Tyler Cowen's Blog, page 532

Parking spots as price controls

But not everywhere:

San Francisco is trying to shorten the hunt with an ambitious experiment that aims to make sure that there is always at least one empty parking spot available on every block that has meters. The program, which uses new technology and the law of supply and demand, raises the price of parking on the city's most crowded blocks and lowers it on its emptiest blocks. While the new prices are still being phased in — the most expensive spots have risen to $4.50 an hour, but could reach $6 — preliminary data suggests that the change may be having a positive effect in some areas.

There is much more here.

Gallup fact of the day

There are more than 100 Indian trading posts in and around Gallup and the majority are run or owned by Palestinian-Americans, said Ed Jungbluth, Executive Director of the Gallup Convention and Visitors Bureau.

Here is more.  There are further sources here.

Assorted links

1. Best of FiveBooks, new eBook.

2. The value of self-employment, good Reihan comment here.

3. Four odd facts in a story abut a strip club and a Little League team, and the Bob Beamon of our day.

4. Facts about India, from the Census.

5. Yesterday, for me, sort of.

What the Goldman guy should have written

Philosophically speaking that is:

I signed on to this doctrine of fiduciary responsibility but initially I thought it would mean cooperating with other high status people rather than ripping them off.  I now feel uncomfortable about what I had agreed to do because I realize what it can mean.  I can't reject the doctrine of fiduciary responsibility outright, because that would crash advanced capitalism, and furthermore it would leave me unemployable, even to run a charity for Africa vaccines.  Yet neither can I justify my GS-requested tasks on a rule-consequentialist basis, because a) I have read that rule consequentialism collapses into act consequentialism, and b) I still feel bad about ripping off high-status folks, even though I probably cannot demonstrate high welfare losses from those practices, at least not relative to the previous actions of the firm.  I will instead sidestep these difficult issues by claiming that morality and self-interest point in the same direction, that I am right on both issues, that my former firm is wrong on both issues, and that everyone should respect my denunciation of them, and perhaps I am still in a fog after all.

Had I read such a piece, I would have been impressed.  Here is my previous post on the economics of the situation.

On a related note, Energy Secretary Steven Chu "no longer" welcomes higher gas prices.

Pop Bonds

Pay on Performance Bonds incentivize private-sector creativity in the performance of public goals. One of the first Pop bonds (also called social improvement or social impact bonds, SIBs) was pioneered by the British government and the UK group Social Finance. The UK Pop bond is designed to reduce prisoner re-conviction rates. Social Finance raised about $8 million from investors to fund a variety of programs for released prisoners, helping them to find work, stay off alcohol and drugs, reintegrate with society and so forth. The programs are managed by a group of non-profits. The UK government has agreed to pay the investors a return but only if reconviction rates are 7.5% less than those of a control group. If reconviction rates fall below the target level, the investors will earn a good rate of return, 7.5-13%, depending on how far rates fall below the control, but they could also lose everything if rates do not fall. The Pop bond issued in 2010 and appears to be going well although no (potential) bond payments are scheduled until 2014.

A Pop bond puts little risk on governments, who pay nothing if the program does not work but who save money if the program does work. With less at risk government should be willing to experiment more and try new approaches to problems. By contracting out, the government also eliminates a public bureaucracy resistant to change. Most importantly, a Pop bond encourages creativity and innovation in social programs. Investors in a Pop bond have an incentive to monitor the groups implementing the programs and to ensure that they choose the very best, most cost-effective programs. The better the program works, the more the investors earn. If Pop bonds expand it may even pay investors to undertake their own experiments to see how best to maximize their returns.

For Pop bonds to work it is critical that outcomes be measured and marked to an appropriate, randomized, control group. If not carefully monitored, the private sector will also excel at innovative and creative gaming at the public expense (see the comments for some suggestions).

More Pop bonds are being planned in the UK and the idea is also catching on in the United States. The Department of Justice and the Department of Labor both have pilot programs in the works and Massachusetts has issued a request for proposals. By the way, Pop bonds are said to be a new idea but the U.S. bounty hunter and bail bond system which works very well is a clear precursor as is the system of privateering.

