And the greatest of these is ... ? Interesting essay:

Before Christmas I returned, after 45 years, to the country that as a boy I knew as Nyasaland. Today it's Malawi, and The Times Christmas Appeal includes a small British charity working there. Pump Aid helps rural communities to install a simple pump, letting people keep their village wells sealed and clean. I went to see this work.

It inspired me, renewing my flagging faith in development charities. But travelling in Malawi refreshed another belief, too: one I've been trying to banish all my life, but an observation I've been unable to avoid since my African childhood. It confounds my ideological beliefs, stubbornly refuses to fit my world view, and has embarrassed my growing belief that there is no God.

Now a confirmed atheist, I've become convinced of the enormous contribution that Christian evangelism makes in Africa: sharply distinct from the work of secular NGOs, government projects and international aid efforts. These alone will not do.

Marxism. Sowell offers a long analysis of the philosophical and economic system of Karl Marx. Published in 1985, this offers a great survey of Marx's thought from one of the premier thinkers of the late twentieth century. Sowell treats Marx charitably but with appropriate scrutiny, and in the book's crescendo he shows ho the Marxian system comes crashing down when one relaxes the assumption that labor is the only factor of production.

On Classical Economics. This was reviewed uncharitably in The Independent Review, but I found Sowell's take on theories of economic growth in the classical tradition to be a refreshing survey and supplement for both technicians and non-technicians in the field.

Say's Law. Sowell offers an historical survey of the theory of general gluts and asks whether supply does, in fact, create its own demand. It's a more sophisticated approach than what usually appears in textbooks, which is what one would expect given that it is based on Sowell's dissertation.

Inside American Education. I grabbed this off the shelf in Josh Hall's office and skimmed it during my visit to Beloit earlier this month. It contains one of the most chilling statements I've ever read, where Sowell writes that the problem isn't just that Johnny can't think but that "Johnny doesn't know what thinking is." Sowell presents an array of distressing facts about educational infrastructure in a rousing polemic that provides a good starting point for critical perspectives on American education. Caroline Hoxby's edited volume on school choice is on the shelf in my office, and I look forward to reading it in light of Sowell.

Merry Christmas from the Federal Government. Here's the best sentence I've read today, from Tyler Cowen:

"I believe that moving more assets under government guarantees is exactly the opposite of what we should be doing."

I agree.

... provided by Markus Goldstein and Christopher Udry in the new issue of the JPE. Abstract (ungated version here):

We examine the impact of ambiguous and contested land rights on investment and productivity in agriculture in Akwapim, Ghana. We show that individuals who hold powerful positions in a local political hierarchy have more secure tenure rights, and that as a consequence they invest more in land fertility and have substantially higher output. The intensity of investments on different plots cultivated by a given individual correspond to that individual's security of tenure over those specific plots and, in turn, to the individual's position in the political hierarchy relevant to those specific plots.

HT: Greg Ransom

that some of these commentators are soon to be card-carrying Ph.D. economists.

1. Slavery, Violence, and Law in the Nineteenth-Century South. After much foot-dragging, I finally revised this paper and sent it out to Social Science History. Here's the abstract, and it touches on some themes that I will explore in a longer survey piece on the economic history of the South for the Oxford Handbook of Southern Politics:

"Southern economic history is inseparable from Southern legal history. This essay surveys several cases and examples before and after the Civil War to illustrate some of the problems associated with large-scale institutional change in settings where the array of property rights and the structure of social capital are in conflict with one another."

2. Can't Buy Me Growth: On Foreign Aid and Economic Change. This is a paper I wrote for the Independent Institute's Garvey Fellowship Contest in 2007, re-formatted for the Journal of Private Enterprise. The abstract:

"Evidence suggests that foreign aid does not promote economic growth. Institutions which promote entrepreneurship do promote growth. Understanding where these institutions come from is paramount to success. This essay analyzes and summarizes theory and evidence regarding the relationship between aid and economic growth."

3. Guerrilla Economics (tentative title; if you have a better suggestion, please let me know). I finished hammering some of my writings for the Mises Institute and the Independent Institute into a book manuscript today. I'll make the rough draft available online after a revision and after I get the requisite permissions.

In the Hopper: I still have a handful of papers from my dissertation and elsewhere to revise, and I have reviews of David M. Primo's Rules and Restraint and Randall Holcombe's Entrepreneurship and Economic Progress to finish. I also just got Paul Heyne's "Are Economists Basically Immoral?", which I'll be reviewing for the Quarterly Journal of Austrian Economics. I'm looking forward to reading the Heyne book over the break.

A NYT piece suggests NBA attendance depends more on team quality than macroeconomic condidtions:

The Kings are suffering from the twin perils of a poor economy and poor play, with a 7-19 record and no certified stars. The problems are mirrored in Indianapolis, Philadelphia, Minneapolis, Charlotte, N.C., and Memphis, which comprise the bottom fifth of the N.B.A. attendance list.

Over all, N.B.A. attendance is flat — about a half-percent higher than at this point last season on a per-game basis. Cumulatively, arenas are at about 89 percent of capacity, on par with last season.

Given the recession, league officials are actually encouraged. They are expecting neither a significant increase nor a significant decrease in attendance this season.

Still, it is hard to ignore the thousands of empty seats at Arco Arena and Conseco Fieldhouse, or anecdotal reports that things are worse than the official numbers indicate. (N.B.A. teams report attendance based on tickets distributed, not turnstile counts. The latter figure is not publicly available.)

On basketball blogs, fans and reporters swap horror stories about the anemic crowds. A Nov. 12 game between the Grizzlies and the Knicks in Memphis drew, officially, 10,129 fans, but the crowd looked much thinner. A Nov. 3 game between the Bobcats and the Pistons in Charlotte drew a reported 11,023 fans. But two-thirds of the seats appeared empty.

In fact, several teams are defying the recession. The Pistons, operating in one of the most depressed economies in the country, have sold out 246 consecutive games at the Palace of Auburn Hills and lead the league in home attendance, with 22,076 a game.

The Oklahoma City Thunder, despite a 2-24 record, is averaging 18,457 a game in its inaugural season at the Ford Center (capacity 19,314). The franchise drew just 13,335 fans a game last season in Seattle.

Perhaps no team cheers N.B.A. accountants more than the Portland Trail Blazers, who are drawing 20,516 fans a game — an increase of 5,000 over three seasons ago, when the economy was sound but the team was not. Poor play and player misdeeds so alienated the fan base that the owner, Paul Allen, filed for bankruptcy protection and handed the Rose Garden back to creditors.

I got this email yesterday morning from my former colleague Mark McMahon, a Rhodes legend who retired after my first year here and a wonderful mentor:

"I finally figured out what Bush is up to!

I just couldn't see how he could praise capitalism as he did in his recent speech on the benefits and virtues of markets historically while doing so many things to hinder the work of markets.

After the bailout of the UAW and inefficient, non-innovative auto firms, it's now clear. Like Mark Antony, he came to bury capitalism, not to praise it!"

In related news, a planned Toyota plant near Tupelo, MS has delayed the beginnings of its operations. This hasn't been mentioned in any of the news reports I've seen, but it's a fair bet that they would be proceeding more rapidly if the government weren't propping up inefficient competitors.

Cross-Posted at The Beacon.

... the real voodoo economics.

