend 4.4 fewer hours per week in home production and 4.8 hours per week in leisure compared to the lowest educated group in the sample.

Ah Putin!

Be still my heart! The man is amazing!

Just as Putin was arriving with a group of wildlife specialists to see a trapped Amur tiger, it escaped and ran toward a nearby camera crew, the country's main television station said. Putin quickly shot the beast and sedated it with a tranquilizer gun.

Brian Doherty, Radicals for Capitalism. That such a book even exists is fantastic. Libertarian/classical liberal philosophy and economics represent viable intellectual and political programs, but this wasn't always the case. Doherty offers a wide-ranging survey of the who, what, when, where, why and how of American classical liberalism, mostly in the postwar era. One area that will ultimately deserve more study, I think, will be the relationship between the extreme idealism of Ayn Rand, the unwavering commitment to principle of Murray Rothbard, and the pragmatism of Milton Friedman and F.A. Hayek. It will be interesting to see what a followup to Doherty's book will look like in 50 years, and if some of the fallout from the excommunications, in-fights, and witchhunts that seem to have characterized libertarianism in the 60s and 70s has blown over by then.

Thomas Sowell, A Conflict of Visions. I require this for the first couple of days of econ 101 (an idea I borrowed from my predecessor and colleague Mark McMahon). It's an excellent survey of different ways to think about the world. Sowell focuses on what he calls "the constrained vision" (which he identifies with Smith, Friedman, Hayek, Burke, and several others) and the "unconstrained vision," which he identifies with Godwin, Rousseau, Paine, and to a degree, Ayn Rand. Sowell offers a useful way of thinking about the role of ideology and assumptions in social analysis. Highly recommended. Here's a critical analysis by Bryan Caplan.

Paul Pearsall, Toxic Success. This is a contribution to the "more money doesn't make you happier, so slow down and smell the flowers" genre. I skimmed parts of it; I would have read more if Justin Wolfers and Betsey Stevenson hadn't shown that its core thesis is incorrect.

Tyler Cowen, Creative Destruction. Fantastic book. I really like Tyler's work on economics and culture; I'm especially fond of his ability to speak to people across disciplines. Interdisciplinary conversation--and I mean conversation, not condescension--is probably an area where the equal-marginal principle is not satisfied.

Daniel K. Benjamin, ed. The Collected Works of Armen A. Alchian. The Liberty Fund is awesome. I try to read a lot of classic articles by Certified Great Thinkers to see how they approach problems. I’ve only read the first couple of papers in this one, but Alchian’s 1950 paper on the evolutionary aspects of economics is fantastic. I’m struck by the degree to which he anticipates recently-revived interest in the Darwinian metaphor in the social sciences. Walter Block, Stephen W. Carson, and I address some of these issues in our 2006 Business and Society Review paper. I’ve done some thinking about this, and while I agree with Sami Dakhlia (one of my mentors at Alabama, now at Southern Miss) that there are no analogues to the phenotype and genotype in social sciences, I think the “survival characteristic” approach to institutions and forms in markets is appropriate.

Bruce Caldwell, Hayek's Challenge. Caldwell offers a very ambitious attempt to place Hayek in context--a daunting task given the breadth and depth of what Hayek wrote over a seventy year career. He devotes the first third of the book to a careful exploration of the intellectual tradition from which Hayek drew his inspiration; indeed, the first part of the book is a book-within-a-book about the early Austrian School and its relationship with the German Historical School. Caldwell offers a very useful survey of what Hayek did and didn't write while establishing the common themes in his economics, his psychology, and his social theory. Next on the list: Lanny Ebenstein's biography of Hayek and Steve Horwitz's review of both in History of Political Economy.

Max Lucado, 3:16-The Numbers of Hope. My first full Lucado book (I skimmed and enjoyed The Sweet Spot once while waiting at Walgreen’s), and his most recent. I certainly don’t have any soteriological or theological quibbles with what he’s writing; it’s just not really my style. I can see why he is wildly successful, though. I'll try to read a few others this year.

Richard Powers, Gain. "Reading" is a strong word. I’ve been slogging through in intermittent bursts for months. I hope to knock it out some weekend. What I've read of it is pretty interesting, though.

Feeding the Monkey, or, stuff that's on the way from Amazon.com: Vernon Smith, Rationality in Economics; Caroline Hoxby, The Economics of School Choice, Hayek, Law, Legislation, and Liberty (all three volumes).

Meme: Marginal Revolution.

