Gary Becker on Infrastructure

I already posted this to the pen-l mailing list & tried to post it as a comment to Becker's blog, but for some reason (technical, I am sure), it never appeared.

Gary Becker has a piece on the blog he shares with Richard Posner regarding infrastructure in the wake of the Minneapolis Bridge collapse.

http://www.becker-posner-blog.com/archives/2007/08/the_infrastruct.html

I find it interesting the way conservative economists always find a way to make every problem call for the same solution — markets, markets, markets. In my soon-to-be-released (2 October) Confiscation of American Prosperity, I compared this attitude to the behavior of a doctor who would prescribe the same procedure for every problem, whether it would be a heart attack or broken leg.

First of all, he uses several tactics to rule out the need for more government spending. First of all, he claims that the roads and bridges are in good shape. The second tactic is far more interesting to me. Often when somebody calls for more government spending or regulation to solve a problem, conservatives claim that an unrelated program would be more cost effective.

Childhood vaccinations are a good example. For example, if somebody recommends policies, such as the regulation of tobacco, conservatives, such as John Graham, later Bush’s regulatory czar, argued that allocating money for regulation rather than spending it on childhood vaccinations or some other worthy purposes is tantamount to “statistical murder” (see Graham 1995).

Graham, John D. 1995. ”Comparing Opportunities To Reduce Health Risks: Toxin Control, Medicine and Injury Prevention (Dallas: National Center For Policy Analysis).

http://www.ncpa.org/studies/s192/s192.html

Of course, the people who make such an argument never actively promote the childhood vaccination. Instead, they merely insist on government inaction. In this case, Becker argues that reducing alcohol related deaths would make a greater contribution to safety, without giving any suggestion of how to achieve such a goal.

Finally, Becker makes the case that — surprise surprise — the best approach would be privatization, without explaining how privatization could be accomplished in a way to guarantee better maintenance of the infrastructure.

Steve Forbes & Osama bin Laden Join Forces

Osama bin Laden is apparently now appealing to the conservative forces in the United States, calling for a flat tax.

"To conclude," bin Laden says, "I invite you to embrace Islam." He goes on to say: "There are no taxes in Islam, but rather there is a limited Zakaat [alms] totaling 2.5 percent."

What should conspiracy theorists make of this?

NEW BLOG ON IRAQI OIL INDUSTRY

The leading expert on the ins and outs of the Iraqi oil and broader energy sector, Ben Lando, has started an excellent and informative blog at http://www.iraqoilreport.com. Highly recommended. His opening reports remind us of how and why it is that Bush is not getting his way in Iraq regarding an oil law to help the US companies. He also makes it clear that the anathema that Moqtada al-Sadr is held in Washington (with neocons like Charles Krauthammer openly declaring that US troops should have killed him back in 2004, easier said than done) is not how he is held by decisionmakers in Iraq, especially those in charge of the oil industry.

Who Is Michael Perelman

Most of us have already introduced ourselves. I will try to do so. Actually, I will take the easy way out and point you to something I posted elsewhere.

I teach at California State University, Chico, which might make me Chico Marx. Anyway, the following URL might tell you something about my work.

http://michaelperelman.wordpress.com/my-intellectual-biography/

D-I-Y POP-UP GUIDE TO JOY IN WORK II

by the Sandwichman

with the Saint Simonians, industrial labor is seen in the light of sexual intercourse; the idea of the joy of working is patterned after an image of the pleasure of procreation -- Walter Benjamin

The British artist Eric Gill gave a series of lectures in the 1930s, which was subsequently published as a book, Work and Leisure. What he had to say was largely in the tradition of 19th century English moralists on work, such as Thomas Carlyle, John Ruskin and William Morris. He summarized his argument in a letter to the editor of The Burlington Magazine for Connoisseurs responding to a critical review of his book.

I reproduce Gill's summary of his book below, but first a word about Gill's curious sexual (mis)conduct. In addition to countless encounters with models, prostitutes, patronesses and anyone else in a skirt who came within hailing distance, Gill had incestuous relations with his sisters, his daughters and "experimented" with his dog (and he wasn't even a Republican!).

