I recently posted on a currency shortage in Argentina (and previously on a similar problem in Guatemala); George Selgin addresses the same topic in today's WSJ. A snip:

Suppose you want to ride the bus or feed a parking meter without exact change. Or suppose you just want to drop a few cents in a street musician's hat. Nothing easier, right? Not if you live in Argentina. Try doing any of these things there, and you could be in for a major hassle.

Why? Because Argentina is in the grips of a small-change shortage. Want change for a five-peso (about $1.70) note? Don't try getting it at a store, unless you plan to buy something -- and be ready in that case to have the merchant refuse your business rather than part with precious centavos, or to have him hand you bon-bons instead of coins. Banks aren't much help either. The law says they're supposed to give you up to 20 pesos worth of change; but most openly flout that rule, supplying just a few pesos worth, or even hanging out "No Change" signs, like the ones at retailers' kiosks.

Why the shortage? Argentina's central bank blames it on "speculators," meaning everyone from ordinary citizens, who stockpile coins, to Maco, the private cash-transport company (think of Brinks) that repackages change gathered from bus companies to resell at an 8% premium. But those explanations ring false. "Black marketeering" would not exist if coins were easy to get in the first place. After all, Argentines could just as easily hoard razor blades or matchbooks. Yet there's no shortage of those. What's so special about coins?

The answer is that coins are supplied by the government alone. "Put the federal government in charge of the Sahara desert," Milton Friedman said, "and in five years there'd be a sand shortage." If Argentina wants to end the coin shortage, it ought to give up its monopoly.

I'm prepping discussion questions on McCloskey's apology for capitalism for the first day of Classical & Marxian Political Economy. Here are a couple of passages I mentioned a while back that we should dwell on as we move into 2009.

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.

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.

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.

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 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

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.

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.

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 »

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 ...)

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.

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 ...

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 .

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.

Plan A for the Treasury's $700 billion was to buy "troubled assets" from banks. The Treasury quickly scrapped that plan, although the Fed now seems determined to resurrect it on its own self-financed dime. Plan B was to inject $250 billion of new capital into banks. What would be Plan C? Uwe Reinhardt helpfully describes the new program embodied in the guarantees on Citibank's assets: (underpriced) credit default insurance. He calls the operation BBP (for Bair-Bernanke-Paulson) Trio Insurance. Unfortunately, because the guarantees are off the Treasury's balance sheet, the size of the guarantees isn't limited by the unspent share of the $700 billion:

at least there was a legislated $700 billion limit to [the bailout] and some accountability, at least in principle, if not in fact. By contrast, is there any limit to the size of the insurance book of business to which the BBP Trio Insurance can expose the taxpayer, the ultimate underwriter on this insurance? I believe it is something to worry about.

Jim Rogers -- whose book Investment Biker I recommend as supplemental reading for a money and banking class -- discusses the bailouts on a Bloomberg Radio podcast here. Total length 41 minutes, but the best stuff is up front. Here is Rogers getting down to basics (own transcription):

Why are we bailing out Citibank? Why are 300 million Americans having to pay for Citibank's mistakes? The way the system is supposed to work, Mark: People fail. And then the competent people take over the assets from the failed people, and then you start again with a new stronger base. What we're doing this time is, they're taking the assets from the competent people, giving them to the incompetent people, and saying "Okay, now you can compete with the competent people." So everybody's weakened: the whole nation is weakened, the whole economy is weakened. That's not the way it's supposed to work. ... All these homeowners who did nothing wrong are now being forced to pay for the people who did crazy things ...

Here's a panel discussion with F.A. Hayek in 1975, courtesy of the Mises Institute. Hayek has made three points that are ignored in today's policy discussion but that are nonetheless very, very relevant:

1. The crisis of the 70s was due to the policy prescriptions originating in the theory that insufficient aggregate demand is what causes recessions.

2. Inflation distorts relative prices, which draws resources (capital and labor) into lines of employment that they wouldn't be in without the inflation. Thus, further inflation is needed in order to keep them in those lines of employment. This is unsustainable in the long run. As I understand it, Hayek's emphasis on inflation-induced changes in the relative prices of factors of production doesn't get much play in macroeconomics. There were no index entries for "relative prices" in either of my grad macro textbooks (Romer's Advanced Macroeconomics, Blanchard & Fischer's Lectures on Macroeconomics). If I'm wrong, please let me know.

