Coordination Problem

Andrew Farrant and Ed McPhail on The Road to Serfdom

|Peter Boettke| The July/August issue of Challenge has an interesting article by Andrew and Ed on whether Hayek's work deserves the renewed attention it has gotten.

Just For Fun: Incentives, For The Grad Students Out There…

Just For Fun: Incentives, For The Grad Students Out There….

Cowen on Hayek with regard to fiscal as opposed to monetary policy

|Peter Boettke| Tyler Cowen on Twitter this morning claims that Hayek's theory are better at explaining fiscal policy rather than monetary policy. This claim intrigues me. For one I think as Hayek ultimately concluded efforts to tie the monetary authorities hands with a monetary rule don't work, and they don't work because of the fiscal appetite of the state. But in that sense Hayek's monetary and fiscal policy analysis work together. So in what sense is Tyler arguing that one is superior to the other?

The Over-Regulated Economy and the Technocracy Boom

|Peter Boettke| David Brooks has a great line in today's NYT, historians will be amazed that a nation that professed a hatred of bureaucracy produced so much of it. The numbers on the growth of bureaucracy and regulations that Brooks cites should give anyone pause to refer to the last decade as a period of laissez faire. Somehow I don't think it will.

Law, Economics, and Superstition Part 3: "Gypsies"

The third paper in my 3-part series investigating the "law and economics of superstition" is complete: "Gypsies."

Abstract:

Gypsies believe the lower half of the human body is invisibly polluted, that supernatural defilement is physically contagious, and that non-Gypsies are spiritually toxic. I argue that Gypsies use these beliefs, which on the surface regulate their invisible world, to regulate their visible one. They use superstition to create and enforce law and order. Gypsies do this in three ways. First, they make worldly crimes supernatural ones, leveraging fear of the latter to prevent the former. Second, they marshal the belief that spiritual pollution is contagious to incentivize collective punishment of antisocial behavior. Third, they recruit the belief that non-Gypsies are supernatural cesspools to augment such punishment. Gypsies use superstition to substitute for traditional institutions of law and order. Their bizarre belief system is an efficient institutional response to the constraints they face on their choice of mechanisms of social control.

Enjoy.

Housing Policy, Labor Mobility, and Unemployment Duration

Steven Horwitz

One of the distinguishing features of this recession is that the duration of unemployment has been notably longer than in other recessions.  See this graph:

This weekend, I've seen a couple of online pieces (second one gated) arguing that one possible explanation for these data is that unemployed folks are less mobile than they used to be thanks to having homes that they cannot sell for a price that comes close to breaking even. [UPDATE:  to be clear, I'm not, nor are they, arguing that this is the only explanation for the increased duration of unemployment.  Surely benefits extensions matter as well as other factors, but this is one that we perhaps haven't seen before.] Housing policy that subsidized low- or no-equity loans have left a fair number of people in situations where they would like to move to greener pastures in search of employment, but are unable to make the move because they are stuck with houses they can't sell, which in turn prevents them from affording a new home or even a rental in the new location.  It's worth noting that the same argument would apply to currently employed people looking for better work elsewhere, opening up their own job for others.

A comparison to Canada is interesting as they did not have the perverse housing policies we had and still have a home ownership rate similar to ours, yet they have not had the fall in housing prices that would limit labor mobility the way that is being hypothesized for the US.  The latest Canadian data that I could find has their current unemployment rate at 7.9%, lower than the US, and although their median duration of unemployment in 2009 was 17 weeks, which was slightly higher than the US one was on average, that number was actually just a bit higher than their 2007 and 2008 numbers and the same as 2005.  That 17 weeks was also notably lower than their average for the last 15 years.  Canadians have always had longer unemployment duration thanks to differing unemployment policies and a weaker economy, but what they have not seen is anything near a comparable jump in duration during this recession.  That would appear to be some evidence for the "can't sell the house" explanation for labor immobility and unemployment duration in the US.  But I'd love to hear alternative hypotheses.

