Assorted Links: 9-11-2008

The Culture of Prosperity by Gregory Clark

Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer by Arnold Kling

The Dream for a Human Capital Agenda by Ed Glaeser

Tim Harford: "Never Trust an Economic Forecast"

The Undercover Economist writes:

When people discover that I am an economist, they rarely ask me for my views on subjects that economists know a bit about – such as how to respond to climate change or pay less at a supermarket. Instead they ask me what will happen to the economy.

Why is it that people won’t take “I don’t really know” for an answer? People often chuckle about the forecasting skills of economists, but after the sniggers die down, they keep demanding more forecasts. Is there any reason to believe that economists can deliver?

When I tell people I am studying economics, the most common response I get is: "Well, good. Maybe you'll be able to fix our economy someday."

People do have a woefully inaccurate conception of what economists actually do, but, really, why should they know? Milton Friedman used to note, in response to other economists' wailing about the inadequacy of the public's economic knowledge, that most people's ignorance is a rational ignorance. Learning a new subject takes a lot of time and effort. On the flip side, for any given person, knowing economics is next to useless. So, there are high costs, and low benefits for achieving economic literacy--could it actually be that a low level of economic knowledge is socially optimal? Maybe. I tend to think knowledge has large spillover effects (which, of course, is one of the major reasons we subsidize it so heavily in the first place), which complicates things.

In any case, the public does know enough about economists to know that they are dismal at predicting the future. Though, curiously as Harford notes, the public continues to demand such predictions nevertheless.

More from Health Zealots

Apparently, the Los Angeles City Council has banned the construction of new fast food restaurants within a 32-square-mile area inhabited by low-income residents of the city. William Saletan calls it "Food Apartheid" and writes in Slate:

We're not talking anymore about preaching diet and exercise, disclosing calorie counts, or restricting sodas in schools. We're talking about banning the sale of food to adults.

This kind of stuff really bothers me.

Samuelson, the optimist

From Robert Samuelson:

The paradoxical thing about today's economy is its strength. No kidding. Consider all the hand grenades lobbed at it. Higher oil prices. The housing implosion. Large layoffs in affected industries: autos, airlines, construction, mortgage banking. The "credit squeeze" triggered by losses on "subprime" mortgages. Despite all that, the economy hasn't collapsed. It's merely weakened. Output in the first quarter of 2008 was actually 2.5 percent higher than a year earlier.

This really should be remembered.

HT: Greg Mankiw

Let 'em fail

Roger Lowenstein writes in The New York Times Magazine about the mortgage and banking crisis:

The goal should be to ensure not that they never fail, but that for Fannie and Freddie and for other institutions, failure reacquires its proper status in a capitalist society: that of a tolerable event.

Insulating these financial behemoths from failure encourages intolerably high risk taking behavior. On the other hand, refusing to bail them out can send shock waves through the economy. What's worse? Hard to say, but I'd guess the bailout is worse--at least in the long run-- because, as noted in the article, with every bailout the problem gets worse.

What I've Been Reading

Homer's The Iliad

The Works of Aristophanes

"The Economics of Science" by Arthur Diamond Jr.

Science Funding by Joseph Martino

"Educational Attainment and Other Characteristics of the Self-Employed: An Examination using Data from the Panel Study of Income Dynamics" by Chad Moutray

Cracking the GRE by Karen Lurie

Trading Places

Maarten Bosker, Eltjo Buringh, and Jan Luiten van Zanden published a new paper on the simultaneous economic decline of Arab cities and economic rise of European cities. Here is an summary article from VOXEU that is well worth reading. The teaser:

Baghdad was a wonder of the world in the year 800 while London was an economic backwater. By 1800, London was the largest city in the world while Arab cities languished. Recent research attributes this ‘trading places’ to institutional differences: Arab cities were tied to the fate of the state while European cities were independent growth poles.

The authors conclude:

Arab cities were part of the ‘predatory’ structure of the state. When the region was unified under the Abbasids, this worked well and the region experienced its ‘Golden Age of Islam’. Efficient institutions regulated exchange, allowing high levels of commercialisation and urbanisation. When state systems disintegrated, so did the urban system and the underlying commercial networks.

In Europe, after a period of disintegration, a different urban system more or less independent of ‘predatory’ states emerged. These managed to claim their own niche in the political economy of the period and developed increasingly effective ways of organising commercial exchange in spite of the fragmented political system.

It is this development in Europe of an economically well integrated urban system largely independent of large territorial states, spurred on by the effect of the Great Discoveries that can explain to a large extent why London, an economic backwater in 800, was able to overtake Baghdad, the formerly thriving capital of the Abbasid caliphate.

