Friday, August 31, 2007

A hot day at the Fair 

Here we are again, Michael and me, ready for three more hours of NARN Live at the State Fair. We're here 5-8pm tonight; many guests are expected but unconfirmed, so I'll leave this list blank (Michael updates while we're on, so check to see from his link. I'm busy trying to keep this thing between the ditches.)

Tomorrow, we have John and the Fraters 11-1, Mitch and Ed 1-3, and then we're back 3-5, for our usual NARN turn. Below is video from a food eating contest two years ago created by Saint Paul, featuring Mitch and former Patriot program director Patrick Campion.

So stop by us at the Fair, or listen, on AM 1280 the Patriot.

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A rather silly letter 

Someone tries to analyze the national economy in the local paper.
Prices are rising because the value of the dollar is falling.
You have me up to the "because". Each side of "because" is true, but it's the causal link that I'd like you to explain.

Yes, the dollar has fallen, but if that made prices rise, why didn't the dollar fall a whole lot when we had the dollar rising in the 1990s?

He goes on:
Why is the value of the dollar falling? The Federal Reserve is printing money to pay for the Iraq war so the money in circulation loses value. The housing loan industry was bailed out by the Federal Reserve, who printed several billion dollars to bail them out so the stock market would stop falling.
That graph to your right is monetary base, which is the only thing the Fed could use to pay for either Iraq or for the loan bailouts (I've explained here that they aren't yet really bailouts, though this is discouraging news from the Bush Administration.) The Iraq war has been financed by other central banks, perhaps -- see Nouriel Roubini for one such explanation -- but not by our own.

We teach classes that help you with this, sir. Our door is open.


A sprinker under every roof 

An opinion in the St. Cloud Times suggests that the city should create a more stringent sprinkler requirement for new buildings and those commercial buildings which have a change of use or change of occupancy. Residences under 9,250 square feet would be exempt, which would exclude almost every house in town. Perhaps a swipe at rich people who they think "can afford it" -- otherwise why wouldn't you want middle class families to have this extra safety?

But the requirement for businesses is far more odious. Small business owners who wanted to expand would face a new required expense. The rule is utterly indifferent to the use of the building -- is this a chemical manufacturing facility or a coffee shop? Who is in the best position to determine the value of a sprinkler system, anyway? Wouldn't it be the insurance company selling fire coverage to the business owner?

This is just one more example of how ignorant people generally are of how businesses operate.

Thursday, August 30, 2007

Tribute to MN's Iraqi Heros, 9/2/2007 

This Sunday, September 2 at Veterans' Lake Park, near Elk River, a memorial to those Minnesotans who have who have given their lives in the Global War on Terror will be dedicated. Events and activities are scheduled throughout the day with a parade scheduled for noon, actual memorial dedication with a flyover at 3:00 PM, and fireworks at dusk.

By clicking on this link, Veterans' Lake Park, you will find directions to the ceremony location, 8702 181st Ave., Ramsey, MN. Ave/Cty Rd 22).

If you can attend this commemoration or just stop by to pay your respects, this Sunday, please do.

Questions or donations can be addressed by contacting:
Pete & Darla Hagan, 612.282.2066,
John and Bonnie Enstrom, 763.441.4086,

No More Tag - Hello - Life is not Risk Free 

A Colorado Springs elementary school has now banned tag on its playground. Why? It causes conflict.

Were the students harassed? (I taught elementary school for nine years; I never recall hearing a student use the word "harass" even though I taught in at least one very multi-ethnic school). A couple of students complain, no one checks to establish the legitimacy of the complaint, but voila, the game of tag is now banned. The vice principal feels justified because only a couple of parents complained about the ban.

Let's consider this event in a larger context. First, life is competitive. No amount of coddling on the part of parents or schools can remove this fact. Sometimes people win, sometimes they lose. Tag has numerous benefits including releasing energy, yelling, and temporarily being "it." If you were "it," you went after someone else and they became "it."

Second, parents who complain on behalf of their children or children who have learned to use certain words (oppress, harass, bother, etc.) will have a huge awakening in the real world. Then again, they may never figure it out.

Third, life is not risk free. People have accidents, get hurt, and all of us will die. We are doing our youth an incredible disservice by protecting them from all things negative.

Fourth, we are teaching our children to be irresponsible. If they do not learn accountability for their actions, they will lose.

Fifth, as indicated in this post, we are also giving the school systems a free pass on enforcing rules, teaching accountability, and helping students deal with uncomfortable situations. We teach the whiners and complainers that they can get away with their form of bullying.

I would hope the parents in this school would challenge this ruling and that the vice principal would look for the culprits instead of punishing an entire school. Who knows, the whining bullies may have made up the charges. And we wonder why juvenile diabetes and obesity are on the rise?


Back to the Fair 

I am behind the Patriot booth preparing for NARN Live at the MN State Fair. If you are at the Fair today or tomorrow at 5-8pm, or Saturday 11-5, be sure to stop by the booth on Judson Street, across from the Horticulture Building and say hi. We hope to have Sen. Norm Coleman on with us before he leaves for Iraq tonight, Prof. Larry Jacobs, a pollster at the University of Minnesota, Rep. Marty Seifert, along with Mark Yost, author of , and Sean Broom from MN Publius. He seems nervous, but we promise to treat him well.

If you're not at the Fair, listen in.

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Broken Glass, Not 

As most of us have heard, the surge is working. As with most conflicts, there are levels of success: military, political, social, and business, among others.

A key sign of hope that things are improving is that small business people are opening shops. These shops are not being vandalized nor are they being targeted by those thugs who wish the Iraqi chance at representative government to fail. As the author of Badgers Forward notes, "There at the first corner, I see it. New glass. Someone has put new glass in a shop. Someone only installs new glass when they think it won't get broken. New glass is confidence."

Read the entire, short post.

Net, new glass equals new hope equals new chance for freedom.


The Moving Wall - Veterans' Memorial 

The St. Cloud Veterans Affairs (VA) Medical Center will host a traveling replica of the Vietnam Veterans' Memorial on its campus September 6-9, 2007. Medical Center Director Barry Bahl said "The Moving Wall will be on our grounds to honor and respect those who made the ultimate sacrifice during their service in the Vietnam War."

The Moving Wall will be open to the public 24 hours a day during its stay on the VA campus, 4801 Veterans Drive, St. Cloud.

I hope many of you in the St. Cloud area will take the time to pay a visit of respect to our greatest Americans. If you have any questions or wish to obtain additional information, please feel free to contact Dennis Erie, of the VA at 320.255.6365.

Fabrications and Journalistic Standards 

Embedded Daily Princetonian reporter Wesley Morgan (see my earlier post here) reports (hat tip to Glenn Reynolds) that one story he had written up turns out to have been largely made up by the soldier:
An update on the story of the specialist at FOB Rusty: she took me for a ride. I'm pretty sure now she fabricated much of what she told me, which I'm pretty pissed about; when a soldier invents a story, no matter why, they denigrate the real sacrifices of their comrades, and through my gullibility I was complicit in that. Several soldiers of 2nd BCT, 2nd ID have raised very serious doubts about her story; apparently she has a tendency to do this. I'm on my way home right now and will not be able to visit the FOB to look into this further. Suffice it to say that the specialist, like many other soldiers, went through a lot, but not all that she said. I apologize for relaying the story -- I was so dumbfounded by it that I tried to convey the experience even though it was a passing conversation and not part of an embed, which I should not have done.
There are two lessons here.

First, no reporter is totally free from the normal human desire to believe stories that reinforce our view of the world. This sometimes reduces our skepticism about what people tell us they have experienced or observed in person.

Second, we readers want to be able to rely upon the reporters and news organizations that serve as our sources of information. We know that people and organizations make mistakes. No one is perfect. What is critical is how those mistakes are handled. Morgan understands that such mistakes must be promptly acknowledged and corrected. Unfortunately, all too many of those who claim to be professional journalists have resorted to sham defenses like "fake, but accurate."

I wrote earlier that
The openness and detail in reporting provided by Morgan stands in vivid contrast to the discredited Scott Beauchamp stories published by The New Republic.
Morgan's candid acknowledgment of his mistake makes that contrast even more vivid. I continue to commend Morgan's blog reports, such as those here and here. There is no better source of information about our soldiers than first-hand reports from Iraq.

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Wednesday, August 29, 2007

Another economics blog list 

Currency lists this humble blog as one of three "conservative economics blogs". I would have preferred to be called simply "free market", but the term conservative is not one from which I shrink.

What I should note is that this is not sponsored by SCSU or my department in any way shape or form. Opinions here signed by me are mine alone. At one time it was a group blog of the SCSU Association of Scholars (part of the NAS) but the group dwindled to only me (recently adding Janet, who's not of SCSU but a Scholar nonetheless.)

Quick media note 

I will join Ed Morrissey and Robert Rector on CQ Radio at 2pm Central, to talk about the poverty report and Rector's own research. Listeners can call in with questions at (646) 652-4889. Sorry for the short notice, but Ed caught me thirty minutes ago at lunch.


Defining "liquidity" 

Alex Pollock tries to do so in yesterday's Financial Times:
But the real confusion derives from the fact that "liquidity" is a misleading metaphor. This metaphor suggests that there is some "flowing" substance, which could be a "flood", could "slosh around", or could be "pumped" somewhere. But if liquidity were substantive, there could not have been plenty of it a few weeks ago and a shortage now.

[L]iquidity is about group belief in the solvency of counterparties and the reliability of prices, reminding us that "credit" and "credo" have the same root. When no one is sure who is broke, and there is high uncertainty about prices, we will discover that liquidity has vanished, however plentiful it may recently have seemed.
I use a graph in my money and banking course in discussing the theory of asset demand, reproduced at left. I can sell my house right now ... for $1000. If I wait until tomorrow, a sign offering it for $5000 might find a buyer. If I want to find a buyer for what we might call "fair price", on the other hand, I have to wait a while for someone to find it, prove its value to someone else who will lend the money, and draw up contracts to complete the transaction. Liquidity, in short, is a function of time, and this is how I've drawn the graph.

The point here is that in the world Pollock describes, liquidity simply means it takes longer to find the buyers willing and able to purchase an asset, and this drives down the price of all assets, not just the ones that are more risky. My house isn't any less a good now than it was two months ago -- it still produces the same level of household services -- but if I wish to sell it within 90 days of listing it, I would have to offer it for less money than I would have then even if there are no more houses on the market now than two months ago.

This is why temporary injections of credit by a central bank can help; they may increase the number of buyers who can purchase assets in a normal amount of time by decreasing the number of lenders they would need to visit to obtain funds.

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One good sentence about the financial crisis 

Financial services continues to be very innovative -- even when it is part of cleaning up their own mess.
Ken Jarboe, commenting on one way one person got around the difficulties with jumbo mortgages.


Tuesday, August 28, 2007

Blisters and poles 

It appears that my choice of footwear at post-MilF did not meet with the approval of all and sundry. For the record: Me and my Birks have often had socks come between us; they prove the only thing to wear after blisters form during golf, but the strap will cut into the blister if not first met sock and Band-Aid (in my case, some leftover Garfield bandages back when Littlest thought him cute.) It is all but impossible to walk otherwise.

There will be no confusing me with the NARN metrosexuals like Mitch Berg.

Lest one think that socks were the greatest debauchery of this day, however, we offer the following into evidence.

Case closed.


FOMC minutes 

I have just read the FOMC minutes of the meeting of August 7, with an eye towards finding what it was they thought of the subprime market and credit conditions at the time of the meeting. (We won't hear what they thought in their videoconference of August 17, when they cut the discount rate, until October 9.) I read them to say the Fed did not believe the problem had spread by that time out of the subprime market. Moreover, the prime markets looked stable. They saw some issues with asset-based commercial paper and jumbo mortgages, but they get barely more than a mention. In short, while aware there was a potential problem, there was nothing in here that indicates they thought the problem sufficiently severe to overcome lingering doubts that inflation had moderated over the medium term. The inflation readings in early summer, they thought, were due to transitory factors.

Here are some snips:

Demand for housing in the second quarter was restrained by higher interest rates and by tightening credit conditions in the subprime mortgage market. Sales of new and existing homes in the second quarter were down substantially from their average levels in the second half of 2006. In June, single-family housing starts held steady at their May rate, although adjusted permit issuance slipped further. The combination of decreased sales and unchanged production left inventories of new homes for sale still elevated. House-price appreciation continued to slow, with some measures again showing declines in home values.

Outlays for nonresidential construction rose rapidly in the second quarter...

Market participants had largely anticipated the FOMC's decision at its June meeting to leave the target for the federal funds rate unchanged, although the accompanying statement expressed greater concern about inflation than investors reportedly had foreseen and caused the expected path for the federal funds rate to edge higher. Expectations for a policy easing diminished somewhat more in the wake of favorable economic news early in the period. Subsequently, the semiannual Monetary Policy Report to the Congress and the accompanying testimony, which reported lower projections for real GDP growth than investors apparently expected, appeared to prompt a downward shift in investors' expected path for the federal funds rate. Later in the intermeeting period, growing apprehension that turmoil in markets for subprime mortgages and some low-rated corporate debt might have adverse effects on economic growth led investors to mark down their expectations for the future path of policy considerably further. At the same time, measures of long-horizon inflation compensation based on inflation-indexed Treasury securities edged down.

Financial market conditions were volatile during the intermeeting period, particularly over the last few weeks of the interval. Yields on nominal Treasury securities fell on balance, possibly reflecting an increased preference by investors for safe assets as well as revisions in policy expectations. Conditions in markets for subprime mortgages and related instruments, including segments of the asset-backed commercial paper market, deteriorated sharply toward the end of the period. Credit conditions for speculative-grade corporate borrowers tightened substantially, as investors pulled back from higher-risk assets. Spreads on speculative-grade bonds increased to near their highest levels in the past four years. A number of high-yield bond and leveraged loan deals intended to finance leveraged buyouts were delayed or restructured, though other high-yield bonds were issued. In contrast, credit conditions for investment-grade businesses and prime households were relatively little affected by the market turbulence. Issuance of investment-grade bonds continued. Yields on investment-grade corporate issues rose relative to yields on Treasury securities, but because yields on Treasuries declined, yields on investment-grade bonds were about unchanged on net. Nonfinancial commercial paper outstanding posted a modest gain in July, while the pace of bank lending to businesses picked up from an already solid clip. Mortgage loans and consumer credit appeared to remain readily available to households with strong balance sheets, although late in the period some evidence pointed to diminishing availability of jumbo mortgages. ...

Participants agreed that the housing sector was apt to remain a drag on growth for some time and represented a significant downside risk to the economic outlook. Indeed, developments in mortgage markets during the intermeeting period suggested that the adjustment in the housing sector could well prove to be both deeper and more prolonged than had seemed likely earlier this year. Participants noted that investors had become much more uncertain about the likely future cash flows from subprime and certain other nontraditional mortgages, and thus about the valuation of securities backed by such mortgages. Consequently, the markets for securities backed by subprime and other non-traditional mortgages had become illiquid, and originations of new subprime mortgages had dropped sharply. While these markets were expected to recover over time, it was anticipated that credit standards for these types of mortgages would be tighter, and interest rates higher relative to rates on conforming mortgages, in the future than in recent years. However, participants also observed that mortgage loans remained readily available to most potential borrowers, and that interest rates on conforming, conventional mortgage loans had declined in recent weeks, providing some support to the housing sector.

...The ongoing adjustment in housing markets likely would exert a restraining influence on overall growth for several more quarters and remained a key source of uncertainty about the outlook. The recent strains in financial markets posed additional downside risks to economic growth. Members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages. However, a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully. For the present, however, given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern.


Progressivity and inequality 

I am impressed by this graph drawn by Political Calculations. It shows that while the level of income inequality has risen in the U.S. in the last five years ever so slightly, the amount of progressivity in the federal tax system has gone up as well. I suppose this is as it should be. Those with income below $25,000 do not pay a positive income tax.

I'd like to see this one re-done with the inclusion of Social Security taxes.


Gets one right 

Congratulations to Tufts University for understanding how to handle speech it doesn't like.
A Tufts University dean on Monday reversed a campus board's requirement that a student-run conservative journal include authors' names with articles - a rule imposed after the magazine published an unbylined parody that many found racist.

James Glaser, the private school's dean of undergraduate education, said the byline requirement was an unfair restriction on free speech, a view echoed by Tufts President Lawrence Bacow in a statement issued before the start of a new school year.

Glaser ruled on an appeal by the publication, The Primary Source, of a decision last spring by the Committee on Student Life. The panel, a board of professors and students that hears complaints against campus groups, took issue with The Primary Source's Christmas carol parody called "O Come All Ye Black Folk."

"Imposing such a (byline) provision on one publication in the context of a judicial decision can only be construed as punishment of unpopular speech," Glaser wrote in his decision. "To protect freedom of expression at Tufts, I must reverse this aspect of the outcome."
It is still pursuing charges of harassment and hostile environment against the newspaper. The paper is also facing charges from a Muslim student group (Mike blogged this last May) that hopefully will also be dispensed with. The harassment charge was discussed in this letter by The FIRE's Greg Lukianoff last May. If the school is truly committed to free speech, it would recognize the difference between actually putting a stick in someone's eye and satire.


The problem you throw money at 

Yves Smith (filling in for Felix Salmon) has an excellent post on how sometimes sensible people are arriving at nonsensical solutions to the subprime/credit crunch. The takeaway:
[T]he prospect of a 10% to 15% fall in house prices is being treated as if it would constitute the end of the world. Yet as we pointed out, quite a few economies have endured 25% or more housing price falls. They did not go into an economic black hole. They had short bad recessions.

The fear of recession in this country has gotten so bad that the Economist ran a story this week arguing that America needs a recession. I have no doubt they did that mainly to be provocative, but the horrified reactions from some quarters proves the point. This fear of recessions, and tendency to paint a recession in the dark colors of a depression, is dangerous and distorts policy decisions.

Fear of a recession is leading some to argue that we need to throw money at this problem, in the many variety of ways Smith elucidates. Fortune itself has an article in which Jerry Useem is calling for Washington to take on "the scarier role of leader" to avoid a panic, predicting dire consequences if we do not do something about.
a nebulous concern about income disparities, assets obtained with easy credit, the use of novel financial instruments that seep into the mainstream, and above all, the lack of what Henry James called the "imagination of disaster."
Yet that has been just what has been done: The Fed has acted in as close to a Bagehot-ine fashion as possible without yet firing all the bullets in its holster. It has certainly given the impression that it will use those bullets if needed. It has gone so far as to let banks borrow against sound collateral to finance their brokerage affiliates; some see this as a bad sign for the commercial paper market, but it does demonstrate that there has already been a robust response from Washington.

Fiscal solutions do what John Palmer fears: When you shield losers from losses while letting winners keep their gains, you encourage a greater-than-optimal amount of risktaking. Be it own to rent (helping borrowers) or expanding Fannie and Freddie into jumbos to help lenders as Larry Summers supports, or some other bailout like that Bill Gross suggests. In each case you are encouraging people with little financial cushion to purchase highly-leveraged assets.

Mark Thoma argues that heads do not need to roll to prevent this from happening again because it will happen again, and it does without anyone necessarily committing fraud. (Those who do, we agree, should be punished according to law.) Yet it is in the interest of a well-functioning market that people understand we live in a profit-and-loss system, and that those who do not appropriately treat and take precaution for the risk of their investments will not use scarce resources that could have gone to other, potentially more valuable investments. That is, a way to view this crisis is as an overinvestment in housing. While we may not be able to prevent overinvestment, that's no reason to encourage it.

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Monday, August 27, 2007

Do we need a special session? 

After Michael got off the air on his view that we should not be afraid of a special session, The Lady Logician struck back.
First off, we are echoing the sentiments of our friends and neighbors who just watched this Legislature fritter away a $2.2 BILLION DOLLAR budget surplus on"optional" expendatures [sic] --none of which was scheduled to go toward bridges and roads. Money went to just about everything else.
OK, but that was then and this is now. Priorities respond to circumstances. I agree as well with Gary that the DFL looked at transportation issues and saw only gas-tax-increase; what I don't agree with is that this is a reason to do nothing now.

I have a roof on my house. I look at it in spring and say, "it appears OK, it should be fine for another year," and I don't call the roofing company. After the tornado passes through and my roof fails because I didn't replace it (assume it would have been fine if I had replaced it in spring), do I not get to collect on my insurance to pay for a new roof? Do I not get to change priorities?
Second - the money is already there for use not only for the bridge but for the flood zones. Drew Emmer at Wright County Republican has the breakdown of the emergency funding access that the Governor has.
He has the power to get the money now, certainly, but that doesn't mean there wouldn't be a tax called for to pay for it later. It is my preference to have a regular session later and have all spending and tax options available, and a little more information about the 2008-09 biennium. I would prefer to wait. But you can read the July budget forecast which says the outlook for the economy is slightly weakening, and then look at the subprime/credit crisis, and argue that at some point we might need the rainy day fund for general obligations of the budget. Yes, they may have spent too much in May, but that's a sunk cost now. The alternative, of course, is unallotment after the emergency spending; for both political and economic reasons, that's an unattractive alternative.
Lastly, as Representative Seifert stated after the bridge collapse, the latest budget forecast shows an even bigger surplus than we had previously expected. The final numbers are due in November.
Tell you what, LL, let's have a bet. You can take the side that we'll have a bigger surplus in November than projected in July. I'll take the under. If the Global Insights weighted forecast (which the state uses for budget forecasting) had 20% on the pessimistic scenario in July, you don't think it'll be less in November, now, do you?

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Leveraging earmarks 

Ben Muse should be required reading for those trying to understand how government money is allocated in transportation projects. Departing from a story on a particular earmarked traffic interchange in Florida, he includes an interview of Mary Peters, Secretary of Transportation. This is particularly telling:
The dirty little secret of earmarks is that they're not the true cost of the projects. In many, many cases it only partially funds a project. In most cases, and I certainly experienced this as a state administrator, we had to take more money out of the rest of our programs to supplement the earmark in order to build that project because the earmark was rarely, if ever, the total cost of the project.

What that did was usurp the other priorities, the priorities that were set by state departments of transportation and local governments that went out in the public process and established priorities based on trying to take care of the systems they had. And, instead, that whole process begins to get usurped by these earmarks. I would hazard to guess that maybe earmarks, at most, would give you about a third of the project costs, and that's on the high side. The fact is that the cost of earmarks is really understated in terms of what it really takes out of the program.
Of course the last transportation bill included the Bridge to Nowhere and overall 6400 earmarks that diverted 9% of $285 billion allocated in 2005. It is fair to say that earmark reform has been a failure of both parties (you need only a few minutes of Porkbusters to get that message loud and clear), but I think Peters agrees with Michael in his call for a thorough review of spending priorities. Peters says:
It's the time to start talking about not just how much money is spent, but how and where that money is being spent. Before someone makes the argument that there isn't enough money, we need to say, "How are we spending the money today? Are we getting the best return on investment for the decisions we're making and where are we spending money today?" And I think one could argue that some of the places that money is going, whether it's because of earmarks or the proliferation of new programs, is not necessarily the highest and best use of that money.