Google search of blogs shows Greg Mankiw has picked this up, but I didn't find it elsewhere, so here goes. By email forward from Veronique de Rugy:

Subject: WANTED: STIMULUS SPENDING SKEPTICS

OBAMA AIDES SAY “ONLY ONE OUTSIDE ECONOMIST” HAS EXPRESSED SKEPTICISM ABOUT MASSIVE STIMULUS SPENDING PLAN

An AP story this morning (Kuhnhenn, Jim; “Obama Considers $1 Trillion Plan to Jolt Economy,” Associated Press, 18 Dec 08) indicates President-elect Obama and his advisors are contemplating an economic “stimulus” spending bill with a price tag as large as $1 trillion, with the vast majority of that number going to new spending on government programs and projects. The article quotes Obama transition officials as saying “[o]nly one outside economist contacted by Obama aides. . .voiced skepticism” about the President-elect’s emerging spending plans.

House Republican Leader John Boehner (R-OH) is compiling a list of credentialed American economists who would like to add their voices to the list of stimulus spending skeptics. If you know of an economist who would like to be added to this list, please visit http://gopleader.gov/jobs. The page includes a contact form that allows readers to sign up and submit comments. Please be aware that information submitted through the webpage can, and most likely will, be shared publicly.

Bill Greene
Republican Leader’s Office
202-225-4000

Here is Tyler Cowen "driving home the point" that there is no evidence to support the putative economic benefits of stimulus spending.

The bailout du jour ...

The White House plans a $17.4 billion rescue package for the troubled Detroit auto makers that avoids bankruptcy, officials said. President George W. Bush was set to make an announcement at 9 a.m. Eastern Time.

The deal would extend $13.4 billion in loans to General Motors Corp. and Chrysler LLC in December and January, with another $4 billion likely available in February. The deal is contingent on the companies' showing that they are financially viable by March.

The deal generally tracks key provisions of the bailout legislation that nearly passed Congress earlier this month. But it is somewhat more lenient in judging their viability.

The deal appeared to represent a relatively modest step in the administration's efforts to put the auto makers on a long-term path to viability. By forsaking a trip to bankruptcy court, the White House gave up its most powerful weapon to extract concessions from the companies and their workers, suppliers, dealers and creditors.

Yet another disgrace. Anyone know of a 12-step program--call it Bailouts Anonymous--for pols addicted to spending other folks money?

UPDATE: I just saw Ed's link to Pete Boettke's post about Bush being the worst president of our lifetimes. I'd still go with Nixon (wage and price controls, the alphabet soup of regulatory agencies), but Bush seems determined to catch up. In what may be an attempt to check the wage and price controls box on the interventionist scorecard, the feds have just enacted new regs for credit cards that look like interest rate caps.

1. Dictionary.com's word of the day is "iambic". Why do we have a three syllable word to mean "having two syllables"?

2. Ouch. Injury to insult: Illinois's AG says state won't pay for Blago's defense. And DOJ is moving to block acceess to his $3m. campaign war chest. BTW, folks, he ain't guilty yet!

3. With Cerberus working the White House halls, W. won't give up on a Detroit bailout and solidifying his record as the worst president of our lifetimes.

4. Meanwhile, Philip K. Howard says let's restructure Washinton, DC, too!

5. A Gen-Xer explains why network t.v. died a long time ago (but doesn't talk of the affiliates).

6. David Allen Grier at Chocolate News unveils the mystery of Kwanza. (NB: video includes a dubbed out F bomb)

Everyone, it's been a great year. I hope you have safe travels, a merry Christmas, happy Hanukkah, and blessed Kwanza (oops, I almost forgot Festivus!). And best wishes for a peaceful and prosperous 2009. Giddyup!

From the WSJ:

President-elect Barack Obama plans to name former Dallas Mayor Ron Kirk, a longtime free trader, as U.S. trade representative ...

The appointment of a free trader suggests my reading of the Becerra withdrawal--that Becerra was a protectionist who didn't like Obama's backing away from a fight over NAFTA--was correct. Mankiw, in an update to his original post, correctly points out that merely maintaining the status quo leaves trade deals with Columbia and South Korea unratified.

Over at Cato Unbound on Tuesday, I tagged J. Bradford DeLong with the “Nirvana Fallacy”: the view that if the real-world market doesn’t match an idealized model, then that’s evidence of “market failure” rather than of something missing from the model (like, say, transactions costs). The statement I was criticizing was not very explicit, so I might have been jumping to an unfair conclusion.

But I wasn't. Elsewhere, at the Talking Points Memo Cafe on Monday, Professor DeLong made a more explicit statement that I think is an unmistakable (even breathtaking) example of the same Nirvana-fallacy thinking. Here it is:

The mortgage interest rate is made up of four things. Compensation for inflation--call it 2% per year. Real time preference--the fact that because we will be richer in the future we value future goods at less than par in terms of present ones--call it 2% per year. The default discount--which in a well-run housing market should be small. And the risk discount--the extra return mortgage lenders demand because they are not sure when their payments are going to come exactly or what they will be worth exactly when they do come--and I am under the spell of Richard Thaler and Matt Rabin who argue that this discount should also be very small.

Thus I think that 4.0% per year is what mortgage interest rates ought to be. There is no higher "normal" that they ought to return to. The fact that they are not at 4.0% on average is a sign of a significant market failure--a failure to appropriately mobilize the collective risk-bearing capacity of the y.

[…]

So I say: unleash Fannie Mae and Freddie Mac. Let them borrow at the Treasury rate and buy and buy up mortgages until the mortgage rate is down to inflation plus 2% per year. That seems to me to be a good use of public money--and in all likelihood a profitable one.

Got that? The model says that the real mortgage interest rate should be 2%. The fact that the actual market rate is higher demonstrates a “significant market failure”. Policy implication: government should intervene to drive the market’s real mortgage rate down to where it matches the model.

No recognition that something might be missing from the model. Something like, say, the transactions costs of intermediating savings into mortgages. (Note that his model equally implies that the real bank deposit rate should be 2%, which would leave the bank’s spread at 0%. How is lending at a 0% spread “in all likelihood a profitable” use of anyone’s money?) Something like, say, the transactions costs of “mobilizing the collective risk-bearing capacity” by trading risks to their most efficient holders. Something like, say, the fact that mortgage default risk is not negligibly small at the margins of the mortgage pool even after costly creditworthiness checks on borrowers.

... comes from Michael Lewis's The Blind Side :

Many of them [black football players at Ole Miss], according to their tutors, were less prepared for college than Michael Oher. The typical incoming player in Michael's class had third-grade level reading skills. Several had never taken math. Ever.

This is an indictment of both the NCAA and the school systems that the players attended. Passing someone through 12 years of schooling without teaching the person basic reading and arithmetic is simply child abuse.

I liked the book (though not as much as Moneyball), especially chapters 2, 5 and 9 dealing with the evolution of football and the increased importance of the left tackle position. JC Bradbury's review provides more information about Michael Oher's background.

A valuable database

You might want see how your neighbors are making out. In my home county, four members of one family accounted for about one-third of the USDA subsidies.

... if the media will stop drooling over Caroline Kennedy long enough to point out that she has less experience than the (somewhat deservedly) maligned Sarah Palin. I'm not sure experience is a good thing, but if it's a fair charge to raise against Palin then it should be a fair charge to raise against Kennedy.

Just as Freakonomics presented some of Steve Levitt's research to a non-academic audience, Economic Gangsters is a non-technical compendium of Raymond Fisman and Edward Miguel's research exploring the role that corruption and violence perpetrated by "economic gangsters" has on economic growth. Gangsters can also be thought of as development economics version of Freakonomics because, like Levitt, Fisman and Miguel often seek evidence from natural experiments and unusual data sources. I liked the book--the research is interesting and the authors are excellent writers--but I've put a few quibbles below the fold.