3. "Planning" flatters the intellectuals, who are attracted to the idea that a society is a machine that can be controlled, coordinated, and planned. Much like Adam Smith's "man of system" arranging pieces on a chessboard, the intellectuals to whom Hayek referred view societies as neat and orderly processes that can be tinkered with. I'm not convinced that we take Smith's insight that all of the pieces have their own principles of motion seriously enough, but that's another thought for another day (shameless plug: we'll discuss this in detail in my Classical & Marxian Political Economy course this Spring, and I'll be writing about it here and elsewhere).

Historical holiday widsom in a new op-ed from Ben Powell, "The Pilgrims’ Real Thanksgiving Lesson"

Many people believe that after suffering through a severe winter, the Pilgrims’ food shortages were resolved the following spring when the Native Americans taught them to plant corn and a Thanksgiving celebration resulted. In fact, the pilgrims continued to face chronic food shortages for three years until the harvest of 1623. Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages. Bad economic incentives did.

Ben says the Pilgrim leaders at first centrally planned agriculture. All productive resources were commonly owned, while distribution was uniform. Bad harvests were the result. Culling Governor William Bradford's 1647 history of the Plymouth Plantation, Ben illustrates,

The problem was that “young men, that were most able and fit for labour, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense.” Because of the poor incentives, little food was produced.

Leaders changed the organization og agriculture from a commons toward private property, and happier results followed.

Makes me think of what John Wayne would have said: "Privatize, Pilgrim." In the spirit of Ben's article, I wondered about the origins of this particular John Wayne-ism. As many of you know the phrase was first used in The Man Who Shot Liberty Valance, a 1962 John Ford film and one of the best westerns ever.

I spoke on "Federal Reserve Policy and the Housing Bubble" at the Cato Institute's annual monetary conference on Wednesday (theme: "Lessons from the Subprime Crisis"), and reprised my Cato talk at the Southern Economics meetings on Friday. The Cato conference is now available for streaming as RealVideo or for downloading as podcasts here. (A fast connection is recommended for streaming the video.)

My talk was the second on the first panel. I emphasized two points: (1) the Fed held the Fed Funds rate too low too long between 2001 and 2006; (2) the Fed's new lending programs add up to a shadow bailout of $1.7 trillion. That's right, trillion. It's a bailout because it has nothing to do with being a lender of last resort in the standard sense of preventing the money stock from shrinking. Buying T-bills is an effective (and preferable) way of doing that. The Fed is trying to selectively channel credit.

Preceding the first panel was a keynote address by Donald Kohn, vice-chairman of the Federal Reserve Board of Governors, essentially defending the legacy of his mentor Alan Greenspan. I wasn't persuaded, but I do tip my hat to Kohn for sticking around to listen to the first panel. It was a rare opportunity for what our leftist friends like to call "speaking truth to power".

All of the panels were very good, and I also recommend Jeffrey Lacker's post-luncheon address. In understandbly guarded language, Lacker made it clear that he isn't happy with the Fed's departures from its traditional mission.

HT: David Boaz

"Large transfers of physical capital to Third World countries, through nationalization and foreign aid, have often been only a prelude to the deterioration of that capital."

Thomas Sowell, "Marxism," p. 192

*Meme: Marginal Revolution, of course.

From Josef Sima:

Prague Conference on Political Economy, April 24-26 2009

Call for Papers!