An indignant sketch of Gill's proclivity was given by Barbara Grizzuti Harrison in a 1989 review -- "Perversity raised to a principle" -- of Fiona MacCarthy's ERIC GILL A Lover's Quest for Art and God. My own view is that Harrison's indignation was misplaced. Not to condone or celebrate Gill's behaviour, I would place the blame for it instead on modern industry's failure to realize the utopian dream image mentioned in the above quote by Benjamin. And now, without further ado, here's Gill's summary of Work and Leisure:

In Chapter 1 of the book, I dealt with the nature of art as embracing the whole of human making. In the course of this, I endeavored to show that by the use of modern machines responsibility is denied to the individual workman -- he has been reduced to a subhuman condition of intellectual irresponsibility -- and that machines in their perfection do not help the labourer but are a substitute for him. It is argued therefore that machine-made things, however good in their kind, are not, properly speaking, human products and are therefore ultimately unsuitable for human use.

In Chapter 2, I argued that in human society, commerce springs naturally as the business of exchange and that there is not normally any "art" which is not an object of commerce--for no painter can eat paintings but must exchange them for bread. The trouble arises, according to my argument, when the trader or middleman becomes insubordinate and obtains control of production and consumption, thus perverting production to "the vicious aim of profit." In this commercialism, machine-production is the natural instrument. It enables those who control it to make more things more cheaply and, therefore -- the machine-minders being dispossessed -- more profitably, and they are not worried by any questions of inhumanity.

In Chapter 3, I argued that though art is all human making and commerce is the right and natural business of the exchange of goods and services, there is a quality in human beings and therefore in human works which is not patient of valuation in terms of prices and that it is this quality which, in ultimate analysis, is man’s reason of being or final cause, and without which there could be no need to bother about art or commerce, right or wrong, justice or injustice, piety or politics. This is the quality of holiness and in humane societies, societies not ruled by finance, societies in which things are made by men for men and not by machines, the quality of holiness is a common quality, a common-place quality, nothing to write home about or put in glass cases in museums.

Jay Leno for President!

isn't having the king-maker in office even better than having a king?

meanwhile, pause to ponder the precipitate plunge of a prime portion of the photography profession: the Pavarotti Paparazzi.

JD

BY FORCE OF THOUGHT -- MEMOIR OF JANOS KORNAI

"So, Barkley, what book did you read this summer?" says the teacher at the beginning of the school year. Well, over a recent weekend at the beach in Lewes, Delaware after dropping off our daughter to be a freshman at George Mason, I read most of the intellectual memoir of the Hungarian economist, Janos Kornai, By Force of Thought, published by MIT Press recently. It is really an intellectual history of central and eastern Europe from the 1930s to the present.

So, Kornai became a true Stalinist in 1945 as an 18-year old Jew in Budapest who barely survived the Nazis and whose father and older brother did not. Doubts began creeping in during the early 1950s as he encountered friends who had been tortured into false confessions. He would split from Marxism, and during the 1956 Hungarian uprising went through the difficulty of surviving while not abandoning or violating friends or principles. Later he would be a fan of neoclassical economics in the 1960s, as he published papers on mathematical programming that could be used in principle for central planning, although he notes that the conditions for his two-level planning to work did not hold in reality, so he saw it as an ultimate critique. In the 1970s he would come to be a critic of neoclassical economics, in his book Anti-Equilibrium, even as he would be begin to spend half his time at Harvard (and the other half in Budapest). His most famous idea was of the soft budget constraint, a critique of attempts at market socialism in Hungary and elsewhere, although also applicable to western economies. Later, he would write wisely about the path of transition out of the Soviet bloc economies, with Hungary doing better than most in its path to join the EU. He emphasized a more social democratic approach that would retain substantial parts of the old social safety network, even as the economy mostly became market capitalist. This would preserve social structures and democracy and equality better than the harder line policies found in Russia and other states with far greater problems.

I have great personal respect for Kornai and think he deserves the Nobel Prize, although probably he will not get it, "transition" now being somewhat passe. But, he is a wise observer, and this book is deeply insightful and even moving.

Plus que ca change

In a new popular history of "Mr. Polk's War," Invading Mexico, by Joseph Wheelan, I find:

"Above all, the Whigs resented Polk's assertion that by questioning his conduct, Whigs were aiding and abetting the enemy. [Tennessee Congressman Meredith] Gentry bitterly observed:'Because we will not crouch, with spaniel-like humility, at his feet, and whine an approval of all his acts, we are met...with the grateful compliment from the President that we are traitors to our country.'"

