Monthly Archives: June 2014

Pre-commitment and Private Cities

Posted on by

On this post, a commenter writes,

By the way, one way to solve certain coordination / collective action problems like this – “I’ll only do it if I know a lot of other people like me are also going to do it.” – is through the ‘Kickstarter’ mechanism.

…offers people the ability to pre-commit to purchase the items, but only if there are enough other precommitments. One pays nothing until the number of other commitments reaches the target subscription, and at that point the commitment becomes binding, the money is transferred, and the product produced and shipped.

The problem of filling up a new private city could perhaps be solved with some clever variation of this mechanism, but there would also be the issue of how to enforce the commitment to migrate. In this way, you could come up with a new private city business plan that includes taxes, services, and selective demographic criteria, and test the demand curves. Putting aside questions of legality, one could even try the nightclub model and discriminate with regard to pricing (like ‘ladies’ night’) to bring in people who have a special ability to attract other desirable residents who would be willing to pay a lot extra in taxes to subsidize the residency of those attractors, whom they wish to live around.

Some remarks:

1. Wasn’t there an attempt several years back to have libertarians commit to moving to the same state (I believe New Hampshire) to try to make it more libertarian?

2. Cities price-discriminate plenty today. Think of subsidies to professional sports teams.

3. I think the way to run the kickstarter city project would be to have people state conditions for moving and conditions they would help satisfy if they moved. (“I would move if there are at least two good yoga studios and at least 200 single professional men aged 30 to 40. I would help satisfy a condition about the number of physicians, the number of single females age 30 to 40” etc.) Everyone puts down a large deposit. Your deposit is refunded if your conditions for moving are not met. Otherwise, you either move or forfeit your deposit.

Casey Mulligan on the ACA

Posted on by

He writes,

During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the seventy years.

We need the SNEP solution of replacing means-tested programs with a universal benefit.

Boomerang Kids

Posted on by

Adam Davidson writes,

Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000…And more than half of recent college graduates are unemployed or underemployed, meaning they make substandard wages in jobs that don’t require a college degree.

…In 1968, for instance, a vast majority of 20-somethings were living independent lives; more than half were married. But over the past 30 years, the onset of sustainable economic independence has been steadily receding. By 2007, before the recession even began, fewer than one in four young adults were married, and 34 percent relied on their parents for rent.

Pointer from Tyler Cowen.

Some comments:

1. Segments of our society are falling apart. The left’s treatments are exacerbating the problem. That is why I think that changing our system of means-tested benefits ought to be a high priority.

2. I chide my daughters for not working for a profit. But they are all out of the house. I am not a total failure.

3. Government-subsidized college loans contribute more to the problem than to the solution.

Private Cities, Continued

Posted on by

On this post, Patri Friedman commented,

Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.

I think that the last sentence, concerning transaction costs of leaving, is interesting. I am not sure what the equilibrium would like if you brought those costs to zero.

Suppose that a big challenge with creating a new city is that the value is in the people there. This creates a Catch-22. You cannot convince me to move to a city until I know there are people there with whom I want to interact. And there won’t be people with whom to interact until you convince people to move to the city.

If there were zero transaction costs in changing cities, then you might get me to try a city before I am sure that it has enough interesting people for me. However, if I know that there are zero transaction costs to changing cities, then when I see interesting people in a city I may not be confident that they will stay there. So what do I do in that case?

I think that in that scenario, cities would behave like dating bars. Such bars tend to surge in popularity until they suddenly lose clientele.

Who Wrote These paragraphs?

Posted on by

What other tribe will tell the Fed how to set interest rates, or Congress when to spend money? Mainstream macro has its discontents, but the more time you spend among the people pushing the alternatives, the more you realize how much lesser of an evil the mainstream academics represent.

Check your answer.

We have no business throwing applied-math majors into an economics Ph.D. program. Both a liberal arts mora-philosophy B.A. or equivalent and two years out in the real world working at a job of some sort should be required.

We have no business offering a narrow economics B.A. at all. At the undergraduate social-science level, the right way of organizing a major curriculum is to offer some flavor of history and moral philosophy: enough history that students are not ignorant, enough sociology and anthropology that students are not morons, and enough politics and philosophy that students are not fools. (And, I would say, a double dose of economics to ensure that majors understand what is key about our civilization and do not get the incidence of everything wrong.)

…A first-rate undergraduate economic major will also spend due time on government failure and bureaucratic failure, and thus reach the very economic conclusion that there are substantial trade-offs, and we must pick our poison among inadequate and imperfect alternatives, even in institution design.

Check your answer.

Pointers from Mark Thoma. Some thoughts on why there is such a focus on math.

1. Some economists really believe that the answers can be found inside equations.

2. Some economists (I think of Robert Hall) think that mathematical ability provides a reliable signal of overall intelligence, while other indicators are all more noisy.

3. It is a stable, self-perpetuating equilibrium. Once the math guys took over, they just keep giving the best jobs to other math guys.

4. Important questions in economics tend to have messy, ambiguous answers. Therefore, economists who do a bad job at answering important economic questions, or who do not even bother asking important economic questions, can do quite well for themselves.

5. Graduate students think that a class where the professor explains equations provides tangible training, while a class where a professor poses philosophical issues does not.