If this argument is right, it's an interesting unintended consequences story in the way that housing policy interacts with labor market mobility.  One can also tell a Lachmann type story here:  housing and a job are complementary goods in a household production function.  In the face of dynamic change that changes the value of one of the goods, substitution will be called for.  Unemployment requires a revaluation of one's human capital.  And changes in one's human capital that might make a new job attractive may require rethinking the housing side by moving.  But substituting a new job for the old one means that it has to be complementary to the housing piece of the puzzle.  In a healthy housing market, swapping out the housing component is not as difficult, which makes it easier for the household to make the necessary shifts in employment/human capital in the face of dynamic change.  Where households are stuck with the housing capital, they are also stuck with the range of jobs available in that area.  The result is, apparently, longer spells of unemployment and a higher unemployment rate.

I also think this poses some interesting questions for the whole "recalculation" process.  Much like the Hoover high-wage policy (though much less dramatic), one of the effects of the housing debacle has been to reduce labor mobility.  In the Hoover case, it was a matter of being unaffordable to hire, and in today's case, it's that people can't sell their houses to move to where opportunities might be.  In both cases, interventions prevent human capital from finding the places where it is complementary to the new post-crash structure of production. If we want households to recalculate effectively in the face of economic change (e.g., adjust their labor supply when the structure of production changes), we cannot distort the various markets and prices that inform that recalculation process.

If all of this is correct, it would suggest that we're in for a long period of fairly high unemployment until the housing market settles.  It may well be the case that some folks who would like to find a (new) job elsewhere will have to wait until they have sufficient equity in their homes to afford to sell.  This is yet another reason to get rid of the policies that created this mess so that we don't exacerbate or repeat it in the long run.  As for what, if anything, can be done through policy (including, of course, eliminating bad policies) to alleviate this situation in the short run, I have no brilliant ideas.  Feel free to suggest some below.  The answer, of course, may be "nothing, let the process play out and heal itself."

Apparently Environmentalists Have Different Definitions of "Credible" and "Authoritative"

Steven Horwitz

Thanks to the magic of Facebook, I came across this entry on "Neoclassical Economic Theory" from the "Encyclopedia of Earth."  The latter bills itself as (my added bolds):

Welcome to the Encyclopedia of Earth, a new electronic reference about the Earth, its natural environments, and their interaction with society. The Encyclopedia is a free, fully searchable collection of articles written by scholars, professionals, educators, and experts who collaborate and review each other's work. The articles are written in non-technical language and will be useful to students, educators, scholars, professionals, as well as to the general public.

The motivation behind the Encyclopedia of Earth is simple. Go to Google™ and type in climate change, pesticides, nuclear power, sustainable development, or any other important environmental issue. Doing so returns millions of results, some fraction of which are authoritative. The remainder is of poor or unknown quality.

This illustrates a stark reality of the Web: digital information on the environment is characterized by an abundance of "great piles of content" and a dearth of "piles of great content." In other words, there are many resources for environmental content, but there is no central repository of authoritative information that meets the needs of diverse user communities. Our goal is to make the Encyclopedia of Earth the largest reliable information resource on the environment in history.

Its tag line is "Content.  Credibility.  Community."

So we turn to the entry on neoclassical economic theory.  The first thing we notice is the author, and that he is not an economist (though he IS at GMU!):  "Robert Nadeau is a full professor of environmental science and public policy at George Mason University."  Now it's possible that a non-economist could do a good job writing such an entry, but it's highly unlikely.  And if one is selling one's encyclopedia as being the "authoritative" and "high quality" and "reliable" and "credible" alternative to Google, then perhaps finding oh, say, an actual historian of economics to write this piece might have been a smart strategy.

The results are amusing, in the sad, sick sense of the term.  I could easily generate a list of ten errors right off the top, not the least of which are misspelling Keynes' last name, Von Neumann's first, and Walras's last in various places.  Then we could get more serious with its reference to "Maria Edgeworth" as a founder of neoclassical economics and its claim that all the founders were engineers, to its invocation of the circular flow as if that were part of the late 19th century revolution.  We might also note its almost complete reliance on Phil Mirowski's work and the absence of any references to work in history of economic thought journals (though it does have tons of original sources cited).  Phil's work is fascinating and provocative, but not without its problems and to present it as "authoritative" without any context is just wrong.  And I haven't even mentioned what the entry does to Menger.