Peter Leeson is guest-blogging at Freakonomics and discussing a paper he is working on with Claudia Williamson about the paranormal (sorry; URL below the fold because of the Mac/Firefox thing I still haven't figured out yet). They point out that there is a positive correlation between UFO sightings and Bigfoot sightings, adjusted for population. In the comments, "Doug" offers what I think is the obvious explanation: "...the aliens are Wookies" (I'm-a-giant-nerd alert: it's actually spelled "Wookiees," but I think we can let it slide).

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Ed’s post on the car rental market reminded me of a car rental pricing anomaly I recently encountered. I had to get from St. Louis to a Liberty Fund gig in Indianapolis. (Coincidentally, Ed was there!) Out on Thursday, back on Saturday. It’s a four-hour drive each way, so driving takes no more time door-to-door and (to my taste) involves less of a hassle than flying.

But should I drive my own car, or a rental? It’s about 500 miles round-trip. My neighborhood Enterprise Rent-a-Car was willing to pick me up and rent me a new car for two days for about $70 (weekend days are half-price) plus $0 per mile (“unlimited mileage”). Gas added another $75. Total expense: $145. At the current standard reimbursement rate of 50.5 cents per mile, driving my own car would have cost Liberty Fund $252.50.

So how can rental car companies cover maintenance on their fleets when they charge less than standard reimbursement? Won’t the adverse-selection problem, of which my trip is an example, do them in? Neighborhood Enterprise offices used to charge by the mile. Why did they switch to the unlimited-mileage model?

Comments are open. UPDATE: Comments are now closed.

Zipcar is a short-term car sharing program that doesn't have a commons problem (like Frank's community bike programs), but the private company still can't make a profit and its model is destined to be absorbed by Hertz, Enterprise, et al.

Zipcar members pay a standard two-part tariff and Zipcar foots the bill for gas, insurance and maintenance. In dense cities where it's available, there's a $50 annual fee and a $7 hourly rate up to $77 a day. There is not much variation in prices, except on college campuses that offer green subsidies (e.g. Bowdoin College and Rice University). Businessweek has an informative story on Zipcar's profitability:

Since Zipcar was founded in Cambridge, Mass., in 1999, it has expanded into more than 50 cities. Fueled partly by high prices at the pump and the green halo of a car-sharing model, membership this year is on pace to grow 80% over 2007, to 300,000 members.

There's just one blemish on Zipcar's rosy complexion: red ink. ... Simply put, Zipcar's all-in-one price scheme leaves it vulnerable to volatile fuel prices and other costs. "I lose sleep at night knowing I'm paying for gas for 225,000 people," says CEO Scott Griffith.

The solution, he says, is scale. The bigger Zipcar's customer base, the more broadly it can distribute its operating costs. That's one reason Griffith merged his company last October in a stock swap with Flexcar, a West Coast competitor backed by AOL (TWX) co-founder Steve Case.

In short, Zipcar is a good idea whose economy of scale has not yet come. But suppose the innovation leads significant numbers of people to change significantly their driving habits. Schumpeter describes such forces of change as the innovations that are the destructive sources of economic growth:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer's goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation--if I may use that biological term--that incessantly revolutionizes the economic structure FROM WITHIN, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism...

[I]t is not [price] competition that counts but the competition from the new...which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. [Capitalism, Socialism and Democracy, pp.83-4].

Hmm. I don't see the likes of Hertz and Enterprise running for their lives. Instead they're mixing Zipcar's idea with their own scales of operation:

Long term, [Zipcar's] biggest worry may be competition from giant car rental companies, which have begun to clone Zipcar's approach. Hertz (HTZ) is offering hourly rates, gas included, in New York and Boston. And privately held Enterprise, the world's largest rental provider, launched a similar program, WeCar, in St. Louis, which could go national. "The big players do monthly, weekly, and daily rentals," says [industry analyst Neil] Abrams. "Hourly rentals are the obvious next step."

William Baumol calls this the routinization of innovation.

[T]he independent entrepreneur provid[es] many if not most of the more revolutionary and heterodox contributions, while the routine innovation activities of the oligopoly corporations take those contributions and improve and extend them, often well beyond what their capabilities could have been imagined to be. [Free Market Innovation Machine, p.57]

Innovation isn't always the destructive force of the popularized Schumpeterian view. The market selectively absorbs profitable creations into existing industrial organization. For Zipcar in the long run, that means a shrinking and perhaps zero market share unless it holds onto niches like urban colleges. For the customer, routinization means falling prices and greater access for the masses. Again, Schumpeter:

It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.

What about existing car rentals and sales? Isn't there destruction there? That depends. Is the growth of short-term rentals coming from people ditching their existing cars, or from people who already don't have cars and are now driving more miles? That would say a little something about that green halo...