Sunday, January 29, 2006

Hero of the day: BB&T

Eminent domain is one of worst violations of property rights to which the government can resort. Previously used to commandeer private land for public use, the Supreme Court ruled in June that cities can now redistribute private property to other private hands to "promote economic development." (Is it me, or does it seem that Justice Stevens is almost apologizing while delivering the lead opinion of the Court?)

There's plenty to say about eminent domain; plenty has already been said. I'll offer a Ludwig Von Mises line: Progress cannot be organized.

Thus, it is wonderfully refreshing to see that BB&T, a growing bank in the eastern half of the United States and the top financial institution by market share here in West Virginia, will not make loans to developers whose projects involve land taken from private citizens through eminent domain. The Washington Times has an article on it here. A number of other papers picked up the AP story as well.

Indeed, as BB&T's chief executive John Allison notes, "the dollar amount is insignificant." BB&T stands to lose less than one percent of its lending business, and there is no shortage of financiers for eminent domain-related projects. But the message is an important one-- companies can take a definitive stance against eminent domain. After all, while BB&T could often be privy to the sleight of government hand, it may well be them on the wrong end of the coercive sword the next time around.

BB&T's stance does raise the issue of corporate responsibility. In the interest of maximizing shareholder value, should BB&T be refusing loans based upon philosophical difference? It comes down to which effect is larger-- the negative impact from foregone profit opportunities on passed over loans, or the positive impact of more funds to loan from like-minded depositors. We know that the balance sheet impact is "insignificant," so even if the announcement generates no net inflow of loanable funds, the whole deal would be a wash.

Balance sheet implications aside, BB&T is free to run its company according to any moral standards it chooses. They have made their values clear; shareholders can react accordingly.

One bank's stance against eminent domain is valuable not in its immediate fiscal impact but in the message it sends. If other institutions chose to do the same, then the impact could be palpable. It would be a glorious market-based solution to a government-created problem.

Friday, January 27, 2006

Hamas = No Harm

As the Hamas parliamentary election victory changes the face of Palestinian politics, many critics anticipate there will be an increase in violence, political instability, and social turmoil. I am only a dilettante when it comes to theories of war and conflict, but I am skeptical of these claim. I see two reasons why this election might moderate violence rather than enhance it.

First, Hamas has, in essence, transformed itself from a roving bandit into a stationary bandit. They now have an incentive to maintain social and economic systems in order to facilitate the future attainment of taxes, power, and prestige. As the status quo, they now have a incentive to reduce potentially disruptive terrorist activities for their own benefit. Despite their threats against Israel, this election has given them a lot to lose from frivolous military action.

The second force acting against greater violence is that terrorism is more difficult to fight than wars between nation states. As Martha Crenshaw writes in "The Strategic Logic of Terrorism", terrorism is a weapon of the weak -- of those not represented by governments. The Hamas victory has indelibly linked the group with a nation state. To an extent, they have lost the ability to engage in stealthy terrorist activities. Furthermore, the United States and other countries can now blame Hamas and the state of Palestine for terrorist activities even if they are not responsible. This will create some incentive for Hamas to regulate terrorism even if it is towards goals which they approve.

These two reasons alone are not enough to be carefree about the situation in the Middle East. Clearly, these could be very troublesome times. These are, however, two reasons to hope that the pessimism of journalists and political commentators is misplaced.

Monday, January 23, 2006

Your taxes, their dictators

Parade Magazine, the inserted Sunday magazine in a wide swath of the nation's newspapers, just published "The World's 10 Worst Dictators." They add 11 through 20 here. Rankings always make for a good time, don't they? Why should dictators be exempt?

(As a side note-- if you are ever looking for comedy online, read the comments by readers at the bottom of articles like this one. Someone out there has to filter these, so you know they have to have a sense of humor about them. I particularly like this jewel: "Read Noam Chomsky or Michael Moore if you can not read articles of Nelson Mandela." That might be the best sentence I've read all year.)

Anyway, here's the breakdown by region: Africa 7, Non-Southeast Asia 4, Southeast Asia 3, Middle East 3, Europe 2, and North America/Caribbean 1. I'd be willing to bet that, Israel witheld, if you were to rank the same regions in terms of development assistance received, you'd get an order that would be pretty similar.