Mortgage Equity Withdrawal

Posted on by

Bill McBride tracks data on mortgage equity withdrawal as a percentage of disposable income. You withdraw mortgage equity when you take out a second mortgage or refinance your existing mortgage with a larger loan (“cash-out refi,” as we call it). The graph at the link shows how from 2002-2007, the withdrawal rate was between 4 and 9 percent each quarter. Ordinarily, the number should be slightly negative, as people pay down the principal in their mortgages. We had big negative numbers in 2009-2011, “mostly because of debt cancellation per foreclosures and short sales, and some from modifications.”

Thanks to a commenter for the pointer. Some further comments:

1. From an AS-AD perspective, you can say that mortgage equity withdrawal boosted AD from 2002-2007, and then it went into reverse when the subprime crisis hit. This might be the best story for the drop in AD.

2. From a PSST perspective, you can say that a lot of consumption patterns were unsustainable, based on people spending capital gains on housing. When the capital gains leveled off and then turned into capital losses, the economy needed to find new patterns of trade, and it still has not done so.

3. Apropos of nothing, I once cursed out the guy who developed the measure of mortgage equity withdrawal. In about 1982 or so, Jim Kennedy was the forecaster for Industrial Production, and I was the forecast co-ordinator (we were both economists at the Fed). The forecast process, which was pretty much all clerical, was time-consuming and grueling. I had finally put a forecast to bed when Jim came in and said that the forecast for Industrial Production was out of synch and needed an update. He was very concerned about who might be blamed for the glitch. I shouted, “I don’t care whose bleeping fault it is!” I really lost my temper. It was just a case of my being tired, still at work long after I usually went home, and caught off balance by having my relief at being finished turned to anguish at finding that there was more work I had to do.

America’s Prospects

Posted on by

Heather Sims writes,

Henry Olsen proposed that America’s economic stagnation exists primarily within a segment of the population: the working class. For Olsen, the political party that taps into this group’s declining income and offers a solution to this problem in terms of “comfort, dignity, and respect” will win elections in the future. Pollster Kristen Soltis Anderson concluded the panel discussion with a description of Millennials and why they are “a generation worth fighting for” electorally. According to Anderson, Millennials’ and conservatives’ values coincide on several key points, including the importance of hard work, education, family, and individual social responsibility.

I attended the session. In response to my question, Anderson said that she thinks that Millenials’ belief in individual community service rather than government programs provides an opportunity for conservatives.

I disagree. I think that young people are indoctrinated in school to believe that they can identify moral individuals by looking for signals like:

–belief that straight white males have “privilege,” and other classes of people are victims
–belief that intention toward the poor is an indicator of the morality of economic policy
–belief that fossil fuels are evil

Against such indoctrination, conservatives offer arguments like those of Yuval Levin and others that government crowds out civil society. That may be true and important, but it is much too subtle for most young people to grasp. Although they may have acquired some skepticism about big-government solutions, when push comes to shove they will still apply the intention heuristic that the community-service ethic inculcates. The supporters of government programs will get credit for trying, and the supporters of smaller government will be viewed as immoral.

The License Barrier

Posted on by

Jared Meyer writes,

Excessive permitting processes are part of professional licensing. They also act as a deterrent to work and were seen as a large problem by small businesses. The utter complexity of many states’ permitting processes makes it difficult for entrepreneurs to focus on getting their ideas off the ground, and for small business owners to devote the necessary time to ensuring their businesses stay alive.

He cites a survey by Thumbtack, a business services firm working with the Kauffman Foundation, which shows that small business owners find licensing and permitting to be a significant barrier to their development.

Pointer from Don Boudreaux.

Timothy Taylor makes a prediction

Posted on by

He writes,

ultimately, I expect that the growth in services trade will reduce pressures for protectionism. Instead of talking about hypothetical trade in hypothetical completed goods–like cars and computers–it will become clear that portions of the value-added are often being created in different places. Pushing for trade protectionism in the name of specific products made in other countries like cars or steel or televisions is one thing, but I’m not sure any similar protectionist movement will form to prevent, say, insurance record-keeping or checking diagnostic X-rays from happening in another country. In addition, countries will need to be wary of placing tariffs or other restrictions on imports, because many imports will be part of a global production chain, and domestic produces will be quick to point out how inhibiting their access to those global connections will injure the domestic economy.

He cites a paper by Prakash Loungani and Saurabh Mishra and points out that trade in services has been growing three times faster than trade in goods. I would make the additional prediction that the Great Factor-Price Equalization will continue.

Pure Transactional Bank?

Posted on by

Jeremy Warner writes,

A simple transactional, online bank, where all deposits are placed as reserves with the central bank, making them completely safe, free of costly capital requirements, and immune to loss and panic, cries out to be invented.

Let’s assume that the main cost of the bank is upfront software development. It recovers that cost (and other expenses) with a monthly service charge to each customer.

Each customer will have a companion institution, call it a mutual fund, that pays a return on deposits. When you want to earn more interest, you shift money from the transactional bank to the mutual fund. When you want to have more money available for transactions, you shift it from the mutual fund to the transactional bank. As the cost of moving funds between institutions approaches zero, your average balance at the transactional bank will approach zero.

If they took away deposit insurance, would the system evolve toward this? If they keep deposit insurance, are you ensuring that the system cannot evolve toward this?

In any case, the safety of the transactional bank does not mean that risk goes away, or maturity mismatching goes away. It goes to other institutions, and I’m not convinced that those institutions won’t have a cozy relationship with the government.