Russell Roberts's Blog, page 1513

Smart Lights

Several days ago my son, Thomas, and I were grocery shopping at a Target store in northern Virginia.  We noticed that the lights in the freezers in the frozen-food section were off – but then turned on the moment a customer walked close to one of the freezers.

The lights-triggered-by-motion-detectors save Target money (by keeping its electricity bill down); they save consumers money (because they are a source of cost-saving that enables Target to further lower its prices as it competes with the likes of Wal-Mart and Safeway); and, of course, these motion-detector-triggered freezer lights reduce the demand for electricity generation – cleaned by capitalism.

Thomas used his iPhone to take this very short video of me triggering the freezer lights.

The Sneaquel

Here is a sneak preview of the next Keynes/Hayek rap battle. The music will be different but this will give you the flavor. It also includes some brief footage of John Papola and I being interviewed.

Free Trade: More Than About Mere Stuff

Free trade does far more than offer ordinary people access to a greater abundance of goods and services; it enriches culture and even sharpens human reason – so I argue in this new article at EconLib.

Rosner on securitization

Josh Rosner of Graham, Fisher didn't predict the collapse of the housing market. He did something more perceptive than that. Back in 2001 (2001!) he identified the changes in the housing market that would lead to the collapse and warned of the possibility. He called his analysis "Housing in the New Millenium: A Home Without Equity is Just A Rental With Debt."  He saw things no one else at the time saw and he understood the implications. You should be able to find his paper here or here. From the summary:

This report assesses the prospects of the U.S. housing/mortgage sector over the next several years.  Based on our analysis, we believe there are elements in place for the housing sector to continue to experience growth well above GDP. However, we believe there are risks that can materially distort the growth prospects of the sector.   Specifically, it appears that a large portion of the housing sector's growth in the 1990's came from the easing of the credit underwriting process.  Such easing includes:

• The drastic reduction of minimum down payment levels from 20% to 0%

• A focused effort to target the "low income" borrower

• The reduction in private mortgage insurance requirements on high loan to value mortgages

• The increasing use of software to streamline the origination process and modify/recast delinquent loans in order to keep them classified as  'current'

• Changes in the appraisal process which has led to widespread over-appraisal/over-valuation problems

If these trends remain in place, it is likely that the home purchase boom of the past decade will continue unabated.  Despite the increasingly more difficult economic environment, it may be possible for lenders to further ease credit standards and more fully exploit less penetrated markets. Recently targeted populations that have historically been denied homeownership opportunities have offered the mortgage industry novel hurdles to overcome. Industry participants in combination with eased regulatory standards and the support of the GSEs (Government Sponsored Enterprises) have overcome many of them.

If there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large.  These impacts come in several forms. They include a reduction in the demand for homeownership, a decline in real estate prices and increased foreclosure expenses. These impacts would be exacerbated by the increasing debt burden of the U.S. consumer and the reduction of home equity available in the home.

Although we have yet to see any materially negative consequences of the relaxation of credit standards, we believe the risk of credit relaxation and leverage can't be ignored.  Importantly, a relatively new method of loan forgiveness can temporarily alter the perception of credit health in the housing sector.  In an effort to keep homeowners in the home and reduce foreclosure expenses, holders of mortgage assets are currently recasting or modifying troubled loans.  Such policy initiatives may for a time distort the relevancy of delinquency and foreclosure statistics.  However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again.  The virtuous circle of increasing homeownership due to greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures.

Rosner recently wrote an analysis of the state of the securitization market. It is superb. He argues that it is crucial to re-establish the securitization market. I disagree. But that doesn't matter. What does matter is his superb analysis of the Dodd-Frank bill. First, he appears to have read it. Second, he shows how much the legislation relies on government agencies implementing the goals of the legislation. Third, he understands that that is not ideal. Fourth, he shows how even if the legislation is implemented according to its intentions, there are still lots of problems. It's the best analysis I have read of the current state of the market and the likely impact of the financial reform legislation. A must read.

What is Unseen

Here's a letter to the Wall Street Journal:

Carl Bialik laments that "there isn't much research on how to link trade to jobs" – as in which, and how many, particular jobs are 'destroyed' and 'created' by Americans trading with the Chinese ("Flawed Math Seen in Unemployment Tied to China," Oct. 30).

True.  But this lack of hard data is unavoidable, for it reflects the very nature of a modern economy.  Each American, as both consumer and producer, is connected to hundreds of millions of other persons across the nation and the globe in a web of commercial relationships so vast, intricate, and nuanced that it is impossible to trace out and quantify in detail how changes in one part of this web affect other parts of the web.