But what about these particular countries under the rule of these particular despots? Are they getting development aid in the face of horrific rights atrocities? Well, a quick visit to the World Bank's World Development Indicators shows that the DAC has given money to every single one of these regimes. Some examples are below. If there's enough demand for it, I'll put up the data for all twenty dictators with their respective U.S. shares.

And how does the United States fit into the mix? Studies have shown that the U.S. tends to give development assistance primarily for the pursuit of democracy, so it would be surprising if the U.S. gave any significant amount of money to these leaders.

Yet they have-- and quite a bit in some cases. The DAC figures include all money given from the 23 member countries, but USAID gives just the U.S. portions. I like to think of the resulting percentage as the share of dictatorship that the United States has bought into for each country.

Foreign aid doesn't cause economic development-- Bauer liked to say that money was the result of growth, not the precursor to it. Despite the wishful thinking of first-world countries, aid doesn't cause democracy either.

Some examples:

1) Omar al-Bashir, Sudan. $6.31 billion in aid, $1.04 billion from the United States, for a 16.5% share.
2) Kim Jong-il, North Korea. $1.07 billion in aid, $581.5 million from the U.S., for a 54.3% share.
3) Than Shwe, Burma (Myanmar). $1.26 billion in aid, $31.8 million from the U.S., for a 2.5% share.
4) Robert Mugabe, Zimbabwe. $7.41 billion in aid, $1.13 billion from the U.S., for a 15.3% share.
5) Islam Karimov, Uzbekistan. $1.5 billion in aid, $385.4 million from the U.S., for a 25.7% share.
8) Saparmurat Niyazov, Turkmenistan. $348 million in aid, $143.4 million from the U.S., for a 41.2% share.
12) King Mswati III, Swaziland. $698 million in aid, $155.1 million from the U.S., for a 22.2% share.
13) Isayas Afewerki, Eritrea. $1.97 billion in aid, $364.8 million from the U.S., for a 18.5% share.
14) Aleksandr Lukashenko, Belarus. $702 million in aid, $153.5 million from the U.S., for a 21.9% share.
17) Pervez Musharraf, Pakistan. $6.59 billion in aid, $1.11 billion from the U.S., for a 16.9% share.
18) Meles Zenawi, Ethiopia. $8.2 billion in aid, $1.86 billion from the U.S., for a 22.7% share.

Creative Destruction and Economic Calculation

Ludwig von Mises's debate against Socialism in the 1920's was an important step in the development of economics. He argued that economic calculation, and thus economic growth, is not possible when government owns the means of production. This point is well-accepted amongst Austrian, and many neoclassical, economists. This idea, however, is not accepted amongst most politicians.

Donald Williamson, mayor of Flint Michigan, has proposed that the city own and run an assembly plant. The article quotes Williamson:
"We will (build) our own manufacturing plants that the city funds" he said. "We are going to specialize in nothing but truck accessories."

There is plenty of factory space available and people who are used to working on the assembly line. And once the city proves the plants can make a profit, buyers are certain to come knocking, Williamson said.
Not everyone in Flint agrees with Williamson. Paul Keep, editor of the Flint Journal questions the mayor's plan: "It seems like the private sector ought to be the one developing plants and not the municipality."

I see two significant problems with this policy proposal. First, the unemployment caused by failing assembly plants is certainly difficult for those who lose their jobs, but it is this process of "creative destruction" that is the source of the economy's strength. This process forces resources into more productive pursuits. Second, the government is distorting the system of relative prices that is required for economic calculation. Admittedly, it is only an intervention and not total socialism, but it will distort the efficient flow of resources. Preventing these two forces will slow the economic growth that the people of Flint, Michigan so desperately desire.

While Mayor Williamson may be ideologically drawn to partial (whole?) state ownership of the means of production, his policy will do much to limit the economic prosperity that comes as the result of market prices and the perennial gale of creative destruction.

Thursday, January 19, 2006

Always more regulation...always

Wal-Mart is a popular scapegoat for everything people feel is wrong with corporate America. Health care coverage for employees is as hot a topic as any, and Wal-Mart takes its fair share of abuse on this topic. Enter the Fair Share Health Care Act, West Virginia's latest stab at retaining the bottom position on the Fraser Institute's Economic Freedom Index. A general run down of the situation as it pertains to West Virginia is here. (If nothing else, the Mountain state has proved its bills are as lyrical in name as any.)