Details and registration http://pcpe.libinst.cz/

Cuhel Memorial Lecture: prof. Hans-Hermann Hoppe
Wieser Memorial Lecture: prof. Svetozar Pejovich

Pre-concerence event: April 23, 2009 16:00 - 19:00
Booklaunch of the Czech translation of Murray Rothbard's The Ethics of
Liberty
Key-note speech: H.-H. Hoppe (author of the introduction of New York
University Press edition)

I just read Alexandre Padilla's very interesting paper "Self-Regulation in the Adult Film Industry: Why Are HIV Outbreaks the Exception and Not the Norm?" Here's the revised abstract:

This paper analyzes how self-interest and long-term profit expectations provided the necessary incentives for the adult film industry to self-regulate and to find mechanisms to minimize the risks of HIV outbreaks that could result from the asymmetric information and network effects that characterize the industry. With the help of the Adult Industry Medical Healthcare Foundation (AIM), the adult film industry developed a corporate culture to facilitate widespread coordination among members and to make the industry similar to a private club. First, I discuss the predicted effects of asymmetric information and network-effect problems on the industry in terms of HIV outbreaks. Second, I tell the story of AIM and present the policies the industry has adopted since AIM’s creation to mitigate those predicted effects. In particular, I discuss how the industry managed the 2004 HIV outbreak without government intervention. Finally, I present statistics comparing HIV infection rates in the industry and general population as well as additional observations to assess the relative effectiveness of the industry in preventing and containing HIV outbreaks.

A couple of comments are in order. I really like the research design. Alex is exploring how self-regulatory institutions arise to address problems arising from networks and asymmetric information; in the porn industry, these problems are crystal clear and at the center of how the industry operates. Thus, the probability of arriving at clear insights that aren't gummed up by confounding factors is pretty high.

The worst-case scenario--HIV infection--is very clear and the transmission mechanism is unambiguous. That said, I would be interested in seeing just how the risks of working in porn compare to the risks of other hazardous occupations--in other words, I wonder how the estimated HIV-related cost of working in porn compares to the estimated injury-related cost of working in construction. Further, how does the insurance market work for porn? Do porn stars pay higher or lower premiums? How does this affect their incentives?

Another thing I like about the research design--which also complicates it a little bit--is that pornography is an internationally competitive market with near-perfect capital mobility. It can be produced virtually anywhere and sent anywhere at the click of a button. This puts serious constraints on regulators and has implications for how the industry self-regulates. I'd like to see this explored in greater detail.

The paper will probably attract attention because it has the phrase "Adult Film Industry" in the title, but the most important term in the title (and in the paper) is "Self-Regulation." It's a very interesting paper because of the obvious and seemingly intractable problems in a globally competitive industry. I look forward to seeing where this leads.

Update: via email, Alex tells me that it's going to lead to a book. I look forward to it.

Economics instruction gets better via the Monty Python YouTube Channel.

HT: Brad DeLong.

"Shock and Awe: Institutional Change, Neoliberalism, and Disaster Capitalism." This is a long review essay on Naomi Klein's The Shock Doctrine prepared for the Journal of Lutheran Ethics. Thanks to the Fraser Institute for letting me use some of their graphs, and thanks to Bob and Josh for letting me use one of the tables from our still-uncirculating paper.

"The Skinny on Big Box Retailing: Wal-Mart, Warehouse Clubs, and Obesity" (with Charles Courtemanche, revised 11/6/08) A couple of additional changes and this one's out the door. The abstract:

We estimate the impacts of Wal-Mart and warehouse club retailers on height-adjusted body weight and overweight and obesity status, finding evidence that non-grocery selling Wal-Marts reduce weight slightly 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, all three types of stores are associated with increased consumption of fruits and vegetables and reduced consumption of dietary 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 conventional wisdom that cheap food makes us eat more.

Mean Automakers Dash Nation's Hope For Flying Cars

Remember: it isn't usually a question of funding. It's usually a question of reality.

Many DOLers are headed to the Grand Hyatt in DC for the Southern Economic Association meetings. Here is the conference program and list of participants. The Southerns are an important annual event for economics in the classical liberal tradition. For example, the Society for Development of Austrian Economics holds its meetings each year here (list of sessions is here). Also, more than 175 faculty in the Institute for Humane Studies network will attend. The Cato Institute is also hosting a reception in honor of Bill Niskanen; Saturday from 5-7 p.m. at the Cato building (details and registration here). Personally I am presenting a paper on the entrepreneurial economics of fashion apparel, "Of Human Action and Human Design: Adaptive Entrepreneurship and the Marketization of Fashion."