Pop bonds have the potential to produce public goods with private innovation; they are an idea worth watching.

Price discrimination for higher ed *classes*

Faced with deep funding cuts and strong student demand, Santa Monica College is pursuing a plan to offer a selection of higher-cost classes to students who need them, provoking protests from some who question the fairness of such a two-tiered education system.

Under the plan, approved by the governing board and believed to be the first of its kind in the nation, the two-year college would create a nonprofit foundation to offer such in-demand classes as English and math at a cost of about $200 per unit. Currently, fees are $36 per unit, set by the Legislature for California community college students. That fee will rise to $46 this summer.

The classes would be offered as soon as the upcoming summer and winter sessions; and, if successful, the program could expand to the entire academic year. The mechanics of the program are still being worked out, but generally the higher-cost classes would become available after state-funded classes fill up. The winter session may offer only the higher-cost classes, officials said.

That is some premium for reading and writing!  The naive might have thought that would have been guaranteed.  The story is here and for the pointer I thank Robert Tagorda.

Arbitrage markets in everything

Companies like EurimPharm work much as arbitrageurs do in the financial markets. Instead of trading stocks or bonds, the drug arbitrageurs buy prescription and over-the-counter pharmaceuticals from European countries where they cost less, such as Spain and Greece.

They repackage and resell them at a markup in more- expensive European markets, including Germany and the Netherlands.

The arbitrageurs' profit comes from country-to-country price differences that can be hefty. A Europe-wide price survey in 2009 by a Spanish parallel trader showed price differentials that in a few cases topped 200 percent.

"There used to be a rule of thumb that said you can make money on a price difference of 20 to 25 percent," he says. "Now you can do it with 10 percent."

Here is more, there are several other economic points in the article, and for the pointer I thank Alex Bilimoria.

The bottom line

Bernanke has given serious thought to the Krugman-Rogoff argument. One obstacle is practical. Fed policy works, in part, by getting the market to do the Fed's work (if the Fed is buying bonds, traders who want to be on the same side of the markets as the central bank will buy bonds too). But any policy adopted by less than a 7-to-3 majority by the Fed's Open Market Committee would not be viewed by markets as a credible policy, likely to endure, and Bernanke is not guaranteed to get this margin today. "No central banker would do it," Mankiw says of raising the inflation target; the political reaction would be too severe. (When Mankiw, a Harvard economist, wrote a column raising the possibility of a higher inflation target, Drew Faust, the university's president, received letters urging her to fire him.)

That is from Roger Lowenstein's profile of Ben Bernanke, interesting and excellent throughout.

Assorted links

1. Driverless cars will minimize the need for traffic lights.

2. Can this method help you avoid getting stuck on problems?

3. Very good piece by Josh Barro.

4. Very good comment thread on neuroimaging.

5. There is no great stagnation (in bookmarks), short video.

Model this (the Goldman guy)

Everyone is talking about the Goldman guy who quit, he wrote this (reactions here):

I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival. It astounds me how little senior management gets a basic truth: If clients don't trust you they will eventually stop doing business with you. It doesn't matter how smart you are.

Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.

This strikes me as economically naive.  Is it at least possible that the culture at Goldman has changed (I am not myself committing to any assessment here of GS) because profit maximization dictates such a shift?  What are a few possible models?

1. Income from trading has risen in importance, relative to income from clients, and if you can do well trading you will make money, whether or not you are a jerk.

2. Greater competitiveness lowers levels of service quality for efficiency wage-like reasons.  GS can no longer play the role of high mark-up, precommit to high-quality, monopolist.

3. We have moved to the "used car" equilibrium.  You know they are screwing you over, or trying to, but leaving for the guy next door simply replicates the same basic incentives so you stay put and fight back best you can.

4. The current interest rate spread means they don't have to try too hard.

Anything else?  Those are possible mechanisms, not factual claims about the world.  In any case, I am suspicious of his impulse to blame it all on a sudden shift in the moral propensities of the people he was working with.