In the wake of Climategate and related events, the envrionmentalist movement needs all the credibility it can get.  Pieces such as this one aren't going to help and will only reinforce the idea that these folks have trouble with what "authoritative" and "high quality" scholarship looks like, especially in specialized disciplines.

But please, don't let me ruin your fun.  Take a skim through the piece and feel free to spot additional errors and list them in the comments.  And if any of the GMU folks want to print this out and pin it to Nadeau's office door, feel free.

"Climate Change is real, and it is man-made. But the question is what are we going to do about it."

|Peter Boettke|

That was Bjorn Lomborg commenting on the radio show On Point.  The show was focused on a new study by Stanford climate scientist Noah Diffenbaugh which argues that heat waves are becoming commonplace.  The host Tom Ashbrook really wanted to push an alarmist interpretation of the study and the discussion.  In fact, one caller actually suggested that the best government policy would be to give each of us a gun so we can shoot ourselves because the living will envy the dead in this apocalyptic future of extreme weather.

Actually, Diffenbaugh resisted this interpretation and said that as a scientist he tries to take a skeptical stance toward all positions, including his own, and examine the data critically, and think in terms of trade-offs.  In fact, he said at one point in response to Ashbrook's prodding, that there were obviously benefits from the activities that are leading to climate change, and that ultimately the policy options are really about weighing costs and benefits.

In fact, the most 'controversial' thing Diffenbaugh said was that the scientists associated with "Climategate" were perhaps rude but completely innocent of the charges of scientific fraud.  But in this he was merely reporting what the British panel released last week.  I don't have any strong opinion on the episode, and would study it mainly as a case-study in the sociology of science.

I am not an environmental scientist, and I am not someone who follows the climate debates closely.  I do believe that trade-offs abound in every aspect of human life, and suspect this issue is no different. And I am very skeptical that government policy can effectively deal with negotiating these trade-offs.  And, I should add that I was long ago persuaded by Julian Simon's argument that the ultimate resource is the human imagination, so that as the costs start to outweigh the benefits of activities, individuals will have a strong incentive to find alternative ways to avoid the costs and realize the benefits of living better together.  I should also add, that I have a great faith in the resilience of nature and of man if left to free to choose.  Add all that together and I am an environmental policy skeptic even if I had a strong position on climate change as being real and man-made.  Even if you make an argument about a "global public good" it seems to me you still would need to worry about "demand-revealing" mechanisms, etc.  In other words, if you grant many of the strongest arguments to the climate change alarmists, they would still have to worry about (a) identifying what the correct policy response would be, and (b) figuring out how to implement such a policy in a cost effective manner.

Another Credit Market Regulation, With a Twist

Steven Horwitz

In this week's Freeman column, I discuss legislation just passed in Arizona making it the 17th state to limit the interest rates that so-called "payday" lenders can charge on their short-term, no credit check loans.  Arizona, like many of the other states, has capped the effective annual interest rate these firms can charge to 36%.  The result is that these lenders just leave those states, abandoning the populations who can only find access to credit through their services.

As I point out in the column, 36% may seem high, but consider the nature of the loans.  Payday loans are usually 14 day or 30 day loans designed to bridge the gap between paydays for consumers who have no access to other forms of credit, or who have problematic credit histories.  The idea is to take the loan and then pay it back on the next payday, hence their name.  These lenders frequently charge something like $17 interest per $100 borrowed for 14 days.  Compounded over a year, and including various fees, it's not unusual to see annual interest rates in the 400% range - if one holds the loan for a full year.

Although capping rates at 36% may seem generous to the lenders, consider one other fact:  the default rate is around 50% within a 12 month period.  Compare that to credit card default rates that are just under 10% and home mortgage default rates that are, even these days, under 5%.  Not surprisingly there's a direct correlation between default rates and interest rates, as well as the lack of collateral.  Collateral-free loans like credit cards and payday loans will always have higher rates, and loans without a credit check, such as payday loans, will be higher still.  At a 50% default rate, it's no surprise that lenders want to charge high rates.

