Today's "I Told You So"

I really hope Ani reads this because he doubted my hunch that a combination of factors might lead to a sharp decline in the price of oile & gas over the next few months, definitely in the next year.

Check out this NPR "All Things Considered" interview with Phil Flynn. 2:15 in he talks about the fact that oil quantities are as high as they've ever been (relative to demand) for this time of year. Partly this is because consumers are making small changes to their habits (a handful more people taking the bus/metro, a few taking bikes, and a lot of people canceling that summer car trip). The other part is that the oil market is rife with speculation. This speculation comes from certain people who think the price of oil can only go up (and are wrong) and certain other people who are buying commodities to hedge the downside risks in the stock market. He discusses this second aspect of the market 3:00 into the interview.When I heard the interview driving, I thought I heard some numbers on the surplus between supply & demand, but they don't seem to be in this take of it.

On the demand side: don't forget Clive Granger's prediction of a harsh fall for China after the olympics.

More on Guns

I wanted to take a moment to clarify yesterday's post. Information isn't a problem when selling a gun in all markets. For example, in a lot of rural markets, most sellers know most of the people around, and most of them know to whom they should not sell, and most of them even abide by the rule of thumb of not selling to the one crazed lunatic drunk in town, and have no more than one or two degrees of separation between themselves and everyone else in their market.

Problems arise in larger markets, because it's hard to know the entire market you're serving. Problems also arise when these smaller markets are preyed upon as havens for unscrupulous thugs who take them back to cities to commit (second or third) gun felonies. That is the point that (mostly libertarian-minded) New York has made about Southern States, including Virginia, whose lax regulations have allowed felons to obtain guns (by mostly legal means) without coming subject to a background check.

Having these background checks as mandatory keeps the local Bubbas from entering a "prisoner's dilemma," or negative-sum strategic game where, even though some would prefer to check buyers' backgrounds, they are trapped by the fact that competing against rivals who may not. As a result even the best-intentioned vendors in these localities are caught in a race to the bottom. Another advantage of making these checks mandatory is that it mandates federal, state, and local governments to show better diligence in keeping "do not sell guns to this man" lists up-to-date, and therefore lowering the monitoring and information-gathering costs of those honest and well-intentioned distributors.

Gun Shows and Market Failure

Since the VT shooting, firearms, public health, and emergency preparedness have become a serious and important issue for the State of Virginia (N.B.-I know, it's the "Commonwealth" of Virginia, but it's fun to irritate the redneck aristocracy 'round these parts). Measures in two important areas were considered: (1) reform of the mental health system, most of which ended up being a Criminal Justice-oriented compromise, but a net improvement in many cases (page 2, bottom; page 3, top); (2) stricter rules on background checks for the sale and purchase of firearms, which was killed ("Carried Over"; page 3, middle).

My focus, for the moment is on the Kill Bill on the measure attempting to close the "Gun Show Loophole" on criminal background checks. Basically, there are about a half-dozen loopholes at various state levels that circumvent the federal laws requiring background checks for people purchasing firearms. Admittedly, Cho, the shooter at VT, did not purchase his guns through any such loophole, but that does not mean the argument for closing the loophole is closed. Cho did get his bullets from one such "loophole dealer, which reminds me of this:

Chris Rock Bullet Controll

Anyway, both sides bring strong moral arguments to the table on the broader issue of gun control, so I will try to take a more market oriented approach. Suppose that we meet in a market and we exchange corn for shoes. Better yet, we meet and I buy corn from you for the "social contrivance" Paul Samuelson called money. There is nothing that you really need to know about the corn or that I need to know about how you intend to use it that affects my expected profit from selling the corn or has any externality on any third party. In jargony terms, there's no real market failure in the form of informational asymmetry, moral hazard, or externality.

Now consider a few examples of so-called market failures starting with the used car market. Georg Akerlof used this market to describe the market for "lemons." Basically, only sellers know for sure if their product is a lemon, and this informational asymmetry drives down the price that all sellers are able to obtain, thus crowding out "good" used cars, leaving only lemons. In this example there was some very important information that the seller had that the buyer did not, thus worsening the quality of the market. Similar models by Joseph Stiglitz and Michael Spence use information asymmetry to describe employers' efforts to screen "ability" and "effort" of their employees in labor markets.

We can also consider the auto insurance market. In this case, buyers are "adversely selected": only the buyer knows if he is a bad or reckless driver. The result? One result might be that it drives up the cost for users who are good and careful drivers, or good drivers are not insured (insured drivers are "adversely" selected). Alternatively, this type of market can have an equilibrium in which good drivers are not "overcharged," but they separate themselves from the "bad" drivers by choosing to "under-insure," and only "bad" drivers get full insurance. A similar argument has been applied to health care.

