Why Fiscal Stimulus Stimulates the Wrong Things

If you want a perfect demonstration of how an understanding of public choice and rent-seeking can change what kind of policy recommendations you should make, then have a look at this post from Greg Mankiw:

If there is going to be another fiscal stimulus, there will likely be a division between those who want tax rebates to households and those who want to help states pay for extra infrastructure spending. I have a compromise, based on the grand U.S. tradition of federalism: Let each state decide.

Congress could pass a fiscal stimulus of a certain amount per person but offer two ways to have it paid out. Each state governor could be allowed to determine whether to take the money as state aid or have it paid directly to his or her state's citizens. Those governors who think they have valuable infrastructure projects ready to go would take the money. Those who do not would let their citizens take the extra cash. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters.

So, first we'll have all the rent-seeking at the Federal level, which will encompass those trying to avoid being taxed for it and those who want the receipts as riders to the bill. Followed by a new round of rent-seeking at each of the 50 states as they doll out the goodies.

Survey of NFL Players

Labor is polled on the management, results reported by Kansas City Star, n=1440 with response rate=.8:

Which active coach they would most like to play for:
1. Tony Dungy (Indianapolis Colts)
2. Lovie Smith (Chicago Bears)
3. Bill Belichick (New England Patriots)
4. Herman Edwards (Chiefs)
5. Mike Tomlin (Pittsburgh Steelers)

The least?
1. Tom Coughlin (Giants)
2. Eric Mangini (Jets)
3. Jon Gruden (Tampa Bay Buccaneers)
4. Bobby Petrino (formerly of the Atlanta Falcons)
5. Bill Belichick (New England Patriots)

The worst organizations:
1. Oakland
2. Miami
3. Arizona
4. Cleveland
5. Cincinnati

The best:
1. New England
2. Indianapolis
3. Dallas
4. Green Bay
5. Pittsburgh

Time for compensating differential study!

From the Department of Hhmmmm...

That was CNN's homepage at 8:18 am Eastern on 10/31/2008.

Attn: California; Subject: The Problem is Prices

From the AP:

California said Thursday that it plans to cut water deliveries to their second-lowest level ever next year, raising the prospect of rationing for cities and less planting by farmers.

The Department of Water Resources projects that it will deliver just 15 percent of the amount that local water agencies throughout California request every year.

Since the first State Water Project deliveries were made in 1962, the only time less water was promised was in 1993, but heavy precipitation that year ultimately allowed agencies to receive their full requests.

The reservoirs that are most crucial to the state's water delivery system are at their lowest levels since 1977, after two years of dry weather and court-ordered restrictions on water pumping out of the Sacramento-San Joaquin Delta. This year, water agencies received just 35 percent of the water they requested.

Farmers in the Central Valley say they'll be forced to fallow fields, while cities from the San Francisco Bay area to San Diego might have to require residents to ration water.

Rationing. Get used to it, it's not just for water anymore.

MNF Ruins My Perfect Election Season

I have carefully avoided interveiws and debates throughout this entire election process. It's something I'm pretty happy about, that instead of watching these socialists discuss how they plan to level our liberties, I have spent time with the family or at least watching good TV.

I have received no help on in my avoidance, however, from TV. Late night shows I expect this from, but I was truly annoyed when they canceled The Office for the VP debate. I didn't go for their ploy to con me into watching the campaign just because my show wasn't on.

However, the next stooge in the game is ESPN's Monday Night Football. DURING the game, they will be splicing Chris Berman's one-on-one interviews with each of the candidates. WTF! Now I would have to avoid the entire game just to dodge the inane double talk of the campaign. Unfortunately, my interest in hoping Pittsburgh loses some ground will outweigh my desire to dodge the election, thereby ruining my otherwise perfect record of indifference.

What's the problem?

People have some pretty strong thoughts on placebos; CNN implies this morning that the action of knowingly prescribing a placebo is "awful" and "deceptive."