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Minneapolis taxi case goes to trial 

Oral arguments are expected this week in the lawsuit of the existing taxi owner/operators in Minneapolis against the city's desire to remove limits on the number of cab licenses in the city. The demand for cabs is currently expressed by a price of $25,000 per license that Luis Paucar faced when he wanted to operate fifteen licenses in the city. George Will explained in May:

As a byproduct of government intervention, a secondary market arose in which government-conferred benefits were traded by the cartel. In 2006, Minneapolis had only one cab for every 1,000 residents (compared to three times as many in St. Louis and Boston), which was especially punishing to the poor who lack cars.

That fact -- and Paucar's determination and, eventually, litigiousness; he is a real American -- helped persuade the City Council members, liberals all (12 members of the Democratic Farmer-Labor Party, one member of the Green Party), to vote to allow 45 new cabs per year until 2010, at which point the cap will disappear. In response, the cartel is asking a federal court to say the cartel's constitutional rights have been violated. It says the cap -- a barrier to entry into the taxi business -- constituted an entitlement to profits that now are being "taken" by government action.

The Institute for Justice has joined with Paucar and blind Minneapolis resident Blanca Prescott (who pays more for cab services as a result of the cartel) as a third party of interest in the lawsuit to argue for the city's right to remove its own regulation and free the market. It would be a perversion of the Fifth Amendment to use the compensation clause as an argument for making government pay to deregulate.

Such regulations have long been known to kill jobs in a community, as John Fund notes in the WSJ today. The hair braiders story (also picked up by IJ in 2005) is just one example of this. But it's also important to see the other side of the story: the consumers who are denied services because they cannot contract freely with people like Luis Paucar who want to give it. IJ explains how she comes to this lawsuit:

On June 7, 2005, hours before her daughter�s graduation from Head Start, she telephoned Luis Paucar�s company, A New Star, and scheduled a multi-stop trip, involving travel to the local K-Mart and then on to her daughter�s ceremony. A New Star�s driver waited in the parking lot for his blind passenger.

But while the driver was assisting Blanca back into his car for the second leg of the trip, he was cited for operating a taxi in Minneapolis without a government-approved license. The Minneapolis police officer ordered Blanca out of the car, had the vehicle towed and left her in the parking lot to fend for herself. It was 5:30 p.m. and her daughter�s graduation was at 6:30 p.m. No other taxis were in the vicinity, and Blanca eventually arrived late to her daughter�s graduation.
We anticipate having Lee McGrath or Scott Bullock from IJ on The Final Word next weekend to tell us how oral arguments went and how the case might proceed. While we normally would rail against liberals on the show, let's stand in fulsome praise of the Minneapolis City Council's action to remove this barrier to public transportation among the poor of that city.

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We think it's important but we know little about it 

The new semi-annual NABE Policy Survey is out from the National Association of Business Economists, and it reports a sharp uptick in concern over subprime mortgages and credit more generally among the 320 economists surveyed (I am one.)
�Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy,� says Carl Tannenbaum, NABE President and Chief Economist, La Salle Bank/ABN-AMRO. �However, these concerns appear to be somewhat transitory, as the five-year outlook for housing remains positive.�
The reading for terrorism as a the top short-term concern dropped to 20% of respondents from 35% in March and 34% last August. 18% listed subprime loan defaults and 14% listed excessive household or business debt as their top concern. And yet the survey, which ran from late July to August 14, shows 72% of respondents still think monetary policy has been "about right", down from 81% last March. 16% thought it now "too restrictive." Most interestingly, 19% say they preferred more stimulative monetary policy for the next six months and 12% more restrictive. It would be interesting to hear if that opinion has changed over the last two weeks (mine has not, though I did indicate I expected a 50 bp decline in rates over the next six months -- I would take that to 75 now.)

That's all quite reasonable, but what bothered me was this paragraph:
Despite the prevalence of NABE members holding advanced degrees in economics and other business-related disciplines, substantial percentages admitted to having little or no familiarity with the structure, activities, and risks associated with hedge funds (45%), private equity funds (40%), asset-backed securitization (48%), credit default swaps (CDS, 68%) and collateralized debt obligations (CDOs, 51%).
And yet in the very next paragraph a good number want more regulation of these very same instruments and institutions.
In terms of regulation and reporting requirements, members were generally split between �fine as is� and �prefer more,� with the greatest need for regulatory and reporting enhancements seen for hedge funds (57%) and CDOs (48%).
If you don't understand the instruments, why are you asking for more regulation?


Embedded Reporter Wesley Morgan 

Glenn Reynolds noted last night two posts from Iraq here and here by embedded Daily Princetonian Reporter Wesley Morgan. In the comments to the second post, about an incredible female soldier identified as "Allison K.", Morgan has just said(8/27 at 5:45 am) that 'i confirmed the story with her sergeant." Morgan also says that he has " her full name but am not going to give it out without checking with her."

The openness and detail in reporting provided by Morgan stands in vivid contrast to the discredited Scott Beauchamp stories published by The New Republic.

The brief bio on Morgan's blog says that he
is a sophomore at Princeton University, where he writes for The Daily Princetonian. He is blogging from Iraq, where he will spend the month on the invitation of the commander of U.S. forces there, Gen. David Petraeus. Wesley is a member of Princeton's Army ROTC and lives in Watertown, Massachusetts.

Morgan has several excellent earlier posts from Iraq, including a long post about his day accompanying General Petraeus. Read as many of Morgan's posts as you can -- it is outstanding reporting.

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Sunday, August 26, 2007

Coal, China, India and Global Warming/CO2 

Sunday, August 26, Parade Magazine, had a brief article on long burning (read years)coal-mine fires in India and China. These fires are difficult if not impossible to extinguish. "In China alone, up to 200,000,000 TONS (400,000,000,000 pounds) of coal go up in flames every year - this may equate to America's TOTAL carbon dioxide gasoline emissions. ...India's mine fires waste up to 10,000,000 more tons. Counties and land in both countries have become uninhabitable. And the problem is expected to get worse."

This aspect of the global warming/CO2 problem has not gotten much attention, yet. Some experts now are asking if controlling these Asian mine fires might be a key to reducing global warming....and controlling these mine fires would be more efficient that offsets. (Economist Diana Furchtgott-Roth).

Both India and China are exempt from having to apply Kyoto Protocol CO 2 emission standards but they are interested in getting help extinguishing these fires. What can be done?

Western technology to the rescue. CAFSCO has developed a nitrogen-laced foam fire retardant that was used to extinguish a coal-mine fire in West VA. IF this retardant can be applied to the Chinese and Indian fires, this could have a positive effect on global warming not to mention air quality, protecting humans and land, etc. Of course we would continue planting trees but eliminating a large CO 2 source would give the planet more time for other activities that take longer to show results.


New York Times, one-sided views 

This article printed in the New York Times (NYT) on August 19th was written by seven US soldiers who will be coming back to the USA shortly. The article is not optimistic about Iraq's future - not because the US military has failed but because the Iraqi people are simply too divided. Of course this NYT article plays right into the defeatist mentality of the main stream press and particularly that of the NYT.

But there is another point of view, from a group who really knows what is happening in Iraq. Problem is, they cannot get their op-ed in the New York Times because the NYT refuses to publish anything that even suggests the NYT just might be wrong. To read their thoughtful analysis, go here.

We hear from numerous sources, including other soldiers on the ground that the surge is working. Why? We are doing what we should have done years ago - when you send in a military, let the military do its job and clamp down on all aspects of an enemy. Only when you have the control do you move on to other options like setting up governing units, etc. We forget - Germany and Japan, after being defeated, were not able to hold elections for 10 years and we still have troops stationed in both countries today. Yet to hear the mantra of the New York Times and the left, we are to get out of Iraq now and let the cards fall where they may. Too many on the left ignore the millions of southeast Asians who were murdered, reeducated, or harmed in many ways when our Congress after listening to the defeatist attitude of the western press bailed out on the Vietnamese government in 1973. Our enemies know us well - get our press to do their dirty work, add the Democrats to the equation and they win.

This time, we have other ways of getting out the word. Our press owes it to the free world to do their job. Unfortunately, too many of the defeatists leftist organizations like the NYT, simply want to lose and leave.

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Opus and the Timid MSM 

CORRECTION (8/27/2007): As noted in the comments, the Star Tribune did run the Opus strip yesterday.


The Opus cartoon is a favorite of many Americans (present company excluded). Berkeley Breathed, the author is known for his ability to skewer most any group. He took a light-hearted approach to Islam for Sunday newspaper editions running today, 8/26 and next Sunday, 9/2. Salon has published the strips on line - you can view the 8/26 one here.

Our esteemed mainstream media (MSM), including Breathed's home paper, the Washington Post, along with the New York Times refused to run the cartoon. The St. Paul Pioneer Press ran the cartoon today (thank you) but not the Mpls. (Red) Star Tribune.

Why is it that so many papers on the left are determined to run anything that slams Christianity but play ostrich when it comes to anything other than kowtowing to Islam?

This cartoon cowardice triggered a conversation I had with one of my Muslim students. He informed me that in his home country, Muslim women did not laugh or smile. When he came to the US, it took quite an adjustment on his part to get used to women laughing. A sense of humor on the part of this particular group would help tremendously.

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Saturday, August 25, 2007

An Error at the Counterterrorism Blog 

In one of my earlier posts, I included a quotation from a piece by Jeffrey Breinholt at the Counterterrorism Blog that included this sentence:
Cat Stevens� conversion to Islam and his relocation to Iran is now common knowledge...

Reader "Missy" took me to task in the comments to my post:
Cat Stevens never relocated to Iran. He has lived in London, England his entire life. He has never even visited Iran. How can you say this is common knowlege when it is not even true?

By the way, Jeffrey Breinholt said Yusuf sued the "Boston Globe". That is not true. The untrue article was printed in the tabloid paper, "Globe", and as you know, they make up alot of what they write. Yusuf sued the "Globe" tabloid and won the lawsuit because the article was untrue.

I responded to Missy by pointing out that this was Breinholt's claim, not mine, and told her that I had requested further information.

Almost immediately thereafter, as readers may know, my husband and I went away on a trip. Upon my return, I noted that my inquiry had generated no response. I finally trucked over to the Dakota County law library (I don't have university access to legal research services) and obtained a copy of the case Breinholt cited, Globe Communications Corp. v. R.C.S. Rizzoli Periodici, S.p.A., 729 F.Supp. 973 (S.D.N.Y.1990).

Breinholt's on-line resume is impressive, with 10 years in the Counterterrorism Section of the U.S. Department of Justice, where he served as the Deputy Chief, so I expected his information to be reliable. Unfortunately, in this case it is not. Here is Breinholt's summary:
The Boston Globe publishes an article about Yusuf Islam, the popular musician formerly known as Cat Stevens, describing how he had embraced Islam and moved to Iran. Islam sues the Globe for libel. Globe Communications Corp. v. R.C.S. Rizzoli Periodici, S.p.A., 729 F.Supp. 973 (S.D.N.Y.1990)."

Breinholt�s summary is wrong in almost every respect. Globe Communications publishes the weekly magazine Globe, not the Boston Globe newspaper. The lawsuit was brought by Globe against Rizzoli, the original publisher of an Italian news magazine article about Cat Stevens that Globe had reprinted. Globe wanted to recover from Rizzoli the damages Globe had paid to Stevens because �Globe determined through discovery that many of the facts contained first in the Rizzoli Article and then in the Globe article were false.� 729 F. Supp. at 975. This totally undercuts Breinholt�s later assertion that �of these cases I list above, there was only one that was not dismissed in favor of the defendants - the oldest one, involving the Arab Sheik looking to acquire an American wife.�

I now regret my original description of Breinholt�s post as �a great piece of research.�

New York Times, one-sided views 

This article printed in the New York Times (NYT) on August 19th was written by seven US soldiers who will be coming back to the USA shortly. The article is not optimistic about Iraq's future - not because the US military has failed but because the Iraqi people are simply too divided. Of course this NYT article plays right into the defeatist mentality of the main stream press and particularly that of the NYT.

But there is another point of view, from a group with Iraq experience. Problem is, they cannot get their op-ed in the New York Times because the NYT refuses to publish anything that even suggests the NYT just might be wrong. To read their thoughtful analysis, go here.

We hear from numerous sources, including other soldiers on the ground that the surge is working. Why? We are doing what we should have done years ago - when you send in a military, let the military do its job and clamp down on all aspects of an enemy. Only when you have the control do you move on to other options like setting up governing units, etc.

We forget - Germany and Japan, after being defeated, were not allowed to hold elections for 10 years and we still have troops stationed in both countries today. Yet to listen the mantra of the New York Times and the left, we are to get out of Iraq now and let the cards fall where they may. Too many on the left ignore the millions of southeast Asians who were murdered, reeducated, or harmed in many ways when our Congress after listening to the defeatist attitude of the western press bailed out on the Vietnamese government in 1973. Our enemies know us well - get our press to do their dirty work, add too many Democrats to the equation and they win.

Today we have other ways of communicating. We forget we still are the beacon of freedom for the rest of the world. Our press owes it to the world to do their job. Unfortunately, too many of the defeatists leftist organizations like the NYT, simply want to lose and leave. For some reason they think they are immune to any negative ramifications based on their behavior.

Our military is finally building the personal security the Iraqis need as the foundation for political stability. Iraqis want it and they can make it happen but they need time.

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Friday, August 24, 2007

Vets for Freedom - Washington, DC 

The Vets for Freedom are sponsoring a gathering in Washington, DC on September 17th and 18th to show support for General Petraeus and this battle for freedom across the planet. To succeed in Iraq, the troops under General Patraeus� exceptional command need the reinforcement of the U.S. Congress and the American electorate.

If you are an Iraqi or Afghan veteran, and support the mission, you are invited to attend the gathering in Washington DC to show support to our soldiers still there. Your travel and lodging will be covered by Vets for Freedom. Please visit their website for details.

Thank you in advance for your support.

A good day is golf 

I would like to blog, but there is a higher calling. After spending the night with Bagger Vance, I am to MilF today. I'm going to send KARNation home.

Now to see if Yost has game; please note that KARNation has arranged teams in order to subvert the competition.


Find the non sequitur 

In reply to a Times editorial that argued against a special session for Minnesota's legislature, DFL Senator Tarryl Clark declares "there is no longer a debate." Declare your side has already won? Cute.

Watch for the non sequitur in the first three paragraphs:

A recent St. Cloud Times Our View argued against the need for a special session to address the Interstate Highway 35W bridge collapse and the overall decay and safety of our bridges and roads. Since that time Minnesotans have suffered through another huge setback. People drowned in flooding in southern Minnesota. Raging waters destroyed homes, businesses, roads and bridges.

There is no longer a debate about whether we need a special session; rather the question is what critical issues we should take care of during that session.

We are at risk of losing entire towns in southern Minnesota. The metropolitan area has a huge hole in its transportation system that has a daily effect on people's lives and commerce. We must act now in both of these areas and also we should address the larger infrastructure issues the bridge collapse has made real.

Did you see it? Why do we need to address "larger infrastructure issues"? What in these sentences indicate that a special session is needed to deal with "larger issues"?

We have a reserve fund. It pays for emergencies. If there's not enough money, or if you think it draws reserves down too low, pass a bond to pay for what is needed to replace what is lost.

What are her critical issues? I again quote from the SCTimes three weeks ago:
We hoped all along the governor would be willing to compromise and we're glad to see he's willing to be flexible and move Minnesota forward. Hopefully, (a special session) would be about jobs and infrastructure, including transportation, bonding and Local Government Aid.
And in today's editorial she does it again, blaming the governor for the failure of bridges:
In each of my two years in the Minnesota Senate, lawmakers passed bills that significantly increased transportation funding. If either bill had been signed, millions of dollars of funds would have already been spent to address those unmet needs. If we were to pass such a bill in a special session, we could begin making our roads and bridges safer much sooner.
Look, we all have unmet needs. I've referred to this as my 25% short principle, but in general at any point in time we have limited resources and unlimited wants and needs. Your choice is to limit what you want, or find a way to make resources unlimited. Government fulfills its wants by force through taxation, thus it is an imperative to a nation that it finds a way to limit that force.

Senator Clark does not know these limits. Having already provided prudentially for emergencies with reserve funds, she now wish to take advantage of twin tragedies in Minnesota to attempt the impossible: to satiate her politically class' insatiable appetite for other people's money to satisfy her political supporters. (Follow the money.)

Special sessions are not for investing. They are for fixing, unless you're a political fixer.

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Thursday, August 23, 2007

How Mitch does radio 

I have the distinct pleasure of broadcasting from the State Fair again this year, for the fourth year running of the NARN. I find hosting this rather than riffing off Mitch Berg's venerated radio skills hard. I mean, Mitch, you know, he really knows how to do the Fair.

Here, by the way, is the full schedule:
As the Fraters will tell you, there's no finer way to end your summer than with the NARN at the Fair -- at the bleeding edge of freak shows. See you there.

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Stealth easing 

One of the data we were waiting on this week is the usually-obscure H.4.1 report from the Federal Reserve, which tells us the factors affecting reserves. The line to look at is "Loans to depository institutions" -- the amount of discount lending the Federal Reserve has accomplished with its new policy. The data show that there was none outside the very-public declaration of the four NYC banks yesterday. There must have been some before, given the average for the week is greater than $2B/5, but whatever else there was was extinguished by the close of business yesterday.

That would indicate to me that banks are still using the Fed Funds market, where today the Fed put in $14 billion in 12-14 day repurchases. The market there has died down a little as the nearby graph shows (this measures the standard deviation of the rate on trade of Federal funds) but still with volatility well above recent levels. These OMO trades stopped out at around 5% on agency and mortgage-backed securities; Treasuries were discounting at around 3%.

James Hamilton picked up on this point yesterday, wondering if there's been a stealth easing:
...whatever is motivating the Fed's most recent open market operations, it is not an effort to keep the effective fed funds rate right at the announced target. My guess is that it is also not a simple effort to keep the effective funds rate at some other number such as 5.0%, either, but that instead the Fed is responding to specific concerns, perhaps related to the comment I made above about credit rationing. Although Bernanke has a commitment to openness about monetary policy in general, he would not be in a position to give us the details of any such concerns, since the Fed has to be very careful not to let its own announcements become the cause of a panic withdrawal of deposits or lending from institutions facing temporary challenges. Suffice it to say that the Fed likely has some real worries at the moment, and they're not adequately summarized by just looking at the interest rate on a volume-weighted average of fed funds trades over a day.

Based on where fed funds have been trading so far this month along with today's closing price of 95.015 for the August fed funds futures contract, the market seems to be expecting an average effective fed funds rate for the remaining days of August of 4.94%. The September contract (95.06) is predicting exactly the same thing for the following month, and lower values as we go on from there. I suspect that the period since August 10 will become one of those episodes where the series for what the fed funds "target" actually was will always be noted by an asterisk by scholars, because the Fed's objective at the moment is something other than achieving any particular value for the effective fed funds rate. But whatever label you want to put on it, we're not going to be seeing fed funds averaging 5-1/4 again any time soon.

That sounds about right.

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Investing in uncertain Ukraine 

The Kiev I knew when I worked there eleven years ago was a rather drab place. Some newer Western shops dotted around the city, but many cranes stood still for months on end, roads were filled with chuckholes, and not much seemed to be happening. With the political turmoil of the past few years, you'd think things wouldn't have changed much.

Der Spiegel says you'd be wrong.
Gross domestic product powered ahead by an impressive 8% during the first half of 2007, and economists expect the strength to continue, boosted by a surprisingly diverse economy of services, manufacturing, and raw materials. Metals, mainly steel, account for 40% of exports, but most of the growth is coming from manufacturing and services. Production of heavy equipment rose 22% in 2006. And Ukraine's software houses saw their exports jump by 50% last year, to some $250 million.

Investors see promise in the growth. The Kiev stock exchange has more than doubled in size this year, and now boasts a market capitalization of $76 billion-a sixfold increase since late 2004. And a real estate boom has pushed up housing prices by 60% in 12 months. "We joke that as long as all these disputes are going on, [politicians] don't have time to interfere in business," says Taras Kutovyy, chief financial officer at XXI Century Investments, a leading developer that in May raised $175 million in Eurobonds to finance new apartments, hotels, and hypermarkets.
Countries that are seriously divided like Ukraine typically do not provide investment climates that are conducive to foreign firms. Is that what's going on? I don't know. A look at recent economic data indicates much of the influx of foreign trade has come from resurgent Russia rather than Europe or the USA. Construction has been up and down over the last few years. The Economist forecasts 6% growth for the foreseeable future, but whether the investment is productive for Ukraine's future or shop-building for imported goods -- which both the 'Orange' forces and the current parliamentary leaders of the Party of Regions would be happy to accept -- remains to be seen, particularly in the runup to next month's elections, where everyone promises everything to everybody.

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The ways of the rich and the Chinese 

I absolutely loved this story of Hetty Green, the Witch of Wall Street. While a miserable miser, Jeffrey Tucker tells us, she nevertheless did good:
Capitalism doesn't create misers; it turns their ways toward productive good. Hetty hurt no one but herself and perhaps her son with a wood leg. The market economy localized the effects of her sins and contained them. In the market, she created massive value to society and was rewarded for it; one shudders to think what she might have done with power under a socialist tyranny.

It is even hard to argue that she hurt herself. She was as happy as she could be just the way she was, and no amount of forcing her to be otherwise could have improved the situation. She embodied traits that we think of as being awful but she worked in an industry that allowed these traits to be turned to good for all. That is a credit to the market economy! Indeed, it is the highest praise of the free market that it can find a place even for someone so awful as this.
The problem of teaching economics or history is that most writers hold up images of the rich that paints them as Hetty Greens. While there are other misers, most of them benefited from using government for rent-seeking. Many others though used the market to make money by offering consumers more of what they wanted at a lower price. We can deride the Vanderbilts and Rockerfellers, but we may do so while riding a cheap flight on Southwest Airlines, which makes money the same way. (Coyote Blog makes this point more fully.)

The term robber baron is simply name-calling regarding competition; it's what the losers call the winners among the sellers, without any regard for the benefits provided the buyers. Don Boudreaux points out this fallacious thinking regarding the effects of trade between China and Africa. The fear of China as the world's largest exporter has always struck me as an odd fascination: if China wants to subsidize trade and transfer wealth from itself to the US and other trading partners, why are we complaining? I'd think it would be the Chinese themselves who should complain; alas, they live in a country where complaining is, um, not rewarded.