Lefties in the White House

Cowen writes:

Ford, Reagan, Bush I, Clinton, Gore, and now Obama and McCain are all left-handed. Call it chance or availability bias, but I'm still wondering. Read more here, and thanks to Martin Weil for the pointer. Here's one on-line discussion. Here is a brief survey on Wikipedia. It is my general view that left-handers have higher genetic variance in a number of dimensions, so they should be over-represented in many different kinds of extreme situations, including the Presidency.

This is one of the more interesting random pieces of information that I've read in awhile.

Cowen on Privatizing Water Markets

In Forbes, Tyler Cowen advocates privatizing water markets in Third World countries. He writes:

Yes, I'm saying that Third World governments should consider letting private companies sell water at any price they want. This includes giving them the right to cut off people who don't--or can't--pay their bills.

And no, I don't mean a water concession with a price regulated by the government, I mean true laissez faire in water supply. No price regulation, no rate of return regulation, no government ownership of assets, no political pressure to keep prices low. Water companies should be allowed to maximize their profits, and because supplying water is nearly always a monopoly, they should be allowed to make monopoly profits. I know the idea sounds crazy--to an economist, water supply is a classic "natural" monopoly--but on closer inspection the other alternatives might be worse.

Many of the world's poor don't get good water because they don't live near a piped water connection. Or if they have a connection, it is often bad and irregular, with backflow putting dangerous and dirty substances into the drinking water. The underlying problem is that many governments artificially hold down the price of water, or they won't let water companies cut off nonpaying customers. The result is that water companies don't want to serve these poor customers in the first place, and they certainly don't want to spend money by adding more water connections for the poorer areas.

Deregulation would give water companies a stronger monetary incentive to serve these customers. For starters, an unregulated private monopoly would try to bring as many buyers into the system as possible, so as to make as much money as possible.

Of course deregulated monopolies are bad, mostly because monopolies raise market prices and not everyone can afford the higher rates. But for all the problems deregulation can bring, the status quo seems much worse. And it's worth asking what these higher prices are relative to. Carrying water on your head costs much more--in terms of both money and effort--than piped water. If you're a poor person, wouldn't you rather face a private monopolist, selling you water through pipes, than not have any water company at all? Whether we like it or not, those are the real world alternatives.

If complete deregulation is too radical for you, consider the interesting compromise proposed by the economist Jeffrey Sachs, currently heading the Earth Institute at Columbia University. He suggests that the private company be allowed to charge high prices, but only under the condition that it allocates a minimum amount of water for everyone, either for free or at a much lower price. Basic water needs would be met, and the company still might make a profit.

That said, I'm less worried about high prices than Sachs. Let's say the new water prices were so high as to capture all the benefits that buyers would receive from the new supply of water. We can expect much lower rates of diarrhea and other diseases, if only because the water supplier can charge more for cleaner and safer water. The resulting decline in disease means that children will die less frequently and adults will be healthier and more energetic. Those long-term social benefits are of enormous help to poor communities, even if high prices take away many of the initial, upfront benefits of the new water supply. In other words, we should consider radical privatization precisely because water is a public good and because clean water is so important for long-run economic growth.

Of course creating and maintaining these new water connections isn't easy. Even with deregulation, many companies still won't be interested in serving the poorest elements of their societies because they can't charge poor customers a lot of money. They might not be able to charge enough to cover the costs of billing, much less the cost of laying down the pipes. But the more weight that point carries, the weaker the case for doing nothing and weaker still for regulating water prices. We already know that with artificially low, regulated prices the poor get no water; with a private market they at least have a chance. Governments need to be doing everything possible to encourage piped water supply, and that means allowing high prices.

Sachs recently called for increasing United Nations water subsidies by a factor of at least 100. No matter what one thinks of the U.N., or that plan, it's safe to say it isn't going to happen. Wealthy countries simply don't want to spend the money. Maybe that's unjust, but it's a fact.

Water deregulation, in contrast, wouldn't involve much in the way of upfront expenditure. It wouldn't require the U.N. Some poor countries could experiment with the idea while others waited and observed.

The real question is, What do we have to lose? Let's try some water deregulation and hope that at least a few million people can take those buckets off their heads and trade them in for the pleasure of paying a monthly water bill.

I have to say, if you gave me this article and asked me to guess who wrote it without looking at the name, I would never have guessed Cowen. In fact, if you gave me a 50/50 chance by telling me the author blogged at Marginal Revolution, I would have immediately said Tabarrok. It is much more forceful that I'm used to getting from Cowen. That said, it's a good article.