But is it really that bad? You have to consider the following situation: Let's consider all previous ailments you had in the past that no longer afflict you (so as not to change the placebo mindset and possible effectiveness of any current medication you are taking) in which you were prescribed medication. If you were told today that every single medication you were prescribed was a placebo, how could you be upset, strictly concerning the medication's efficacy towards your condition? I suppose if you felt that the medicine didn't do anything to help your condition you could have an issue-- but the usual response is not to sit and complain about the ineffective medicine, it's to go back to the doctor and get something else that works. And if that was placebo #2 instead of placebo #1...again, can you really have a complaint?

FDA regulations require that new medicines, in general, outperform a placebo. So, if medicine X has a 10% success rate, yet a placebo also has a 10% success rate, that medicine can not go to market. Obviously, why prevent a medicine with a positive success rate from going to market, but in addition-- if a placebo has a 10% success rate, why not sell the placebo!?

In an unregulated medicine market, those companies and those medicines that rely on placebo effects will be weeded out should that effect wane.

Assorted thoughts, October 29 edition

- I noticed a shuttle to take people to the early voting booths this afternoon on its way through campus; presumably, the idea of voting over a span of time should increase the turn out, and so too should the availability of a shuttle to take you there as well.

Some may think that this increased voting would cut against the rational voter hypothesis-- quite the opposite, actually, as decreasing the cost of voting yields a higher turnout rate. Are these shuttles/early voting times varied across states? That's testable!

- I've heard a decent amount recently about the Washington Redskins proclivity to predict the winner in an upcoming presidential election. The theory goes as follows: In their last home game prior to the election, if Washington wins, then the incumbent party remains in power, and if they lose, the challenging party assumes the presidency. In 2004 it did not hold true, but in every presidential election prior to that it did, all the way back to 1936. I think I'm hearing about this because I receive Pittsburgh television broadcasting, and the Steelers are playing in Washington on Monday night.

Let's assume that this were a causal relationship-- through what mechanisms could this be true? I'm having a hard time even pulling something out of thin air. Would a better Washington team mean, across the board, the rest of the NFL cities are doing worse, and that means we want to keep the same party in office? Elections are on a Tuesday and the NFL plays on Sunday/Monday-- is there enough of a national Redskins following to have a national impact on elections immediately following the outcome of a game? Is there reason to believe that the success of Washington's football team is coincident with political cycles?

Yes, it's spurious correlation, but from 1936 to 2000-- that's 17 straight successes for a (presumably) 50/50 outcome. That just doesn't happen. (Though I believe there was one season where the St. Louis Rams lost the coin toss every single week, or something close to that.)

- What do you do when there's malinvestment in the economy? Add more credit!

-Here's an interesting result from Vegas concerning the ever intriguing Game 5 of the World Series. Just to clarify-- the possibility still exists that you could have bet the Phillies to win every single game of the World Series, have had it paid off four times, yet Tampa Bay could take home the trophy. Who doesn't love Vegas?!

By the way, the decision to postpone the game was a big edge for Tampa Bay-- Philly now has had a few days to think about winning 3 innings. Hamels could probably have gone another inning or two-- now he's out. And Balfour is a reliever who is used to working on sporadtic pitching schedules-- now he's basically on full rest coming into the 6th inning, with Price in the pen in case things drag on. And Philly doesn't want to go to Tampa. And Tampa has seemed to have their big players begin to produce now. In baseball, things even out over the long run, and even a World Series isn't long enough to always determine the best team, so 3+ innings tonight certainly could fall anywhere. But if you're Tampa, you've got to feel better after 6 innings than you did right before the first pitch of Game 5.

Will Politicians Keep Their Campaign Promises?

According to my colleague here at SPEA, Evan Ringquist, they will about 70% of the time on environmental issues. I hope it is lower on economic issues. Here's the abstract from his paper, published at Social Sciences Quarterly (sorry, gated only):

Objective. The extent to which candidates for elected office keep their campaign promises holds great interest for citizens and has important consequences for the quality of democracy. However, we know very little about whether candidates actually keep these promises. This article examines the relationship between campaign promises and the subsequent legislative behavior of members of Congress in the area of environmental protection. Methods. Responses to the 1996 National Political Awareness Test (NPAT) are matched with roll-call data on environmental issues from the 105th Congress. A series of bivariate probit models with selection are then used to assess the extent to which roll-call votes are consistent with candidate policy statements in the NPAT. Results. We find that members of Congress vote consistent with their campaign promises 73 percent of the time, and that NPAT responses help to predict roll-call votes even when controlling for party, race, gender, campaign contributions, and previous environmental voting record. We also find that the propensity to keep campaign promises varies systematically across types of legislators. Conclusions. Contrary to public perceptions, candidates for Congress routinely act to keep their campaign promises once elected, at least in the area of environmental protection policy.