The inability to think clearly about trade, and to understand that the creation of wealth is just a marker for the creation of value for the others participating in the transaction, is what leads to threats of bad economic policy. For our part, universities need to teach better what the products of the market transaction are for society. Here's one example.


Wednesday, August 22, 2007

Special session line of the day 

It's like a joyride in a fire truck. There's no fire. But it sure is fun to drive around town with the lights and sirens on!
Drew Emmer, commenting on reports that the special session is on for more than just a bridge.

UPDATE: He's not just blowing smoke. Apparently there is a meeting today with the Governor and legislative leaders in which property tax relief is a topic for discussion, along with the items of the August 10 memo, a limited bonding bill and emergency funds for the flooding in southeastern MN.

"They threw property tax relief under the bus in an instant so they could fuel their appetite for social service and welfare spending,"Pawlenty said. "That is out of whack with the message and priorities they said they were going to stand for during the campaign, and it's out of whack with where the state should head."
The answer is not to feed them more.

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Disturbing and quieting signs 

Let's start with better news. The discount window strategy of the Fed might be working.
U.S. banking giants Citigroup Inc., J.P. Morgan Chase, Bank of America and Wachovia Corp. said on Wednesday that they borrowed $2 billion from the Federal Reserve as part of a new program set up last week to pump cash into the creaking financial system.

Citibank, a unit of Citigroup, said it took out a $500 million, 30-day loan from the New York Fed's discount window program for its clients. The company didn't identify those clients.

"Citibank stands ready to continue to access the discount window as client needs and market conditions warrant," the bank said in a statement. "Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients.
Using the banks as go-betweens for paper that mortgage companies and hedge funds need to use is part of the strategy. The banks may be better judges of the paper's value than Fed officials. There's no doubt this jawboning, as Bill Polley calls it, is working with those banks. I'm reminded of the Knickerbocker crisis of 1907, when NYC banks did act as a lender of last resort before there was a Fed. (See Tallman and Moen for more.)

There are stories all over of mortgage bank units being closed.
I don't see any stories of people jumping from windows (though an abandoned Maserati of some hedge fund official is rather humorous.) I am not necessarily calling this bad news; it's part of what has to happen when some people take risks that go sour.

It may be that they took more risks than we realized, if this story from Barry Ritholz bears out.
What happens if a lender fails to comply with the TILA [Truth in Lending Act] rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
It's not clear to me whether judges are going to allow borrowers to get out of the first liens on their homes by this, but it doesn't sound entirely implausible. This could be part of that information problem we've discussed -- the collateral the lenders think they have might not be good.

Here's the one that will have to go down as bad news:
The number of troubled assets among federally regulated thrifts rose rose 49% in the second quarter from 12 months before to the highest level since the savings and loan crisis, the Office of Thrift Supervision reported Tuesday.

The agency also reported that the number of "problem thrifts," or companies rated poorly by regulatory standards, had risen to 10, up from just 4 in the second quarter of 2006.

Thrifts are federally regulated banks that originate one out of every four mortgages. The companies largely originate prime or jumbo loans, so their stressed loan portfolios suggest that more loan types - not just subprime mortgages - are under pressure.

The thrift industry had $14.2 billion in troubled loans, which are either noncurrent loans or repossessed assets, the OTS said. That's up from $9.5 billion in the second quarter of 2006. This is the highest level of troubled assets since 1993, though as a percentage of total assets its only the highest level since 1997. Noncurrent loans include mortgage delinquencies, which have grown precipitously as the adjustable-rate mortgages that were very popular during the recent housing boom reset into much higher monthly commitments.

"This is what is keeping us as regulators up at night," James Caton, director of financial monitoring and analysis, said at a press briefing to discuss the data.

The OTS attributed the growth in noncurrent loans to two business lines - one-to-four family mortgages and construction and land loans. For one-to-four family mortgages, 1.26% were considered noncurrent as of June 30, up from 0.78% on June 30, 2006.

For construction and land loans, 1.61% were noncurrent at the end of June, compared with 0.47% on June 30, 2006. Troubled loan levels are expected to continue rising in the third quarter, OTS senior deputy director Scott Polakoff said.
I think this is as much a symptom of the bursting of the housing bubble as it is the fault of subprimes. (h/t: Calculated Risk.)

Of course the most worrying thing: Congress wants to get involved and do more for borrowers.
Sen. Charles Schumer (D., N.Y.) is pushing federal regulators to raise portfolio caps at Fannie Mae and Freddie Mac and ask banks to help with workouts for borrowers hit by the mortgage lending meltdown.

�The Federal Reserve Bank has taken good steps to restore liquidity to the financial system, but there is still much more that needs to be done to address the risks that we face to our broader economy caused by the ongoing turmoil in the mortgage market,� Schumer wrote in a letter to federal regulators.

Schumer, a member of the Senate Banking, Housing and Urban Affairs committee, asked Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other federal regulators to get behind a plan to provide $100 million to not-for-profit housing groups to help borrowers refinance their subprime loans, spokesman Brian Fallon said. Fallon said that 20% to 40% of borrowers hit in the subprime lending crisis should have qualified for prime-rate loans.

To see why that probably won't help, read the post just below this.

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Encouraging ownership of highly leveraged assets 

Chad the Elder has posted an excerpt from Holman Jenkins' editorial in today's Wall Street Journal (link for subscribers only.) Go read Chad's excerpt first please, then return.

OK. Now recall a quote I posted here:
When you buy a house you are doing two things: 1) paying rent to yourself instead of someone else (and forgoing the opportunity for someone else to pay that rent to you), and 2) taking a long position in the asset class that is real estate in your local area. The type of mortgage you take out has no bearing on the rent you are "saving" (or forgoing) but it has everything to do with how levered your long position is in the asset class that is real estate. While the details of ARMs, neg-am mortgages, NINJA loans, no-money down deposits etc. are complex, essentially they all add leverage to that position. This is fine when prices are rising, but it also means you will lose all of your money (equity) when prices fall. Historically, home prices have never fallen, but they have never had such leveraged financing either.
Dean Baker (with an approving nod from Andrew Samwick, from whom I got the link) has been pushing the idea of a repurchase agreement between the holders of subprime mortgages, who are in their homes but can't afford the higher payments. In short, the lender gets back the house in a foreclosure but then rents the house to the former borrower at "fair market rent", to be determined by a government entity, perhaps a judge, and adjusted as market conditions change. The now-renter "could then remain in their home as a renter for as long as they liked," and the now-owner-former-lender "the mortgage holder would now own the house and be free to sell it to another person, but the former homeowner would still have the right to remain as a renter, regardless of who owned the house."

I think this is a bad proposal for two reasons. First, it assumes in some way that you can shift the risk of house prices from the borrower to the lender costlessly. But the process of giving the renter a usufructuary right to the home removes value from the house -- the collateral is damaged by not having the ability to sell to other potential buyers the right to use (or bulldoze) the house. Let me put it this way: If I'm auditing a bank who holds a house under this arrangement, can I use the price of houses in the area not under this arrangement as comparables for setting the value of the asset? I think not. And the bank itself has the same problem. The whole subprime problem in the market has been based on not knowing how to value assets -- this does nothing to solve the information problem. A house that had this put option on it, in short, is going to cost more because the bank knows it bears an extra risk. Hello red-lining.

Second, there appears a moral hazard problem in the housing market by these owners. If prices go up, I can keep the house and pocket gains. If prices go down, I lose the ownership claim on the house but continue to enjoy its services. Does this encourage or discourage risktaking by those least able to afford it? True, they are protected against loss, and they end up with a house they can continue to use. But they lose that extra incentive to maintain the house (not unlike affordable housing.) As the WSJ points out, these schemes have had a poor track record in helping upwardly mobile families get a leg up. Encouraging them to stay in homes they no longer own is hardly going to help.

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Tuesday, August 21, 2007

Why do you have reserve funds? 

The most remarkable thing I see in the discussion for a special session is the lack of focus on what the state has in reserves. So here's the spreadsheets for all state funds, after the regular session ended. There is $4 billion in the reserve accounts. Over $2 billion are reserves in the general fund. There is $121 million in the Municipal State Aid Street Fund, $323 million in the County State Aid Highway Fund.

What is the purpose of these funds, if not to provide for emergencies?

What is a flood and a bridge collapse, if not emergencies?

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Cool tool 

Following up on a post I wrote about the natural rate of unemployment, Political Calculations has developed a tool to calculate natural rates for yourself. If you could find the same kind of data for other countries, you'd have quite a good bit of analysis to do. I'll have to save this for class.

I'll see your Bagehot and raise you a Kindleberger 

(Updated with current news at bottom.)

Much has been made in the press over the fact that Federal Reserve Chair Ben Bernanke has read Walter Bagehot (first mentioned on this blog here.) Is this necessarily a good thing?

Yves Smith has an outstanding review of four views of how the central bankers have gotten this right or wrong. These are, to summarize: a group that thinks the Fed has not done enough now and must rescue the financial system (and is uncritical of its role leading up to the crisis); "cold water Yankees" who think the financial markets need to bear the pain and should thus go cold turkey; the realists of the financial markets who have been quoting Bagehot at length -- "yeah, mistakes have been made but their sunk costs and lending freely must be done now"; and a group that believes this crisis stems from both a lack of a mandate for dealing with asset bubbles like subprimes, and thereby calling for both more regulation and changing central bank charters. Smith provides a compelling case for putting people in these four camps.

I think it would be interesting to consider where to place central bankers in those four categories. If Bernanke has Bagehot on the bookstand, does that make him a realist?

I think so, but with a caveat. The general understanding of the Great Depression that Bernanke takes away from his work is that financial crises will have non-financial consequences. Willem Buiter and Anne Sibert argue that the next likely Federal Reserve move -- the cut in the Fed funds rate that Tim Duy takes as a foregone conclusion -- is warranted "only if the Fed were to believe that the recent financial market kerfuffles are likely to have a material negative effect on real activity in the US or on the rate of inflation." I think the statement on Friday has given up the inflation story but put the real activity proviso in play. This is the nature of the Fed's dual mandate (though the ECB, with a sole mandate for price stability, nevertheless intervened quite strongly. Perhaps they're realists too.) So to say, Bernanke is a realist, but he's probably more sensitive to the possibility of spillover from subprime mortgages to the rest of the economy than perhaps Alan Greenspan was.

A fuller understanding of Bernanke should include as well a reading of Charles Kindleberger's Manias, Panics, and Crashes. Kindleberger viewed bubbles as naturally arising in good times, a sign of progress in the economy as new technologies come into vogue; they tend to be overdone, he said. My shorthand for Kindleberger's thesis of how one deals with firms in financial crisis is that there are three choices: you can bail them out; you can let them burn; or you can provide a period over which they work it out for themselves. Yves Smith's first two views fit the first two choices of Kindleberger rather nicely; the third might be the view of the realists, though again one man's realism is another man's bad advice.

Two quotes from Kindleberger may help here (these are from the 4th edition, I do not own the 5th.)
I see no a priori way to answer the question of whether a central-bank policy of holding the money supply constant, limiting the liquidity of the money market, or raising the discount rate at the first sign of euphoric speculation would prevent mania leading ot crisis or correct it after it got under way. ...the weight of historical evidence strongly favors the case that while monetary policy might have moderated booms leading to bust, it would not have eliminated them all. (p. 69)

If, then, one admits the necessity for a lender of last resort after a speculative boom and believes that it is impossible for restrictive measures to slow down the boom at the optimal rate without precipitating collapse, the lender of last resort faces dilemmas about amount and timing. The dilemmas are more serious with open-market operations than with a system of [discount window operations.] In the latter case, Bagehot specified the right amount: all the market will take -- through solvent houses offering sound collateral -- at a penalty rate. With open market operations the authorities have more of a decision to make, but Bagehot is surely right not to starve the market. Given a seizure of credit in the system, more is safer than less. The excess can be mopped up later.

As for timing, it is an art. That says nothing -- and everything. (p. 178)
The first quote can be interpreted that while the Fed might have done something to slow down the expansion of the bubble, it could not stop it. While the 2000 stock market peak was about technology, this one was about risk. We learned how to repackage it, move it around. Unfortunately, as Kindleberger would have expected, we got a little ahead of ourselves (Arnold Kling's reference to hide-and-seek would not have surprised him.) I think it's fine if people want to go back and find where the Fed might have moved the funds rate up another 25 or 50 bp, but to think that would have solved the issue is folly. It is the nature of discovery of how to manage risk that someone is going to take too much unknowingly. Even if there were an asset mandate, it is doubtful that we would have gotten policy exactly right, even if it's Stephen Roach running the controls.

The second quote should be viewed as forward-looking to policy. Bernanke has been relatively incremental in his actions so far. He knows timing will be a question, and he's probably going to overshoot the amount of liquidity issued in the long run, to great consternation of Smith's second view holders. Charles Wyplosz, writing over the weekend, thought the discount rate cut last Friday was the right move for the Fed because it kept options open:
By reducing the discount rate, and accepting the infamous mortgage-linked assets as collateral, the Fed is offering markets a very strong reassurance. They can now find cash, and use the hot potato as collateral, in virtually unlimited amounts, at a cost, of course, but a very moderate one. The odds of a meltdown have now decreased.

Will that be enough to bring some much needed quiescence? Only time will tell, of course. If it does not, then the Fed can reduce its interest rate, on September 18 or anytime beforehand. Herein lays another great merit in the Fed�s actions today. It has fired a powerful shot, but it kept the heavy artillery in reserve.

This morning's troubles with other mortgage bankers may mean they still need that artillery. But better they still have the shells. Mop-up of the discount loans is also harder than the discount window lending that has been encouraged, and that's why Bernanke may have gone to a little-used policy instrument first.

UPDATED (kind of): After I wrote this I took a last tour of Bloomberg. I found this quote by Richmond Fed president Jeffery Lacker:
``Financial market volatility, in and of itself, doesn't require a change in the target federal funds rate,'' Lacker said at a luncheon of the Risk Management Association of Charlotte. ``Interest-rate policy needs to be guided by the outlook for real spending and inflation,'' and markets can change that assessment if they induce changes in growth or prices.

...``Sound discount window policy, I believe, should aim at supplying adequate liquidity without undermining the market's assessment of risk,'' Lacker said.
Bernanke has met with Sen. Chris Dodd of the Senate Banking Committee (and a Presidential candidate) and indicates he'll use all tools at his disposal to get through the crisis. Of course he will, and of course he'd say that. But that doesn't mean Bernanke is just speaking Bagehot.

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A top twenty finish 

There's a new ranking, based on Technorati, for economics blogs. I'm not surprised that Freakonomics is #1 -- that's why it gets bought out -- and a little surprised that The Big Picture is #4, as I thought it was a hidden gem. I guess not so hidden.

We still are, but thanks to you dear reader we have managed to finish 16th out of the 125 economics blogs examined, just behind the excellent Profs. James Hamilton and Menzie Chinn at Econbrowser. That's very esteemed company, and I thank you. There are several excellent writers just behind either with newer blogs or blogging in sub-fields, so if this blog should stay in the top twenty it will be very fortunate.

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Chimera in Iowa 

To reinforce yesterday's point, we read Lisa Lerer's dispatch from Iowa.
There are four views of Iowa, at least according to a local joke: corn on the left and soybeans to the right; soybeans left and corn right; corn on both sides; soybeans on both sides.

The old joke needs an update, says Bill Sells, production manager at the Hawkeye Renewables ethanol plant in Iowa Falls. Twenty-eight ethanol plants now dot the Iowa landscape, sticking out like spaceships amid the cornfields.

...Three Republican presidential candidates, former Massachusetts Gov. Mitt Romney, former New York Mayor Rudy Giuliani and former Arkansas Gov. Mike Huckabee, all visited the Iowa Falls refinery, where they pledged further investment in alternative energy.

Over the past year, two other candidates, Sen. Hillary Rodham Clinton (D-N.Y.) and Sen. John McCain (R-Ariz.), went from strongly opposing the expansion of ethanol to endorsing it.

Backing ethanol is a political necessity in the state that is the traditionally the first to choose its presidential candidates. Iowa boasts the greatest number of ethanol plants in the country, producing about 30 percent of the U.S. supply. Ethanol is Iowa�s golden, corn-fed goose.

�It would be a mistake for a candidate to come to Iowa and not address renewable energy,� says Carrie Giddins, communications director for the Iowa Democratic Party.

With a presidential contest in Iowa and an energy bill in Congress, ethanol has become the panacea of all political problems. Pro-ethanol politicians offer the fuel as a cure for everything from dependence on foreign oil to global warming to outsourcing.

All of the major candidates bow at the ethanol altar in Iowa, supporting some form of increased subsidies or development.
If we did not have a caucus so early in Iowa, would we have this boondoggle? One suspects voters in, say, Maryland take a different view.

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Monday, August 20, 2007

The chimera of energy independence 

Local DFL leaders are still drinking the ethanol.
Calling today�s investment in ethanol production �feedstock,� U.S. Rep. Collin Peterson believes the nation can reach energy independence in 10 to 15 years.

�The bottom-line goal is for us to get off foreign oil,� Peterson, DFL-7th District, said Friday at an energy conference at Bemidji State University.

He was joined by U.S. Rep. Jim Oberstar, DFL-8th District, who said in his remarks that moving more Americans to public transit � or bicycling � can negate the need to import millions of barrels of foreign oil.
(Yes, I know, I laughed at the bicycle reference too!)

The biggest issue is that it won't. It turns out first of all that in terms of emissions, growing more for biofuels causes a greater net harm than burning more fossil fuels and planting trees with the land you didn't put into biofuel production. Prairie grass might be better, but that wouldn't be bragged about by Rep. Peterson.

Second, it might be nice for Minnesota agriculture to push up prices, but it really makes Hugo Chavez and the poor around the world unhappy. One of those is a good thing. The other is not. Think there's a connection between tortilla prices in Mexico and immigration? Of course, it also turns out increasing developing country wealth has also raised food prices ... but isn't that all the more reason to not divert crops to biofuels, to allow those countries to enjoy their newfound gains?

Corn-based ethanol is only a stepping stone to making ethanol from other sources, such as wood wastes or switch grass, Peterson said, adding that negative press has been �ginned up� by special interests who claim Third World countries are starving because they can�t get American corn, which is now used to make ethanol, a blend of gasoline and bio-fuel.

�There�s a lot of stuff being ginned up out there by some of these people saying that we�re going to starve people in Africa because we�re making all this corn into fuel, which I think is a bunch of baloney,� he said.

�This ethanol, and some extent biodiesel, opportunity has repriced agriculture,� he said. �And it was about time, because we have been selling corn for the last 10, 15 years below the cost of production. We were using the government to finance that benefit, going to the big grain traders to feed and livestock producers, big dairy producers.�

Now with higher corn prices due to ethanol, the government can step out, he said. �One of the positive things is that we�re now seeing a price in the marketplace for corn and soybeans where you can make money without government help, and that�s good.�

Do you think that will come back to us in tax cuts? I wouldn't bet on this. Politics relies on being able to favor one's special interests. Witness two local legislators:

While federal lawmakers talked about pending legislation, Minnesota state legislators talked about three bills they passed and Gov. Tim Pawlenty signed earlier this year.

�We have passed the most forward-looking renewable energy legislation in the country,� Assistant Senate Majority Leader Tarryl Clark, DFL-St. Cloud, told the 200 people attending the energy summit.

Rep. Bill Hilty, DFL-Finlayson, said the three new laws require an increase in renewable energy sources such as wind, while providing loans and grants to meet the goal of producing 25 percent of electric energy from renewable sources by 2025.

They produce cheaper energy, they say, and use the savings to fund loans and grants to produce more renewable energy. We will not see the savings.

They are not interested in energy independence; politicians of both stripes only want to divert dollars spent on a key good to their favored interests. If you want people to be energy independent, just let prices rise and have people learn to conserve as best they can. But then, that doesn't allow the rent-seeking.

FMI: WSJ, Energy Independence, A Dry Hole?

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That's rather much 

I received a copy of the letter Governor Pawlenty sent to legislative leaders on August 10 regarding the boundaries he would draw for a potential special session. Here are some key parts:
The gas tax promise seems to me a little bit much, but he's clearly left this out as a carrot to try to get the necessary legislation passed. It's a path through the difficult forest that Mitch Pearlstein describes today. A special, focused session would be more likely to actually focus dollars where they might do the most good (who knows? they might even use cost-benefit analysis!) The timing of this release, so close to Minnesota GOP's call for no special session, is curious, but I think it provides the DFL with its best chance to get dollars to transportation. Dare it refuse a second time?

Yes, yes, it might.

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When you have to farm harder 

I had missed this article -- I've been out of town many Sundays lately -- but Andy Barnett points out a local article on SCSU's recruiting efforts to bring in more students of color.

Andy thinks we are "promoting one race over another race." I would say, perhaps. But we live in a time when finding the traditional 18-year-old student from the usual parts of Minnesota and the Dakotas (and a few Wisconsinites) is much harder. Drive along a freeway in the Twin Cities and look at the signs for universities and how far away they are. SCSU has some of those, but there are some from the Dakota state schools. Over the next ten years the number of 15-19 year olds in the state will fall by 29,200, according to State Demographic Center estimates. So too North Dakota.

If you are trying to maintain student population, then, you must recruit harder, and reach into pockets of youth that are traditionally not in the pool of students we reach. Thus I think the efforts of recruiting minority and immigrant populations are probably for the best. The alternative is to lower admission standards, or downsize. The first is clearly wrong; I might argue to downsize instead, but impetus for that is most likely to come from outside the system.

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Zimbabwe -- the denouement? 

It's a perfect illustration of the end game for statist economics. When state-created shortages threaten the economy, dictators attempt to stamp out the symptoms through even heavier state action rather than cure the original disease.
That's Captain Ed commenting on the collapse of the Zimbabwean economy. And the heavy state actions include a price police that have arrested thousands, wherein the police can say with a straight face "the police are major players in creating a conducive business environment, which bolsters investor confidence." There are opposition reports that the government is using its artificial shortage to steer food to its supporters and away from its opposition. The central bank is so desperate for foreign currency that it is buying them in the black market.

And neighboring countries continue to sit on their hands.

Funny side story in this otherwise sad tragedy -- like the Russians and vodka, Mugabe has learned not to mess with Zimbabweans' beer. Notice how quick the supply response was in this case. Do you think it possible that Mugabe understands he could end famine tomorrow if he would just relax the price controls? If so, why do you think he does not?