Read More »

The Dec. 18, 1908 NYT reports on passenger traffic and train revenues generated from the Yale-Harvard game held in New Haven Connecticut the previous week:

[T]traffic and earnings from the Yale-Harvard football game here last month show that the passengers carried were 39,777, as compared with 41,454 passengers for the Yale-Harvard game in this city two years ago. The revenue received from football passengers on the steam road was $71,299, as compared with $62,901 from the Yale-Harvard game of 1906. On the day of the football game the company ran into New Haven sixty-six trains, carrying 584 cars and 21,215 passengers, and out of New Haven fifty-five trains carrying 500 cars and somewhat over 20,000 passengers. This army of passengers was handled without incident.

Calculating the real average revenue per passenger, as reported, we obtain $1.55 per passenger in 1906 and $1.79 per passenger in 1908. Fewer passengers and a higher price in 1908 yielded an increase in real revenue, suggesting demand was inelastic. How inelastic? The arc elasticity between these two "points on the demand curve" is 0.271!!

This is a great example of how price elasticity changes with the availability of substitutes. How else could one get to New Haven in a timely fashion on the day of the game?

The Dec. 18, 1908 NYT reports on an interesting decision on the part of 200 workers at a silk manufacturing plant:

The refusal to grant an increase of 5 cents a week caused a strike to-day of 200 girls employed by Ackerman Brothers silk manufacturers. Their wages had been reduced recently, but a promise was made that this month the wages would be raised to $6.10 [$141.79 in 2007 dollars]. The girls have been receiving $6.05, and decided not to return to work until the firm agreed to give the additional 5 cents.

Going on strike for $2.60 per year when one week's lost wages outweighs the annual gain from the strike?

The Dec. 18, 1908 NYT reports (somewhat comically) about the goings-on in the House Ways and Means Committee hearings on the tariff schedule:

A number of small schedules occupied the committee to-day. L.R. Eastman, Jr., of the New York Dried Fruit Association asked that uncleaned currants be put on the free list and that the duty on cleaned currants be not more than half a cent a pound. This brought Representative Needham of California to his feet at once with the statement that the California growers of raisins wanted the duty at 2 cents, as the currants imported from Greece compete strongly with domestic raisins. This fact was denied by the New Yorker.

P. Flintwood of Virginia asked for higher protection on peanuts. They are now grown in several of the Southern States under a protection of half a cent on shelled peanuts and 1 cent a pound on the unshelled. His request for a flat rate of 2 cents a pound.

That American macaroni is practically as good as the Italian, and deserves all the protection it can get, was the contention of G. F. Argetsinger of Rochester, N.Y. He said that in spite of this fact the American Italians, who are the chief consumers of macaroni, remain loyal to their home variety and insist on getting the imported product. They would continue to import it, he said, no matter how high the duty was. He therefore urged that, as a revenue measure, the present duty of 1 1/2 cents a pound could well be raised.

I like the vision of Argetsinger licking his thumb, sticking it out in front of his face, and then "estimating" the import elasticity of demand for macaroni.

It is humorous because just about every week the NYT reports on another decision concerning the tariff - whether from Congress, the Customs House, or otherwise. However, this is pre-income tax so we seem to have simply replaced tinkering with the tariff schedule with tinkering with the tax code, with similarly silly displays.

The snail darter, which (even though it was not endangered) halted one turkey of an Army Corps project. An act of congress was required to allow its completion.

The ivory-billed wookpecker does not seem to be up to the job. For years the Corps has wanted to pump water from the White River. Now according to this story, the Corps will be allowed to pump water from Western Arkansas to the eastern part of the state.

"There's a lot of opportunity here for putting people back to work," Carman [chief engineer and director of the White River Irrigation District] said, noting that such a project "is a fairly sizable lick for a state like Arkansas."

The main opportunity is for taxpayers to provide subsidized water to grow already-subsidized sugar beets and soybeans. The project's estimated cost is $420 million.

Two bets: (1) The project will cost more than $420 million. (2) The Corps counted some of the labor cost as benefits.

John Steele Gordon, on the vulnerable value of reputation.

Most Ponzi schemes are penny-ante affairs, such as chain letters, that bilk their victims out of a few dollars each. Even Charles Ponzi's investors put in an average of only $500 each. But Wall Street's most famous Ponzi scheme was, like the present one, no small affair. And its principal victim was a man few associate with Wall Street at all -- Ulysses S. Grant.

Ulysses Grant Jr., known as Buck, had been trained in the law and tried several businesses without success before coming to Wall Street. There he was befriended by Ferdinand Ward, a typical all-hat-and-no-cattle fast talker whom Grant was too naive to recognize as such. They soon formed a brokerage firm named Grant and Ward.

Ward hoped to trade on the Grant name and when Gen. Grant moved to New York in 1881, four years after serving as president, he came into the firm as a limited partner, investing $200,000, virtually his entire net worth. Many people, hoping to profit by a connection with the former president's access to power in Washington, opened accounts with the firm.

...

But Grant, as honest as he was foolish about business matters, had flatly refused to lobby for government contracts. So Ward just lied and solicited investments from Grant's friends and well-wishers, promising large dividends to come from lucrative government contracts with the firms he was investing in. He then took the money and speculated with it. He kept the promised large dividends flowing by paying them out of the money new investors put in.

ATSRTWT

... if we'll hear anything about Bernie Madoff (and other Madoffs who I assume are related to him) making political contributions to Democrats (including Hillary Clinton and Chuck Schumer) in the same way we heard about George Bush's ties to "Kenny Boy" Lay in the wake of Enron's collapse.

Greg Mankiw points to this bit of news:

Saying that he has come to the realization that trade is not the highest priority for the incoming Obama administration, Rep. Xavier Becerra has decided not to accept Barack Obama's offer to be United States Trade Representative, according to an interview the California Democrat gave to the editorial board of La Opinion, a Spanish-language newspaper in Los Angeles....

Becerra said, "My concern was how much weight this position [U.S. Trade Representative] would have and I came to the conclusion that it would not be priority No. 1, and perhaps, not even priority No. 2 or 3."

Mankiw indicates that this is what worried him last March [in a NYT op-ed]. I think he may be misreading the situation. That Becerra--a trade skeptic*--says trade is a low priority for Obama might mean that Obama intends to preserve roughly the status quo rather than, say, unilaterally change NAFTA.

*Here's Jake Tapper on Becerra:

The move to tap the liberal Southern California congressman indicates that Mr. Obama's campaign rhetoric about trade was not just words, and U.S. policy will soon make a dramatic shift from the trade policies of the Bush administration, with more union and environmental concerns taken into account during trade negotiations.

Becerra has said that "all the evidence points to the fact that NAFTA and CAFTA are not the approach to free trade or fair trade. They're a prescription for increased commerce, but one that concentrates the benefits of that commerce in the hands of very few." Becerra voted for NAFTA in 1993, but has said he regrets the vote.

The congressman from the Golden State's 31st congressional district, first elected in 1992, in 2007 voted for the free trade deal with Peru, but he voted against free trade deals with Oman in 2006, with Central America in 2004, and against the Dominican Republic-Central America-United States Free Trade Agreement Implementation Act in 2005.

Speaking against the free trade deal with Oman in 2006, Becerra assailed trade deals that lead to massive trade deficits and don't protect U.S. interests.

From the WSJ:

PARIS -- France, long a champion of a heavy government hand in its economy, credits recent deregulation for its ability to grow in the third quarter while other economies shrank.