The bill mandates that all companies in West Virginia that employ 10,000 or more employees spend at least 8 percent of their wages on health care costs. Given that only Wal-Mart would be subject to the legislation, this isn't a bill about health care as much as it's another competitive obstacle that Wal-Mart has to hurdle to keep their company moving forward. After all, if this were about health care, why not have every company be required provide some degree of health insurance? What makes Wal-Mart employees particularly susceptible compared to, say, supermarket employees?

Of course, even if the bill were to pass and Wal-Mart became subject to its provisions, there's any of a number of actions it could take to side step the blow. Wal-Mart currently employs a little more than 12,000 West Virginians; they could simply cut back operations until their employment fell below the 10,000 mark. Who would suffer more-- Wal-Mart, or the community which Wal-Mart served with lower prices and employment opportunities? Without scaling back operations, Wal-Mart could simply reduce cumulative wages by the amount they would be required to pay in health-care. Nothing would change with respect to the bottom line for the company, nor would the employees be receiving less in value for their labor-- but they would be limited in their choices in how to spend their own money. As such, every employee would be weakly worse off by the legislation.

As is so often the case with legislation, the intended targets of new laws are often not the ones actually effected. Instead of hampering Wal-Mart's ability to compete by increasing their costs relative to their competitors, the Fair Share Health Care Act threatens the communities and the employees of the retail giant.

It took two volleys from the Maryland State Legislature to get their Fair Share Health Care Act passed-- one to get it to the governor's desk, and another to override his veto and turn it into law. As a West Virginia resident, here's to hoping that our legislature isn't as...persistent.

Wednesday, January 18, 2006

Discrimination or Basic Economics?

According to ABC News, "six female employees at the Wall Street bank Dresdner Kleinwort Wasserstein Securities LLC are trying to break the proverbial glass ceiling with a $1.4 billion sex discrimination lawsuit". The women alleged that they were "passed over for promotions, and generally treated as second-class citizens at the firm". They are pursuing the lawsuit with the hopes of making the world a better place for their daughters.

I am very skeptical of the economic merits of this case. These six women allege that they were not paid what they were worth -- presumably their discounted value of marginal productivity. If these workers are paid less than they are worth, why didn't another company act as an arbitrageur and offer to pay them more? In fact, it seems like an alert entrepreneur could hire an entire firm of women who are allegedly paid too little and earn economic profits. Why hasn't this been done? The most likely answer to me is that they are already being paid a wage commensurate with their business abilities.

The women's attorney, Doug Wigdor, argues that discrimination is obvious considering that "Under 2 percent of the managing directors at the bank are women". This is a common fallacy. A grouping of a particular people does not automatically prove there has been discrimination. It may be that women have not worked in the industry as long as men or that they have different educational qualifications. "2%" is not compelling justification by it's own right. To be a bit more controversial, some people have argued that women are different than men. Some scholars believe that while men and women have the same average intelligence, the variance is greater for men. This explains, among other things, the greater proportion of men in top positions and the greater number of men in prisons and homeless shelters. Should we be upset that there are fewer female beggars than male?

Lastly, it might be that the consumers in general prefer men over women and this is the reason for the alleged discrimination. If so, this lawsuit is completely misdirected. The company should not be forced to pay because they were successfully serving the needs and biases of their consumers.

Monday, January 16, 2006

Trophy Hunting

According to the AFP:

Trophy hunting should be encouraged as a way to protect the dwindling number of African lions facing habitat loss and other threats, a group of conservationists has said. "Regulated trophy hunting was not considered a threat, but rather viewed as a way to help alleviate human-lion conflict and generate economic benefits for poor people to build their support for lion conservation," said a statement from the IUCN-World Conservation Union...
The first key element of economics is "Incentives Matter". This new policy approach towards lions will go a long way to aligning incentives in the best possible way. It now gives poor people an incentive to encourage lion populations because of the substantial sums of money they are worth. This is no small feat; the article notes that "the reality is that lions in Tanzania alone attack over 100 people every year, and they kill over 70 people every year". By allowing a market to develop legally, these people now have an incentive to actually save the lions rather than kill them indiscriminately.