Catallaxy?

Hayek used the word "catallaxy" not only to mean exchange, but taking from the Greek meaning to "admit into the community" and "to change from enemy into friend". The photo taken yesterday shows Christian and Islamic images on carpets hanging in a marketplace in Baghdad. A small piece of evidence of markets supporting peaceful social coordination among socially distant agents?

Winning Paper

The Society for the Development of Austrian Economics has selected TPS blogger Emily Schaeffer's paper, "Mixed Income Development Housing: What’s Left in Neighborhood Economic Planning" as one of the winners for the Don Lavoie Memorial Essay Competition. The prize is $1,000 and a place on the SDAE panel to present it at the Southern Economics Association meeetings. Congrats Emily!

What You Don't Know Won't Hurt You.

My colleague, Jason Aimone, has an interesting paper with Dan Houser on "betrayal aversion". Here's the abstract:

Trust promotes economic growth and development, and previous research has shed much light on reciprocity and other motives for trusting decisions. Why people choose not to trust has received substantially less attention, perhaps in part because not trusting is predicted by standard economic theory: selfish people consider the (perhaps subjective) stochastic nature of the environment and make the earnings-maximizing decision. This explanation is incomplete: we provide evidence from a laboratory analysis with an investment game that people’s decisions vary according to how an environment’s uncertainty will be resolved. In particular, if resolving uncertainty requires an investor to learn whether her trustee chose to betray then she is much less likely to trust. Our data thus provide evidence that “betrayal aversion” detrimentally affects propensities for trusting decisions. Our results also emphasize the importance of impersonal, institution-mediated exchange in promoting investment and economic efficiency.

Pure Public Choice

From the IndyStar:

The state Democratic Party is accusing Republican U.S. Rep. Mark Souder of inappropriately seeking a $1 million federal grant for a project involving a company in which he owned stock, a charge the congressman denies.

Indiana Democratic Party spokeswoman Lauren Smith pointed out that Souder, who bought stock in Warsaw-based medical device maker Biomet in 2003, announced that he had secured the grant that Biomet and two other orthopedic companies would share with three Indiana universities and then sold the stock last year.

Sarcasm On: I'm sure all of this is the function of the political party, not the incentives facing the individual.

Things that frustrate me, October 23 edition

- That trade deficits are bad. Maybe this just especially gets me because it's in tomorrow's State Journal. I thought I'd done a workman's-like job of culling such nonsense from these pages over the last few years. Then again, it is from the West Virginia Center on Budget and Policy, whose beta is as close to -1 as I've ever witnessed.

- That economic diversification is the best/safest/insert-your-adjective-here path for economic growth.

- The belief that we have entered into a "new economy," and that this "new economy" requires a re-thinking of economics as a whole and of the role of the public sector. It just occurred to me now, but is this the leftists circling the wagons, coming up with a new push and ceding defeat on past margins? Perhaps that's a bit too optimistic.

- That the current financial situation is what happens when you leave the free market to its own devices.

- That some regulation is crucial to protect the little people and to keep big profit-driven companies in line.

The last three are culled from topics that came up during a panel discussion I recently participated in.

Stiffling Housing Demand

If this was KPC, the title of this post would be something like "Housing Demand: yer doin' it wrong!"

Anyway, many have suggested that allowing more immigration to help prop up housing prices as a possibility to help slow the spread of foreclosures. However, according to Miriam Jordan of the WSJ the U.S. is doing precisely the opposite (Hat Tip to Philippe Legrain for the article pointer):

Dubbed ITIN mortgages, the loans that made homeownership a reality for thousands of undocumented workers have withered -- although not because they underperformed.