Meanwhile,

"I've abandoned free-market principles to save the free-market system," Bush told CNN television, saying he had made the decision "to make sure the economy doesn't collapse."

Only 35 more days to go ... though that's plenty of time for at least one more bailout ... probably Detroit's sclerotic 3.

This from page D08 of the WaPo:

Most Americans continue to oppose a government-backed rescue plan for Detroit's Big Three automakers as majorities blame the industry for its own problems and are unconvinced failure would hurt the economy, according to a new Washington Post-ABC News poll.

Maybe they think G. W. Bailout will not read that deeply into the paper. Maybe they're right.

The Dec. 16, 1908 NYT reports on what might have been a close call: a proposal for the U.S. government to purchase, install and operate pneumatic tubes for the purpose of delivering mail and other goods:

"That it is not feasible and desirable at the present time for the Government to purchase, to install, or to operate pneumatic tubes," is one of the most important conclusions reached by a commission appointed by the Postmaster General to inquire into the feasibility and desirability of the purchase and operation by the Government of pneumatic tubes in the cities where the service is now installed...

The pneumatic tube service is in operation at present in New York, Philadelphia, Boston, Chicago, St. Louis, and Brooklyn...

The report commends the service as an important auxiliary for the rapid transmission of first-class mail and special delivery mail. It however, adds these conclusions:

That pneumatic tube service appears to be still in an experimental condition, although progress has been made toward the development of a fixed standard of machinery;
That with the above reservation the regularity and efficiency of the tube service are commendable.

No monopoly likes competition, so it is understandable (in one sense) that the government would look into "purchasing" the existing pneumatic tube services in order to stave off competition. The commission suggests putting off the decision for "five or six years," perhaps to see what is going to happen with the technology and the overall market for pneumatic tubes?

According to this entry in Wikipedia the number of cities that actually operated a large-scale pneumatic tube system was rather low, thus it seems that the technology never really took off. This might not be surprising given that technology in the early 1900s was changing rapidly - wireless, manned flight, the automobile, and advancements in wired communications - much like our technological revolution in the past fifteen years or so.

One wonders what our communication system would be like if the government had undertaken a large scale, nation-wide, pneumatic tube system for mail delivery. It seems there was at least a small possibility that we might actually have had a system of "intertubes."

Another fine example of main stream news media "opinion leaders" exhibiting a dreadful ignorance of basic economic concepts: Michael Kinsley, writing in Time magazine (Dec. 22nd). This is more sad fodder to use in your principles of economics class.

Kinsley is talking about our country's need for a high tax on gasoline to make us more green and to allocate fossil fuels more efficiently (as if market pricing just simply fails to do so). He describes the oil market in such a way that any economics professor would be embarrassed to claim him as a former student:

"Of course, we've been through this before. The price of oil shoots up; we start using less; reduced demand sends the price down, we start using more; pretty soon it shoots up again."

Forgive me for thinking this, but wouldn't the world be a much better place if those editorialists who make fundamental errors in applying basic economic concepts (such as confusing a change in demand with a change in the quantity demanded) and then use the resulting illogical implications to criticize market allocations were summarily censored from all media?

Sigh... I suppose not. I am much more for preserving free speech than I am for banning idiocy.

The December 15, 1908 NYT reports on the pending new digs for the Pittsburgh Pirates:

Pittsburg's (sic) new National League baseball park will have a seating capacity of 20,000...They [the plans] call for an immense three-decker, V-shaped grand stand, from every part of which the "fan" will have an unobstructed view of the playing field...

One of the innovations will be the apartments for the players. Under one corner of the grandstand will be the rooms of the Pittsburg players, consisting of plunge and shower baths, massage rooms, smoking and lounging rooms, with a billiard and pool parlor. There will be similar rooms for the visiting team, and a room for the umpires. The rooms are so arranged that the players and the umpires can slip away in case of trouble, without crossing the field, thus eliminating the danger from the rowdy element.

No discussion of sliding roofs, luxury suites, extended megatron HDTV screens. More importantly, no discussion of public funding for a stadium that was billed to be the "largest in existence."

It is interesting that there was considerable concern for the safety of the players and umpires. During the playoffs in 1908 there were a number of instances of players being hit by items thrown by dis-enchanted fans. One important, and overlooked, aspect of sport in the United States is that the only barriers between the fans and the field of play are, generally, in place to protect the paying fans rather than to protect the players from the fans. Contrast that with many other countries (especially in association football) and it gives food for thought.

I proposed a bailout for the doughnut industry a few years ago; I don't think it went anywhere. The doughnut bubble appears to have burst near the end of summer 2003, and the share price fell from a high of $48.90 on August 11, 2003 to a price of $2.02 in its last trade a little over fifteen minutes ago. Shouldn't we be helping an ailing company whose shares have lost about 95% of their value in five short years? After all, there are important spillover effects. If Krispy Kreme dies or if people start eating healthier diets, what will happen to all those high-wage cardiologists? And medical device manufacturers? And sugar farmers? And the construction industry?

12/16 Update: On our way back from lunch yesterday, Mike pointed out that since cars are consumer durables while doughnuts aren't, the uncertainty about whether the Big Three will still exist in a few years can have more pronounced effects than low-carb diets. We both agree, though, that this should all be captured in the price. For more, here's today's column from Don Boudreaux.

A miracle occurred at Atherton Elementary this summer, if its standardized math test scores are to be believed.

Half of the DeKalb County school’s fifth-graders failed a yearly state test in the spring. When the 32 students took retests, not only did every one of them pass — 26 scored at the highest level.

No other Georgia fifth grade pulled off such a feat in the past three years. It was, as one researcher put it, as extraordinary as a snowstorm in July. In Atlanta.

Atherton Principal James Berry said the scores were the product of intense tutoring.

But state education officials said last week they will investigate steep gains at Atherton and four other schools as a result of The Atlanta Journal-Constitution’s inquiries.

Atherton’s unlikely performance was one of a handful the AJC uncovered by analyzing student scores on the CRCT and retest. The surges were so far outside the norm they raise questions about whether those schools’ retest scores are valid.

As a result, the findings also suggest some schools — such as Atherton — that relied on the retest to reach academic goals might not have met federal standards.

Atherton originally placed in the 10th percentile among Georgia fifth grades on the math test, meaning 90 percent of the 1,200-plus schools scored better, the newspaper’s study shows.

After the retest, Atherton jumped to the 77th percentile. The move was unduplicated by any school statewide.

The Atherton student with what was likely the biggest gain answered just 16 math questions correctly his first time taking the test — a slightly better result than a student could expect after guessing on all 60 multiple-choice questions.

On the retest, however, the unidentified boy joined the ranks of high scorers, answering 50 questions correctly. Students needed 29 right to pass.

Source.

...on monetary policy?

WASHINGTON (Reuters) – The U.S. Federal Reserve is expected to drop interest rates close to zero on Tuesday, but anticipated remarks on unconventional methods to dispel a year-old recession are what will really matter.

Economists forecast a clear statement that the U.S. central bank will aggressively deploy so-called quantitative easing measures to shelter the economy from a steepening downturn, but do not expect details of what steps it will actually take.

Those words would accompany a decision by the Fed to lower its target for overnight rates by at least a half-percentage point, economists believe.

A half-point cut would take the bellwether federal funds rate to just 0.5 percent, the lowest on records dating to July 1954, as the central bank battles a recession many think will stretch well into next year.

Story.