Finally, for friends and alumni of IHS who are in the area, please join me and Nigel Ashford at the IHS reception, Friday the 21st 6.00-7.30pm at Grand Hyatt, Penn Quarter B.

The makings of an exam question in Econ 101:

The Wall Street Journal, 11/14/08: "Wal-Mart Flourishes as Economy Turns Sour"

The Wall Street Journal, 11/19/08: "Target's Profit Continues to Slide"

I was reminded of this paper by Emek Basker. The abstract:

I estimate the aggregate income elasticity of Wal-Mart's and Target's revenues using quarterly data for 1997-2006. I find that Wal-Mart's revenues increase during bad times, whereas Target's revenues decrease, consistent with Wal-Mart selling "inferior goods" in the technical sense of the term. An upper bound on the aggregate income elasticity of demand for Wal-Mart's wares is -0.5.

My friend Don Lacombe (Ohio University -- Go Bobcats!) co-authors a nifty new paper on the minimum wage. Here's the abstract,

The relationship between minimum wage increases and youth employment is investigated using county-level data and spatial econometric techniques. Results that account for spatial correlation indicate that a 10% increase in the effective minimum wage is associated with a 3.2% decrease in youth employment, a result that is 28% higher than the corresponding estimate that does not control for spatial correlation. Thus, estimates that do not take into account spatial correlation may significantly underestimate the negative effect of the minimum wage on teenage employment. Improperly controlling for factors that vary systematically over space can lead to incorrect inferences and misinform policy.

ATSRTWT.

Lawns gardens are a great idea, and I completely agree with the writer that if one is going to spend time and energy on yardwork, why not ask that such time and energy yield something? As some of the comments on the post point out, local regulations often forbid it.

I understand the rationale for green lawns, which are basically a form of fire insurance (HT: my father-in-law, who inspects hospitals for a living and knows everything there is to know about fire codes). However, and in my mind this is unfortunate, what we think of as a "yard" has been enshrined in law and potentially useful experiments in urban living have been effectively made illegal. I'd much rather tend a tomato patch in front of the house than mow grass (or, more specifically, pay someone else to do it). I'm pretty sure the City of Memphis wouldn't let me. I'll have to look into it.

I can think of a couple of externality rationales for laws against front-yard gardens, but I don't think they're tenable when subjected to scrutiny. One could argue that there are aesthetic externalities, but first I'm not sure they justify the regulatory costs and second it isn't clear that the externality is positive or negative. Some of our neighbors do truly amazing things with their yards, and we reap some of the aesthetic benefits (they don't grow vegetables, though).

It seems like this can also be fixed through the housing market. In efficient housing markets the expected value of future positive and negative externalities emanating from the fact that we don't have onerous restrictions on what you can and can't do with your yard in our neighborhood will be capitalized into home values. One man's trash will be another man's treasure: people who value freedom and experimentation will live in neighborhoods that don't have such restrictions. People who value uniformity and continuity can select into private neighborhoods with restrictions on what you can and can't plant.

A more plausible externality argument is that edible flora will attract undesirable fauna. Again, though, the steps people would take to ensure that their veggies don't get eaten would also reduce the probability that neighbors' veggies would get eaten and at least partially mitigate the externality. Even if contracting institutions fail, I'm still not convinced that the size of the externality justifies government intervention, especially when one considers the long-run effect on incentives to use force rather than persuasion to accomplish what you want.

And while we're talking about externalities, if the "food miles" argument for locavorism has any merit--and I'm not convinced it does, but don't take my word for it--then we're trading off small negative externalities associated with at-home food production in order to reduce negative externalities associated with the international structure of food production ("global calorie infrastructure," perhaps?).

There is also a more fundamnetal question about liberty at stake here. If Sarah Palin can shoot wolves from a helicopter, shouldn't I be allowed to grow tomatoes in my front yard?

Is the media a cause or an effect of pessimistic bias? If prices rise, it will worry economists and pundits because it is inflationary. If the price level falls, it will worry economists and pundits because it signals possible deflation and a "contracting economy." For what good news might look like, here's the European Central Bank's website on price stability. With respect to macroeconomic policy, here's co-blogger Larry White on the Gold Standard and a podcast with George Selgin on free banking.