I won't rehearse the usual economic arguments about high time preference, mutual benefit, and the problems of price ceilings.  I want to emphasize one point I raised at the end of the Freeman piece.

One main group of customers of payday lenders are immigrants, both legal and illegal.  The usual voices on the left are cheering this legislation as a victory for such folks against the "predatory" lenders.  (Of course another major set of customers are military personnel, but no one seems to think they are being preyed upon in the same way immigrants are - I'll call the attitude toward immigrants "condescension" and leave it at that.)  But the economics suggests a radically different interpretation:  this legislation is a logical follow-up to SB 1070, the controversial state law on illegal immigrants.  If you wanted to make life tougher for immigrants, especially illegal ones, drying up one of their key sources of credit would be the way to go.  So the very groups on the left who are in opposition to SB 1070 (and rightly so) are also cheering a bill that ends up probably having a larger negative effect on the people they purport to care for.

Persons who have difficulty accessing credit through formal channels are the ones most likely to use payday lenders, particularly people with no or a problematic credit history and who do not have the assets to use as collateral, or perhaps even the proper ID or legal status, for the formal sector.  And as the recent credit card legislation has limited the availability of that collateral-free form of borrowing, it has probably contributed to the demand for payday loans.  The high interest rates are unfortunate, yes, but probably a reality of their status as credit risks.  The question is whether they are better off having access to credit at high rates (and to be clear, the lenders are required to make clear how high those rates are), or to have no access at all, which is likely to be the result as payday lenders have left the states who have passed interest rate caps.

However unpalatable these lenders might be, at least they are in the formal sector of the economy, unlike the "loan shark" of years past.  They are established companies working within the law and who have reputations they wish to protect.  By driving them out, these 17 states will not stop the demand for short-term credit without a credit check, rather they will drive it underground where real predation is much more likely without any recourse to the law.  The supposedly "vulnerable" populations really will be vulnerable when their non-payment brings physical violence to them or their family members, rather than escalating fees or some sort of negotiated settlement in the formal sector.  Payday lenders don't break your knees or threaten your kids - not if they want to keep customers and avoid jail time anyway.

Are the backers of such legislation (and it's coming in other states) really doing those in need of this sort of high priced short-term credit any good by driving out those who provide it legally and leaving the market to the walking stereotypes of the loan sharking business?  It is yet another irony that those on the left who have made the exact same argument about making abortion illegal seem blind to this point.  (Payday lenders:loan sharks::trained ob/gyn:guy with a "dirty knife and a folding table".)

We should also consider a Baptists and bootleggers story here.  As loud as the voices shouting concern with the well-being of vulnerable populations are, it would be interesting to see what role the credit card companies have played in this legislation.  I'm sure they're happy to some degree to not have the payday lender competition, although it's not clear how many payday customers would qualify for credit cards under the recent change in regulations.

The bottom line here is that those who are supporting legislation to chase out payday lenders are portraying themselves as the humanitarians, but it is they who are denying some of the poorest among us access to the credit they need to put food on the table between paychecks or to not have to wait what might be a crucial few days to buy medicine for their children. Once again, ethical proclamations that ignore economics are largely worthless.  "Ought" has to first consider "can." 

Mises Day at IEA on July 22nd

|Peter Boettke|

On July 22nd the Institute for Economic Affairs will hold a conference entitled "Why Today's Political Class Needs Ludwig von Mises."  This is excellent and very much needed on both sides of the pond.  If you are in London, attend; if you are here in the US and involved in an organization that holds such events think of imitating IEA!!!  Friedman is great, Hayek is great, Buchanan is great, but there really is no substitute for Mises.  When we consider economics as a science for yesterday, today and tomorrow, the one voice that is the loudest and clearest is without doubt Ludwig von Mises.*

I heard about this through Anthony Evans at his excellent blog The Filter.

*Favorite rhetorical point from Mises: "The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built.  It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused.  But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race." (Human Action, p. 885).