Saturday, 25 June 2016

Austrian School of Political Economy

From the The Vienna Circle comes a series of brief interviews with Chris Coyne, Associate Professor of Economics at George Mason University on Austrian Economics. The discussion is about that analytic framework developed by economists associated with the Austrian school of economics and its relevance for past and present research in political economy.

Austrian School of Political Economy I: Value, Prices, & Economic Calculation

Austrian School of Political Economy II: Knowledge & Institutions

Austrian School of Political Economy III: The Continuing Relevance of Austrian Economics

Friday, 17 June 2016

Privatisation and information

Over at the Offsetting Behaviour blog Eric Crampton quotes from the conclusion to my recent NZEP paper on the theory of privatisation. Eric highlights the problems that the ex ante restrictions that governments often place on privatisation schemes can cause.
From Walker's conclusion
...there is an implicit assumption in the literature discussed above that economic efficiency is a major objective of privatisation but the, ex ante, conditions sometimes imposed by governments on the sale of assets often serve political rather than economic ends. Examples of such conditions are things like the New Zealand government’s restrictions on foreign ownership and the desire to sell to ‘Mums and Dads’, both of which restrict the number of possible bidders. Such conditions also result in fragmented ownership, making it difficult for owners to coordinate their efforts to effect the firm’s behaviour. In addition, given that each ‘Mum or Dad’ will own only a very small share of any of the firms, they have little incentive to become informed on the firm’s activities since they will only capture a very small amount of any improvement in performance they could bring about. These factors suggest that, in practice, little will change in terms of the behaviour of the SOEs: they will remain, for all intents and purposes, government-controlled entities. This contradicts the very reason for privatising SOEs in the first place.
While I completely agree with myself, let me add that ex ante restrictions are not the only cause of problems with privatisation programs. Badly designed ex post rules can also result in bad outcomes from privatisation: important driver of several of the results presented above is the degree to which politicians can interfere, ex post, with the operations of the firm. The lower the cost of interference, the greater the likelihood of firms being induced to serve political rather than economic ends. This highlights the importance of post-privatisation regulation, and competition, to the outcome of an asset sales programme.
The easier and (politically) cheaper it is for politicians to interfere with firms after they have been privatised the more likely it is that the results of a privatisation program will be poor. A strong ex post framework which emphasises competition and raises as high as possible the costs to political interference with the privatiased firm the better the outcomes to privatisation are likely to be.

Monday, 13 June 2016

Some stupid just never dies

Conor Dougherty writes in the New York Times that,
After years of punishing rent increases, activists across Silicon Valley and the San Francisco Bay Area are pushing a spate of rent control proposals, driven by outrage over soaring housing prices and fears that the growing income gap is turning middle-class families into an endangered species. Those campaigns, if successful, would lead to the largest expansion of tenant laws since the 1970s.

Rent controls are just a big amount of stupid. As Swedish economist Assar Lindbeck once quipped
"next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities"
Dougherty continues,
Nevertheless, a group called the Mountain View Tenants Coalition is collecting signatures for a voter initiative in hopes of putting rent control on the November ballot. One of the group’s leaders and its chief spokesman, Evan Ortiz, is a 29-year-old Google employee who works in ad sales.
Thomas K. Bannon, chief executive of the California Apartment Association, a landlords’ group, said his members were mobilizing a statewide response and planning to spend millions of dollars — he would not estimate exactly how many millions — to beat back the initiatives one city at a time. The members’ message: Don’t blame landlords. Blame cities for making it so hard to build new housing. (Emphasis added.)
The highlighted sentence is the important one, as anyone in places like Auckland should be able to tell you.

Dougherty adds, inline with Lindbeck's view, that,
Economists have an almost universally dim view of rent control because it does nothing to attack the underlying problem here, which is that more people want to live in the Bay Area and Silicon Valley than there are housing units to put them in.
Increasing rents are just a sign that there is a problem on the supply side of the market. The question to ask is Why? And the people to ask the question of are, usually, the local government.

Saturday, 11 June 2016

Why Beauty Matters

An interesting video by the English philosopher Roger Scruton on "Why Beauty Matters".

You know the economy is in trouble when .......

This report is from Reuters.
Venezuela is putting neighborhood committees linked to the ruling Socialist Party in charge of distributing basic foods amid increasingly violent unrest over chronic shortages that have battered the socialist government's popularity.

President Nicolas Maduro's government wants state agencies to buy some 70 percent of food produced in local plants and distribute much of it to the population, which is suffering under a severe recession and triple-digit inflation.

Officials say the system will cut down on smuggling of state-subsidized food by limiting the role of private food distributors, who Maduro accuses of hoarding goods and raising prices as part of an "economic war" against him.
The first question you have to ask is, What determines the prices the state agencies will buy at? If they force prices down firms will not produce or will produce and sell on the black market rather than sell to the state. The answer to shortages isn't more state control but a return to a market economy. It seems likely that the only "economic war" being waged here is that by the government against the people in Venezuela.
But the country's opposition is slamming the plan as a discriminatory rationing system that will worsen hunger and could give Socialist Party sympathizers the power to withhold food from government critics.