Saturday, August 18, 2007

Read and Weep #5 Rights and Responsibilities 

In previous posts, I discussed my teaching background, all occurring before the educational establishment decided to ignore their responsibility in teaching our youth. Yes, these are strong words but I believe they are true. Today I teach college students in their 20's and 30's - those who went through American and foreign school systems of the 1980's and 1990's. Suffice it to say, a general observation is that the foreign students are better grounded in history, memorization, writing skills, thinking, behavior and work ethic.

Too many of the so-called teacher colleges began emphasizing self-esteem, the whole person, etc. over content in the 1970's. These institutions were extremely influential. When these "can do no wrong" ideas began, the college population came from homes where books, magazines and papers are readily available. Most came from English speaking homes with trditional work ethics and those who did not understood an earned degree (vs one given to students) would open doors regardless of background. Unless spoiled, these students would succeed. Once the feeling mentality overtook the learning mentality, problems started. Though today's college population is more varied the skills to succeed are the same. Unfortunately too many students are not taught necessary academic or social skills and too many parents overprotect their kids while demanding too little respect for themselves and teachers. The result is: a less educated populace; entry level workers who do not understand that showing up on time and doing what needs to be done are necessary for success; businesses and agencies that hire workers discover these new comers often cannot think, cannot make decisions, and call home when the going gets uncomfortable (note, I did not say the 'going gets tough').

Teaching is hard work, takes time and patience. To default to "students will figure it out" is insane. On the other hand, teachers have lost their ability to discipline. They must tolerate students whose parents think their Johnny or Susie are perfect; that anything that goes wrong is because the teacher discriminates or picks on certain students. Hence teachers and school systems have become reticent to demand standards academics or inappropriate behavior.

To all of this, I say, "Wake up!" We are denying our history and our future with this copout mentality.

Every player in this process has rights and responsibilities.
Teachers - the right to discipline students; the responsibility to know the material and teach it.
Parents - the right to expect their children to be taught; the responsibility to respect teachers, other students, administrators; to make sure their students do homework, are prepared; to understand that their kids are not perfect - in other words, back teachers when the "perfect" child misbehaves.
Taxpayers - a right to demand an ROI for their investment; the responsibility to hold school systems accountable
Students - the right to learn, to be taught what they need to succeed and not focus on an empty self-esteem mantra that leaves them educationally handicapped when they have to earn a living; the responsibility to treat teachers, administrators and other students with respect; to do their homework, to learn.

We have spent far too many years in the bubble of "I'm ok, you're ok." We are ok but we still need to learn. By default, American attracts the best, brightest and most energetic. We are lying to ourselves if we continue to adapt a system that handicaps everyone, native and foreign born.

Friday, August 17, 2007

Tune in tomorrow 

I need to go tune up my golf game for MilF next week, so I'm off to take advantage of the weather. You get a double-dose of me tomorrow, and I get two guest co-hosts. I'll fill in for Mitch and Ed as the Headliner-of-the-Day, with guest host from the ether Duane Patterson, a/k/a the Generalissimo of the Hugh Hewitt Show. I will among other things talk about his post on the study of strike calls by Major League umpires (see Phil Miller, J.C. Bradbury and Skip Sauer; Skip gives us a link to the actual study.) That would be 1-3pm CT. Then, with Michael annoying his wife and new twins by live-blogging their births, Residual Forces' Andy Aplikowski will join me for The Final Word. You can bet the words "special" and "session" will be used liberally. The politicization has been noted as far away as New York and Washington. Andy has posted that the BPOUs (read: grassroots) are making inroads to slow the idea down.

That's all from 1-5 on AM 1280 the Patriot tomorrow. Stream it. Or (from Monday) podcast it.

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The Fed jumps in with one foot 

The Federal Reserve acted this morning, after seeing two pretty large offers on both the 14-day and overnight open market operations. There may be other information they are using, but certainly we're not privy to that. First, it cut the discount rate by 0.5% to 5.75%. The discount window is used by banks that want to borrow from the Fed against high-quality collateral. The Fed normally charges a 1% premium over the federal funds rate for this action; that penalty is now cut to 0.5%. It's also extended the term of the loans to thirty days, which is a substantial deviation from normal practice for primary credit. (Discount window FAQ.) This move is quite sensible in my view: In normal times you want to discourage use of the discount window and keep banks in the fed funds market to hold overall money growth under control. These are not normal times, and the penalty rate for the window has a higher cost right now, so best to reduce it.

Second, the FOMC announced that it had given up the inflationary bias in its statement by issuing a new statement:
Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.
I looked and found the statement made on October 15, 1998, when the Fed cut both the discount and fed funds rates by 0.25% to shore up the banking system during the Long Term Capital Management crisis. What they said then:
Growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future. Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation.
Of course, at that time the Fed had just embarked on a set of rate cuts beginning three weeks prior, thinking the economy was cooling under the effects of the east Asian crisis. This time the Fed is leaving a position of putting inflationary risk ahead of recessionary risk that it took only ten days ago, and moving to the opposite position without changing the Fed funds rate.

Some will say it's too little, too late, or perhaps a reaction to the continuing turmoil at Countrywide. The market is happy, yet some will say this is a step towards bailing banks out. But given what it did on August 7th, which was seen by some as acknowledging the squeeze without acting yet upon it, it strikes me as the logical next step.


Thursday, August 16, 2007

Gross and net jobs 

The Business Employment Dynamics report from the Bureau of Labor Statistics shows that we netted 516,000 jobs in the fourth quarter of last year, about 15,000 less than reported by the last payroll survey. More goods-producing firms contracted employment than expanded, with losses in both manufacturing and construction. Professional and business services continue to do well. Not much in there, but it's another check on the jobs data.


Fly by the seat of your subprime pants 

Here's a good paragraph about the housing market, from someone who claims not to be a financial expert:
When you buy a house you are doing two things: 1) paying rent to yourself instead of someone else (and forgoing the opportunity for someone else to pay that rent to you), and 2) taking a long position in the asset class that is real estate in your local area. The type of mortgage you take out has no bearing on the rent you are "saving" (or forgoing) but it has everything to do with how levered your long position is in the asset class that is real estate. While the details of ARMs, neg-am mortgages, NINJA loans, no-money down deposits etc. are complex, essentially they all add leverage to that position. This is fine when prices are rising, but it also means you will lose all of your money (equity) when prices fall. Historically, home prices have never fallen, but they have never had such leveraged financing either.
Being leveraged when there's "a perfect storm for real estate" is not a good thing. Treasury Secretary Paulson has made it clear the Administration thinks things will settle down and that those that bore the risk of increased leverage are going to suffer the consequences.
[W]hen you go through a period like this, certain markets become illiquid and certain products become illiquid. [It takes time] for the market to better understand the risk and � the risk versus the benefits of certain investments before the money pours to the product and liquidity returns.
And from here,
There�s nothing in my judgment that we should be doing in terms of guaranteeing market participants against losses or in terms restraining risk-taking. The natural consequence of these excesses is there will be some entities that will cease to exist.
David Wessel in that article reports that Paulson believes the global economy is strong enough to pull us along a little bit and keep us away from recession. He also makes the point that the prime mortgage market looks fine, and Fannie Mae reported this morning that this is so.

There's some sideways noise this morning from having political pundits Robert Novak and George Will writing this morning on issues they don't quite seem to understand (in Will's case) or just engaging in rumor-mongering. Mark Thoma is quite right to note that St. Louis Fed President Poole's interview yesterday was a clear marker that the rate cut everyone thinks is coming now is not a done deal. See also (Tim Duy.) Poole is a notorious inflation hawk, so he's not a great weathervane, but neither is anyone fully ready to say it's time for a cut.

I agree with Nouriel Roubini on this point: We are experiencing real, Knightian uncertainty. It is kind of comforting to think you can somehow figure out there's only $40 billion or $200 billion at risk, but would you bet your house on it? When you read the reports, don't the percentages look like SWAGs? We don't know, and neither does Fed President Poole nor Treasury Secretary Paulson. It'll be fly by the seat of your pants time for the near future.

And what does that do to consumers? That's really the $64 question. Tomorrow's consumer sentiment report might give us a clue.


Is "I Stand for Israel" a hate symbol? 

Powerline points out an alarming story at the University of Maryland. A student is refused service at a co-op (not owned by the university, but on its campus) because she wore a short saying "I Stand for Israel." The student eventually was checked out by another cashier, but had to apologize to the offended clerk and offered chocolate cake as penance.

The university has a speech code that include this statement:
Incidents that are motivated by prejudice and hatred pose a unique danger to society. Such acts affect the fundamental rights of our community, not just the immediate victim. These incidents cause tension and may erupt into violence.


* RRESD Slurs
* Computer/Phone Harassment
* Physical Attack
* Hate Symbols
* Hate Literature
* Verbal Abuse
* Destruction of Property
Is "I Stand for Israel" a hate symbol? We know that displaying the Israeli flag gets some liberals upset -- even Jewish liberals.

Or perhaps the problem is that she wore the shirt outside of a free speech zone.


Wednesday, August 15, 2007

Read and Weep #4 - Social Costs 

As mentioned in earlier posts, I taught in a variety of schools as measured on the socio-economic scale. In each location, we encouraged and for the majority got parental participation.

In all three environments expectations for learning and behavior were high. Tolerance for poor work habits and irreverent behavior was low. My belief was that school needed to be a safe place and put downs were unacceptable. On the other hand, sloppy, undisciplined, illiterate or no teaching also was unacceptable.

Now, why do these approaches and attitudes matter? Via our tax system, all Americans pay for schools - kindergarten through graduate school at universities. From a pragmatic point of view excusing teachers from teaching and not demanding proper deportment of students is defeating for everyone: students, schools, government, businesses, and the nation as a whole.

An educational profession that abdicates its responsibilities to instruct by letting children "figure it out themselves" is a gross misuse of taxpayer money, period. If students do not learn they are trapped in stifling environments and drain the public coffers for the rest of their lives.

Too much of today's educational culture puts our nation at risk. Most of us are very happy with our toys, opportunities, activities, etc. However, they are not guaranteed in perpetuity. We will not experience a continued lifespan expansion, a maintenance or improvement in lifestyle, and more everyday conveniences if we drop demands of students and teachers from our educational system. Believing so is only fooling ourselves. A society cannot maintain its standard of living when the standards of its education continue to decline.

We have systems that work but the educational lobby and certain politicians appear to be against using those processes that produce results. To be "progressive" without content is lying to our children, our future and ourselves.

Next post will cover issues with the educational community.


Life expectancy 

The Big Question asks about a new study showing us 42nd in life expectancy. (Powerline had this on Monday.) One possible answer: Too many preemies. Another: African Americans have lower life expectancy even with access to health care.
African-Americans have, for reasons no one quite understands, higher levels of premature birth, infant mortality, and low-birth-weight babies, and birth complications. This is true even when obvious factors like income, prenatal care, and maternal health and age are controlled for, and substantially lowers America's performance in the statistics.
It also turns out that if a black male lives in a rich neighborhood, his survival rate is 40% higher than a black male of the same income level living in a poor neighborhood. That suggests it's not to do with health insurance but of living in risky areas.

I believe this is the Census data.

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The ECB as a lender of last resort 

On the Real Time Economics blog early this morning, Robert Eisenbeis, outgoing director of reserach at the Atlanta Federal Reserve, wonders what the European Central Bank is doing with the liquidity crisis from last week, now apparently well in hand.
That the ECB flooded the market with liquidity is both interesting, and understandable, given that the ECB doesn�t have Lender of Last Resort (LLR) powers. What should have happened (and this is still a missing piece of information) under the current arrangements within the European system of central banks is that BNP, or any other bank experiencing a liquidity problem, should have had access to its respective central bank�s Lombard facility. (My link -- kb) But the ECB stepped in ahead of the national central banks. The ECB does have the authority to provide liquidity, but doesn�t have systemic risk responsibility, except for payments system stability. The event points out how important it is for the ECB to have its LLR powers clearly defined, and there is a need to ensure coordination across the two functions.
The ECB has always been a little secretive about its role as a LLR. Patricia Pollard quotes ECB board member Tommaso Padoa-Schioppa, "To the extent that there would be an overall
liquidity effect that is relevant for monetary policy or a financial stability implication for the euro area, the Eurosystem itself would be actively involved." Former ECB head Wim Duisenberg says in the same article, "The Governing Council has this issue well under control but will never make anything public in this regard."

Also, the ECB sets a marginal lending facility rate that is, like the discount rate here in the States, set at a penalty of 100 basis points over refinancing rate (equivalent to our Fed funds rate.) Those funds are available through the national central banks. This is where Eisenbeis would have had BNP and IKB Deutsche Industriebank go to get credit.

The big issue I see here is that the national banks cannot provide discount loans to financial institutions holding paper that is non-marketable, because it would not be able to assess the value of the collateral. Particularly for DI, a commercial paper crunch means you don't have collateral. They would have needed to pledge other assets. True, you do not want to bail out banks and funds that have made bad loans, but if the European markets faced a substantial liquidity crunch, it's hard to fault them.


More on private bridges 

Chad sees the light at the end of a toll road:
It's a toll road, but one that you don't mind paying for at all. The speed limit is seventy-five, the roadway is new, and you share the road with very few cars. Six bucks to get from DIA to Boulder (the last $2 on another toll way) is a bargain by any measure.

I've now hit the E-470 four or five times and the one thing that has always floors me is the toll way operators. Without exception, they've been friendly, polite, and seem genuinely happy to be doing their jobs.
I need to renew my drivers license soon, and this will be kept in mind (though I've noted before that the license plate people are usually quite nice.)

Also worth reading is William Anderson this morning, who reflects on the incentives for road and bridge maintenance.
The owners of a privately owned bridge would have the incentive to keep it in repair because the bridge is bringing them income; loss of that piece of capital is the loss of the income that flows from it. Therefore, we see the economic calculation for privately owned capital at work.

Governments, on the other hand, operate according to a very different economic calculus. Since the bridge does not bring an income to the state, at least directly, it is much easier for politicians to want to spend on those things that provide fame, glory, and votes. In fact, in a perverse way, the bridge collapse in Minnesota provides a benefit to politicians, since they now have an excuse to confiscate even more taxes from individuals, thus expanding the power of the state.

While some seem to think a public discussion of spending priorities is a good idea, I think it would be at best a waste of time to contemplate where government's inability to rationally allocate resources and form capital would do the least harm, when private alternatives are present and proven.

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Curious kinda lucre 

I am a huge fan of Lileks' money site. I've given him some notes to use for the site (I think I've spotted one.) I now know what to get him for Christmas: a gas coupon.

From Time, December 17, 1979:

Last week the Administration disclosed the details of its proposed emergency rationing plan. Each registered vehicle would be limited to a fixed number of gallons per week, and any driver who did not use his quota could sell his ration coupons on a "white market" for whatever the traffic would bear. Congress rejected a similar scheme last May, and adoption of almost any rationing plan is not expected before next autumn�unless Middle East oil is cut off.

Compounding the sense of drift, Energy Secretary Charles Duncan made public a confusing state-by-state conservation plan that calls for holding 1980 gasoline consumption to about 7 million bbl. per day, just about where economists expect it to be anyway. In an embarrassingly typical DOE bungle, the targets set for New York, New Jersey and Connecticut during the first three months of next year would allow drivers in those states to increase their auto usage.

Almost in desperation, the White House for the past month has been examining a consumption-cutting tax on gasoline. In late October, an Administration task force headed by Deputy Energy Secretary John Sawhill began looking at what the U.S. could do in event of a major supply interruption. From a list of 28 options, the task force came down to two: rationing or a gasoline tax.

I'd be fascinated to know what the other 26 were. There are only two things you can control in a market, price or quantity. It's unusual to control quantity in peacetime, which might be why we had to hear about MEOW.

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With apologies to National Lampoon 

Headline: St. Paul mayor calls for more aid from state to keep tax hikes down
[Chris] Coleman wants city leaders to take a three-year approach toward balancing the budget by 2010 by recommending comparable levy increases in the coming years. If the city doesn't receive the $10.2 million additional state aid, Coleman anticipates a 14.6 percent tax levy increase. That would cost the owner of a home assessed at $181,000 -- the median assessment in St. Paul -- $72 more next year for city services.

In addition, homeowners who see a dramatic increase in their home's taxable market values would see even higher increases.

However, if the city does succeed in getting more local government aid, Coleman recommends a 7 percent tax levy increase. The cost for the owner of that same house, assessed at $181,000, would then be $30. If that house's taxable value also increased by 13 percent, the tax bill would rise by $94.
(h/t: Michael)

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Teachers for death 

A group of teachers showed up yesterday at the local office of Michele Bachmann "to end her support of President Bush's Iraq surge." Since by all accounts the surge is working, they would like her to stop supporting an effort to win the war. They spread the usual disinformation that a draft is coming -- not even Nancy Pelosi thinks that -- and brought out a dozen teachers to help. Here's one local teacher:

For some, the event was personal. Louise Olson, a 30-year St. Cloud school district employee, said her grandson came home from Iraq with post-traumatic stress disorder two years ago and has required treatment at the St. Cloud VA Medical Center.

"I felt so bad for him," she said. "I hate Bush so much because he's a liar."

And I feel bad for you, Ms. Olson, and pray you receive the help you need.

Drew Emmer shows us the list of usual suspects that ginned up these dozen teachers.

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Tuesday, August 14, 2007

Excuse #813 for why your gas tax will rise 

You're not using enough. For explanation, we turn to Chicago, where there's a desire to tax bottled water. Watch for the reasoning:

Cooling off with bottled water could soon cost you more within the Chicago city limits if one alderman has his way.

As CBS 2's Kristyn Hartman reports, Ald. George Cardenas (12th) wants to slap a tax of up to 25 cents on the cost of every bottle to help close a $217 million budget gap.

"People enjoy jogging or driving with a bottle of water. There's a cost associated with this behavior. You have to pay for it," said Cardenas, one of Mayor Richard M. Daley's staunchest City Council supporters.

Cardenas noted that there's a nearly $40 million shortfall in the city's water and sewer funds, in part because of a decline in water usage.

"How is this possible when we have a water system that's won honors? It's because bottled water has become a $15 billion industry that's growing at a rate of 20 to 30 percent a year," he said.

As Phil Miller points out, bottled water is a convenience, which the City of Chicago thinks you should pay them for. If you drive less, or drive a hybrid, you will use less gas and revenues for roads and bridges will get down. People enjoy biking, there's a cost associated with this behavior, someone has to pay for it. (An excise tax on bicycle tires seems surely in the offing.)

For some, the only time to raise taxes is always.

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Do you look at the data first? 

Jerry Bowyer tries to lay blame for the subprime crisis at the feet of the Federal Reserve.
When the Fed pumps money into the economy, it does so through the banks. The Fed buys bonds from banks using money created from thin air. Yes, the money ends up flowing throughout the whole economy, but it hits the banks first. And flush with this excess cash, the bankers make loans, including loans to homeowners. And when they run out of reasonably good credit risks, they start lending to bad credit risks � such as all those sub-prime mortgage holders you�re now reading about.

In the year of the great money flood, sub-prime lending went from 4 percent of total lending to more than 10 percent. That�s in one year!

...But here�s what I think: The executive and legislative branches went the way of the supply-siders, cutting taxes on income and capital. These results are reflected in the growth-sensitive areas of the economy: GDP, unemployment, and stock market valuations. The Fed, however, didn�t believe the tax cuts would do the job, and turned on the money pumps. The results showed up in monetary phenomena such as inflation, loss of dollar value, and the sub-prime bubble.
Where the results didn't show up are in the monetary base, the amount of money in the system under the control of the Fed. This has gradually decelerated since 2002. And if there was a massive influx of money into the system, why did none of it go to commercial and industrial lending, particularly when supposedly tax rates were being cut as much as Bowyer says?


This'll hurt just a little 

I know the writer doesn't pick the headline, so I can't fault Dane Smith for the headline on his editorial yesterdat morning, "Modest increase in taxes could improve our safety." But Dane begins his column,

A harmful spell is beginning to break in Minnesota, making it possible at last to move forward and rebuild all kinds of bridges.

Gov. Tim Pawlenty is to be praised not only for his energy and unifying eloquence in responding to the I-35W bridge collapse, but for casting off the anti-government, anti-tax, anti-investment hex that has paralyzed Minnesota for a decade.

"A harmful spell"? "[T]he anti-government, anti-tax, anti-investment hex"? Someone's been reading too much Harry Potter.

Your data. Spending has in fact risen each year. The Democrats are, of course, rather upset about the last two numbers on this sheet, but they have only themselves to blame for trying to pressure for a huge tax increase when a more modest one might have peeled away enough votes. Particularly on transportation, there were votes for an override. The attempt now is for a do-over.
His recent declaration that he will be "moving to consider and put on the table a gas tax increase" ends almost five years during which any form of general state tax increase � no matter how grave the budget shortfalls, no matter how compelling the case for investment in infrastructure and human capital � was "off the table" in budget negotiations.
Ah, how soon they forget.
Bridges are powerful symbols of our democratic governments' role as the steward of our shared assets. They physically connect us and we realistically cannot build, replace or repair them as solitary individuals, but only through our community institutions.
In Tulsa, Oklahoma, a new privately-constructed and privately-financed toll bridge is proposed. It would go where a previous toll bridge was constructed by Tulsans back in 1904. Texas has a long history with them. Even in Massachusetts, the Charles River Bridge in 1786 was funded by investors (who earned a good return from them.) Their history in the 19th century was successful, but attitudes changed and people want them publicly provided. Fine, but it's not correct to say that "we realistically cannot build, replace or repair them" -- that is a choice.

The choice made by Minnesotans apparently should be unchanging, Smith continues, both in terms of time --
--and in terms of income. It is interesting that Smith's view appears to be that the state is entitled to a share of your income; perhaps he has a tithe in mind. Oh that it would be only 10%! -- Milton Friedman thought that would be right for government as well as for the church -- but alas the combined marginal tax rates are much higher.
The promised payoff for the tax cuts, an economic boom and a supply-side gusher of extra revenues did not materialize. To the contrary, recent reports show Minnesota for the first time in three decades is underperforming the nation in income and job growth. State Economist Tom Stinson recently summed up the trend as "disquieting."
I've noted that this is more due to industrial mix than anything else. Look at any state with a high share of employment in manufacturing -- do any of these states grow faster than the national average? We still rank 10th in per capita GDP in 2006; yes, we were 7th four years ago, but two of the three states that passed us (Colorado and Virginia) have had tax restraint. The third is California, which bounced back from the tech bubble. And 2003 and 2004 were years in which we grew faster than the national average. And there is this little matter of convergence to consider.