Not as leveraged as I thought. (UPDATE: But maybe so. See #3 below.) From the Gold Antitrust Action Committee:

Interviewed Monday this week on the "Trading Day" program of Business News Network in Canada, former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold may figure heavily in the Fed's attempt to rescue the U.S. economy.

The program's guest host, Niall Ferguson, an author and history professor at Harvard, asked Gramley, now senior adviser at Stanford Group in Houston, about the seemingly grotesque expansion of the Fed's balance sheet in recent months.

Ferguson asked: "I've heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed's reputation?"

Gramley replied: "I think you have to reckon with the fact that one of the Fed's assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed's leverage would look a lot less than it is now."

Three comments:

(1) I don't know where Ferguson heard it, but I made exactly such a remark at the Cato Monetary Conference last month.

(2) Gramley has a point. According to the Fed's latest H.4.1 balance sheet release, current Fed gold @$42.22/oz = $11b. Multiplying by 822/42.22 makes it approx. $215b. That would raise the book value of the Fed's capital by the difference of approx. $204b, from $43b (2% of its $2262b assets) to $247b (11%). So if we mark the gold to market, the Fed's balance-sheet leveraging falls from 50:1 down to only 9:1.

(3) For accuracy's sake, we should also mark the Fed's exotic loans to market. But there is no market for such loans. (UPDATE: If we use fair value accounting, Ed Kane suggests by email, the writedowns would swamp the $204b selective writeup on the gold account.)

HT: Walker Todd

In November I spoke at the Cato Institute's annual monetary conference. During the afternoon of the conference I sat down with Cato Daily Podcast-meister Caleb Brown in Cato's "recording studio" (more like a large broom closet). We talked about the ginormous amount of bailout-type lending the Federal Reserve has been doing over the last year. On Tuesday this week, while I wasn't looking, Cato posted 8:37 of that conversation as a podcast. You can listen to it here.

P. S. Speaking of media posted while I wasn't looking, I just discovered that the Mises Institute last week put videos on YouTube of the talks from its first conference, "The Gold Standard, An Austrian Perspective," which was held November 16-17, 1983. One of the speakers was a much younger me:

In preparation for Classical & Marxian Political Economy and for her visit this Spring, I've been re-reading Deirdre McCloskey's The Bourgeois Virtues: Ethics for an Age of Commerce. In this, the first of a planned five-volume magnum opus, McCloskey argues for the instrumental value of bourgeois capitalism not merely as a vehicle for the production of goods and services but as a vehicle for human flourishing more broadly defined. I read a draft of it in preparation for her visit to Wash U the week before my dissertation proposal, and now after 2.5 years as a faculty member, I’m appreciating it in a whole new light. McCloskey writes with penetrating insight, unmatched verve, and a master’s command of price theory. A few choice passages from pp. 1-55 are below the fold.

Read More »

No, they don't look like dumpsters.

A New Mexico company is building all-wood human coffins in a partnership with People for the Ethical Treatment of Animals. They bear painted slogans, such as "Lifetime PETA Member" or "I saved 500 animals."

The coffins, which went on sale last week, are priced from $620 to $670, which includes a $75 PETA contribution. Made of wood, they are designed to be Earth-friendly, with no screws, nails, hinges or animal-based glues.

Source. Thanks to Mike Hulsey for the pointer and MR for the meme.

We've entered the "conversation" phase over at Cato Unbound's web-posium on the causes of the financial crisis. Tune in to catch the the latest exchanges between J. Bradford DeLong and me, between DeLong and Casey Mulligan, and between Mulligan and me. (One of us really should address the essay by the fourth participant, William K. Black ...)

In today's WSJ, Thomas Frank turns his anti-market bias to surrogate motherhood:

Surrogate motherhood has been the subject of much philosophical and political dispute over the years. To summarize briefly, it is a class-and-gender minefield. When money is exchanged for pregnancy, some believe, surrogacy comes close to organ-selling, or even baby-selling. It threatens to commodify not only babies, but women as well, putting their biological functions up for sale like so many Jimmy Choos. If surrogacy ever becomes a widely practiced market transaction, it will probably make pregnancy into just another dirty task for the working class, with wages driven down and wealthy couples hiring the work out because it's such a hassle to be pregnant.

The recent (and not very good imho) film "Baby Mama" has a couple of snips showing that surrogacy could be, as we would expect, a mutually beneficial transaction. In the film, Tina Fey's character is unable to conceive so she hires a surrogate (played by Fey's SNL colleague Amy Poehler) to carry an embryo fertilized via artificial insemination. In the first snip we see Fey's character being persuaded on grounds of specialization and division of labor to try surrogacy (10:00-11:15). In the second snip, we see Fey's character and the husband of the surrogate celebrating a mutually beneficial transaction--the successful pregnacy for the surrogate and resulting payment of $10,000 to the surrogate (22:40-23:25).

Not surprisingly, Don Boudreaux has aimed his intellectual howitzer at Thomas Frank's popgun:

On a day when the top news story is a politician's attempted sale of a U.S. Senate seat, Thomas Frank fires his intellectual popgun at surrogate-mother contracts ("Rent-a-Womb Is Where Market Logic Leads," December 10).

What irony! A high-ranking member of the class of people that Mr. Frank believes must protect us from greed - politicians - tries to sell that which doesn't belong to him, while Mr. Frank gets all hot'n'bothered by the idea of a private person selling that which DOES belong to her.

... Doors singer Jim Morrison's dad was born in good old Rome, GA. Jim Morrison's father died last month; he was a Navy admiral.

In a 1992 visit to Paris, I came across Jim Morrison's grave (photo here; scroll down) during a visit to Pere La Chaise Cemetery. I say "came across" because I wasn't there to join to the ongoing party at Morrison's grave site; I was there looking for the burial site of Jean Baptiste Say. Other famous people buried there include Chopin, Oscar Wilde, and Richard Wright.

I've heard it said that corporate greed isn't as bad a problem as corruption in American politics is. We have stories like today's out of Chicago to remind us of this truth. Yahoo News carries an early story:

CHICAGO (Reuters) – Illinois Gov. Rod Blagojevich was arrested on criminal charges on Tuesday, including trying to sell the U.S. Senate seat being vacated by fellow Democrat President-elect Barack Obama, federal prosecutors said.

Blagojevich was also accused of threatening to withhold substantial state assistance to the Tribune Company in connection with the sale of the Chicago Cubs' baseball home Wrigley Field "to induce the firing of Chicago Tribune editorial board members sharply critical" of him.

He was seeking a "substantial" salary for himself at a nonprofit foundation or union affiliated organization, a spot on a corporate board for his wife, promises of campaign cash, as well as a cabinet post or ambassadorship in exchange for his Senate choice, the FBI affidavit added.

1. Corruption in the U.S. is common.

This is a very high profile case, but it's not uncommon. Search "arrest corruption" and you'll find that Blagojevich isn't the only corruption case making the news today. In fact, the Department of Justice reports that it arrests about 1,000 state and local government officials across the country each year. The DOJ conviction data are comparable across states since it's the same DOJ convicting crooked cops in Connecticut, jailing jobbery judges in Jersey, and locking up legislators in the Land of Lincoln. Yeah, I was curious about Illinois, so I looked it up. Over the past 20+ years Blagojevich's state is the 6th most corrupt.

The economists Ed Glaeser and Raven Saks analyze these data and find some cool patterns.