They say the committees, known by their Spanish acronym CLAP, violate basic freedoms and do not address the underlying causes of shortages, which include an unproductive economy and artificially low caps on food prices that stimulate smuggling.
In the working class community of Araguaney on the outskirts of Caracas, residents on Wednesday lined up to buy bags of groceries that included a chicken, pasta and corn flour for 2,300 bolivars, equivalent to around $2.30 on the black market exchange rate.

"It wasn't very much, but we have to accept it, because right now there's nothing," said Flor Gaviria, 36, who quit working at a pharmacy last year because standing in supermarket lines to buy food was too time-consuming to hold down a job.
There clearly is something very wrong with an economy when you have to give up your job so you can stand in line to buy food.

An obvious part of the problem is that
Local firms have little interest in producing because price controls often require them to sell below cost.

Residents are increasingly turning to black markets where product such as milk or sugar often fetch 10 times the regulated prices, creating a lucrative smuggling business.
With prices below cost, firms either stop producing or produce and sell in the black market or smuggle their goods into neighbouring countries where prices are not controlled. These are very predictable responses to price controls.

Friday, 10 June 2016

Why are big cities becoming expensive places to live?

Arnold Kling argues that the reason may be upward sloping demand curves:
But one possibility I want to throw out there is that people want affluent neighbors. If I want an affluent neighbor, and an affluent neighbor is going to live in a neighborhood with high prices, then in some sense I want to live in a neighborhood with high prices. In the extreme, this makes my demand for neighborhoods upward-sloping. Higher prices make me want to live there.
Back to cities. Suppose that an important “urban amenity” is having a lot of affluent people around. Young singles may wish to meet potential marriage partners who are affluent. People who have acquired affluent tastes (sushi, yoga, wine) may want to be around people with similar tastes.
Given the cost of housing, you would have to have very strong preferences for the "urban amenity". I can't help thinking there must be cheaper way to take advantage of the amenity.

Wife swapping: it's hard to make binding contracts for repugnant transactions

The following comes from Al Roth's Market Design blog:
Yannai Gonczarowski writes:

"A week ago, the following question was asked on a popular Israeli web forum that discusses legal questions: The author says that he and his wife agreed with their neighbor and his wife that they will exchange partners for a day: the neighbor will be with the author's wife for one day, and after the neighbor's wife returns from her current trip abroad, she will be with the author for a day. As you can already imagine, the author writes that the first part happened, but when the neighbor's wife returned from abroad, the neighbor and his wife denied any such agreement and ignored the author's messages. The author says that he has text messages on his phone to prove the agreement and that he spent a considerable amount of money on beverages for the intended day with the neighbor's wife, and asks the readers of the web forum whether he has a cause for legal action against the neighbor and his wife for violating the agreement.

A link to the question on the web forum (the actual Hebrew text is somewhat more colorful/offensive):
There is sometimes is a real difference between sequential and simultaneous move games.

Tuesday, 7 June 2016

Latest New Zealand Economics Papers

There are actually a few interesting looking papers in the latest issue of NZEP:
Does stadium construction create jobs and boost incomes? The realised economic impacts of sports facilities in New Zealand

by Samuel A. Richardson
Government involvement in facility construction is typically justified on the basis of ex-ante predictions of economic impact resulting from events hosted at the new or upgraded facility. This paper examines the impact of facility construction on construction sector employment and real GDP across 15 New Zealand cities between 1997 and 2009. Results from static and dynamic models indicate that certain types of facilities had short-term (during construction) positive impacts on construction sector employment growth, although only stadium projects generated positive post-construction employment impacts. There is also little in the way of empirical evidence to suggest that new or upgraded facilities had any significant impact on local area real GDP either during or post-construction.
The effects of home heating on asthma: evidence from New Zealand

by Andrea Kutinova Menclova and Rachel Susan Webb
New Zealand, along with the USA and Australia, has one of the highest asthma rates among developed countries and previous analyses attribute this partly to insufficient home heating in certain neighbourhoods. International public health and medical studies corroborate this link but strong evidence of causality is lacking. In this paper, we empirically investigate the effect of home heating on hospital asthma admissions using panel data techniques and controlling for endogeneity. The hypothesis that higher electricity prices (via less adequate heating) increase hospital asthma admissions is tested and receives strong empirical support across a number of model specifications and datasets used.
and, of course, the truly magnificent - he says with all modesty
From complete to incomplete (contracts): A survey of the mainstream approach to the theory of privatisation

by Paul Walker
Privatisation is a common, yet controversial, policy in many countries around the world, including New Zealand. In this essay, we survey the literature on the theory of privatisation to see what insights it provides to the privatisation debate. We divide the literature into two periods defined by their relationship to the theory of the firm. In the period up to 1990, the literature followed the theory of the firm in using a complete or comprehensive contracting modelling framework. By the end of the 1980s, the ownership neutrality theorems highlighted a major weakness with this approach. The contemporary (post-1990) literature took advantage of incomplete contracting models to explain the difference in the behaviour of state and privately owned firms.