Monthly Archives: October 2014

Trains, planes and no automobiles

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On my planes and trains just recently I read Charlie LeDuff’s [amazon_link id=”0143124463″ target=”_blank” ]Detroit: An American Autopsy[/amazon_link]. No automobiles in my travels, and, as it happens, not much about the automobile left in Motor City either.

It’s a gripping read, in the same post-crisis-America genre as [amazon_link id=”0571251293″ target=”_blank” ]The Unwinding[/amazon_link] by George – another superb read that paints a depressingly realistic picture of life for so many people in the post-industrial US. [amazon_link id=”0143124463″ target=”_blank” ]Detroit [/amazon_link]is a rather gonzo journalism version – LeDuff used to report from war zones. As it turns out, that perspective seems all to appropriate when he returns to his home city.

[amazon_image id=”0143124463″ link=”true” target=”_blank” size=”medium” ]Detroit: An American Autopsy[/amazon_image]

One of the most depressing aspects is how quickly and comprehensively the polity and economy crumble when trust or social capital falls below some threshold. Everybody is afraid. Normal contact and transactions become impossible. There are, for example, no high street names left in the city of Detroit, none – the chain stores have all left. Politics had become – this was written before the official bankruptcy – absolutely venal with all the usual manifestations of corruption and incompetence that characterise poor countries with failed institutions.When LeDuff writes: “The entire country was being run into the ground by a generation infected with incompetence and greed,” he surely speaks for many of his fellow citizens. Among the most incompetent, as portrayed here, are the managers of the big auto companies, whose bailout by the Federal Government in 2009 did nothing to stem the tidal wave of job losses.

The book is interesting about the loss of this factory work. It doesn’t romanticise it at all, recognising how dull, dispiriting and disempowering it is. At the same time, LeDuff argues that it taught workers an important perspective on the world and – at least in the past – an understanding of the nobility of the hard grind. “Turning away from our birthright – our grandfather in the white socks – is the thing that ruined us,” he writes of his generations aversion to the discipline of hard graft that – at least – factory work gave earlier generations.

The collapse theme harks back to my last post here, about how essential trust is to a modern (any) economy. Detroit offers an example of the post-trust economy. Read this book and be afraid.

The paradox of trust

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John Plender reviews favourably [amazon_link id=”0198712383″ target=”_blank” ]Trust: A History[/amazon_link] by Geoffrey Hosking. The review says: “He argues, convincingly, that there is a tendency to give too much attention to power and the law relative to trust. The workings of trust are nonetheless complex….In the complex modern world, what increases trust in one group can intensify distrust in another.”

This seems to me one of the most difficult questions in the trust/social capital literature: what is the scope of the relevant group for trust to be a positive rather than a negative influence on the economy? Criminal gangs can be high trust organisations yet decrease trust in the society of which they form a part, and so on. Divisions into inside and outsider groups rarely end well.

[amazon_image id=”0198712383″ link=”true” target=”_blank” size=”medium” ]Trust: A History[/amazon_image]

Last year I wrote a short essay for the OECD Forum on the economic cost of diminishing trust in many of the institutions in OECD societies, including trust in big business. It highlights the paradox that the complicated, interlinked modern economy could not work without high levels of trust and yet so many indicators show that trust in established institutions is declining. More questions than answers here too, I’m afraid. But one can’t help but feel that we’re in a very corrosive downward spiral in trust at present.

It’s the housing market, stupid

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Thanks to @PeterBoettke on Twitter, I found these articles by Vernon Smith (an economics Nobel winner) and Steven Gjerstad arguing that the housing market has had a central role in the 2000s bubble and subsequent crash, because of its importance to household and lenders’ balance sheets. The first article (of 3) suggests that the Taxpayer Relief Act of 1997, which exempted homes from the capital gains tax up to $500,000, might have helped to trigger the bubble in house prices that ran from then up to 2006. The authors suggest:

Proposition 1. Severe economic recessions have their origin in joint household and bank balance sheet crises.

Proposition 2. The Great Recession is an example of a housing boom-and-bust that devastated the economy – as is (Proposition 3) the 1930s Depression.

Proposition 4. Monetary policy is ineffective in a balance-sheet crisis and so is government deficit spending for the same reason (which is that both operate on income flows at a time when households are repairing balance sheets).

Part 3 is still to come, but the articles are based on a recent book (which I’ve not read), [amazon_link id=”0521198097″ target=”_blank” ]Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modelling Economic Cycles[/amazon_link].