My concern is over the article's statement that trophy hunting is a way to "generate funds that could help governments deal with problem animals." I have few concerns if this simply means that trophy hunting will be taxed like any other product. If so, it carries the same inefficiencies as any other tax. I fear, however, that the government is taking ownership of a portion of the lions or the land that the lions inhabit. If this is the case, this will lead directly to a tragedy of the commons problem. This occurs when individuals share ownership of a piece of property and cannot guarantee use of a portion of that property in the future. The result is that each individual is better off consuming the property now rather than waiting for a more profitable future use. In the future, another own of the owners of the property is likely to have already consumed it.

I hope for the sake of the poor in Africa that the trophy hunting is made legal and ownership of the lions has been given to people in local communities. This will result in a healthier lion population and a wealthier African population.

Friday, January 13, 2006

More private relief in New Orleans

There is a great piece in today's WSJ on one New Orleans school's struggles to reopen after Katrina. Unfortunately, you need an account to view the article. It's here if you've got access. Email me if you don't and you'd like it.

The story is as follows: Top public school in New Orleans suffers heavy, but not paralyzing, damage to their school. Wanting to get the school back on track as soon as possible, school employees and "old-fashioned volunteerism" sped the process along as far as it could go. When institutional constraints kicked in, fast-acting administrators applied for (and received) charter status. When the federal money they were promised was tied up (what are the odds?), the shortfall in the budget was covered by private bridge loans and grants.

The state reponse? Not happy. They're losing one of their best public schools, which routinely steered kids to the Ivy League and of which 99% of its graduates went to college.

The teachers' unions response? "...union leaders hate it." More charter schools = less public schools = less teachers in their grasp = less political clout.

When it's all said and done, there will be an, a, a volume of books to be written on the private disaster relief related to Katrina.

Thursday, January 12, 2006

Hedging the Hedge Fund

Starting in February of this year, hedge funds will now be subject to a smattering of regulations under the Investment Advisers Act. Previously, hedge fund investors were subject only to the terms of the investment agreement, which varies from fund to fund. Now the SEC imposes restrictions that require each fund to have a Chief Compliance Office and each fund adviser to be registered with the Commission. Policies are in place to ensure that client securities are in the best interest of the client. There’s also a code of ethics involved.

What made hedge funds attractive from the outset were the degree of freedom they had from regulation, and the steps they could take because of that freedom that traditional mutual funds could not. The “hedge” in hedge fund comes from the ability of the fund manager to borrow against the value of the securities in the fund and, subsequently, to take higher risk positions. Mutual funds managers are severely restricted in their ability to use leverage as an investment strategy, and as a result, limited in their ability to move the fund forward using their better judgment. In addition, mutual funds are required to be priced at day’s end; the value of a hedge fund could be indeterminate at any time. Fees are a big issue with the NASD—not only is the amount changed under restriction, but the format under which the fees are presented in the prospectus and by the salesman to the buyer must follow certain guidelines. Hedge funds do not put up with such nonsense.

I wouldn’t expect the regulation of hedge funds to cease at its current level. After a few more rounds with Uncle Sam, a hedge fund will be nothing more than a glorified mutual fund. These rules are undoubtedly aimed at protecting the consumer (that, and keeping the SEC well employed)—but what it does is rob the investment industry of the market process. It’s remarkable how much the SEC and NASD imply that people can not figure their investments for themselves. Every time you read “protect the investor,” translate to “we feel you don’t know what you’re doing, so we’re going to tell you instead.”

But better laugh than cry; the irony, of course, is that this wave of rules is designed to protect the unknowing hedge fund investor—investors which, due to investment minimums with hedge funds and that wily market process, are weeded out in the first place.

Monday, January 09, 2006

Policy Vertigo

Since 1927, Time Magazine has named its Person of the Year, and this year’s is as interesting as any—Bill and Melinda Gates, and Bono, for their work towards ending poverty and disease. It highlights two ways of trying to solve the same problem. It’s clear that one of them doesn’t work.