Om an unrelated note: Go Venus!

It's a dog's life, act II

Barbara Ehrenreich reports that: > A friend of mine, of very modest means himself, consults for a billionaire couple who commute between London and Los Angeles by private jet, with their dogs following in a second private jet. <

--
Jim Devine / “In the years since the phrase became a cliché, I have received any number of compliments for my supposed ability to 'think outside the box.' Actually, it has been a struggle for me to perceive just what these 'boxes' were — why they were there, why other people regarded them as important, where their borderlines might be, how to live safely within and without them." -- Tim Page (THE NEW YORKER, August 20, 2007).

Tax Carbon?

The New York Times has a story today about John Dingell’s change of heart on climate policy. The auto industry’s point man in Congress now favors a stiff tax on carbon emissions. There has been an undercurrent of suspicion that he has rallied to the least popular approach to the problem in order to discredit it. The Times’ Leonhardt gives Dingell the benefit of the doubt.

What I didn’t like were Leonhardt’s claims that a carbon tax “is the climate solution that economists and environmentalists have long dreamed of” and that the only alternative is cap-and-trade, giving away emission permits to longstanding polluters. The third approach, and by far the best, is setting up a permit system and auctioning off each one of them.

There are two reasons why permits rule. (1) There is great uncertainty about the future relationship between carbon prices and pollution levels (long run elasticity of demand for fossil fuels). Taxes place the burden of this uncertainty on the environment (the amount of pollution); saleable permits place it on costs faced by energy users (fossil fuel prices). (2) Politically, if we go the tax route, we end up in a discussion about taxes. That’s why skeptics thought Dingell might be boring from within. If we center the policy on permits the debate is over how much greenhouse gas emissions we are willing to tolerate. That’s the discourse we need.

Folks, this is a very important issue at a very important time. In the next year the contours of the national debate over climate change policy will be set. Huge ecological consequences – and gobs of cash – are on the line. It is essential to start off in the right direction. I’d like to see enough clarity and truculence in the activist community that journalists are forced to take notice.

Do We Do What Dewey’d Do?

A recent discussion of industrial policy on Dani Rodrik’s blog got me thinking. When the phrase “industrial policy” comes up (as I’m sure it often does at the wild parties our readers get soused at), we think of government commissions that “pick the winners”, funneling credits and subsidies to the embryonic Industries of the Future, while showing the door to the enfeebled Industries of the Past.

My experience in Germany, however, showed me another model. A society can favor the development of certain types of industries via a mosaic of education and training institutions, stakeholder-oriented financial institutions, vibrant local and regional economic development initiatives and the like. In other words, IP can be bottom-up rather than top down. When Germans think IP they think France, where all decisions are made in Paris, but a foreigner can see that Germany has its own form of IP, one that probably works better and is more participatory.

The next step was to think again about John Dewey and his ideas for the extension of democracy (his strong democracy, not our current weak one) into the economy. Open up a system like Germany’s to even more participation and you would have something like what Dewey had in mind. (The old guy called it “socialism” but admitted it didn’t look much like what the rest of the world called socialism.) But Dewey’s concern was not only political but (ahem) pragmatic. It was essential that the system should really work and not just be politically agreeable. Most of his analytical juices went into that part of the problem, and I think much of his insight could be translated into IP-ish terms. He was also off base on some matters (such as an overly optimistic conception of the role of science), and we can learn from that too.

Kevin Q. can probably spin rings around this post – I’d be happy if he would.

THE HOUSING MESS, THE FINANCIAL MARKETS, AND THE MACROECONOMY

I wish to recommend to one and all Jim Hamilton's reports and commentaries over the last several days on the meeting at Jackson Hole for the Kansas City Fed annual do, where they are all going on about the sub-prime mortgage problem and its many implications. Jim has them up at econbrowser at http://www.econbrowser.com, and he presented a paper there as well as being a very up-the-middle and fair-minded commentator on the proceedings, which have included speeches or papers by Bernanke, Gramlich, Mishkin, Taylor, Shiller, Leamer, Richard Green, and Susan Wachter. Hamilton is not a pessmist like Dean Baker or Nouriel Roubini who have been predicting a recession for some time out of all this, but does critique the more pollyannaish of the speakers there, with Fed Governor (and author of the most widely used money and banking text) Frederick Mishkin fitting that bill. Despite some stabilization of the financial markets two weeks ago, Hamilton sees ongoing problems due to the opacity and "where is the garbage?" of the derivatives and CDOs with all the sub-prime crud in them still out there. The other problem, emphasized by Baker and Roubini, is that as long as housing prices continue to fall, more mortgages can turn into garbage and ultimately the economy can be pushed into recession. There is the added wiggle that foreclosures and bankruptcies can dump more houses onto the market, thereby exacerbating the downward trend in prices.