A 5 cent or 10 cent increase per gallon in the gas tax to tackle the backlog of neglect of our transportation systems is a good start. It's been 20 years since the gas tax was raised and its inflation-adjusted value and buying power has fallen dramatically. But these other bridges need attention, too, and more revenue will be needed to strengthen them. Minnesota has descended to near the bottom in investment for early childhood education, for instance, and federal mandates for water quality improvement will require hundreds of millions of dollars in the next decade.

Meanwhile, the badly damaged bridges across partisan and ideological divides could use some repair and rehabilitation too.

Get that? A modest increase, a good start ... to what? I was again listening to a podcast, this time after I had finished a book rather than started it, and while listening learned of a very old essay I had not heard of before. William Graham Sumner wrote this in 1883, but it applies here as well:
As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, 'but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.
It will take you about 20-30 minutes to read that essay, but you will read there a philosophy that Smith is now attacking. The Forgotten Man is forgotten by the Wy Spanos and John Gunyous; the Forgotten Man is the one who walked back to the school bus after the bridge fell but now is told he or she has been bad for wanting to keep more of their earnings. They should give "a modest amount" to bridge "partisan and ideological divides."
Republicans and conservatives and their constituencies, as Pawlenty has begun to do, need to acknowledge that a reasonable increase in the amount of revenue we put into the common wealth is necessary and vital for our economy and safety.
As the St. Cloud Times editorial board notes this morning, we don't know that yet. The rush to do something is to put the taxpayer at risk. It's easy to remember the 13 victims of the bridge collapse; what is not seen is the panoply of goods and services not purchased and increasing the welfare of our citizens by the seizing of their resources so we can create a package to make legislators feel like they did something. Those dreams dashed by increased taxes are also part of our common wealth.

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Read and Weep #3 - Special Program #2 

As mentioned in the first Read and Weep post, the third school in which I taught crossed most of the social and economic spectrum in the United states.

We purchased a unique reading system (Scott Foresman if I recall correctly). What was special about this system was that each grade had nine skill levels of books. Each text within grade level focused on the skills and codes the kids needed to learn in order to advance in their reading. For those who were below grade level, that meant that they had a 5th grade book with fifth grade interests but skills covered could be as low as first grade. As they learned the specific skills, they advanced to the next level. It was a system designed to focus on what the student needed to know.

Three of us taught fifth grade. We tested the kids and identified five starting levels which allowed us to group by ability. I kept the advanced readers and implemented the research program for them (the program I described in Read and Weep #2). Then I took two other groups, the lowest and a small, slightly below grade level group. The other two teachers took the larger groups that were on or very close to grade level.

The lowest group was reading at a first/second grade level. The following is a recollection of my conversation with them.
Me: "You are about three years behind. You have a choice: you can stay behind, goof off, not do your work, "forget" your pencils, homework, and make excuses or you can decide to learn to read. I promise you this, if you decide to learn to read and really work at it, you will gain at least two years. You h ave exactly 10 minutes to decide as a group what you want to do." Then we looked at the clock and agreed that I would come back for their answer in 10 minutes. I proceeded to go to the other small group and get them started. Exactly 10 minutes later, I returned to the first group.
Me: "What is your decision?"
Students (begrudgingly): "We want to learn to read."
Me: "Congratulations. We will do it."

I worked with both groups every day - each needed oral and written and silent work. The beauty of this text system was you could see results, the kids and I. Students came prepared: books, homework, pencils, assignments, etc. Remember, often the poor readers are the ones with shoddy work habits, too. They experienced legitimate pride when they did well on a test. They'd go to the principal and tell him, "I got a 90% on my reading test!"

My concern is for those students who are not raised in the middle-upper-middle class environment. We had every combination of student background you could imagine but we out performed (read out scored on standardized tests) over half the schools in this large, wealthy school system (Fairfax County)even though we were one of the bottom five (and possibly lower) socio-economic schools in the district.

We established a safe school, one where students were allowed and encouraged to learn; one where putdowns were not tolerated. What we got from these kids, despite all the environmental issues was simply fantastic.

It worked. I still get grins thinking about this - I mean, it worked! These bottom readers tested on a 4th grade level at the end of the year. A minimum of a two year gain in one year! The other group got up to grade level. By the time both groups went to 7th grade, they were at grade level.

I honestly believe that over 90% of students can learn to read at least at a 7th grade level. It's not a case of just telling them, we need to give them the tools to learn the codes to do it. This silly whole language stuff is just garbage. Every skill, discipline and function in life has its own jargon, rules and patterns. To deny children the access to these tools is just wrong.


Monday, August 13, 2007

Your honest Democrat of the day 

Mike Gravel, as Bryan Caplan explains, is the only one who figures out that a carbon tax increases the price of gas and is willing to tell that to voters. The rest want a combination of jawboning, reducing subsidies, a witch-hunt against anyone making a profit on gas, and forcing people into smaller, more fuel-efficient cars. (Which as noted before will reduce gas tax revenues and cause the junkies to suffer withdrawal. But at least that might reduce push gas prices down.)

Of course, Mr. Gravel will be on the Tommy Thompson bus in short order.

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Storm over? 

I'm watching for any further evidence of Federal Reserve intervention in the markets. So far the only transaction was for $2 billion in overnight loans, a fairly normal event size for a Monday and some indication that calm has restored. The European Central Bank is in for another $65 billion, about half the intervention level last week. Markets appear to be normal as well.

That's for today. Longer term, there's still the real estate market and the consumer more generally to worry about. James Picerno looks at today's retail sales data, which may be sold in the press as more positive than it really is.
Judging by the [declining] trend in retail sales, one is tempted to extrapolate the past into the future. All the more so, given the fallout in the mortgage market of late. It's not yet clear if this fallout will spill over, if ever, into the general psyche of consumer spending, but at this point we'd be foolish to dismiss the notion entirely.
And this from today's New York Times doesn't help: The housing market decline is spreading to places you wouldn't think, like Stockton.

The deadening market for houses has only worsened problems for people like Alma Neri, a mother of three boys who bought a modest house in Stockton in 2002 for $223,000. Three years later, Ms. Neri and her husband, Juan, found an even better house � three bedrooms, two and a half bathrooms, a two-car garage � around the corner. The plan was to sell the old house to pay off its mortgage, and live out their days in their dream home.

But now, both of the Neris� houses are languishing on the market, and the debt from two mortgages � and an equity loan they took to remodel the new house � is piling up.

�We made bad decisions,� said Ms. Neri, 30, who commutes to her job as a contractor in Pleasanton, about 50 miles to the west. �We�re worried if we don�t sell by the end of the year, we will lose one of them. We just didn�t see the downturn coming.�

It is tempting to call the Neris speculators and allow them to suffer the losses they risked when they bought the second house. Some people will make this into a political issue instead, using other people's money to make the Neris whole.

UPDATE: Two pieces of background:

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Preserve this quote 

We hoped all along the governor would be willing to compromise and we're glad to see he's willing to be flexible and move Minnesota forward. Hopefully, (a special session) would be about jobs and infrastructure, including transportation, bonding and Local Government Aid.
Senator Tarryl "No Entertainment Radio" Clark, from the St. Cloud Times, page 5A. This somehow was not on their website when I looked for it, so I wanted to be sure we preserved it for when the accusations of Republicans playing political games come.

cff., the Mee Moua Stratagem.

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Why you have to have trade 

There is a fascinating article in Reuters this morning interviewing a U.S. Defense official on how we did not grapple with issues of trade in Iraq.
Years of economic policy mistakes after the fall of Saddam Hussein left unemployed young Iraqis easy targets for recruitment by al Qaeda and other insurgents, a U.S. Defense Department official said on Sunday.

Paul Brinkley, deputy under-secretary of defense for business transformation in Iraq, said Iraq's shattered industrial base had to be revitalised to bring down unemployment levels of about 60 percent and help reconciliation.

He said political, social and economic stability would be much easier if factories, many left idle since the 2003 invasion to topple Saddam, could win even a small fraction of the trade the United States conducts every year with economies like China, India, Indonesia and Thailand.

"If we could just get some of that factored into Iraq we'd uplift the lives of every Iraqi and al Qaeda wouldn't have any people to recruit," Brinkley told Reuters in an interview.

Brinkley said early economic planners had made the understandable mistake of assuming that a free market would rapidly emerge to replace what he described as Saddam's "kleptocracy", and create full employment.
Had you asked people like me, who had worked in advising in eastern Europe after the Soviet Union's collapse, we could have predicted this. Under the best of circumstances, a re-orientation of trade under free markets takes years. Djankov and Freund found that trade pointed inward after transition; 60% more trade happened intra-Russian rather than between Russia and the other ex-Soviet republics.

But Estonia and Latvia, two countries that quickly and energetically adopted free market reforms and made joining Europe a national priority, avoided these problems.

One of the most remarkable parts of the Iraqi transition process has been the utter failure of the leaders to learn from the Soviet experience. The Coalition Provisional Authority under Paul Bremer fell under the sway of the same market romanticism as did those in the early days of transition. Whether this is a systemic failure or a particular incompetence of Bremer and the State Department is debatable (some of which was encapsulated by Dan Drezner last year; I'm of the systemic camp, and have read this recent paper by Christopher Coyne with some head-nodding.)

What should be less debated is that we don't know how to create markets very well, in the sense of making big changes in the circle of potential traders one embraces. Trading involves trust as well as institutions; we at best can do something about the latter, and even that not so well.

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Sunday, August 12, 2007

Read and Weep #2 - Special Reading Program #1 

Because students were very homogeneous in the first school, we read the assigned text and always used the advanced activities. In the second school, I grouped students by ability. I had a small group of below-grade readers. The below-grade students got phonics and other techniques to work through words. They did more oral work than on-grade and advanced students because they needed to make the connection between the written symbol and the correct sounds. For the above grade students, I established a research reading program.

These advanced readers were given a topic: animal, country, famous person, invention, etc. We would meet for a class and brainstorm the kind of information they would need to find to write about the topic. They were given 3 x 5 note cards. On the top of each note card, they listed one of the subtopics. They were then sent to the library for two weeks to find information about the topic. They had to use three information sources but only one could be an encyclopedia article. I taught them how to use indexes and tables of content to find the data they needed. The librarian knew they were coming, what the topic was, etc. so she could help them. If they got stuck, they came to me and we worked through their concern. They were not allowed to write in sentences on the index cards, they had to take notes. After two weeks, they turned in the cards, I reviewed them, made comments on content. Next they wrote a rough draft, including a bibliography and indicating where they would put footnotes. They turned in the rough draft, got it evaluated, then had a week for the final copy. They LOVED this project.

In fact, this reading research project was so successful, my on-grade readers begged to write one. I made a deal with them, "We get through the functional work we need to do. If we accomplish this ahead of schedule, you can do one of these papers." It worked. They pushed themselves to complete the text early. By the end of the year, all but a few students had done one of these basic research papers.

This program simply showed what could be done. Students want to learn to read and to apply reading. Their minds are like sponges. If we provide them with the right attitude and incentive, they can produce fantastic work and be proud of it. My students set goals for themselves and then discovered they could push themselves and accomplish something outside the ordinary.


Saturday, August 11, 2007

Read and Weep #1 

Want to become depressed, frustrated, angry and appalled? Read the article: Read It and Weep, published in the Weekly Standard. I taught upper elementary grades in the 1970's. We were seeing the initial efforts to displace reading systems that worked with the untested whole language ideology in reading and other subjects. Since then I have seen the lack of progress in reading skills, particularly for poor students. I know that SAT test scores have been renormed. But I had no idea how much the instruction of reading (and I'm guessing other subjects) had been replaced with letting students literally write and spell incorrectly as well as trying to read without learning the codes to decipher language.

As background, I taught in three levels of public schools.
1 - This district was quite wealthy. The average classroom IQ was about 120 and ranged from 110-145. Parents paid attention to what their children were learning (but were not the helicopter, "my kid can do no wrong" parents of today). Attendance at back-to-school night was so high we offered three nights of two grades each so parents could meet all teachers. Often both parents attended personal conferences.
2 - The second district was an average middle class school. We had a far wider range of IQ scores and decent attendance at back-to-school. We had full attendance at individual parent conferences though usually only one parent.
3 - The third school was incredibly diverse: economically we had welfare families to upper middle class; racial mix included every shade of beige and brown and all in between; we had 25% off the boat foreign students from Latin America, Asia, Africa and even a few European nations. We had missing parents and embassy staffers. In other words, we had it all. We did have high attendance at teacher conferences. Mine was close to 100%.

In each school system we used reading texts designed to improve reading scores. In all I read aloud to my students daily. They thoroughly enjoyed this. They thought they were getting a "break" but actually they were getting exposed to the best written stories of the day. I always gave distinct voices to the main characters. They loved this aspect and began to do it themselves. This practice makes books come alive.

Future posts will discuss the various approaches used in each school. Demographics drive programs but we demanded work, excellence, timeliness, and other standards in every school. We simply said, "No excuses - you must read and read well."

On the Final Word today 

We'll talk about the bridge in the second hour. Before that we'll hear from HD 28B special election winner Steve Drazkowski, and talk about financial markets with Western Illinois Professor (and blogger) William Polley.

Weigh your costs and benefits, and I'm sure you'll listen in.

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Friday, August 10, 2007


The Economist's Free Exchange reminds me to read my Bagehot. A fuller quote:
But that object is not attained if the amount of that reserve when so published is not enough to tranquillise people. A panic is sure to be caused if that reserve is, from whatever cause, exceedingly low. At every moment there is a certain minimum which I will call the 'apprehension minimum,' below which the reserve cannot fall without great risk of diffused fear; and by this I do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. Such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread. What is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended.
I assume someone who's studied the Great Depression will remember this as well.


Another day without book writing 

Thought I would do that, but the darn financial markets aren't agreeable to this. I suspect a few people woke up this morning, grabbed their New York Times and actually read Krugman this time. I will tell you what I think of Krugman -- the closer he gets to his field of specialization, international economics, the better he is. This means that about every two weeks you get a column that is good, and twice a year you get one that you should keep. This is one. (Free copy courtesy Mark Thoma.)

But yesterday�s announcement by BNP Paribas, a large French bank, that it was suspending ... three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of �the complete evaporation of liquidity in certain market segments� � that is, there are no buyers.

When liquidity dries up ... it can produce a chain reaction of defaults. Financial institution A can�t sell its mortgage-backed securities, so it can�t raise enough cash to make the payment it owes to institution B, which then doesn�t have the cash to pay institution C...

And here�s the truly scary thing about liquidity crises: it�s very hard for policy makers to do anything about them.

Not that they haven't been trying. William Polley has been watching the Fed put money out in the market today -- $38 billion all told, and all in return for mortgage-backed securities -- along with a statement about providing sufficient liquidity to financial markets to maintain the current 5.25% Fed funds target. He also recommends this article for a review of how central banks provide liquidity; I admit I hadn't read it before, but did while prepping for the WCCO radio interview. (It is amazing, by the way, how much of what I prepare for those things get left on the desk. I get two more chances tomorrow, with David Strom and Margaret Martin on Taxpayers League Live at 10-11am CT and then on our own NARN The Final Word at 3-5pm. Both will stream from here.)

More evidence of the seizing up of credit markets comes from Felix Salmon:

Today's WSJ fronts a long explanation of how obscure German bank IKB blew up; the short version is, basically, that it suddenly found itself unable to roll over its CP [commercial paper--kb]. Other problems in recent days have been CP-based, too, such as WestLB Mellon's Brightwater vehicle. And commenter Ken Houghton has a long memory:

Drexel didn't go out of business because their liabilities exceeded their assets; they went out of business because no one would roll over their CP.

A quick introduction to CP, for those of you unfamiliar with it. Think of a conversation like this:

A: Can I borrow $10 till tomorrow?
B: Sure.
A: I'm good for it, you know.
B: But you're not earning any money tomorrow, how will you pay me back?
A: Oh, there's lots of liquidity at the short end of the yield curve.
B: In English, please?
A: You're going to lend it to me.
B: Lend what to you?
A: The $10 I need to pay you back.
B: Ah.

This is the kind of scheme which works until it doesn't. CP is a safe investment, because it's maturing very soon � often, literally, tomorrow. On the other hand, the entire CP edificie � which is mind-bogglingly enormous � is predicated on CP issuers being able to roll over their debts, and borrow what they have to repay. When that's no longer the case, and lenders start shying away, very nasty consequences indeed can ensue.

If you look at those two things, you'd say pretty much it's a liquidity crisis. And for some of these markets, unlike the banks and securities industries, there isn't necessarily a lender of last resort. Floyd Norris notes the vulnerability of hedge funds, wondering whether it's unreasoning fear or the these funds are holding more bad paper than we realized. Nouriel Roubini says it's worse than that.
Insolvent and bankrupt households, mortgage lenders, home builders, leveraged hedge funds and asset managers, and non-financial corporations. This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort � the IMF � only postponed the inevitable default and made the eventual crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors� bailout. Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress � hard landing of economies � and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy � with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing.
I was asked today how likely this hard landing possibility is; as much as I'd like to say zero, I can't. I think it's unlikely still, but given what I've said before about the probability of recession, it would be folly to completely discount Roubini now. James Hamilton doesn't think the administration's use of the economy's fundamentals necessarily helps calm markets. Salmon appears to also be with the unlikely but not unreasonable camp. Liquidity will help enough, particularly if we can keep the housing market from crashing. It will also help if it turns out other parts of the financial markets don't have too much of these mortgage instruments (to that end, this article about money market funds has to be worrying.)

Nonetheless, the Federal Reserve is doing what it can.
Early Friday, the Fed accepted a larger-than-expected $19 billion in three-day repurchase agreements, a way to inject liquidity into the banking system. The federal-funds rate -- the rate at which banks make overnight loans to each other -- had risen to 6% early Friday, sharply above the Fed's 5.25% target rate, suggesting demand for reserves ahead of the weekend, according to John Silvia, chief economist at Wachovia Corp. After the $19 billion injection, the rate fell back toward the target. Later in the morning, the Fed accepted another $16 billion in repurchase agreements.
And another $3 billion after that was written. (Mark Thoma has the analytics for the macroeconomics-minded.) That's just a weekend injection, meaning the Fed is still treating this as a liquidity problem for the time being. The key will be to monitor this page on Monday and Tuesday to see if the Fed is having to put in as much. The market close today would indicate to me that investors may have been calmed.

Going forward as well will be the discussion whether we have really reached the end of our concerns about inflation.
Until the past few days, most monetary policymakers were emphasizing their concerns about mounting inflation pressures rather than problems emanating from the troubles of the U.S. subprime mortgage market. But that may be changing . "This is a disinflationary event," said Richard Berner of Morgan Stanley. "If it continues, inflation risks are mitigated. That gives the Fed and other central banks latitude to step up the timetable for moving rates back to neutral or below neutral if necessary." A neutral rate neither stimulates nor dampens economic growth.
I think the Fed can do that in September at its regular meeting, but to move before then would indicate something far more dire. Besides, do we really want to make Jim Cramer happy?

Key stat coming up? Consumer confidence. What this does to the consumer in my mind will matter quite a bit. So far, they've born up pretty well.


Media alert 

I will be on WCCO radio at 1:10pm today, talking about financial markets for the hour.

We've shared enough 

The NCAA has decided there should be a four-year moratorium on schools moving into Division I athletics.

The NCAA�s Division I, with 331 institutional members, is getting too big, its Board of Directors decided today. At the athletic association�s summer presidential committee meetings, the board imposed a four-year moratorium, effective immediately, on new applications to the NCAA�s most competitive division. The 20 institutions with pending applications will be allowed to continue that process as the division reviews its standards for membership. Also during the four-year period, colleges will not be able to move subdivisions within Division I.

There has been much discussion at SCSU about moving potentially to Division I; this moratorium will close the window for the foreseeable future. The move is largely directed towards basketball, since D-IA football has already been putting in restrictions. What it does, in short, is assure the cartel of D-I basketball programs greater profit, and reduces some of the pressure on teams trying to maintain the chimera of student-athletes from the temptation to bring marginal students to campus to compete with new schools. See also Inside Higher Ed.

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Thursday, August 09, 2007

CBA under real uncertainty 

I notice from Learned Foot that someone still can't learn a new trick.
Bingo, grasshopper. Just like our slippery goat owner, the professor has some problems with his arguments. You can't argue that the risk of something is unknowable and then claim that the politicians and the public made a rational cost-benefit analysis. If you don't know the costs or the benefits, you can't possibly do the analysis.

Oh...I think you can grasshopper. I can come up with myriad everyday examples about how governments, businesses and individuals do a rational cost benefit analysis on certain things without knowing the risk.
Yes, though it's awfully hard. Since I'm writing a course for someone to teach CBA, I have some notes to draw on, but this section is quite hard. This is usually the bailiwick of environmental regulation, where CBA is the most disputed.

When I've talked about it discussing black swans, I spent a good deal of time discussing Frank Knight discussing the difference between risk and uncertainty. Risk is measurable. Sometimes you can use a ready-made probability distribution based on existing data. Sometimes you have to do something different because there's nothing to draw on for a probability distribution. One option is Monte Carlo analysis, which asks you to model the risk by replication over a thousand or ten thousand samples of the event you are trying to measure. In reliability engineering, for instance, you want to know the mean time between failures as a way to get at the likelihood, say, that a structure might fall down. If you could create a computer simulation of vehicles driving over a bridge, simulate the cars, weather, river current, etc., you might get a number. But that's hard, and there are lots of bridges.

So maybe you couldn't have that either. There are other options, such as sensitivity analysis, but I doubt any of those might have been very useful, or provided a result in which one could have had any confidence. One of the worse things I see in this analysis is when someone tries to make a probability judgment -- "The risk of bridge failure is 0.00014% for the next twelve months" -- based on unreliable estimates. As we know from cognitive psychology, people in general are rather poor judges of probability. Aaron Wildavsky noted "large proportions of people care more about avoiding loss than they do about making gains. Therefore, they will go to considerable lengths to avoid losses, even in the face of high probabilities of making considerable gains." I think this, in fact, is where ol Spot is coming from.

But that doesn't justify using other people's money to avoid those losses, and it doesn't justify the use of poor decisions, and those societies that rely on learning from mistakes, as a strategy to reduce uncertainty, will fare better. Wildavsky:

In regard to the consequences of technological risk, there are two major strategies for improving safety: anticipation versus resilience. The risk-averse strategy seeks to anticipate and thereby prevent harm from occurring. In order to make a strategy of anticipation effective, it is necessary to know the quality of the adverse consequence expected, its probability, and the existence of effective remedies. The knowledge requirements and the organizational capacities required to make anticipation an effective strategy�to know what will happen, when, and how to prevent it without making things worse�are very large.