We use a data set of federal corruption convictions in the U.S. to investigate the causes and consequences of corruption. More educated states, and to a less degree richer states, have less corruption. This relationship holds even when we use historical factors like education in 1928 or Congregationalism in 1890, as instruments for the level of schooling today. The level of corruption is weakly correlated with the level of income inequality and racial fractionalization, and uncorrelated with the size of government. There is a weak negative relationship between corruption and employment and income growth. These results echo the cross-country findings, and support the view that the correlation between development and good political outcomes occurs because more education improves political institutions.

I guess we shouldn't be surprised to learn that corruption rates vary with states' socio-economic indicators and harm economic growth. But it is a good paper. They also include an appendix ranking states by corruption rate over 1976-2002. They got the data from Corporate Crime Reporter. I use these same data in a paper explaining the states' legislative responses to the Kelo backlash, but corruption rate is a non-factor in our results.

So corruption in the American states is fairly common. An obvious limitation to these data is that convictions depend on enforcement levels, and the enforcers have their own agendas. Which brings up another interesting point...

2. Corruption and Public Choice Theory

Twice today I have heard economists say that this is a victory for public choice theory. Notch one in the W column for the cynical old Virginia School. I am not so sure. Public choice theory doesn't say that politicians are bad. But it does say, if we want to understand politics, that we mustn't merely assume or romantically hope that politicians are always good. So yeah, I can see the connection. Still there's nothing particularly special about public choice in this regard. The shared political heritage of the American founding is to embrace a healthy mistrust of government power. James Madison wrote famously in Federalist 51:

If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

So I think this is just a victory for better government.

I see a stronger influence of public choice in drawing our attention to the behavior of the federal prosecutors, and to the effect of political incentives on their level of enforcement. A state's corruption ranking may reflect the state’s political standing among federal policymakers, particularly in the executive branch. The actual or near sacking of dozens of US Attorneys in the spring of 2007, followed by its dramatic political fallout (the U.S. Attorney General's resignation), strongly suggest that the fervor and priorities that a U.S. Attorney brings to her job are under the microscope from the highest levels of the federal pecking order. It's possible that corrupt officials are more likely to be bad people, but it doesn't follow that they're more likely to get convicted for it. My co-authors and I write about this in our empirical Kelo paper. So that actually brings up my third thought...

3. Corruption and the Scottish Enlightenment

My opening quip contrasting political with corporate corruption was not a throw away line. It's not that people who go into politics are worse people than those who go into business, or vice versa. At least that's not what's important to economists, who want to explain not just describe. Good political economics begins with what Buchanan and Tullock call "methodological symmetry," which means treating the butcher, the brewer, and the politician as having self-interested ends. Here on DOL, for example, Larry White likens greed to gravity. It's always there. In the corporate board room as well as on the floor of Congress.

That said, it's a subsequent question whether and to what extent natural self-interest is channelled into behavior that is beneficial for society rather than desctructive to it. And here is where public choice makes a fundamental point. It's not bad people but bad institutions that deliver bad outcomes, such as greater corruption in politics than in business. Simply put, the rules of the political game do not exert as much discipline as market competition does, and political actions are at best zero sum while market exchange is generally positive sum. For the most part, we owe healthier, longer and more comfortable lives to the profitable exchanges that are possible under market competition. And, for the most part, we owe the post office, pork barrell spending, wars of expedience, and 90%+ re-election rates to political institutions. Not to mention corruption.

The Scottish philosophers of the enlightenment worked with the idea that we do not have to hold altruistic or public spirited intentions in order to contribute to the general good. The opposite, actually.

Thus every Part was full of Vice, [155]
Yet the whole Mass a Paradice;
Flatter'd in Peace, and fear'd in Wars
They were th'Esteem of Foreigners,
And lavish of their Wealth and Lives,
The Ballance of all other Hives. [160]
Such were the Blessings of that State;
Their Crimes conspired to make 'em Great;
And Vertue, who from Politicks
Had learn'd a Thousand cunning Tricks,
Was, by their happy Influence, [165]
Made Friends with Vice: And ever since
The worst of all the Multitude
Did something for the common Good.
Bernard Mandeville, from The Fable of the Bees

And of course Adam Smith in ...

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By…directing that [labour] in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Public choice takes up the Scottish Enlightenment because it uses rational choice theory to analyze how self interest impacts public interest within political institutions. And in the spirit of the Scots, public choice applies reason to design improved rules. Here is Buchanan and Tullock in The Calculus of Consent (p. 23, 27 Michigan edition).

The Scholastic philosophers looked upon the tradesman, the merchant, and the moneylender in much the same way that many modern intellectuals look upon the political pressure group. Adam Smith and those associated with the movement he represented were partially successful in convincing the public at large that, within the limits of certain general rules of action, the self-seeking activities of the merchant and moneylender tend to further the general interests of everyone in the community. An acceptable theory of collective choice can perhaps do something similar in pointing the way toward those rules for collective choice-making, the constitution, under which the activities of political tradesmen can be similarly reconciled with the interests of all members of the social group. Insofar as possible, institutions and legal constraints should be developed which will order the pursuit of private gain in such a way as to make it consistent with, rather than contray to, the attainment of the objectives of the group as a whole.

I guess one of those legal constraints would be: you can't auction off a seat in the U.S. Senate, not if you're a state governor anyway.

A bailout message from the Big Three automakers. (Warning: salty language.)

HT: Will Wilkinson.

I'm not sure this is his proudest moment, but my former student John Coleman won Harvard Business School Public Speaking Club's Business Speaking (B.S.) contest. Of course, it's not too surprising since John won a national speech title in his senior year at Berry. (He also has a forthcoming book, How to Argue Like Jesus: Learning Persuasion from History's Greatest Communicator.)

Here's John's talk (apparently the first minute is missing; thanks to Ted Crouse for the pointer):

No, not on some sunny beach consuming tropical beverages--at an IHS seminar.

The Institute for Humane Studies is sponsoring two seminars in March--one is March 7-12 at UC-Santa Cruz and the other is March 14-19 at Emory. I'll be one of the faculty members for the Emory seminar. More information and application details are here.

Students looking for scholarship support for next year might also want to check out IHS's Humane Studies Fellowships. I think there is a preference for graduate students but that some undergrads get supported.

Also from the Foreign Policy piece linked in Wilson's post:

In September, the United States pledged $1 billion in aid to Georgia to help the country recover from its August war with Russia. The money was intended to “help Georgia sustain itself,” Secretary of State Condoleezza Rice said. With several Georgian towns badly damaged by Russian bombing and 20,000 refugees from South Ossetia still unable to return home, there were seemingly many worthy causes for all that cash. So why was $176 million of the aid money earmarked for loans to businesses—including $30 million to a real estate developer for a luxury hotel: the 127,000-square-meter Park Hyatt in downtown Tbilisi, an area that was not at all damaged in the war? The 183-room, five-star hotel will include 70 luxury condominiums, a fine-dining restaurant, conference facilities, and a health spa with juice bar.

Details here.

Thanks to Mike Hulsey for the pointer and the title.

Who knew what a fine philospher Kermit is? This from Foreign Policy:

Think switching to solar energy will make you green? Think again. Many of the newest solar panels are manufactured with a gas that is 17,000 times more potent than carbon dioxide in contributing to global warming.

Our paper "Wal-Mart, Leisure, and Culture" was accepted by Contemporary Economic Policy. Here's a WP version. Here's the abstract for the WP version:

This essay contributes to the debate about the alleged spillover effects associated with Wal-Mart's growth. Combining county-level data on Wal-Mart entry and location from 1985 through 1998 with individual-level data on leisure activities, we estimate a positive relationship between Wal-Mart penetration and participation in activities involving inputs that can be bought at Wal-Mart. The relationship between Wal-Mart penetration and activities that do not involve inputs that can be bought at Wal-Mart is negative in most cases, but may be positive or zero for "cultural" activities such as attending classical music concerts and visiting art galleries. The evidence is consistent with the thesis that deeper Wal-Mart penetration expands consumption possibilities.