The Gates’, through the foundation that bears their name, have given nearly $10 billion in grants since its inception, 60% of which have gone toward global efforts. Private charity is a powerful force that is often overlooked in aiding the less fortunate, be it hurricane victims or African malaria suffers—and the Gates’ are proving it can have a sizeable worldwide impact. Since their name is connected to the gift, they have every interest in making sure the money goes to good use. I am fairly certain that the Gates’ would not like their name connected to, say, twelve separate loans to Zambia over a fifteen year period with the intention of lowering inflation, only to yield an average inflation rate of over 40 percent.

Governments often feel it is their role to step in and provide assistance, but a host of incentives problems follow them. Politicians have no incentive to make sure the money is spent well, though they do have an incentive to make sure they clear their annual budgets so they can dish out some more. Recipients have no incentive to spend the money well when debt forgiveness is the vogue policy stance.

Enter Bono, champion of foreign aid and debt relief. In connection with this summer’s Live 8 concerts, Bono called for the sum of $50 billion in aid to be raised and dispersed to Africa, along with the books being cleared of all debt. We’ve heard this story before; Easterly’s The Elusive Quest for Growth highlights the folly of development aid and debt relief, along with a whole smorgasbord of World Bank policies that failed miserably.

Bono has generated hundreds of millions of dollars in wealth through his decades of musical grandeur. Whether you like Zooropa or not, U2 has been a tremendous asset to the world economy. Their members should stick to what they do best. (And encourage fellow musicians Coldplay—outspoken fair trade advocates—to do the same.)

Thursday, January 05, 2006

Terror on the Train

The Washington Post reports:
A gang of more than 20 youths -- thought to be North African immigrants -- terrorized hundreds of train passengers in a rampage of violence, robbery and sexual assault on New Year's Day, French officials said yesterday. The five-hour-long criminal frenzy was "totally unacceptable," French President Jacques Chirac told reporters. "Those guilty will be found and punished, as they deserve." The gang of between 20 and 30 youths boarded the train, heading from Nice on the French Riviera to Lyon, in eastern France, early on Jan. 1, as it carried 600 passengers home from New Year's Eve partying overnight.
How could 20 to 30 youths intimidate, rob, and terrorize 600 passengers for five hours? If all of the passengers attacked the gang, it seems clear that they could fight them off. Perhaps this situation can best be explained by applying Mancur Olson's Logic of Collective Action.

Having safety on the train is a collective good because it is nonexclusive and nonrivalrous. Each individual passenger acting rationally will see that attainment of the collective good will not be altered by his particular contribution or lack thereof. As a result, all of the passengers withhold their resource in anticipation of the collective good that will, unfortunately, never arrive.

Olson argues that there are several ways to get around this collective good problem. Small groups may be able to communicate better or create "selective incentives" to reward participation and punish abstinence. Maybe if each car of the train was locked off from the others, the groups would find that cooperation was possible. This could result from a change in costs and benefits that makes it profitable for one individual to provide the entire collective good (a "privileged" group), or it might arise simply because the group is now small enough that each member can identify who contributes and who does not (an "intermediate" group).

Another solution for large groups (what Olson calls "latent groups") to the collective good problem is to bundle a non-collective good with the collective good. If the passengers on the train were able to bundling something, perhaps heroism or the contents of the hoodlums wallets, to the goal of safety on the train, they might have been able to summon the resources to ensure that safety.

Olson also recognizes that force can help provide a collective good. Perhaps if a passenger on the train made a credible commitment to kick anyone off the train who did not help stop the rioting youth, there might have been sufficient production of the collective good.

It's truly unfortunate that the Logic of Collective Action can have such a significant, negative impact on people's lives.

Via: Catallarchy

Tuesday, January 03, 2006

No federal pork for the rain weary

The extensive rains in California bring the issue of government-provided disaster relief to the forefront again. To the best of my knowledge at the time of this post, Governor Arnold Schwarzenegger has declared a state of emergency in seven counties, but no federal disaster relief has been allocated.

Which may be somewhat good news-- if government-provided disaster relief is going to be a fact of life, better it be provided at as local a level as possible. Federally provided disaster relief is akin to a federally provided economy. Back when Katrina hit, story after story of inefficient and ineffective federal relief efforts came across the wires. My (least?) favorite is the report on the distribution of ice. The private sector, meanwhile, did an amazing job at providing relief to sufferers of Katrina, most notably through the efforts of the Red Cross and Wal-Mart.