I think that in their best moments, advocates for stricter background checks are really just trying to address these simple market failures. Basically, the best way to protect the gun-ownership rights of honest, law-abiding citizens is to take steps to ensure that those who buy guns (be it at gun shows, estate auctions, or other "loopholes") are not "adversely selected" due to some informational asymmetry, because the potential harm to third-parties (externalities) are so immediate and severe. I

Person Joseph Stiglitz

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Fake Economic News

Is it me or does this article from the Onion eerily similar to something ("economic" advisor to Hillary Clinton - quotes indicating the fact that he has no degree in economics whatsoever) Gene Sperling would say?

Economist Makes Correct but Insensitive Remark... and it Makes News

I found a link to this Amity Shales editorial on Division of Labor. Anyway, let me preface this by saying it is highly unlikely that I would ever vote for McCain, and only Hillary's darkest wishes would bring that into consideration. Hell maybe I'll go for Barr. Who knows?

Still... Amity's got it right. Most of what Mr. Gramm had to say last week was correct. At the same time, what he said was collossally stupid. It was kind of a John Kerry "study hard or you'll get sent to Iraq" moment. True, but politically fatal.

Phil Gramm: "Mental Recession... Nation of Whiners"

Some people paint this as a battle between "campaing econ" and "real"
economics, but I think it's a little broader than that. No one seems to
be calling the media or pander-happy politicians out on the fact that
they have been exaggerating this so-called recession for months. Let me
rephrase: WE ARE NOT CURRENTLY IN A RECESSION. That doesn't mean that there will not BE a recession, it just hasn't arrived yet. This is the first regard in which Mr. Gramm is correct. The other is in the fact that the US economy has enormous potential, especially if it puts its ingenuity to work towards innovating clean alternative fuels to take us through the next century.

But here's where Mr. Gramm was wrong and where he was collossally stupid: He underestimated the pain that's been caused by some of the real disruptions in the housing market, and in job losses, and he really underestimated the inequities that have cropped up over the last 8 years between the rich and the poor. While aggregate and per capita income has generally risen over the last 1, 2, 8 years, the MEDIAN income has fallen. That means that the lower 50+ percent of the population has measurably less than it did 8 years back, while the rich have benefited quite a bit.

The distributional consequences of economic policies (which may be symptoms of other "frictions" in the economy that slow efficient resource allocation) are not just banalities of "campaign econ." They actually have long-term consequences or the sustainability of economic liberalization. If you need an extreme example, go visit Russia, or Brazil, or Argentina. That is what we face with trade policy now. Ramming trade policy down the throats of a reluctant middle class might be a bad idea if it means that there will be backlash against it that leaves our doors slammed shut more tightly than they had been before. Furthermore, the fact that some people lose needs to be appropriately addressed by governments that make reforms that change the "social contract" workers midway through their careers may have entered into when they began working. That, in a nutshell is what some economists and some candidates are advocating.

Big Mac Housing Index

So, weird title... Got to THIS on Calculated Risk via Krugman's conscience. A lot of conservatives (some of whom I know well as friends and relatives), whose convictions are sometimes unencumbered by inconveniences like facts, like to blame huge million-dollar McMansions and yuppies getting in over their head for both the housing bubble and the POP. The rationale is that the high-end houses had more money chasing them, and at the same time had farther to fall, and it was a fairly logical argument.

But there are convincing theoretical rationales to suggest the exact opposite, and in fact the Data for LA and Minneapolis suggest the opposite. Lower-quintile housed seemed to have a larger proportional increase AND a larger proportional decrease during the crash. Basically, what was happening on this end was that complicated loan scheems that perpetuated the bubble, and led to the subsequent forclosures and crash, were almost exclusively offered (and accepted) by lower-income borrowers who otherwise couldn't afford to buy.

An example is the Payment-Option ARM - Borrowers got their ARM with an option EACH MONTH (not at the outset of the contract, but EACH MONTH) to pay: the normal amortization payment; the interest-only payment, or; the "negative amortization" payment, which kept adding on to the principle. Holy SH..neikkies! This didn't just give people one chance at a bad desicion, but a seemingly neverending sequence of monthly opportunities to display their inexperience with finance.

Ted Kennedy's Brain

Here's a thoughtful post from Freakonomics. So, on first blush it would seem that the social cost of Ted Kennedy's treatment may be very high because it is crowding out resources from more routine medicine that may benefit more people. But I'm not sure this stands the test... unless you're a staunch republican (but, ironically, if you ARE a republican you have to honor and respect the Kennedys' right to choose to receive such treatments, even if they do bid up the cost). It's clear from the principle of "revealed preferences" that the private cost benefit to Mr. Kennedy (and his family) favors vigorous treatments. The implication of the article is that that treatment is the type of low-success-probability procedure that may tend to drive up costs for the rest of us. But, since Ted Kennedy is highly productive and employed in the service of the public, it is possible that extending his life and allowing him to continue is legacy of championing health care and other public-good initiatives like social insurance, his extensive treatments may still create a net gain to society. It's unlikely that this is entering the calclulus, but it is food for thought.