[amazon_image id=”0521198097″ link=”true” target=”_blank” size=”medium” ]Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modeling Economic Cycles[/amazon_image]

This struck a chord for two reasons. One is that Kate Barker’s new book in the Perspectives series, [amazon_link id=”1907994114″ target=”_blank” ]Housing: Where’s The Plan[/amazon_link], also emphasises the way the housing market drives the economic cycle, and has as one of its central recommendations capital gains tax on primary dwellings. She, of course, was a long-serving member of the Bank of England’s Monetary Policy Committee and also authored two landmark reports on planning and the housing market for the Treasury.

The other reason has been my growing conviction (over the last two books, [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link] and [amazon_link id=”0691156794″ target=”_blank” ]GDP[/amazon_link]) that economists and policymakers have paid far, far too little attention to assets in general. But perhaps people in general have become a bit less short-sighted? It would help explain the growing disillusion with politics by the next day’s or hour’s headlines.

[amazon_image id=”1907994114″ link=”true” target=”_blank” size=”medium” ]Housing: Where’s the Plan? (Perspectives)[/amazon_image]

Market failures and government failures

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It’s lecture preparation time of week again, and the general theme for next week is the state as a producer: nationalisation and privatisation, PFIs and PPPs, contracting out and industrial policy.

This is one of those areas where there is a vast amount written, but much of it furiously ideological, or else at the wrong focal length for undergraduate students – far too specific or detailed. However, courtesy of Alex Marsh, I have found [amazon_link id=”0801487625″ target=”_blank” ]You Don’t Always Get What You Pay For: The Economics of Privatisation[/amazon_link] by Elliott Sclar.

[amazon_image id=”0801487625″ link=”true” target=”_blank” size=”medium” ]You Don’t Always Get What You Pay for: The Economics of Privatization (Century Foundation Book)[/amazon_image]

This refers to privatisation in the US meaning of contracting out, rather than the UK sense of the sale of state assets. It starts by situating the debate in the context of the shifting tides of political beliefs over the 20th century, towards planning and the role of government as an agent of social change, and then back towards “free” markets and individual action. It then has a few chapters on the basics of markets versus administered or planned services and market failures, and also the basics of writing contracts and how hard or easy it is to specify the service and level of quality to be provided. This part has some very good and clear examples about how difficult it can be to get the incentives right in such contracts – indeed, how often there are perverse incentives due to contract structure.

The book goes on to market structures and competition, and organisational theory – the distinction between exchange in a market and a continuing relationship between individuals or organisations. The book ends with a plea for a less ideological debate about the issue, in favour of one more informed by economic and institutional analysis, by the realities of information asymmetries, moral hazard, principal-agent problems and the like. I wholly sympathise, for of course markets and governments fail in the same places for similar reasons – and this is why [amazon_link id=”0521405998″ target=”_blank” ]Elinor Ostrom[/amazon_link]’s study of the idiosyncrasies of non-market, non-state collective institutions is so interesting. But am not optimistic about shedding the ideology.

There’s no doubt what Prof Sclar’s views about contracting out are, so this is in that sense a partisan book. However, it is carefully reasoned and the economic issues are set out clearly. The writing is lively with loads of examples (albeit all American), and the book is extremely clear – perhaps it helps that Prof Sclar is an urban planner rather than in an economics department!

It’s too long, and perhaps a bit too demanding, for 2nd year undergraduates though. (One of the things I’m learning in delivering my course is that my idea of a reading list is far longer than others like the look of.) If anybody knows of anything alternative (short-ish) readings that shed more light than heat, I’d be glad to know, especially UK-centric ones.

Women, computers – and economics

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The latest issue of Fortune has an extract from a new book by Walter Isaacson, [amazon_link id=”1471138798″ target=”_blank” ]The Innovators[/amazon_link], which is definitely on my to-read list. The extract is about the female pioneers of computing (and HT to @Dr_Black).

As it says, replugging the connections in the early computers was tedious:

“At first the programming seemed to be a routine, perhaps even menial task, which may have been why it was relegated to women, who back then were not encouraged to become engineers. But what the women of ENIAC soon showed, and the men later came to understand, was that the programming of a computer could be just as significant as the design of its hardware.”

[amazon_image id=”1471138798″ link=”true” target=”_blank” size=”medium” ]The Innovators: How a Group of Inventors, Hackers, Geniuses and Geeks Created the Digital Revolution[/amazon_image]

Of course even before ENIAC, women had had the same job at Bletchley Park during the war. (And in the same way, in the Soviet Union women dominated the economics profession – making up more than two thirds –  because their job was the vast and tedious one of calculating prices and quantities for all the goods made in all the factories around the country. Needless to say, their pay and prestige was relatively low.)

As it happens, last week I was at Harvard and saw this Mark I on display in the Science Center. Grace Hopper was one of its key early programmers.

The Harvard Mark I