A strategy of resilience, on the other hand, requires reliance on experience with adverse consequences once they occur in order to develop a capacity to learn from the harm and bounce back. Resilience, therefore, requires the accumulation of large amounts of generalizable resources, such as organizational capacity, knowledge, wealth, energy, and communication, that can be used to craft solutions to problems that the people involved did not know would occur. Thus, a strategy of resilience requires much less predictive capacity but much more growth, not only in wealth but also in knowledge. Hence it is not surprising that systems, like capitalism, based on incessant and decentralized trial and error accumulate the most resources. Strong evidence from around the world demonstrates that such societies are richer and produce healthier people and a more vibrant natural environment.

Because you can't know what is truly uncertain, you can either choose a precautionary principle and try to avoid any activity that might increase risk to human life, which reduces the ability of a society to specialize and exchange. Or you can embrace the dynamic system of capitalism and its most important resource -- the human mind -- to alter behavior to new lessons learned out of failure as well as successes, and to minimize the likelihood of repeating the failures.

What Knight argued was that some situations of CBA under uncertainty involve trying to calculate the profit or loss in a relatively unique situation. You can't measure the probability of success of an act that's never been done before. When private firms do this, the losses and mistakes are borne by them alone. When governments do this, they don't necessarily pay for it. That's why we worry so about getting the incentives right for the public sector.


Another example of declining marginal benefits 

An article in today's WSJ discusses the use of preschool as a poverty-reduction device. Most of the work on this is positive, coming from both Art Rolnick at the Minneapolis Fed and Nobelist James Heckman from the University of Chicago. The author of that article posts a blog addendum at Real Time Economics noting that Heckman is not a supporter of universal pre-school:
�You go where the marginal returns are the highest and they�re highest with disadvantaged children,� he says. He fears that all the economic data � including his own � has produced a �rush to judgment� that has convinced some camps to pre-school for everyone will produce the greatest return.

�It worries me a lot,� he says. �Science doesn�t support universality � we have to approach it more cautiously.�
From his article with Dimitriy Masterov,
The estimated rate of return to the Perry preschool program is about 16%. This includes benefits from reduced remediation and reduced crime, as well as the increased earnings of the participant. All of the children targeted for intervention are of low ability. While much work remains to be done to bolster the case for wide-scale application of these programs to disadvantaged families, the current evidence is powerfully suggestive, if not yet definitive, that large-scale programs will be effective. None of this evidence supports universal preschool
What is the proper allocation of scarce resources towards preschool? How do you decide it? Heckman and Masterov show that the return on these programs go more to society than to the individual, indicating a large external benefit. But it must be compared to a cost, and that cost is the opportunity cost of those funds in alternative uses. Yes, including bridges. You can offer enrichment to only so many.

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Can't wait to see this guy on Rate Your Professor 

Most every student I work with has something that needs some work. Some of them don't get the message, and some perhaps really don't belong in a university. But even then, you typically try to find some way to get them closer to making the grade.

And you get the usual requests from students for extensions of time. As a young professor I got more of these, and the leading cause of extensions was a death in the family. Grandparents, in my first few years, were dropping like flies. The defining moment was when one student managed to lose three grandfathers in two months. So I announced in syllabi that only immediate family members would constitute grounds for an extension, and that I expected a copy of the obituary with the late assignment. Remarkably, the rate of death of my students' grandparents dropped dramatically. If Social Security goes belly up in 2030, it's my fault.

This has for the most part cared to the problem. But what I've never had to do was to write The email like this to a student who was both doing poorly in school and loses a parent.
I say this reluctantly but not so subtly: you are not suitable for a graduate degree. It does not matter if your father died or if you have a medical certificate.

I have been too nice and given you too high marks all along (at C+). I do not anticipate that you will do better in the final exercise. You are already a day late.

The extension is meaningless because you have not attended the last few classes and are the worse performer in the class.

Of course by a far stretch, You will have the obiturary of your father, but even if available and the student health people might have believed you, I do not.
The professor has been sacked, which has caused a public debate in New Zealand. In part this stems from the student being an international student from Kuwait, and the professor's comment later in the email,
You are close to failing in any event, so these sorts of excuses - culturally driven and preying on some sort of Western liberal guilt - are simply lame.
I'm not sure what motivated him to go there, and the furor has taken the expected politically correct overtones.

And then, remarkably enough, he offers her an out:
Prove that your father died and your were distraught and unable to complete assignments-in spite of your abysmal record to date as an underperforming and underquallifed student- and perhaps you might qualify for an extension to get a C-.
This contradicts the rest of the letter, is abundantly stupid, and were it not for tenure would quite easily lead me to not retain this professor. If you're going to say no, say no.

(h/t NARN producer Matt Reynolds.)


Wednesday, August 08, 2007

Solid between the pipes? 

There's some excitement in Republican circles over a conversation some legislators have had with the governor's office. Gary reports on an email he received from Rep. Steve Gottwalt (15A-St. Cloud),
Governor Pawlenty has been very firm with House Speaker Kelliher and Senate Majority Leader Pogemiller that there will be �no special session without prior agreement on the agenda and on the bills.� It must be �transportation specific�; he will not revisit the Tax Bill; he will not agree to an open-ended session. It would be one day only, and probably in September. This comes directly from Pawlenty�s Chief of Staff, Matt Kramer.
That sounds good, but I don't see the gas tax as off the table in that formulation. Rep. Gottwalt also reported that Mayor Rybak is going for the Mee Moua Stratagem.

Reconstruction of the 35W bridge would be a modern replacement, with 10 lanes. However, Mayor Rybak is trying to accomplish several add-ons, including re-configured interchanges and even a bridge that would carry light rail. Those are �extra� costs above and beyond the $250 million being discussed as federal emergency dollars for replacement.

Congressman Oberstar has made it clear the federal dollars cannot apply to such add-ons. Rybak needs to understand this is relief and replacement, not �Santa Claus comes early to Minneapolis.�

One word, Governor: Bonds. And no, not Barry.

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Graphs of the day 

That sky blue piece of the pie (best to click for larger images) is the tax take for a typical one-income family in 1970 (top) versus a typical two-income family in 2000 (bottom). Graphs from Todd Zywicki, who notes,

As can readily be seen, expenses for health insurance, mortgage, and automobile, have actually declined as a percentage of the household budget. Child care is a new expense. But even this new expenditure is about a quarter less than the increase in taxes. Moreover, unlike new taxes and the child care expenses incurred to pay them, increases in the cost of housing and automobiles are offset by increases in the value of real and personal property as household assets that are acquired in exchange.

Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined. And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined.

...the obvious problem for this "typical" American family appears to be an extremely high tax burden caused primarily by the progressive nature of the income tax that hits families with two working adults by kicking them into higher marginal tax rates.
"Oh no! They aren't talking about the marriage penalty again, are they?"

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I bet my readers do better 

The new National Assessment of Educational Progress report card for economics is out. There are some sample questions set up for you to try. Real Time Economics describes some of the results (I've added a few more):
As it is the first report card in economics we can't tell if we're getting a return on our investment. We do know that 2/3 of high school students now get a course in economics in high school, compared to less than half 25 years ago.

Here's the full report.

UPDATE: Greg Mankiw notes that those 2/3 who took the course did not do significantly better on NAEP than the third that did not. He thinks it has to do with the non-AP classes. My experience meeting AP teachers at economics challenges here at SCSU would support him regarding the AP teachers being of very high quality. I only watched a sample of one in a non-AP course: my son. Not exactly a representative sample.

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How much slack in the labor market? 

Taking time off from writing the book, I take time out to read for some of the coursework I will teach during the year. Teaching macro is harder because the examples you would use are scarcer. But seeing today's Job Openings and Labor Turnover study made me remember to pull it for a discussion of the natural rate of unemployment. With some not-terribly-unreasonable assumptions, you can estimate the natural rate by taking the rate at which the unemployed find work (call it f, equal to about 0.685 in June -- that means the number of people hired in a month is about 68.5% of June's number of unemployed) and the rate at which the employed leave jobs (call it s, about .031 or 3.1% of employment) and calculate a natural rate as un = s/(f + s). Using that and the most recent employment report generates a natural rate for June equal to 4.31%. The actual unemployment rate was 4.5% for that month, now rising to 4.6% for July. (JOLTS is a quarterly survey, so we can't update this any more.)

That suggests that while the economy is not overheating, there isn't all that much slack in the market right now. JOLTS also reports a rise in the job vacancy rate (the number of jobs open); Real Time Economics notes the increase in vacancies in retail trade and professional services. There was a big drop in vacancies in construction.


The information content of government inspections 

While walking last night I was listening again to a podcast from EconTalk with Nobel economist Vernon Smith. For my non-economist readers, Smith won the Nobel for his work with experimental economics (I agree with David Henderson that the term "behavioral economics" is not helpful -- all economics is about behavior.) Smith says something profoundly Hayekian in the podcast, enough to get Roberts to transcribe it:
Markets are about recognizing that information is dispersed in all social systems and that the problem of society is to find, devise, and discover institutions that incentivize and enable people to make the right decisions without anyone having to tell them what to do.
A government inspection system -- be it drugs, food, airplanes or bridges -- has a perverse incentive system. Job safety regulation replaces the natural incentives firms have to keep workers safe. Meat inspection has occurred for years without very good results -- I have friends who STILL won't eat at Jack in the Box. If we actually did have a report back in 1996 about a crack in the St. Anthony bridge pier, why was that incorporated in decisions of the Legislature then, or now?

So I was wondering whether putting any more money into bridge inspections gets the incentives right? Of course you could argue for privatizing bridges and then giving the private owner strict liability for any harm caused. The state faces very limited liability, so its incentives to get the inspection level right is relatively muted. Instead the liability is put on the contractors, who of course do not control the inspection and maintenance process. Insuring themselves against that liability costs them millions, adding to the cost of building roads and bridges.

Could this be solved by a market for private inspections? If the government does the buying of the inspections, you would have a monopsony; would it provide the right number and quality of inspections? I don't know. I think, though, that we're deluding ourselves thinking that the current inspection system has all the right incentives and only a lack of resources.

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A thought about taxing for the bridge 

After the initial emotional reaction of some Republicans to increase the gas tax to pay for the bridge, it appears some have come back to reason.
I just got off of the phone with Gary Gross, who incidentally just got off of the horn with State Representative Steve Gottwalt. Gross stated, when asked about the probability of a special session, Mr. Gottwalt replied, "God, I hope not!"

There appears to be a substantial number of Republican lawmakers who are seeing the call for raising the state gas tax to be what it is-- an opportunistic ploy by DFL lawmakers to ramrod a political agenda by exploiting a tragedy that had absolutely nothing to do with either the presence of or absence of a tax increase. While they certainly see the need to prioritize and ensure the safety of bridges and other infrastructure, they are likewise acknowledging that the answer lies not in an additional burden on Minnesota taxpayers, but rather on a good, old-fashioned prioritization of allocation of resources.
The DFL has already made clear that once brought to a special session they will not limit their actions to funding the bridge. Senator Tarryl Clark was cited in the Saturday paper as arguing that a special session would include restoration of local government aid. Relevance to the bridge = 0. Captain Ed and others have spent time looking at where the transportation dollars are spent; it's disheartening to see that the tragedy is used by both our U.S. Senators to call for expedited monies to go to Northstar, which would not be ready before the bridge is replaced according to current estimates. All around, behavior towards this has been opportunistic.

Here's another example of this, from Saint Paulicy:
SPicy has learned that last week, as part of the 4th Annual Tom Bakk Golf Scramble, there was a "caucus-like" meeting of elected DFL'ers. One of the issues apparently on the clubhouse table was the probable special session and what should be on the agenda.

...SPicy has been told that as legislators discussed the special session, State Senator Mee Moua found it time to make a dramatic announcement. If Saint Paul does not get $18 million � the full amount that was originally in the formula for the city � than Saint Paul does not want a special session.
So you want these people to come back? I'm with Rep. Gottwalt: God, I hope not.

Here's a thought: Do we not keep a reserve in this state? Why yes, yes we do. A billion dollars, in fact. What is the purpose of a reserve, if not to be used to meet unexpected expenses? If you're not going to use a rainy day fund for a bridge collapse, why have it? Pay for it from reserves, and then let the next Legislature replenish the money from the entire budget, not just from a gas tax. Pawlenty can do this without resort to a special session.

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Tuesday, August 07, 2007

More bridge talk 

I will be appearing on Ed Morrissey's CQ Radio around 2:30 CT to talk about the economics of the Minneapolis bridge. You are invited to call in at 646-652-4889 to join the conversation!

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Lip service 

As almost everyone expected, the Federal Reserve held its target interest rate constant in its Federal Open Market Committee statement a earlier this hour. William Polley had mapped out a set of statements that might change, though, that would indicate a change in position.

There's no real change, tipped off by the second paragraph:
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
Compare to the June 28 statement,
Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.
I read that as saying "we know about this sub-prime mortgage issue, but we don't see it causing any concerns elsewhere in the economy."

Jim Cramer's head will explode in five ... , four... , three... , ...

The inflation paragraph is identical between the two statements. Polley thought the recent data had indicated inflation had moderated and should be signaled, but the Fed does not seem to agree with this. The closest thing to a nod towards moderation comes in the fourth paragraph:
Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.
Again, italics are mine; that phrase replaces the phrase "In these circumstances" in the June 28 statement. That phrase is a real baby step towards moderation of the inflation risk bias. I'd say, in fact, it's nothing more than lip service to Wall Street. Chances are the Fed has paid more attention to the credit boom of the past than the softness of the housing market.

The Dow, predictably, has shed about 175 points in the last forty minutes.

UPDATE: The market bounced back. Mark Thoma has a nice side-by-side of the two statements. He finds some language changes that make him believe "there is more certainty that economic growth has moderated, and there is an increase in the assessment of the downside risks to economic growth." I'm not as sure this is true. The statements look more like qualifiers and CYA-ing than a definite change in tone. Polley says "the Fed acknowledged the fact that there is a bit of a liquidity squeeze. This is significant. I don't recall anything quite this forthcoming in past statement." The Real Time Economics survey has a few people calling it a move towards neutral and others saying it isn't. I'm firmly in the latter with Steven Wood, "The Fed threw the markets a bone, commenting on recent financial market volatility and tighter credit conditions. However, they gave no hint that they would act anytime soon."


I'm not the least bit surprised 

Most economists wouldn't be by this story (from WSJ, subscribers' link)

While it's true that a frozen lasagna dish is usually faster to make than homemade lasagna, researchers from the University of California-Los Angeles wanted to find out how convenience foods are used in the real world. After they videotaped family cooking habits, the researchers saw that convenience foods weren't used as a time-saving substitute for the same dish made from scratch. Instead packaged foods offered a way for families to eat more elaborate meals than they would normally have time to prepare.

When families did cook from scratch, they ate simpler fare -- like one-pot meals or stir-fry. In the end, dinner took about a half-hour to an hour to prepare, whether it was made from scratch or with convenience foods, according to the research, which was published in the July issue of the British Food Journal and funded by the Alfred P. Sloan Foundation, a nonprofit group that funds science, economic and other research.

Says anthropology researcher Margaret Beck from the Center on Everyday Lives of Families at UCLA, "When people use convenience foods, they are ramping up expectations for how elaborate a dinner should be."

...The study showed that meals with little or no convenience foods took 26 to 93 minutes to prepare. Meals that used a lot of convenience foods took 25 to 73 minutes to prepare. While convenience foods were time-savers on very elaborate meals, overall, there was no statistically significant difference in total preparation time.

One difference that emerged was "hands on" time -- the amount of time people spent slicing, dicing and stirring foods. Using convenience foods shaved about 10 minutes of hands-on time, but it didn't make any difference in how quickly the food got to the table.

The anthropologists assume that what you want to consume is time or a particular dish. What you are really purchasing, though, is a meal and family time. A more elaborate meal allows more time to talk; it keeps the kids at the table. And ten minutes without hands on the food is ten minutes to talk, play with your children, start your email, or what have you.

There is no reason why convenience food should be a substitute rather than a complement to food prepared from scratch.

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The loose ends of this bridge talk 

I've summarized some thoughts on causation and on cost-benefit analysis over the last few days, following an initial post on the process of thinking about inspection and building. The most criticism I have received is from one other Minnesota blogger who uses a rule that any bridge that failed MUST have not been inspected correctly. But of course dogs don't get economics. We undertake actions up to the point where the marginal benefit just equals the marginal cost, and that includes inspections. Yes, there are benefits to inspections greater than I*, but they are not worth the cost.

The costs we've paid are fairly substantial. Ed Morrissey has detailed the expenses on transportation in Minnesota by the state and federal governments. Earmarks diverted some money, but both parties are equal opportunity consumers of pork; care to guess in whose district was spent the $1.3 million for the Virginia MN recreational visitor center? Would it happen to be the guy who now chairs the Transportation Committee in the House? And the state has a transportation budget of $2 billion. We still wait for the evidence that somehow we are short of I*. (And, Ed also notes, those marginal costs include the inconvenience of drivers, some of whom vocalize their inconvenience.)

Let me then tie up my two loose ends I mentioned yesterday. First, if you agree that some bridge failures are unpredictable events, how can you argue that CBA is useful? If you can't write down the probability of a bridge failure because you can't know the probability distribution? (By this I'm saying you're argument is ontological -- you can't know, not that you're just not trying hard enough to write it down.) The way this gets covered in CBA is by a method called gross sensitivity analysis. I suggest this paper (in .pdf) as a way to look at the problem. The British -- who in my opinion are well ahead of the US in use of CBA -- provide guidelines (example) to their regulators to both require CBA and how to use sensitivity analysis. In the review of inspection procedures that will occur over the next year in Minnesota, due care should be paid to whether MnDOT correctly uses sensitivity analysis. I prefer gross to net because gross does not require you to actually know the probability of bridge failure if you inspect one time or two.

Second, it may seem odd, heartless, cruel, unctuous, or what-have-you, to put this in calculable terms. I have already made mention of the famous smoke alarm studies which put the value of a life based on one's own actions. I use a story in class from my early courtship of Mrs. S. Before they installed a traffic signal, 15th Ave SE in St. Cloud crossed Highway 10 via a stop sign. Hwy 10 is a busy road Sunday evenings in the summer with families returning from lake cabins and camping. I lived on one side and the Dairy Queen was on the other. I used to prepare dinner for Mrs. S on Sunday evenings and then treat us to Peanut Buster Parfaits from that DQ. I drove a Tempo with a stick. On approach to the stop sign for the return trip I had two top-heavy PBPs to balance while I made the treacherous decision whether to cross the road. The best way to balance PBPs in the pre-cup holder days was to place them on the driver's seat between your legs; this is not comfortable. Also, Tempos did not have A/C standard, so it's hot and your parfaits are melting. A string of two minutes worth of cars is upon you as you stop, but you figure you can cross with a chance of one in ten thousand of being in an accident. Do you cross? Most people I ask say yes. No doubt one inspiration for crossing for me was the opportunity to return with unmelted parfaits to my lady. Who knows what reasons you might give, but they are yours, and they are real. I can then use reasonable numbers for the value of the parfaits and your time and calculate the value of your life, much like the smoke alarm story.

Now that seems trivial, certainly, but the point is we can find many such stories in which the person's own actions place a finite value on their life. (I wonder if those who find this still heartless have anything to say about the practice of forensic economics?) Once the value is assigned, it becomes amenable to comparison to the thousands of little values gained and lost by government policy. If one is interested in reducing waste in government, rather than politics as usual, you shouldn't toss careful analysis aside.

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Why have red tape? 

Governor Pawlenty yesterday sent a letter to the Minnesota Congressional delegation that sought a waiver to allow the Secretary of Transportation or some other designated official "to expedite, waive or relax federal regulations that can be properly and safely be set aside to allow us to recover promptly from this emergency."Mesabi Daily News agrees:
We�re talking about an unexpected emergency situation that has befallen the Twin Cities and Minnesota. It needs some quick action and the federal government can be a helpful partner in that process.

And perhaps, taking the long view, this would create a good opportunity for the White House and Congress to look closely at just how much a hindrance federal red tape can be for state and local governments on several issues.
Will anyone discuss how this red tape drives up the costs of maintenance and repair of bridges, and might be contributory to a lack of repairs? Would they talk about union wages?

Monday, August 06, 2007

Whose gotcha? 

I am watching with some amusement (and a little worry) the exchange between Larry Schumacher of the St. Cloud Times and my co-host Michael Brodkorb over who voted for what when on the bridge/adjournment/special rules. I am amused and worried about the interchange between Larry and Michael. I'm amused because it's fun to watch two guys ply their crafts. Larry took advantage of my tip on the journal to develop a timeline that he thinks will support the Times story. Michael shows how political tacticians can use the same timeline and create a defense and counterattack. Consider me entertained. It's worrying because I don't wish to watch a protracted fight between people I consider friends. Michael and I hope to have Larry (and Pamela Brogan if available) on to Final Word next week; Larry is invited to coffee at Panera at his next opportunity. (I'll buy if rules allowed.)

My take on this is a little different, and not meant to take a side between them. As some people know, I like to read legislative journals. So when the debate was starting around Larry's post last weekend, I decided to go read this journal, and recommended it to him in a comment on his Friday blog. He generated the post I linked first, and then Michael has responded to him.

The original piece, authored by Brogan, brought up the vote on adjournment, but Larry has turned to H.Res 600 instead of the adjournment vote.
In fact, after the motion to adjorn was defeated, Bachmann still voted against H Res. 600, which was the vehicle enabling the bridge bill to come up in the first place.
Yes, but it also allowed two other items to come up: The FISA revision which eventually passed (to the consternation of the Left), and a bill that would require the President "
to develop and transmit to Congress a comprehensive strategy for the redeployment of United States Armed Forces in Iraq." A vote for H.Res. 600 would have put a Republican on record as supporting the Democratic movement to pull out of Iraq. That is why all Republicans except Jim Ramstad -- who's already shown his preference for a pullout -- voted against H.Res. 600.

The original H.Res. 600 did not contain the provision for the bridge. The bridge was added as an amendment with voice vote by Democratic Rep. Alcee Hastings. (See the journal at 4:52pm) Its introduction -- and of course the bad taste in the mouths of Republicans after the shenanigans of the previous night -- left the minority party in no mood to trust the majority to get the bridge to a vote without forcing a vote on H.R. 3087, along with the speechifying and noisiness that would have entailed, and the headlines in the weekend papers (and beyond, since they are now headed to August recess.) This explains to me the votes for adjournment. The recesses taken by the Democratic leadership afterwards -- there were two that day -- were part of the negotiation of how to end the session. I believe, in fact, that it was Hastings and the Democratic leadership who put a gun to the heads of Bachmann and Kline: "Vote against H.Res. 600 and we'll say you voted against the bridge. Vote for it, and we'll say you voted against the war." The rapidity of the DCCC's hit on the two representatives, as Larry documents, should be evidence of the set-up. (You might even say res ipsa loquitur.)