The loan program highlights contradictions in U.S. polices toward illegal immigrants. Even as the Department of Homeland Security sought to deport them, the Federal Deposit Insurance Corp. goaded banks and credit unions to bring undocumented immigrants into mainstream banking if they could prove they had steady income and were creditworthy. Beginning in 2003, when banks and credit unions first offered mortgages to undocumented immigrants, the small segment blossomed. The mortgages performed better than some others, partly because of stringent lending criteria and because they usually had fixed rates over a period of time.
...
But amid the crackdown on illegal immigration and the economic slowdown, the market for immigrants who boast the alternative nine-digit taxpayer ID is dying.
"If you want to buy a house and you're here without papers, now you can forget it," says Jesus Benitez, a real-estate agent who caters to Hispanics in Brooklyn.
...
Bank of Bartlett, a small bank that serves the greater Memphis area, endured the "political heat," says John Byrd, president of Bartlett Mortgages, a unit of the Tennessee bank. "We felt we were doing the right thing; these people had been working here many years and paying taxes." All told, the small bank originated about $20 million in ITIN mortgages over four years, each worth about $100,000. Less than 5% of Bank of Bartlett's ITIN loans are delinquent. Nationally, for loans more than 90 days in arrears, ITIN mortgages had a delinquency rate of about 0.5% last year, compared with 9.3% for subprime mortgages, according to independent estimates.
...
Unwilling to shoulder the risk alone, Bank of Bartlett and others began withdrawing from the ITIN home-loan market -- though they continue to service their current clients.

Your Morning Moment of Zen

From an Obama sponsored ad on Facebook:

Politicians do these kind of pictures because it works on voters.

World Series Betting

The World Series begins tonight, and whoever wins we'll get a fantastic scenario-- the World Series trophy residing in Tampa Bay (!) or Philadelphia fans who are likely to boo the championship parade. Personally, I like Tampa Bay in the matchup-- I think they're just a little better on all margins in the pitching/defense/offense comparison-- but a short series can be won by an inferior team. (St. Louis was far worse than Detroit in 2006 and won the Series in a remarkably easy 5 games.) Anyhow, I'm especially excited to see how Hamels pitches the Tampa Bay lineup this evening.

Nonetheless, I believe there may be something of interest on the betting end of things; at this point, it may be too late to do anything about it, but it struck me this morning as I was driving. Tampa Bay, as you may or may not know, is a young franchise that has been remarkably bad up until this season. Not surprisingly, the general consensus was that Tampa Bay was in for another awful season, so the getting was good on a title bet on Tampa Bay prior to the season, through Spring Training and into the first few weeks of the season. And you don't need to put much money down in order to have a 100-to-1 (or greater) bet become pretty valuable if things shake out your way.

As TPS gambling consultant Rob Holub has let me know (numerous times over the year), the sportsbooks were a bit slow on adjusting their Tampa Bay win-the-World-Series line for the entire season. On May 14, Tampa Bay to win the World Series could have been had at 100-to-1. Tampa's record on May 14 was 23-17, which was slightly pace in terms of the rest of the season-- certainly, the inertia from their franchise history kept the odds very high. And a number of people jumped on board, if for no other reason than to root for Tampa Bay for the rest of the summer.

The problem for the sportsbooks was that Tampa Bay kept on winning. Now there is a large potential payout should the Rays pull it out. This article here talks about the situation, but I think it misses the larger issue. Should you be sitting on a large potential Tampa payout, the risk-minimizing thing to do is to turn your position into a risk-free payout by hedging your bet by betting Philadelphia to win the Series. This is the situation that sportsbooks have to dread-- not that they could be in trouble if Tampa wins (which could well be the case), but that they could have to pay out a large amount of money no matter who ends up winning. Whether Tampa wins or not, I'd be surprised if lines lingered at 100-to-1 or more for any length of time in the future, due to the exact scenario described above.

The interesting part to ponder is exactly what effect this will have on the posted lines for the World Series itself. In years past, the hedging of bets shouldn't have affected (in a large manner) the overall odds on the Series; so long as the hedging is about equal on both sides of the matchup (no reason to believe it would be largely skewed one way or the other in the recent past-- perhaps someone can correct my memory), the line should be a pretty good indicator of the subjective mindset on the outcome of the Series. And, in the long run, this subjective probability should mimic the objective probability pretty closely. (Systematic bias issues aside, of course, though I'm not aware of any within the scope of this situation.) But this year, you could have a large push on one side from people who aren't utilizing any special information to their advantage, just simply improving their position in a risk/reward sense. And this could lead to odds that don't reflect the true public belief of the outcome-- and given an unrestricted gambling market, this is pretty remarkable.