West Virginia
’s Russell Sobel has done a good amount of research into the economics of FEMA. Before Katrina, Sobel and Thomas Garrett took a look at the politics of disasters; the link to the original paper (PDF) is here. States of political importance to the president get more disasters declared. Federal disaster expenditure is higher in states with congressmen on FEMA oversight committees. Election years also saw a bump in disasters being declared. All in all, they predict that nearly half of all disaster spending is politically motivated.

The way I see it, being hit by a natural disaster is usually about being in the wrong place at the wrong time. As it turns out, getting federal relief is about being in the wrong place at the wrong time in the right place at the right time. Having the Russian River sweep away your home in 2006 probably won’t get you any federal pork; withstanding a two-foot snowstorm in Ohio during an election year will yield some bacon.

Cafe Hayek on Monopoly

Russell Roberts has a fun post on the game of Monopoly and the bad economics which it teaches. He correctly argues that the board game wrongly offers a zero-sum view of the world, and it denies the creativity and choice that are an integral part of the market economy. I couldn't agree more. In fact, Ben Powell and I wrote a paper on this topic for the June 2004 issue of the Free Market Newsletter. Check it out.

Sunday, January 01, 2006

The Marginalization of Walras

Pop Quiz: Which three economists nearly simultaneously solved the water-diamond paradox by offering the concept of marginalism? Most economists would say Carl Menger, William Stanley Jevons, and Leon Walras, but according to John Kenneth Galbraith that would be wrong. While discussing the growth of consumer demand theory and marginalism as a solution to the water-diamond paradox in his book The Affluent Society, he writes:
Finally, toward the end of the last century -- though it is now recognized that their work had been extensively anticipated -- the three economists of marginal utility (Karl Menger, an Austrian; William Stanley Jevons, an Englishman; and John Bates Clark, an American) produced more or less simultaneously the explanation which, in broad substance, still serves....The larger the stock, the less the satisfactions from an increment.
Thus arrives the Marginalist Revolution, but why is John Bates Clark credited? Todd Bucholz, in New Ideas from Dead Economists, notes the significant role played by Jevons and Menger, as well as their predecessors Thunen and Gossen, in developing marginalism, and he doesn't even mention Clark. Admittedly, that book is more of a casual introduction to economic thought; perhaps other, more distinguished, books offer Clark the designation. Mark Blaug is a very well-respected historian of economic thought, and his book Great Economists before Keynes has garnered much praise from the discipline. Blaug's discussion of Clark does not cite him as a discoverer of marginalism at all. Blaug correctly recognizes Clark's later role in marginal productivity theory but that is a far cry from sharing recognition of the accomplishments of Jevons and Menger. Furthermore, Blaug notes explicitly that Walras was the "co-discoverer of marginal utility theory". Ekelund and Hebert's A History of Economic Theory and Method mentions Clark very briefly and on only one page in the nearly 600 page book! This was a bit of shock as well, but even after dutiful searching and rereading of the index, that is all I could find of Clark. There was certainly nothing about his role in discovering marginalism, while Jevon's 1874 work is noted as "a seminal work on the marginal-utility theory of value..." Wikipedia also notes that "Walras was one of the three leaders of the marginalist revolution".

I could only find two sources that offered evidence in support of the Clark story. The Wikipedia page for John Bates Clark states that "He was one of the pioneers of the marginalist revolution", but it also says that his contribution to marginal utility theory was only developed "a decade and a half after the simultaneous discovery of this principle by Jevons, Menger, and Walras". The History of Economic Thought Website notes that Clark was "one of the leading figures of the Marginalist Revolution" but then goes on to argue that his main contribution was on the Marginal Productivity Theory of Distribution in 1889. Moreover, their page for Walras recognizes him as "one of the three leaders of the Marginalist Revolution" along with Menger and Jevons.

Why has Walras been marginalized in favor of Clark. Is this just more French bashing and American arrogance? Has Galbraith gotten this wrong too? Clark's contribution to marginalism was not simultaneous with Menger and Jevons; it was almost two decades later and it was a significantly lesser contribution. Considering Clark's rivalry with Veblen (Glabraith's master), it is all the more surprising to see his inclusion. I guess this can be chocked up as just another shortcoming of Galbraith's The Affluent Society.