Moreover, changes within this global web of commercial relationships are incessant, with changes in consumers' demands for imports being simply one among a gazillion changes that occur each year.

It's no more lamentable that we lack hard data on the exact number of jobs 'destroyed' and 'created' by increased consumer demands for Chinese goods than it is lamentable that we lack hard data on the exact number of jobs 'destroyed' and 'created' by increased consumer demands for low-carb foods, e-books, Viagra, or by any of the other countless changes that relentlessly churn our dynamic economy.

Sincerely,

Donald J. Boudreaux

It bears repeating again and again: there is nothing economically special about international trade as compared to intranational trade – save, of course, for the sorry fact that politicians and rent-seeking producers find it easy to demagogue for their own greedy, narrow purposes.

Zombie economics

The latest EconTalk is John Quiggin defending his claims about zombie economics–that certain ideas keep coming back to life even though they should be put to death. His list is different from mine. You may find the back and forth entertaining and, I hope, educational.

Does Real-World Air Resistance Nullify the Law of Gravity?

Attacking free trade over at The American Thinker, John Griffing repeats the urban myth that the principle of comparative advantage justifies free trade "only if three conditions were met: zero international capital mobility, full employment, and balanced trade."

Nonsense.  That one person or country has a comparative advantage at producing, say, wine while another person or country has a comparative advantage at producing cloth – and, hence, that both persons or countries benefit by specializing and trading – depends not in the least on any of the conditions that Griffing alleges to be prerequisites for comparative advantage to justify free trade.

David Ricardo, and countless economists since, have indeed often assumed one or more of the conditions that Griffing mentions (and many conditions that he doesn't mention).  But such assumptions are made only to explore the different detailed ways that comparative advantage works under various conditions, or to simplify the explanation of the central insight of the principle.  Economists never for a moment believed that the central insight of comparative advantage requires these assumptions to hold in reality.

As the late Fritz Machlup (a giant among trade theorists) wrote on page 57 of his 1977 book, A History of Thought on Economic Integration,

most of the established propositions in the theory of international trade were derived from assumptions many of which are quite unrealistic – some idealised but still acceptable as approximations to real-world conditions, some downright counterfactual.  They were nevertheless accepted as heuristic fictions because they yielded interesting conclusions which were judged to remain relevant even if some of the assumptions were relaxed or entirely dropped.

Also, the principle of comparative advantage is not the only principle that helps to form the economic justification for free trade.  Adam Smith, after all, never heard of comparative advantage.

(I thank David Jorgensen for alerting me to Griffing's essay.)

Shed a Tear

The Washington Post's Ezra Klein pities politicians for all the time the poor dears must spend raising money from donors who can choose whether or not to contribute.  I pity taxpayers for all the time politicians spend taking money from them, whose only choice is to hand it over or go to jail.

Open Letter to James Fallows

30 October 2010

Mr. James Fallows

National Correspondent, The Atlantic

Dear Mr. Fallows:

This afternoon on National Public Radio you proclaimed that "there is essentially no disagreement whatsoever" among economists that more stimulus spending is necessary today [emphasis in the original].

You are misinformed.

Last year, hundreds of economists signed a petition, circulated by the Cato Institute, whose key clause reads "it is a triumph of hope over experience to believe that more government spending will help the U.S. today."  Among the economists who signed this petition in opposition to 'stimulus' spending are three Nobel laureates in economics (Edward Prescott, Vernon Smith, and my colleague James Buchanan).  Others signers include Chicago's Eugene Fama and Sam Peltzman, Harvard's Jeffrey Miron, Texas A&M's Thomas Saving, Cornell's Rick Geddes and Dean Lillard, University of Virginia's Lee Coppock and Kenneth Elzinga, Duke's Michael Munger and Edward Tower, University of Rochester's Mark Bils and Ronald Schmidt, Rutger's Michael Bordo and Leo Troy, University of Southern California's John Matsusaka and Kevin Murphy, and one of the world's preeminent scholars of money and banking, Carnegie-Mellon's Allan Meltzer.

Perhaps these economists and the many others who've signed this petition (including myself) – and who continue to speak out against what we believe to be the folly of 'stimulus' – are mistaken.  But for you to announce publicly that there is "no disagreement whatsoever" among economists that more stimulus spending is desirable is so wildly inaccurate that it borders on being irresponsible.

Sincerely,

Donald J. Boudreaux

Professor of Economics

George Mason University

Fairfax, VA 22030

Some Links

The Washington Post's Charles Lane sees clearly what the Chevy Volt is all about – and not about.

EconLog's David Henderson offers a short lesson on the corporate income tax.

Reason's Greg Beato on how the telephone book changed the world (HT Tyler Cowen)