Of course, majorities do this to minorities in legislatures all the time. Bachmann and Kline, correctly, voted against the resolution knowing that their constituencies will not be fooled by a cheap stunt. But to contend that it's the Republicans who are playing politics instead of fixing the bridge is a failure to read the House record of that day correctly.

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Speaking of cost-benefit... 

Mrs. S has penned her latest, arguing that the cost-benefit analysis for Northstar may have changed enough with shifting demographics to justify its build-out to St. Cloud. I do not necessarily agree with her about this, but the push for another CBA has been made around here recently and will likely come to pass shortly.

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In defense of cost-benefit analysis 

I'm afraid that in the aftermath of the bridge collapse, cost-benefit analysis is getting a dirty word. Let us begin by pointing to this comment on a New York Times blog discussion:
The entire 1000 foot long section was tied together structurally to save money. It had no tolerance for partial failure. If one section failed, the entire section would go down. This more modern bridge was ugly as well as a poor design. This bridge was designed by modern engineers who have no sense of beauty and think they can calculate every decision on the basis of cost/benefit. They practice a destructive type of design called value engineering - taking out the expensive stuff if it�s redundant or optional.
Or take Joel Hirschhorn at the Daily Kos:
I can absolutely guarantee that there were countless discussions over the years by engineers, bureaucrats and politicians that combined risk assessment and cost-benefit types of thinking. It comes down to this: To bite the bullet and conclude that to provide maximum protection of public safety the bridge should be replaced would inevitably face debates about the incredibly high costs and the enormous difficulties of obtaining the funding, and also how obtaining such funding would imperil other government projects.

So the decision moves in the direction of higher levels of inspection to postpone the inevitable high cost/low risk scenario. On the other hand, all people connected to these kinds of discussions know one big reality: If the crap hits the fan and there really is a catastrophic bridge failure, then the money WILL be readily available to replace it! This is the way the system works. Of course, to replace the bridge and deal with all the many horrific impacts of the bridge failure AFTER the fact will cost much, much more money than if a planned replacement strategy had been adopted!. But that is exactly what the Minneapolis story ultimately is all about. It is what virtually all of our national infrastructure thinking is about. The New Orleans disaster was totally preventable, as every technically sound and objective analysis showed.

Which assumes, to start, that every preventable disaster should be prevented. Should it? Can we prevent them all? Again, at what cost? Compared to what? How do you know?

So what does cost-benefit analysis (CBA) ask the policymaker to do? Simply put, it totes up all the benefits of a policy change, such as bridge replacement or a different bridge inspection program, against the costs, all put into a common metric (most often, net present value.) Thayer Watkins of San Jose State provides a useful tutorial. Ed Gramlich, whose book is for me the standard of the profession, spoke a few years ago about where it can and cannot be used:
It can be quite helpful when relevant markets exist, when market or nonmarket techniques for valuing inputs and outputs have been developed, when scientific uncertainties are limited, and when time periods are not inordinately long. Should any of these conditions not be present, one still has ways of proceeding; but the methodology becomes more speculative, and the uncertainty band grows. One can still factor uncertainty into the analysis by providing probability distributions of net benefits from some policy change, but the resulting probability distributions are likely to be very wide. This uncertainty makes it difficult for analysts to give programmatic recommendations with any degree of confidence, and difficult to compete with special interests that have very clear ideas of their valuations of programmatic outcomes.

As a result, benefit-cost analysis is more or less useful in providing a framework for policy decisions, depending on the underlying properties of these decisions. If markets and valuation methods are clear and time periods are relatively limited, as with river and harbor projects, subsidy measures, tax or tariff changes, benefit-cost analysis is usually able to frame public decisions pretty clearly. But for programs involving research, climate change, or other types of extreme scientific uncertainty, decisions are framed much less clearly. Even in these areas, benefit-cost analysis has value, as I will try to illustrate, but one must be very careful to ensure that the results of the analysis are not misused.

Here's a rather simple example related to roads from John Quiggin, who is arguing whether to use cameras on roads to limit speeding on a highway:
People who formerly travelled at above the speed limit will go slower and take more time. On the other hand, since this will reduce both average speed and speed variance, there will be less accidents.

For the costs, I�ve assumed 15 000 cars per year, 20 per cent of whom speed consistently, maintaining an average of 130km/h (vs a limit of 110). I�ve given them a value of time saved of $20/hour (higher than is standard), and I estimate an annual cost of $10 million per year from enforcing the limit.

As already noted, the cost per life lost is above $20 million, between $5 million and $10 million so we only need to prevent one or two fatalities per year to get benefits>costs (there have been about 8 deaths per year in the last five years).

So too with a cost-benefit analysis of bridge inspection. You cost out the increased travel time and increased probability of accidents in a narrowed road environment (or perhaps using detours, whichever is better) versus the benefit from the information gained by additional inspections. Those benefits, of course, are subjective; it certainly was higher on Friday when they inspected the De Soto bridge here in St. Cloud than it would have been last Tuesday. Still, do you see anything wrong with that decisionmaking rule? Charlie Quimby does not:

We all make judgments about how long to keep pouring money into our cars. If you're like me, you take good care of your car but drive it for as long as you can. At some point, it clearly becomes structurally deficient � burning some oil, quarter panels rusty, on its third set of rotors, muffler corroded, maybe a crack in the windshield. But it's driveable, safe and still far less costly to operate than a new car with a monthly payment.

I once drove a rotary engine Mazda until it caught fire for the third time. It was a snowy winter, after all, and the blazes on the engine block could be quickly extinguished, with no apparent effect on other functions of the car.

I'm no economist or bridge inspector, but after the third fire, I could see it was getting to be time for replacement.

We should not blame MN/DOT for its analysis, assuming no grievous misjudgments were made about bridge condition. But we should revisit the question of where we want to be as state on scale of new car to flaming Mazda.

Which is fair criticism. Any CBA will have a set of sensitivity analyses that demonstrate the conditions under which a project -- perhaps more frequent bridge inspections, or bridge replacement -- will either be supported or rejected. You and I can look at that sensitivity and come to different decisions. CBA doesn't give you just one answer; it gives you a framework for rational analysis. And to decide ex post that those who looked at the CBA and decided the more expensive projects for shoring up the bridge were not just wrong but malign is a hindsight fallacy.

But the criticism of Hirschhorn is still in need of answering: Did the MnDOT inspectors lean on the scales to favor visual inspection in order to avoid having to go to the boss and say the bridge was unsafe?

To that end it's instructive to note the authorship of the 2001 and 2005 reports on the bridge's safety were not from MnDOT. These independent assessments go exactly to Gramlich's recommendation that government officials doing CBA need to use independent agencies to verify their work. The University of Minnesota, which did the 2001 assessment, did not have incentives to fiddle the numbers.

What I suspect is that the complaints are not about CBA itself but about the budget process, which reinforces CBA just as CBA reinforces it. Gramlich writes:
The federal budget process is one of the most criticized governmental processes around, with observers routinely pointing to projects that should have been, but were not, screened out. But the federal spending and budget process seem to help benefit-cost analyses of projects. The budget imposes discipline, if imperfectly. When projects threaten to become too costly, as the SSC [superconducting super collider --kb] did and dredging the Delaware River may be, OMB [the Office of Management and Budget] and other budget cutters can be expected to join the fray and often support the results of the benefit-cost analyses.

Indeed, the relationship can be symbiotic. OMB needs benefit-cost analysis to weed out projects (otherwise they would be acting in a peremptory manner). Benefit-cost analysts often welcome the sheer political heft of OMB. Those opposing the dredging of the Delaware River will find stopping the project easier with the help of OMB than without it--just as stopping the SSC was easier once costs started escalating rapidly in an era of increasingly tight budgets.
Yes, "increasingly tight budgets." In any cost-benefit analysis one must impose a cost of funds used for a project. What are the alternative possibilities for the funds to be used? For example, the Sunday paper here carried a story of fifteen bridges in the area that are "structurally deficient". Some bridges are seventy years old. Yet under current circumstances and with current traffic flows, there are other projects more in need of help.

The detractors of CBA seem to live in a world where tradeoffs do not exist. To respond to the first comment, 'beauty' is a good that competes for resources with other goods, like education or meals on wheels. So too with safety. As "vinod" notes on his blog, Thomas Sowell's "tragic vision" means that libertarians and conservatives understand tradeoffs are real, while the anointed dogs believe that "problems must be solved in totality with 'no one left behind' and 'no one left at risk'." Even in a world with a few black and gray swans, you can't fix everything.

I have a few loose ends to tie up, to wit:
In case other comments are needed, I'll hold that discussion off until tomorrow.

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Types of uncertainty 

Some dogs didn't like this post last week.
What the professor has given us is the unctuous, rational technocratic explanation of the [I-35W] bridge problem. If you accept his framing of the question, his solution seems inevitable. Shake your head in sorrow, tell the victims that your "heart goes out to them," and move on. The dollars have delivered their verdict.
It's not inevitable, since we have as yet no determination of why the bridge failed. There will be a determination, certainly; someone will say X happened, then Y, and then the steel began to twist and the structure began to fall. That's what good engineers do: They document what happened, and then tell you what could have been done to keep that from happening again. And the political process will take that report and throw money at it. (Sometimes, they don't even wait for the report.)

But the Left will go further, as does this dog:
What we really know is that a bridge, being a mechanical device, will inevitably fail unless it is repaired or replaced. The risk of failure increases as the bridge ages. These things are just as true "no bridge can ever be made perfectly safe." Since we know bridges will fail unless cared for, and since we also know that the consequences of a failure will be, to use the governor's own term, "catastrophic," it seems sensible to be rigorous in inspection of and fixing of bridges. As Spot wrote before, God didn't knock the damn thing down.
Let's assume Spot is not being literal, or serio-comedic in that last line. There was no Monty Python foot that squashed the bridge. But let's think seriously about bridge failures. Take three sets of events, each a subset of the previous one.
  1. The set of all bridge failures.
  2. The set of all bridge failures for which we can reconstruct explanations why they fell ex post;
  3. The set of all bridge failures for which we could have constructed explanations for why they fell ex ante. (We assume if you could have explained it ex ante, you can explain it ex post.)
We know, from the remains at the bottom of the river, that that bridge is part of set 1, the largest set. We do not know yet if it is part of set 2, though I will venture to say set 2 is very large. There will be a desire to put this event in set 2 -- I worry that there will be political pressure for the official investigation to do so -- but let's assume that the I-35W bridge failure is part of set 2. I think Spot's statement is trying to push me into a position that the bridge failure is not a member of set 2. I don't think that's the case.

What would it mean to be part of set 2 and not set 3? It would mean that what happened to that bridge is an event that we can explain, but that we cannot predict. I think in this case about the difference between risk and uncertainty taught by Frank Knight back in the 1920s. As explained by John Maynard Keynes a decade later:
By `uncertain' knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty...The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence...About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. (QJE 1937.)
Now because an event is uncertain doesn't mean we don't know about it. What it does mean is that we cannot write down an expected cost or utility function that captures the possibility of it happening. I'll write a separate post on what this means for cost-benefit analysis a little later.

But the point is that even if this bridge failure is part of set 3, it does not mean that as a matter of public policy we should have done whatever it takes to not let that bridge fall. This gets to the point I was making to Michael on Final Word yesterday: You can buy too much safety. We laugh at Tony Shahloub in Monk for his OCD; he buys too much safety. Andy Samberg buys too little in Hot Rod. My favorite example for students is to ask when was the last time they checked the batteries in their smoke detectors in their dorm rooms or apartments. Is it working right now? How do you know? Because your smoke detector's failure could lead to deaths in neighboring apartments, should we pass a law that requires us to check those batteries every day? Should we have inspectors look at smoke alarms annually? Semi-annually? If you thought about checking the alarm on Tuesday but didn't because you remembered you had checked it only a couple of months ago, would you be considered negligent if a fire destroyed the building on Thursday, killing five of your neighbors?*

Batteries in smoke alarms, at least, have a rate of failure that one can write down. Bridges may be more Knightian in their uncertainty. While more maintenance may have helped prevent some kinds of failure, they don't prevent all types. We do not know which type occurred here yet.

The reason for my using the term black swan was not just to refer to a book I read. Taleb refers to the case of a "narrated" black swan, one of which we become too aware. We suffer from hindsight bias (to use a term Taleb uses in this interview) and think they are everywhere. From his book:
The [narrative] fallacy is associated with our vulnerability to overinterpretation and our predilection for compact stories over raw truths. It severely distorts our mental representation of the world; it is particularly acute when it comes to the rare event.

...The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical link, an arrow of relationship, upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding. (pp. 63-64)
My contention thus far is that dogs use explanations to give their readers the impression that they know that which they cannot yet really know. Attempting to connect dots of a rare event at this stage is highly premature.

*-- more on this later as well; worth noting that such calculations can be used to determine the value of a life. See slides 12-13 of this presentation from MIT's course on regulation. I suspect this will make dogs bark.

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Sunday, August 05, 2007

Crowding out baseball 

Stephen Karlson notes that a community college in Illinois is using a creative means of financing a new athletic facility. Richard Vedder thinks this is a terrible idea:
First, community colleges should concentrate on low cost education, not speculative investments with funds borrowed via tax-exempt bonds. Second, in this case, another group of totally private persons in the same county has been trying to do the same thing (respecting minor league baseball), so this is an attempt by a government entity (a college) to preempt a private effort financed without any public subsidies. Third, for higher ed officials to want to devote their major new effort to promoting professional sports rather than improving existing programs or offering new ones shows a shocking disdain for the basic purposes of higher education. Fourth, and actually almost irrelevant, it is a dumb idea on economic grounds, since even if a team came in the stadium would likely be a money loser unless subsidized by taxpayers.
The crowding-out of private investors by the community college is a loss. Government is able to take advantage of its tax-preferred status to deny private investors an opportunity to make money. While the school says it will make up the difference between what the baseball team will pay and the cost of the facilities on rental of the other facilities to traveling teams, the taxpayer is still the residual claimant and bears the risk if the plan fails. Stephen notes that the move is perhaps spurred by gridlock over higher education funding in the Illinois legislature and the executive office. If so, they'll like this risk-shift even less.

As to the use of higher-education funding for sports stadia, one might wish to think about the University of Phoenix Stadium. But that's a private, for-profit concern, and it uses the stadium as advertising (on any given Sunday during football season.) I'm less worried about the mixing of higher education with commercial enterprises than I am the use of a state higher educational institution to crowd out private investment.

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Jihad: Book Shredding at Cambridge University 

IMPORTANT UPDATE: See this post correcting an error in the information from the Counterterrorism Blog.


Last Wednesday and Thursday, I wrote about the use of libel lawsuits to prevent criticism of the funding of terrorism. The latest incident involves a capitulation by Cambridge University Press, without even trying to mount a defense, in which it agreed to shred the unsold copies of Alms for Jihad: Charity and Terrorism in the Islamic World, by Burr and Collins, and to recall copies from, other bookstores, and even libraries that bought it.

Also on Thursday, Jeffrey Breinholt posted a great piece of research at the Counterterrorism Blog:
History is also full of cases by Islamic organizations and individual Muslims who try to use Western litigation to stop the fountain of knowledge. When it comes to the legal merits, they almost never win. When the dismissal happens, they try to claim it was all a silly misunderstanding.
Breinholt gives citations and sources for more than 20 libel lawsuits by Muslim individuals and organizations, observing that:
These cases may be the tip of the iceberg. Although truth is a defense to libel lawsuits, it generally takes thousands of dollars to establish the truth sufficiently to achieve a dismissal. Settlement is sometimes the best option, no matter how unmeritorious the allegations. When that happens, there will be no court opinion. Thus, we do not know how many more cases are out there in which someone facing steep legal bills chose to quietly settle. For those defendants, they will probably never mention the word Islam again in public. Who loses then? In the long run, fear of discussion has costs to society�s search for the truth. Some of us like the fact that information flows so efficiently, and we want to keep it that way.

Moreover, the truth is not always obvious when the lawsuit is being pursued. It often takes many years and much more lively American dialogue to get there. That means the use of litigation to control the flow of information should matter to those all who appreciate the gradual pace at which knowledge develops. There is now no question that [Global Relief Foundation] was under investigation - it has since been designated as a terrorist financier by President Bush. Cat Stevens� conversion to Islam and his relocation to Iran is now common knowledge... Historically, with some libel actions, we sometimes look back years later and wonder how anyone could have questioned the information then at issue, either because it is so obviously true or because our mores have changed. Then we feel dirty.
The MSM(mainstream media, ABC, NBC, etc.), of course, remains largely silent on this book burning (well, shredding) free speech issue, but the rest of the blogosphere is starting to catch up. Glenn Reynolds posted at Instapundit late Thursday afternoon. PowerLine noted the issue on Saturday, and there are links here and here to Mark Steyn's op-ed in today's Orange County Register.

In additon to the sources linked in my previous posts, Stanley Kurtz has a thoughtful roundup, including links to other earlier material.

The foundation of western civilization requires an open and frank discussion of ideas. When one aggressively "aggrieved" group succeeds in limiting almost all commentary they perceive to be against "them," everyone loses. We must be able to ask the fundamental questions of "Why? Why not? How? What?" These basic, basic words have driven the success the world experiences today. Sympathy (or feelings of guilt) should not lead us to allow any "minority" to undercut the free market of ideas with baseless litigation.

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Unintended Consequences and Government Control 

There are those who wish everything we make, say and do would be controlled by a central authority, in most cases the government. We have our own control driven politicians, those who think THEY know better or more than the rest of us for just about everything. These believers insist they can FIX anything just by either banning something outright or forcing some kind of imposed behavior. This kind of thinking tends to ignore a couple of critical factors: human nature and Mother Nature.

A recent example of government intervention to make everyone "safe" is summarized below. Though the bureaucrats' intention was good, the results could be devastating. And, those who enforce these practices will be the first to blame someone else, outside their bureaucracy for any future accidents or failures.

All of us use computers for much of what we do - not just the "computer" but our cell phones, cars, appliances, etc. In addition, computers run airplanes, our national electrical grid, space stations, satellites, etc. A key ingredient in the manufacture of computer circuit boards is solder, that stuff that lets you adhere metal to metal, to a frame, etc. Solder is also flexible. A small percentage but key component in solder is lead. Turns out bureaucrats in Europe and China, discussed in the Chemical & Engineering News, have decided that lead needs to be eliminated from everything. Problem is, Mother Nature has other ideas. Lead helps prevent computers from short-circuiting, developing tin "whiskers." If the lead is removed, the soldered components become more fragile, develop these "whiskers" and increase the possibility of breakage, short circuiting, etc.

It is wonderful to want to FIX everything with one fell swoop of a law, etc. But characteristics of metals are rigid. When we find a solution that works to minimize risk, breakage, contamination, etc. we would be wise to be very careful before we ban a component that actually saves lives in the long run. Flexibility should be an integral part of the legal process. Hmmmm

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Friday, August 03, 2007

How people can help 

Michael has been posting some information at the end of each post since Wednesday night with information on how to help with the victims of the Minneapolis Bridge tragedy. Here's some information (poststamped to stay top for the day.)

Minneapolis Red Cross - donate blood and money
* Web site:
* Donate blood: 1-800-448-3543
* Donate money: 612-460-3700

United Way (2-1-1)
The United Way has an established protocol for handling donations. They work with state and local officials by consolidating offers of emergency assistance and making them known to responders. Contact United Way's 211 hotline for donations. Just dial 2-1-1 or 651-291-0211. (Full disclosure: I am a board member of the United Way of Central Minnesota.)

Minneapolis Red Cross has established a Family Assistance Center at the Holiday-Inn Metrodome, 1500 Washington Ave., Minneapolis, MN 55454

We'll talk more about this tomorrow on The Final Word at 3pm on AM 1280 the Patriot, and I will guest host for Tony Garcia on The Tony Garcia Show on 1450 KNSI Sunday at 1pm. (Links go to sites where streaming audio is available.) More about the bridge tragedy as infomrmation develops, otherwise, we'll see you Monday.

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Slowing down 

The slow drip of slowing economic news continued today with the employment report. The number came in below forecast:
Job growth slowed to 92,000 in July, from 126,000 the prior month, the Labor Department said today in Washington. The jobless rate increased to 4.6 percent from 4.5 percent. A separate report from the Institute for Supply Management showed service industries, which include banks and retailers, expanded less than anticipated.
Expectations were for a 126,000 increase, and was based on a previously-reported increase of 132k for June. Birth-death model issues are discussed by Barry Ritholz, who I think can be credited for getting this number right. Calculated Risk notes that private employment was much stronger than the ADP figure I reported a couple days ago. Other reactions here from the WSJ Economics blog, including Ian Shepherdson's note that the household employment data have averaged only 26k per month, almost 100k less than the payroll data. It may be months before we figure out that divergence. Separately, James Hamilton uses a weighted average of the three and gives us a smaller increase of only 60,000.
Some would argue, and quite legitimately, that we should not put too much stock in one month's numbers, and the poor July numbers look better when you average them in with the strength reported for June. Even so, things at the moment don't look so great to me.

UPDATE: Two forecasters who previously were calling for a Fed rate increase have folded those hands.

However, both still expect the Fed�s next move to be an increase in rate, some time in 2008. �In making this change we recognize that recent financial market stresses increase the risk of a financial market accident that forces the Fed to respond by easing. We do not however, place a significant probability on this event at this stage (15%),� JPMorgan said.

Most economists expect the Fed to leave rates unchanged next week and Fed funds futures markets remain convinced that the Fed will cut rates by a quarter-percentage point to 5% by the end of the year (and even priced in a 47% chance for further ease to 4.75%).

While most economists have agreed for some time that the Fed is on hold through December, JPMorgan and Barclays weren�t alone in predicting a rise. In the June WSJ survey of economic forecasters, one in six economists expected an increase in rates. However, since that time worsening credit conditions, a continued housing slump and a benign inflation outlook have made that position more difficult to maintain.


Unleash the Practice Freeway II 

In this post yesterday I called for an end to the crippling of the Practice Freeway.

The St. Paul Pioneer Press reports this morning that:

"Drivers of semi-trucks loaded with freight found themselves stuck in congestion Thursday on detours around the collapsed Interstate 35W bridge in Minneapolis, part of a major artery through town, delaying loads and prompting a trade group to appeal to Gov. Tim Pawlenty for help.