Regarding the opacity mess, this has been warned about for some time in connection with the huge expansion and increased complexity of newer derivative instruments for some time, even before the sub-prime mortgage problem reared its ugly head. Almost a year ago, New York Fed President, Timothy W. Geithner, rather cautiously warned about it in a widely noted speech, "Hedge Funds and Derivatives and their Implications for teh Financial System," http://www.ny.fed.org/newsevents/speeches/2006/gei060914.html. The combination of this problem with all the opacity and repackagings of the sub-prime garbage have been very much at the heart of the current flocking of the black swan unknown unknowns along Keynesian/Knightian uncertainty lines that have spooked the global financial markets.

Regarding the potential dynamic for declining housing prices to trigger sales that push further declines, this is like the mechanism behind a crash that happens on a stock or other markets where margin calls force sales on liquidity-constrained investors which then further push down the prices further triggering the margin calls. This Minskyan mechanism is at the heart of a paper by me with Mauro Gallegati and Antonio Palestrini, available on my website at http://cob.jmu.edu/rosserjb, "The Period of Financial Distress in Speculative Markets: Interacting Heterogeneous Agents and Financial Constraints." Beyond what I have already said, I shall not drag you all through the technicalities of this paper, but I do note that it is the first paper ever to provide a mathematical model for the "period of financial distress," described by both Hyman Minsky and also Charles Kindleberger in his magisterial, _Manias, Panics, and Crashes_. According to him there are three patterns of speculative bubbles and their endings: a peak followed by a sudden crash, a peak followed by a slow decline, and by far the most common with the vast majority of historical bubbles following it: a peak followed by a period of slow decline (known as the "period of financial distress") then followed by a crash.

So, the question is, were the events of two weeks ago the peak or a crash? Is it over, as Mishkin thinks, or are the ongoing declines in housing prices the sign of a period of financial distress that will erupt sometime coming up in a much more serious crash with much more serious consequences for the world macroeconomy?

feudalism in Iraq [more]

from "Today's News" from the Washington POST's on-line e-magazine, SLATE, on September 4:

> Bush's visit to Iraq was shrouded in secrecy and he spent approximately eight hours in the country before continuing with his scheduled trip to Australia. He was joined by other top administration officials, and as everyone points out, Bush never left the fortified base. USAT notes that meeting with Prime Minister Nouri al-Maliki in Sunni country might have been designed as "a slight to al-Maliki," whom many consider to be running a sectarian government.

> More likely though, Anbar was chosen because it's seen as the clearest place where some success has been evident. But Anthony Cordesman, an Iraq expert, tells the NYT that Anbar isn't really exemplary of a successful American strategy since any progress there has more to do with the local frustration with al-Qaida in Iraq. Although Bush tried to bring both sides together yesterday, there is clearly still distrust between the Shiite central government and the Sunnis as many doubt the Anbar model can be exported to other areas.

> But that is exactly what the new U.S. strategy in Iraq has become, reports the WSJ in a Page One piece. The paper says that "after almost four years of trying to build Iraq's central government in Baghdad" the United States has concluded that "what appears to work best in the divided country is just the opposite." In other words, the United States is increasingly trying to prop up local leaders and the WSJ suggests this might amount to dividing the country into different areas, a strategy that sounds a lot like the "soft partition" that several Democrats have been advocating for some time. The thinking is that the United States should worry a bit less about the central government and hope that the country will remain united in the long run because local leaders will still depend on Baghdad for money.

> And, wait a minute, isn't that a strategy shift from the stated goals of the "surge" that was supposed to give some breathing room for politicians in Baghdad so they could make progress and create a model democracy in the Middle East? The "big change in the debate has come about because the surge failed, and it failed in an unexpected way," points out the NYT's David Brooks (subscription required) who says there is now a consensus that "peace will come to the center last, not to the center first."