For grad students who are interested in applied Austrian monetary theory and who are reading this blog instead of writing, you can justify your procrastination by beginning an empirical/historical paper on price stability under alternative monetary regimes. You can start your lit review here. And here's the Google Books preview of Larry's The Theory of Monetary Institutions, which you can get used for $10 plus shipping at Amazon.

Mike asks whether this is illustrates pessimistic bias. Off the top of my head, I think there is some merit to the idea that what matters is not our absolute level of income, comfort, whatever but rather how those levels exceed (or fall short of) our expectations. This isn't to say that money can't buy happiness, though.

Dear Members of the Loyola [College in Maryland] Community:

The officials and members of the Adam Smith Society and the Economics faculty wish to apologize for the insensitive and incorrect remarks made Thursday, Nov. 6 by invited speaker Professor Walter Block of Loyola University New Orleans.

Walter's take and reaction is found here.

What do a major network news website's headlines tell you about a country or an economy?

Regulators: Bailout is working--Paulson and Bernanke say the $700b is working despite its critics. Future headline--"Shaughnessy: short economists more intelligent than most."

So if the bailout is working, why do we see the Ford CEO on bailout opposition: Past is past. He says "the automobile industry is just absolutely essential to the United States' economy." Elsewhere, we find out that "The automakers are asking for about $25 billion in loans to help them survive until 2010." An absolutely essential industry needs $2b a month? There are "more than 1.6 million jobs tied to the auto industry." So each affected person requires $15,625 in tax subsidy? This second story only discusses the harm from an auto industry failure; it says nothing about the current harm from misallocating scarce resources to prop up an inefficient industry.

What's really killing Detroit? I'll agree with SUV addiction, lack of small cars, lousy quality (including the struts on my '04 Pontiac Grand Prix), lack of hybrids, and union workers. But of course they also have to throw in the class-envy bone of fat executive paychecks.

From the "government can do everything" file: Bush hopes to ease holiday travel congestion.

And from the "well, maybe not" file: Blind woman threatened with suit over 1-cent. The overdue payment is for her city water bill. The city official criticizes the blind woman for not paying the extra penny in her original bill.

Don't get sick (again): Half of primary-care doctors in survey would leave medicine if they had an alternative. "Many said they are overwhelmed with their practices, not because they have too many patients, but because there's too much red tape generated from insurance companies and government agencies ... With lower reimbursement from insurance companies and the cost of malpractice insurance skyrocketing, these health professionals say it's not worth running a practice and are changing careers. Others say they're going into so-called boutique medicine, in which they charge patients a yearly fee up front and don't take insurance." And if you're looking for an example of the problems of not using price as a rationing mechanism: "People who have insurance can't find a doctor, so suddenly we are going to give insurance to a whole bunch of people who haven't had it, without increasing the number of physicians?... It's going to be a problem."

Lastly, As children starve, world struggles for solution, with a focus on Haiti. Haiti's EFW score is 6.2, but they have an abysmal 2.59 in the "legal system and property rights" category. Why would the world struggle for a 200-year old solution?

As Ricky Ricardo would say, there's a lot of 'splainin' to do. My attempt to summarize the causes of the turmoil is now available as a Cato briefing paper..

... for including DOL on his list of The Ten *Really* Best Economics Blogs. I was also glad to see Craig included his own fine blog in the list.

Here is Mike Lester's cartoon from today's Rome News-Tribune:

Skip Sauer points to articles indicating that the Vancouver and London Olympic organizers have outstretched palms.

Anyone else feeling like The Forgotten Man these days?

Constrain the Federal Reserve's over-expansionary proclivities, writes Jerry O'Driscoll in today's Wall St. Journal. How? Impose a commodity standard, which will automatically stop the Fed from following a policy course that inflates asset prices.

ADDENDUM: Walker Todd sounds a similar theme in the Christian Science Monitor today. The intro:

Too much credit and easy money. Those were the biggest culprits behind this financial crisis. Yet, apallingly, the government's rescue attempt is built on more credit and even easier money. That's like giving a procrastinator a deadline extension.