The Minnesota Trucking Association asked the governor to temporarily lift restrictions that keep commercial trucks from using a section of Interstate 35E that runs through residential St. Paul with a speed limit of 45 miles per hour. The restriction prevents trucks from using the highway as a connection to Interstate 35. Opening the route to truckers would relieve congestion on other roadways, they argue. "

The Star Tribune reports that other affected highways got "a rapid makeover":

"Highway 280 has been converted, temporarily, to a full freeway. Two stoplights on the highway are now permanently green for vehicles on 280, and access to and from cross streets near those signals has been blocked."

The blocked access points from Highway 280 are causing concern among nearby businesses. Other neighborhoods are bearing additional burdens as well:

"For much of Thursday, it appeared that northeast Minneapolis may have borne the brunt of the drivers seeking alternate routes. Commutes that normally took 15 minutes lasted 45. Traffic cops tried to keep intersections clear along Central Avenue, which was packed bumper to bumper for miles north of downtown.

City Council Member Diane Hofstede, whose ward includes Central Avenue and the north end of the collapse site, said the city is considering turning off a few of the traffic signals to improve the flow on Central and on University Avenue, which curves around to become a major north-south route in Northeast."

The 35W bridge catastrophe has radically altered the cost benefit analysis for traffic patterns throughout the Minneapolis - St. Paul metropolitan area. It makes no sense to continue to sacrifice optimum performance of the regional highway network in order to cater to parochial neighborhood interests. Minnesota Governor Tim Pawlenty, St. Paul Mayor Chris Coleman, and US Transportation Secretary Mary E. Peters should lift the artificially low speed limit and other restrictions on Interstate 35E.

River traffic 

I am listening to last night's Hugh Hewitt podcast (note to Duane: I'm still Billy Preston when he announces NARN!) and noting Rep. Michele Bachmann's discussion of river traffic and the importance of the river to economic commerce here. The Reuters report reminds us that most of the grain that would move through that area is still in the field and so it will be a few months before it moves down the Mississippi River to market. I'm looking at corn, soybean and wheat futures contract charts and while prices have risen somewhat, it doesn't appear to have had that large an impact. (Check also the Minneapolis Grain Exchange figures.) From what I can see, taconite shipping is over the Great Lakes rather than down the Mississippi.

How much traffic is that? According to this article from the Minnesota Dept. of Transportation (scroll down to the place where the discussion of draining of the St. Anthony lock begins), 1.5 million tons of commodities are shipped through there (as of 2005) "including grain, gravel, coal, steel, cement and rock salt."

Plans by the city of Minneapolis to convert part of its port for parkland, housing and other uses, Lambert said, will have an effect on river shipping and other transportation modes as well.

He said, for example, that grain that was once delivered to the Minneapolis port by rail now goes to the port at Savage on the Minnesota River for shipment downriver on the Mississippi.
This data on shipping on the waterway suggests much less now, little more than a million tons, compared to over five million from St. Paul and three more from Savage (on the Minnesota River, which enters the Mississippi below the bridge.) The impact here will be felt, but it's not as big as one might have thought from that discussion. The lack of movement on grains and metal prices is indicative of that.

For further research: More on shipping in Minnesota. A directory of river terminals.

UPDATE: William Polley notes there are only three terminals upstream of the St. Anthony locks, and they do not have any grain, so the effects should be de minimus.

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How soon would we have been ready? At what cost? 

As the blame game continues, I got to thinking about time to build. Roughly how long would it take to have rebuilt the bridge that fell, assuming that Governor Pawlenty had somehow been able to gaze into a crystal ball and foreseen the black swan?

I use black swan in the Taleb-ian sense. Unlike Matt's otherwise very sensible post, I don't think trying to figure out why the bridge fell is going to somehow improve policy. I make this point repeatedly to students -- you can sometimes do everything right and get a bad outcome due to randomness. Black swans are simply outliers -- they are things that just happen that cannot be expected within the realm of our experience. I think that until investigation concludes, you should reserve the possibility that the bridge collapse is a black swan event. (Or perhaps a gray swan, for those who've read Taleb.)

Begin with the observation that no bridge can ever be perfectly safe. Rational allocation of scarce resources must involve marginal analysis: We allocate the money to make transportation safe up to the point where the marginal benefit of investing the dollar in project A is equal to that of project B is equal to that of project C, etc. And we invest only an amount where the increase of safety is worth the expense of providing it. I don't wait for the car 300 feet away that I judge to be traveling about 30 mph to pass before crossing the road; experience teaches that I can cross that road without incident. 99.999% of the time, it will be the case; every time I have done so before I have arrived to the other side safely. That doesn't mean the car will never hit me, just that the chance that it will is vanishingly small so that I do not allow it to disturb the decision that I'd rather be on the other side of the street now.

So it is with the I-35W bridge: We knew it was "structurally deficient", just like 73,533 other bridges in America. Repairing them takes a generation, we are told, and costs $188 billion. But, as Peter Gordon points out in another context, all applied economic analysis comes to ten words: At what cost? Compared to what? How do we know? We are told this is the cost, but what else can you do with the money? Would it have come out of light rail? Would it have come out of the DNR budget? Schools?

And the time consideration is vital. The argument over whether we could have prevented this particular event means either the Pawlenty administration would have been willing to impose the costs of detoured traffic on the possibility that this particular bridge would fail. It would have required you to build out over some period of time, probably longer than two years. What is the value of all the time that drivers in the Twin Cities would have lost? And that would have been certainly lost, compared to the possibility of failure. So the state made a decision, with full knowledge, knowing that "sometimes Things Fall Down" but investing the dollars into other, more likely or more beneficial projects. All scarce resources have to be allocated somehow. If you don't want to allocate based on marginal cost equals marginal benefit, tell us what your decision rule is.

Had the Pawlenty administration actually foreseen this black swan, it would have had to argue that this was the one to pay attention to, and damn all the other structurally deficient bridges in the state. Or it would have had to add billions more in taxes, plus all the detours of traffic, to repair all the deficient bridges; otherwise, it must prioritize and leave some other deficient bridges out there. Certainly the road construction firms would have been delighted, but they're the glaziers in the broken window fallacy.

Short of a report from the tragedy that says the engineers missed a flaw in the bridge, we will be left with a report that this was something that just happened, a random event, a black swan. (And not necessarily the only one; recall the Schoharie Bridge failure on the New York Thruway in 1987 after a "50-year flood".) And while engineers can determine whether something could be done to make bridges safer, I can give you the answer: There always is something more. But it's not free, and we don't know if it's worth it. That's a question for markets.

ADDENDUM: As one might have expected, the told-you-sos are now out. Engineers, again, are not paid to decide whether to invest in this project or that, just to tell you what it costs to get a certain result. Engineers never tell you "compared to what?" But engineers make great copy for an article, or witnesses for a legislative investigation. Neither journalists nor legislators will answer the compared-to-what question for you, either.

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Thursday, August 02, 2007

Pay me another toldja 

On July 17 I wrote a post titled "Starvation Comes Next",
It is probably only because people understand so little economics that Robert Mugabe will not be thought of as the perpetrator of democide. Just as surely as a bullet or machete, purposefully emptying your country's stores will kill your people.

...the bakers will stop making bread, and the farmers will stop bringing produce to market. Of course it could be that Mugabe is creating a pretext to nationalize industry like he has the farm system. I doubt that will go well for him either. The only question that remains is how many will die, and when will Mugabe leave.
From this morning's New York Times,
Robert G. Mugabe has ruled over this battered nation, his every wish endorsed by Parliament and enforced by the police and soldiers, for more than 27 years. It appears, however, that not even an unchallenged autocrat can repeal the laws of supply and demand.
Damn! There goes that Nobel.

One month after Mr. Mugabe decreed just that, commanding merchants nationwide to counter 10,000-percent-a-year hyperinflation by slashing prices in half and more, Zimbabwe�s economy is at a halt.

Bread, sugar and cornmeal, staples of every Zimbabwean�s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.

Manufacturing has slowed to a crawl because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.

The chaos, however, seems to have done little to undermine Mr. Mugabe�s authority. To the contrary, the government is moving steadily toward a takeover of major sectors of the economy that have not already been nationalized.

Of course not all starve. Dan Drezner points out correctly that the price caps mean some other rationing mechanism, in this case being a friend of "government price inspectors". But as the economy declines, Mugabe becomes less and less able to deliver these goods even to his friends. Already he is having to resort to enslaving producers to deliver bread and other staples. This will only increase. And as that happens, some other political leader is going to step up and offer a reform program that liberalizes prices ... while maintaining enough graft to pay off that leader's supporters.

Bruce McQuain thinks Venezuela could be next.


Time to Unleash the Practice Freeway 

We give thanks today for the short term good news that the immediate death toll from yesterday's bridge catastrophe was smaller than the initial reports, but wait for the other shoe to drop as recovery efforts continue. Our primary thoughts continue to be with those who were injured or died, and with their friends and loved ones.

But as the first shock wears off, we also begin to think about the longer term consequences for the many others who will be affected by this disaster. Mitch Berg notes that "if you need to go from south to Northeast in the metro, the 35W Bridge was the main link. And it was heavily used; the Minnesota Department of Transportation estimated 140,000 cars a day used the bridge as of 2002." Mitch is right -- we live south of the Minnesota river, and the 35W bridge was one of the only three realistic routes for us to take to go almost anywhere in Minnesota or Wisconsin north of the Mississippi river. Captain Ed Morrisey agrees that the economic consequences for the entire region could be severe. And it is not just freeway traffic. The bridge collapse cut off the new locks for river barge traffic, and a railroad line. All of this traffic also will have to be rerouted

Unfortunately, one of the highway alternatives, Interstate Highway 35E through St. Paul, for years has been justifiably called the "Practice Freeway" by local columnist Joe Soucheray (and many others following his lead). Community opposition at the time 35E was built led to a stretch of limited access, divided highway limited to 45 mph even though it was designed and built for 70 mph. The original plan for a connection from 35E to westbound Interstate Highway 94 along Ayd Mill Road was deliberately crippled as well.

St.Paul city officials have begun to loosen the restrictions on the Ayd Mill Road connector. It is now urgent that all involved federal, state and local agencies and officials cooperate to do whatever it takes to unleash all remaining restrictions on the Practice Freeway and Ayd Mill road.

At this time of crisis, Minnesota and the Twin Cities metro area needs to make the fullest possible use of all available freeway capacity. It is no longer justifiable to constrain freeway use because of NIMBY local neighborhood opposition.

Crediting reasonable politicians 

A number of MOB bloggers have noted some people politicizing the collapse of the I-35W bridge. (See Michael FMI.) Let's give credit to two DFL politicians who have shown more reason:

"The fact MnDOT did not bring that forward and request funding tells me engineers did not have any reason to be concerned about its safety,'' Rep. Melissa Hortman, DFL-Brooklyn Park, said, adding that safety is the agency's top priority.

"If they know there was any risk with this bridge, that would be their highest priority with spending dollars,'' she said.

"We have never sensed there were any troubles with this particular bridge,'' said Rep. Frank Hornstein, DFL-Minneapolis.

Hortman emphasized that a divisive battle this year during the legislative session about the quality of state roads isn't related to the collapse.

"All of the recent battles about funding don't have anything to do with this,'' she said.

Thank you Reps. Hortman and Hornstein.

UPDATE: Here's an example of unreasonable, from former St. Cloud mayor (and blog fan) John Ellenbecker (DFL-Derangedville) in a discussion on the Times chat.
Charming. Have any of you thought about how much light rail costs, and whether that money would be better spent on bridge repair? 5600 daily rides on Northstar = $309 million in capital cost. 140000 daily trips on the I-35W bridge... no, that's the Republicans' fault.

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Silencing Criticism of Terrorist Support 

Yesterday, I noted the use of libel lawsuits as a technique for suppressing criticism of terrorism funding. While most of the MSM continues to ignore this story, an article in today's New York Sun gives more details:

"Cambridge University Press has agreed to destroy all unsold copies of a 2006 book by two American authors, "Alms for Jihad," following a libel action brought against it in England, the latest development in what critics say is an effort by Saudis to quash discussion of their alleged role in aiding terrorism.

In a letter of apology to a wealthy Saudi businessman, Sheikh Khalid Bin Mahfouz, Cambridge University Press acknowledged that allegations made in the book about his family, businesses, and charities were "entirely and manifestly false." The publisher wrote, "Please accept our sincere apologies for the distress and embarrassment this has caused."

The press also published a separate apology on its web site (, and wrote that it would pay substantial damages and contribute to legal costs. A press release by Sheikh Mahfouz's London-based law firm, Kendall Freeman, said Cambridge University Press was also writing to over 200 libraries around the world asking them to withdraw the book from shelves. The total press run was about 1,500 copies.

...The press release from Sheikh Mahfouz's law firm said he would donate the money from the settlement to the United Nations Children's Fund. Forbes magazine lists the sheikh's fortune at $3.1 billion, much of which derives from a sale of National Commercial Bank to the Saudi government in 2002."

UPDATE: Hot Air has an interview with Dr. Rachel Ehrenfeld of the American Center for Democracy, one of the authors who has been subjected to attempted intimidation by libel litigation. And this post by Candace de Russy at Phi Bet Cons on National Review Online has more info and links.

Wednesday, August 01, 2007

35 W Bridge Collapse - A Real Catastrophe 

Many of you have seen the footage on television. A major artery over the Mississippi River from downtown Mpls. to the northern suburbs collapsed towards the end of rush hour today. The Pioneer Press has details and photos. The Star Tribune paper also has an online article.

All sections of the country have their natural disaster risks. A structural collapse like this, though, is totally unexpected. We take for granted that everything we build will withstand whatever. This bridge is relatively new, 30 years old. There will be much studying - we will need to understand why a calamity of this magnitude occurred. The Department of Transportation is on site and will be able to investigate as long as the predicted thunderstorms stay away.

In all disasters, though, the human spirit comes through. People got out of their cars to help others who were more frightened or injured. Those with boats on the Mississippi River launched them to rescue people caught in the water. US Internet opened their WI-FI network so people could contact others. We have heard the phone lines are jammed but internet providers appear to be handling their respective traffic. This is a good way to check with friends and family. We have heard from relatives and friends outside MN via the Internet - it's nice to know that you are remembered.

We will learn more in the next few days but it is very difficult to comprehend something like this happening. For the Twin Cities, the impact will be substantial - it is one of the few ways to access downtown Minneapolis from most of the northern suburbs. And, for those who will have lost family and friend, our sympathies go out to you.

KING ADDS (11;30pm): Using this map, I see the bridge takes 140,000 trips per day, about 10% less than the I-94 bridge there. To put that in perspective for St. Clouders, the most travel on I-94 into the Cities and out, around the Rogers area, tops out at less than half that.

The Twins not only have canceled all activities for tomorrow, they also are contemplating canceling games against Cleveland for the weekend. Those of us living to the west of the Cities don't realize how much traffic goes to the Dome via 35W.

I was out golfing tonight with a 6:20 tee time (my evening league) and had no idea what had happened even after reaching the clubhouse. They had turned the game on because they had watched TV reports and had reached diminishing returns to viewing the news. James' posts on Buzz have been helpful, as has Captain Ed.

Academia, Free Press, MSM, Threats, Loss 

Stanley Kurtz of National Review calls to our attention an insidious practice creeping into academia that has just taken an even more sinister turn. According to the Chronicle of Higher Education (subscription required) one of the bastions of academic publishing, Cambridge University Press, has agreed to destroy its remaining copies of the 2006 book Alms for Jihad: Charity and Terrorism in the Islamic World, by Burr and Collins. Kurtz also notes that the book is being pulled from bookstore shelves, and may disappear entirely.

Why? It seems that certain parties worldwide have decided they do not want their funding of terrorism to become to become known. Three other books that discuss terrorism funding have also received libel suits (or threatened libel suits).

Ms. Rachel Ehrenfeld, director of the American Center for Democracy, was threatened with a lawsuit over her book, Funding Evil:How Terrorism is Financed - and How to Stop It. She called Cambridge's capitulation decision "despicable."

In a blog post entitled, "Attention Authors: Be afraid, very afraid... if you write about Saudi support for terrorism," Emory Professor Deborah Lipstadt expands on the risks of self-censorship arising from fear of being sued. Defending even a baseless lawsuit can be very expensive.

It is very interesting that the MSM, dependent for its very existence on western civilization's protection of free speech, remains silent and unwilling to defend against certain attacks on speech. Failure to defend the rights of those who criticize the funding of terrorists risks losing true freedom of speech for everyone.

The elasticity of economics instructors or, there's no such thing as free economic instruction 

Everyone seems to be in favor of having more people learn economics. Greg Mankiw notes approvingly the suggestion from Nicholas Kristof. John Stossel, who of course has done a great deal to decrease the marginal cost of delivering that education, says it would help create better voters, which leads Bryan Caplan to suggest cloning Stossel.

But note that Caplan says "Everyone who knows some economics" should get out to teach it. That's a resource question. How many people "know some economics" and how many of those people can teach it? Just because we pass a law saying "everyone must learn some economics" in high school doesn't assure that what they learn is actually any damned good. Then there is the set of people who teach in high school. We're looking for the intersection of "people who can teach" and "people who know some economics". (Arnold Kling might have some suggestions on how to tell the difference.)

Suppose the intersection is sparse. We then need to do two things -- we can either pay them enormous salaries to get people who know economics to invest in learning how to teach, or we can develop ways to make each person in the sparse set more productivity. Stossel is productive via the lens and a broadcast network. Caplan, Mankiw and (to a much lesser extent) myself write blogs. William Allen and I can do radio; Russ Roberts can podcast.

Assuming that everyone has found the best means to deliver economic instruction, all this increase in demand should cause the wage I receive to rise. (Yes, presumptuous me, I think I count as one of those guys who both knows some economics and can teach. Your tetchy remarks in comments will be duly ignored.)

Yes, more economic instruction would be good, but TANSTAAFL. What would be the cost of that instruction, compared to what outcome if we don't provide it, who's buying and how will we know we got our money's worth? Consider me skeptical until these questions are answered.

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Unless there are a lot of government jobs 

...the Friday payroll report is going to disappoint.
Nonfarm private employment grew 48,000 from June to July of 2007 on a seasonally adjusted basis, according to the ADP National Employment
Report TM.

This month�s ADP National Employment Report suggests a deceleration of employment. The three-month average change in nonfarm private employment from May to July is 96,000, which is very close to the ADP Report�s year-to-date average monthly employment change of 91,000.

In July, employment in the service-providing sector of the economy grew a moderate 89,000, while employment in the goods-producing sector declined 41,000. This marks the eighth consecutive monthly decline in the goods-producing sector. Employment in the manufacturing sector declined 23,000.
Makes you wonder what that sentiment number was measuring.

And maybe the car industry is just having a bout of gas, but I don't see confidence there either.


Here's what 

Tom Powers sits on page one of the PiPress today with the headline "K.G.'s gone. So what?" For the answer, from Bill Simmons' column on the trade.
Celtics radio guy Sean Grande announced Minny games during KG's initial ascent and argued KG's merits as an underrated superduperstar ever since. I asked him for a one-sentence description of KG and here's what he e-mailed back: "All out, every night, heart and soul -- Game 13 in Atlanta, Game 61 on a Monday night against Charlotte, Game 6 of the Conference finals, doesn't matter."
I'm wearing these all winter. The NBA is back in my life. Thank you Kevin McHale.

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Yeah, but which Nobel? 

Craig Newmark is arguing that Robert Mugabe should win the Nobel Prize in Economics for his solution to the problem of scarcity.
"Where money for projects has not been found, we will print it," Mugabe was quoted as saying.
Brilliant! This has worked so well. Mike at Lamplighter points out to me that the Zimbabwean government has begun the process common in most hyperinflations: You drop a few zeros off the currency to make the numbers a little more manageable.

I sent a note to James the other day -- if I have his email address right -- that this 10 Brazilian cruzeiros note he has in his fabulous Curious Lucre collection has been stamped to make it worth only one centavo. That is equivalent to dropping three zeros too. Of course, they kept switching between cruzeiros and cruzeiros novo and cruzados and cruzados novos, littering the countryside with zeros along the way. When it comes to dropping zeros, the Brazilians were the champions, until they got real. By that time, eighteen zeros had been deleted.

When I was in Ukraine in 1995 and 1996, I saw street vendors using abacus to calculate bills for customers. At that time a dollar was about 180,000 karbovanets; the country had had 10,000% inflation in 1993 alone. I don't recall the abacus operators troubling over the zeros. When the national bank there finally introduce its new currency -- here Mitch, try to pronounce this: hryvna -- five zeros landed in the dust. 1 hr = 100,000 karbs. (Wish I could get on that diet!)

So no, Mugabe doesn't really deserve a Nobel for the dance of the zeros. That's old beer. But the idea that he can create whole buildings just by printing paper? If he can do that, he's more deserving of a Peace Prize than most of the previous recipients. We can only hope the Nobel committee has more sense than that.

UPDATE: Courtesy the Mises blog, I note that a new Z$200,000 note has been issued, which the BBC dutifully reports can buy a kilo of sugar. And then it states:
The new note is worth US$13 at the official exchange rate or $1 on the black market.
No word on how Mugabe makes the sugar appear. Surely a Nobel is not enough for this god.


Scalping now legal in MN 

For one of the few times you'll read here, Phyllis Kahn and I agree on something.
Minnesota's decades old ticket scalping law has gone the way of 25 cent ballgame beers. As of August 1st concert and sporting event tickets can be resold for whatever the market will bear.

"It kind of felt like it would never happen, but we're sure glad it did," says Brian Obert a co-owner of Ticket King, a Wisconsin based ticket broker with a new store on Chicago Avenue between the Metrodome and the Guthrie Theater. Ticket King has already leased Space in St. Paul near the Xcel Energy Center to open a second location. Ticket King's Hudson, Wisconsin office will eventually be closed.

State Representative Phyllis Kahn, (DFL) Minneapolis, pushed for nearly 20 years to have the ticket scalping law repealed as a waste of police resources. "It's just a total violation of the free market system," says Kahn.

I hope this represents an awakening in Rep. Kahn's understanding of economics, though I'll wait for more evidence.

The story goes on to show some illiteracy among the public.
Twins fan Diane Peterson of Butternut still needs some convincing. "To get more than it's worth, that's not honest," she said. "We're from Minnesota and Minnesota nice doesn't do that."
To paraphrase a Paul Heyne line, worth is always worth to someone. Things don't have a worth. People give things worth. That is, the worth something has is reflected by how much people are willing to give up to get it. If I'm willing to pay more than the face value for a ticket, that's because it's worth more to me. If I force sellers to sell for no more than face value, that ticket may go to someone who values it less than I do. Is that Minnesota nice?

UPDATE: Your economics review courtesy of Phil Miller, who separately notes the possibilities for downtown redevelopment.

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