I guess an arbitrage model would have all of those hedges pushed back to the subjective-matching-objective level, but with so much uncertainty in baseball outcomes...should we expect that to happen? On top of that, is volume robust enough to generate the pure market outcome? The latter wouldn't worry me as much as the former; I think if you're a confident handicapper (and nothing outlandish happens over the next few weeks), I think there's a market discrepancy to be taken advantage of. Which, again, spells not good things for the sportsbooks.

Rob, what's your take on this? You follow the lines much closer than I do-- what has the movement on the series line been since it opened late Sunday?

Stossel on Permits and Licenses

Stossel's 'Politically Incorrect Guide to Politics' is quite entertaining and informative. (It's available on YouTube in 6 parts.) The third segment examines a topic of great interest to me -- which I discuss in my working paper Restricting Reconstruction -- how the government creates great barrier to rebuilding and repair of New Orleans through permitting and licensing requirements

The X-Files, Economics Edition: Revisited

Pete Leeson and I are currently working on an economic explanation for UFO sightings across states. In a previous post over at the Freakonomics blog, we showed a strong positive correlation between UFO sightings and Bigfoot sightings. Our goal behind doing so was to show that the sightings are clearly motivated for economic reasons not because they actually exists (Why would UFOs and bigfoot visit the same state?)

We now have new preliminary results suggesting that UFO Sightings are strongly correlated with several different measures of tourism. Both state park acres and hotel expenditures are positive and significant in explaining the number of UFO sightings. This holds after controlling for income and urban population. We also find that UFO sightings are positively and significantly related to state and local government spending.

I am interested in getting feedback to see what you think. We recognize that at this point the relationship may not be causal, but I think these basic results are strongly suggestive that individuals may 'see' UFOs if there is an economic reason to do so.

Update on Labor Demand: Still Downward Sloping

Even for single mothers. Here's the abstract of Joseph Sabia's paper in the new issue of JPAM:

Using pooled cross-sectional data from the 1992 to 2005 March Current Population Survey (CPS), this study examines the relationship between minimum wage increases and the economic well-being of single mothers. Estimation results show that minimum wage increases were ineffective at reducing poverty among single mothers. Most working single mothers were not affected by minimum wage hikes because they already earned wages above state and federal minimum wages. And less-educated single mothers who were affected did not see a rise in net income because of negative employment and hours effects. For this low-skilled population, a 10 percent increase in the minimum wage was associated with an 8.8 percent reduction in employment and an 11.8 percent reduction in annual hours worked.

How Do I Distinguish Between Bad Scientists and Confirmation Bias?

On the environment, by Lorne Gunter:

In early September, I began noticing a string of news stories about scientists rejecting the orthodoxy on global warming. Actually, it was more like a string of guest columns and long letters to the editor since it is hard for skeptical scientists to get published in the cabal of climate journals now controlled by the Great Sanhedrin of the environmental movement.

On economics:

And free trade is not the only sacred subject, Mr. Blinder and other like-minded economists say. Most efforts to intervene in the markets — like setting a minimum wage, instituting industrial policy or regulating prices — are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.

Both articles claim that confirmation bias crowds out the good science, which is "global cooling" in the environment and "free markets are bad" in the economics article. I know enough economics and about the response to Blinder's work on the minimum wage (published in AER, later refuted with own data) to feel confident in dismissing the confirmation bias argument in the second article. However, I have 3 concerns:

1) Given that I am unqualified to weigh environmental evidence, should I assume the same would be true in environmental science as I feel it is in economics?

2) In observing a debate among scientists, where one side is claiming confirmation bias while the other was claiming bad science, how could I discern the truth without years of dedicated study?

3) If my research leads to controversial results that are greeted harshly by the mainstream, how can I tell whether or not I am working against confirmation bias or if I am simply not as good of a scientist as I would like to think I am?