From the Financial Times:

Over the past month, I have picked up 247 men. Fast work in just four weeks but I’ve been putting my back into it. During my sabbatical from the Financial Times, I have obsessively e-mailed strangers on an adultery website, thereby taking part in what I find is the hottest recessionary activity in town.

I doubt if this was what the FT had in mind when it decided that journalists should be given a four-week break every four years for self-development. Neither, come to that, was it what I had had in mind when I embarked on my sabbatical: my intention was to write a novel.

So when I first joined Illicit Encounters, the most upmarket of extra-marital websites, it was for research on internet adultery for my book. But, within the first half an hour of posting my details on the site (under the pseudonym of Sophie Scribe), I had acquired 20 boyfriends and, within an hour, I was hooked. Four weeks later, I have emerged, feeling slightly soiled and more than slightly cross at the way that real life is so much more exciting than the novel I’m writing.

While I was on the site, I noticed business seemed particularly brisk among those citing financial services as their occupation. Over and over again, I was approached by men using names such as “Alpha123”, or “Civilised1” or “CityGent”, each telling the same story: I’m a successful banker, now with time on my hands, looking for excitement/love/romance/casual sex, etc.

Curiosity aroused, I contacted the site’s owners to find out what was going on. They told me that, since September, the number of London-based males in the financial sector registering had risen by nearly 300 per cent. It seems the colder the market for jobs, the hotter the market for adultery.

Thanks to EW for the pointer.

Last night, my family took in Callaway Gardens' Fantasy in Lights outdoor Christmas light show. (I was giving an early morning talk there today so I had to drive down last night; the family came along because my wife has wanted to see the show for several years.) The price for the three of us was about $45 and one of us remarked that the show seemed fairly expensive for an outdoor light show. About halfway through the show--which was spectacular--Pee Wee blurts out "this show is cool, they should have charged us more." Economics from the mouths of babes ...

Gwinnett County GA is apparently having difficulty selling the naming rights for the stadium being built for the Braves AAA franchise. The stadium is also coming in over budget. Just wondering, could this be the way the county is making up the financing gap?

While neighboring counties encourage recycling, Gwinnett County’s new solid waste management ordinance puts teeth into it. The ordinance provides for a civil fine of $500 for violations, which includes those who fail to “source separate residential recovered materials.”

Last week, I participated in a forum at the Cato Institute with my co-author Jim Gwartney (FSU) and Simeon Djankov (World Bank).

How Nations Prosper: Economic Freedom and Doing Business around the World (11/24/08)

A Cato Institute Book Forum featuring James Gwartney, and Robert Lawson, Coauthors of, Economic Freedom of the World:2008 Annual Report (Fraser Institute and Cato Institute, 2008); with Simeon Djankov, Creator, "Doing Business" (World Bank, 2008); moderated by Ian Vasquez, Director, Center for Global Liberty and Prosperity, Cato Institute.

To watch the video or listen to the podcast go here.

My former student Dan Alban points me to this article in Slate:

Welcome to the world's strangest economic crisis. Argentina in general—and Buenos Aires in particular—is presently in the grip of a moneda, or coin, shortage. Everywhere you look, there are signs reading, "NO HAY MONEDAS." As a result, vendors here are more likely to decline to sell you something than to cough up any of their increasingly precious coins in change. I've tried to buy a 2-peso candy bar with a 5-peso note only to be refused, suggesting that the 2-peso sale is worth less to the vendor than the 1-peso coin he would be forced to give me in change. When my wife went to buy a 10-trip subway pass, which retails for 9 pesos, she offered a 20-peso note and received 12 pesos in bills as change. This is commonplace—a daily, if not hourly, occurrence. It's taken for granted that the peso coin is more valuable than the 2-peso note.

I posted on a similar situation in Guatemala about a year ago.

I got word that our paper "Does Wal-Mart Reduce Social Capital?" will appear in the first issue of Public Choice in 2009. Here's a link to the PDF. Here's the abstract:

Social capital has attracted increasing attention in recent years. We use county level and individual survey data to study how Wal-Mart affects social capital. Estimates using several proxies for social capital—such as club membership, religious activity, time with friends, and other measures—do not support the thesis that “Wal-Mart destroys communities” by reducing social capital.We measure exposure toWal-Mart two ways:Wal-Marts per 10,000 residents and Wal-Marts per 10,000 residents aggregated over the years since 1979 to capture a more cumulative “Wal-Mart Effect.”We find that the coefficients on Wal-Mart’s presence are statistically insignificant in most specifications.

Nope, not me. Not Boudreaux either. This is one mighty fine letter in today's WSJ:

In the article "A Bachelor's in Borrowing" (Personal Journal, Nov. 25), Elina Agnoli, a recent law-school graduate, says: "People have this notion of law-school graduates getting $150,000 right off the bat. But that's not the reality for the law grad in 2008. I've got friends waitressing with J.D.s . There's something wrong with that scenario."

Someone should inform the lamentable Ms. Agnoli that, despite her attempts to cloak herself in the victim's mantle, there is absolutely nothing wrong with that scenario. Even granting that America has, arguably, the strongest rule of law in the world, we still have far too many attorneys, concerned with far too much rent-seeking. By any measure -- per capita, per dollar of gross domestic product, per square foot -- we have more lawyers than any country in the world, so we may not pay any additional, freshly minted ones a very good wage. Had the feckless Ms. Agnoli gotten a degree in economics, she would understand that concept.

Sgt. Peter Cook
Forward Operating Base Falcon
Iraq

Sgt. Cook--on the off chance you see this post, stay safe and thanks for your service.

In recent writing on the causes of the subprime crisis I have mentioned the Community Reinvestment Act as one of the mandates and subsidies for riskier lending, noting that it was “hard to judge how much each of these contributed” because I hadn’t seen any estimate of how many nonprime loans were CRA-related.

In a speech today on “The Community Reinvestment Act and the Recent Mortgage Crisis” Governor Kroszner cites findings from a recent Fed study (apparently not yet publicly available, because he doesn’t link to it) indicating that only a very small share (less than 8%) of subprime loans can be directly tied to CRA-related lending.

Kroszner notes that 60% of subprime loans went to middle- or high-income neighborhoods, not covered by the CRA. Many of the loans to lower-income neighborhoods were extended by independent mortgage originators or other non-CRA-bound institutions. Thus the key findings (where “higher-priced loans” is a measure regarded as a proxy for subprime loans):

Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. … [In addition] less than 2 percent of the higher-priced and CRA-credit-eligible mortgage originations sold by independent mortgage companies were purchased by CRA-covered institutions.