> Both the WP and LAT check in on how the troop buildup is going and ask whether the surge is working. Short answer: no. The LAT goes through the depressing data: There's been little political progress, the number of Iraqis forced to leave their home has increased, there's been no significant drop in civilian deaths, and a new troubling trend has emerged of intra-Shiite killings. The best the LAT and WP can say is that things are sort of stable because neighborhoods have become more segregated, and there is a heightened presence of U.S. troops.

> Meanwhile, the WP notes U.S. troops can't trust many in the Iraqi army, which has been infiltrated by Shiite militias. And, to make matters worse, many of the Sunnis joining forces with the United States used to be insurgents and have a strong distrust of the Shiite government. No one really knows if they could ever really work together if U.S. troops leave.<

this sounds a lot like the feudalism from above strategy to me.
Jim Devine

Safety

Peter's summing up of the standard neo-classical approach to job safety is exactly right. There are some exceptions. Robert Frank, for instance. Frank, whose work I admire, is a little bit like the proverbial carpenter who, having only a hammer, thinks everything is a nail. In his case, the hammer is the idea that people care not just about income, but also relative income. In *Choosing The Right Pond* he uses his hammer on the work-place safety issue. Here is a little example based on his ideas that I use in the Principles course. (By the way, I teach economics at Bowling Green State University in Ohio: hello fellow bloggers!).

Suppose there are two types of jobs, safe and risky, and 2 workers. Safe jobs have a safety index of 2 and pay $20,000, while risky jobs have a safety index of 1 and pay $30,000. Further suppose workers utility is the product of three factors: income measured in thousands of dollars, safety( measured by the index), and relative income. Now we have a standard prisoner's dilemma. If you take the safe job, taking the safe job as well gives me utility of (20)(2)(1) = 40. Taking the risky job gives me (30)(1)(3/2) = 45, so I take the risky job. If you take the risky job, I get (20)(2)(2/3) = 26.67 if I take the safe job and (30)(1)(1) if I take the risky job, so I take the risky job in this case too. Each of us does better choosing the risky job whatever the other does, but when we choose the risky job we are worse off, with utility of 30 each, than had we both taken the safe job and gotten utility of 40 each.

Making safety level 2 mandatory makes both workers better off and has no effect on employers (the pay differential is assumed to reflect the cost of making the workplace safer) and is thus a Pareto-improvement. Also note that if we were to infer from the fact that workers reject the safe job (without regulation) that the added safety is worth less than $10, 000, and go on to use this as input into an estimate of the value of life, we would be seriously wrong: deciding collectively, workers would be willing to pay up to $15,000 each for the safer job, since an income level of 15 and safety level 2 gives the same utility, 30, as the risky job when relative income isn't a factor.

The neat thing about Frank's hammer is that the result is consistent with perfectly competitive labor markets and no lack of knowledge on the workers' part of the true risks they face. When these conditions are not met - as they aren't - then the case for regulation is a fortiori. But Frank shares with the neoclassicals a vocabulary that is incapable of talking about injustice.

Perp Walk

Hmmmm. I guess I should say a word about myself, so as not to be too different from everyone else? (Q: What are you going to do when you grow up? A: Find some people, dress like them and follow them around. --Firesign Theater)

I am Peter Dorman, an economist and long-time political obsessive, not affiliated with any school, camp or fire ring. I teach at the Evergreen State College, known for its extraordinarily demanding brand of wanton indulgence. I do a little of this and that academically, never wanting to specialize to the point of accomplishment boredom. Some topics over the years: occupational safety and health, benefit-cost analysis, trade theory, international political economy, child labor, unemployment insurance, climate change, the precautionary principle.

Bloggers seem to be pronouncing themselves on free trade and liberty, so for my part I will say I have theoretical and political issues with the justification for unregulated trade, and I would like to reduce the role that hierarchy and authority (institutional not moral) plays in our world. What really irritates me is nationalism, the utopia of ages past that has now attained a gruesome hegemony.

I will mostly post on economics-related matters, since I figure the web is overrun with everything else, and because I think there is mostly a big hole where serious economic thinking ought to be in the discourse of the left.