Kroszner comments that this finding “makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Putting aside the puzzle of why an 8% share is not meaningful, it can be noted that Krozner himself earlier in the speech provides a possible indirect route for CRA lending to have contributed to the expansion of risky mortgage lending, though a “demonstration effect” (during the period before the post-2001 expansion of subprime lending) that persuaded lenders of the safety of CRA loans. He cites two earlier Fed studes (1993 and 2000) as providing evidence that, before more recent years, CRA-prompted “lending to lower-income individuals and communities” was “nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions.” In this way the CRA, backed by the Fed’s research, “has encouraged banks” to pursue “lending opportunities in all segments of their local communities” that by implication they would not have pursued absent the CRA. After all, if the CRA never compelled or persuaded banks to make loans that they otherwise would have avoided, then the CRA would be completely ineffectual. Kroszner clearly believes that the CRA did have an effect on the types of mortgages that banks and non-banks were willing to take on:

Given the incentives of the CRA, bankers have pursued lines of business that had not been previously tapped by forming partnerships with community organizations and other stakeholders to identify and help meet the credit needs of underserved communities. This experimentation in lending, often combined with financial education and counseling and consideration of nontraditional measures of creditworthiness, expanded the markets for safe lending in underserved communities and demonstrated its viability; as a result, these actions attracted competition from other financial services providers, many of whom were not covered by the CRA.

But if this demonstration was misleading because the period it covered was atypically low in default rates – if it inspired an over-expansion of subprime lending in the 2001-2006 period based on mistaken inferences about the safety of lending based on “nontraditional measures of creditworthiness” – then the 8% subprime share that may be directly tied to meeting CRA requirements would be a lower-bound, not an upper-bound estimate of the CRA’s contribution to subprime lending. Of course, it is hard to imagine measuring the size of the demonstration effect, the volume of loans that were “inspired” by the CRA’s demonstration effect. An upper-bound estimate might be the difference between lower-income neighborhoods’ share of subprime lending (20%) and their share of prime lending (anybody know what that is?).

HT: John Grigorian

Co-Blogger Mike DeBow gave a couple of very interesting talks at Rhodes yesterday on antitrust and American legal history. One of his sources was a 1983 Journal of Law and Economics article entitled "The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932-1970," which records a discussion among eminent scholars about the intellectual origins of Chicago School Law & Economics and which I'm reading now. In light of Tyler's Marginal Revolution Book Club on The General Theory, I thought this comment on methodology from one of the participants was interesting (p. 173):

"...we have to notice that what seemed empirically to blow away the institutionalists like dandelion fuzz was Keynes's General Theory. All of a sudden the very same people who opposed all abstract reasoning were seizing upon it because it supported the conclusions for which they had previously thought there was no theoretical basis, and thie very same individuals (I suppose Alvin Hansen is the most striking case) jumped from being institutionalists to being abstract theorists."

ANNOUNCING THE 2009 YOUNG SCHOLARS PROGRAM

APEE has received a grant to help young faculty and graduate students attend our annual meeting April 5-7, 2009 in Guatemala City, Guatemala. These funds are designed to encourage younger scholars to consider the advantages of APEE membership.

Successful applicants will have their registration fees reduced to $75 (normally $390) and be eligible for a stipend of up to $910 toward travel expenses. To apply applicants must supply us with the following: (1) a short essay (250-300 words) explaining why the applicant wishes to attend the meeting; (2) a short letter of reference, preferably from an APEE member or someone known to APEE indicating why support should be provided to the nominee, and (3) a brief letter from the applicant's department chair or graduate director indicating the level of departmental support that the applicant can expect for this trip. Some of the applicants may be on the program and preference will be given to these applications. The deadline for applying is January 19, 2009. Those selected will be notified within two weeks of that date. Successful applicants will be required to register for the conference (at the reduced rate of $75) by February 19, 2009.

Please send applications to Dr. E. F. Stephenson at efstephenson@berry.edu . If you have questions, you may email him or call him at (706) 238-7878.

Please note: A valid U.S. passport is required for all U.S. citizens, regardless of age, to enter Guatemala and to depart Guatemala for return to the U.S. It may take 4 – 6 weeks to obtain your passport. For additional information please visit the U.S. Government Department of State website at http://travel.state.gov/ passport/passport_1738.html .

From the Dec. 3, 1908 NYT:

President Johnson of the American League has announced the the price of tickets to world's championship series games next season would certainly be cut in two. He said the National commission had come to the conclusion that it was not just to the "fans" who had paid their money to see the clubs battle through the regular campaign to pay big prices for the series at the season's close.

Cutting price in half and selling more tickets might actually increase revenue to MLB in 1909. On the other hand, if price is a signal of quality, promising to reduce price might be sending the wrong signal to future consumers of baseball championship games. I predict that, when we get around to this next October, we will find that the ticket prices were not cut in half.

A condensed version of my Cato Briefing Paper on the financial mess is now available as an essay on Cato Unbound, under the title "What Really Happened?" It will be followed, over the coming week, by alternative perspectives from William K. Black, Casey Mulligan, and Brad DeLong. Then all hell will break loose as we criticize one another's essays.

Warning: salty language.

First, the boys from South Park come up with a great idea...

Then they discover that in a competitive market with no barriers to entry, they can't earn positive economic profits in the long run:

Info here.

This abstract looks interesting (paper here):

Natural disasters have a statistically observable adverse impact on the macro-economy in the short-run and costlier events lead to more pronounced slowdowns in production. Yet, interestingly, developing countries, and smaller economies, face much larger output declines following a disaster of similar relative magnitude than do developed countries or bigger economies. A close study of the determinants of these adverse macroeconomic output costs reveals several interesting patterns. Countries with a higher literacy rate, better institutions, higher per capita income, higher degree of openness to trade, and higher levels of government spending are better able to withstand the initial disaster shock and prevent further spillovers into the macro-economy. These all suggest an increased ability to mobilize resources for reconstruction. Financial conditions also seem to be of importance; countries with more foreign exchange reserves, and higher levels of domestic credit, but with less-open capital accounts appear more robust and better able to endure natural disasters, with less adverse spillover into domestic production.

Tyler Cowen is hosting a Marginal Revolution Book Club on The General Theory of Employment, Interest, and Money by John Maynard Keynes. Since I'm teaching a class on the history of economic thought in the Spring, I'm planning to participate. Here's Pete Boettke's critical perspective. I'm genuinely excited about this. I now have The General Theory, The Theory of Money and Credit, The Critics of Keynesian Economics, and The Essence of Hayek close at hand.

V For Vendetta and Watchmen

“…all the whores and politicians will look up and shout ‘save us!’ And I’ll look down, and whisper ‘no.’” Rorshach's Journal, from p. 1 of Watchmen

I picked up the acclaimed graphic novels V For Vendetta and Watchmen while grading at our neighborhood Barnes & Noble on Monday. I confess I’d never heard of Watchmen before seeing the new Batman movie over the summer. Both raise compelling questions about the relationship between the citizen and the state. One of the most compelling questions, as I see it, concerns our responsibility to know and our responsibility to understand. Both books paint pictures of avoidable misery that aren’t avoided in no small part because of a steadfast refusal on the part of the citizenry to do anything about it. I mean “do anything about it” in the sense that ideas are higher-order factors of production, so to speak, that ultimately determine the structure of a society’s institutions. At the risk of being presumptuous, while there is much we don’t know there is much that we do. In economics, we know that there are no free lunches, that demand curves slope downward, and that decisions are made at the margin. No amount of wishing will make it otherwise.

Time Will Run Back, Henry Hazlitt. Bob lent this to me when I was in Auburn in October. I found it to be a very quick read, and it poses an interesting question: what if all traces of non-socialist thinking were destroyed and a society tried to build markets from the ground up in order to solve allocation and calculation problems? The novel is inspired by Hazlitt’s review of Mises’s Socialism: An Economic and Sociological Analysis and was recently brought back into print by the Mises Institute. Here's Hazlitt's intro to the book.

All three made me think, which is what a good book is supposed to do. Trailers for Vendetta and Watchmen are below the Fold. Discussion of their theological implications and affinity with themes in Atlas Shrugged forthcoming.

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