Relevant and even prescient commentary on news, politics and the economy.

Engineering a Permanent Democratic Majority

Matthew Yglesias points the direction in his post: the Geographically smallest Electoral College map, which starts with the densest states and works down:

Geographically smallest Electoral College map.

If Democrats can bring Indiana, Virginia, North Carolina, and Florida (or even two or three of them) firmly into the Democratic camp, the game is over for the foreseeable future.

Those states are clearly where Democrats’ long-term, big-picture political efforts need to be focused in the next two to four years.

Cross-posted at Asymptosis.

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Fixing Disaster Relief is Simple! Let Markets Work.

I’ve often commented on how childish, really adolescent, the views of libertarians are. But it’s rare that I see such a stunning example.

In a recent NYTRoom for Debate,” Russell Sobel of The Citadel gives us this:

Fixing disaster relief is simple: greater use of decentralized markets, and focusing government on its proper role.

After all, “Economists from Adam Smith to Friedrich Hayek to Milton Friedman have stressed the inherent problems in central planning.”

So there you go. QED.

Here, Sobel explains, is the “simple” solution to solving any problems of disaster relief:

By renting the [Chicago Board of Trade] trading floor and using the exchange, supplies and services would be better allocated to disaster victims than they are now by FEMA.

Because:

Such mechanisms simply work better

It’s so simple! And obvious! Why didn’t anybody think of this before? Heck, a thirteen-year-old could have come up with it.

And all of this is before we ever ask the question: does our disaster relief system need fixing? It certainly did under W. And: what part of it needs fixing? If recent fiascos provide any answer, the missing piece was effective national leadership.

Given that effective leadership, America seems to have far and away the best disaster relief system in the world — private, state, local, and federal combined, all working together. Just look at our preparedness and response this week — awe-inspiring.

Conservatives: Am I wrong?

And: You want to dismantle it?

So much for American exceptionalism.

Cross-posted at Asymptosis.

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Are Refis Contractionary?

Update: David Rosnick of CEPR questions this analysis. Update to come when I have Internet access again–which probably will be Saturday at the earliest.

Brad DeLong got me thinking a few days ago, and not in a good way, when he quoted the brilliantly (and brilliantly-named) Cardiff Garcia:

Thus far the surging mortgage origination business at banks has been concentrated in refinancing rather than purchases. The refi boom is great but can only last so long, as Dudley writes, and from a macroeconomic perspective has less of an impact than a housing purchase and construction rebound…

I’m thinking that rather understates the case.

There are at least two of us on this blog who have benefitted from recent refis. (I won’t out the other one, save to say they got better terms than I did.)  In my case, the net savings in payments was about $700/month—not exactly chump change, unless you’re Tagg Romney.

But let’s follow the flows here, pretending that all transactions are with two banks for reasons that will be clear.  My refinancing means that Bank A receives a lump-sum payout of the balance of my mortgage. But then they have to put that money to work—and they are not going to receive my old interest rate on those replacement loans (if any).

Bank B is receiving current market rates on the refi. So it’s new lending to them. But that’s neutralized on the supply, replaced by Bank A having “freed up” my old loan. 

Similarly, on the demand side, my demand is satisfied—and my demand now is $700/month less than it was before.

So the S-D lines are stable for the assets—or even reduced due to the decline in demand.  Meanwhile, the flows into financial institutions (assets to them) are reduced.

So if A = L + E and A is reduced, what happens to Liabilities?

If you assume standard economic theory, I save that $700.  (Realistically, I spend it and someone else saves it, but the net savings in the economy still goes up $700.)  That savings is a Liability, let us say to the Bank A.

Bank A’s Balance Sheet is now:  Assets down $700/month, Liabilities up $700/months.  To balance that equation, Equity has to go down $1,400/month.

Bank B has Assets up $700/month, Liabilities unchanged, and therefore Equity up $700/month.

Net for the system is that Assets are unchanged, Liabilities are up $700/month and Equity is down $700/month.

Ceteris paribus, refinancing reduces the inefficiencies in the banking system (the above-market asset valuation is replaced by an at-market asset). In doing so, it reduces Bank Equity and increases Bank Liabilities.

Unless lending to other sectors of the economy increases, refinancings that do not take cash (“equity”) out of the property appear to be contractionary.

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Fowl and Fishy Inflation

It has been suggested that the rapid increase in the prices of fish, fowl, meat and eggs for about two years following October, 2009 was the result of QE causing inflation in these items.  From this Calculated Risk graph, we can get the QE date line.  QE was announced on Nov 25, 2008, and expanded in April 2009.  It ended in May, 2010.  QE II was hinted at in Sept, 2010, announced in Nov 2010, and ended in August 2011.

The timing correspondence is less than stellar, since the YoY increase in prices for those food items dropped like a rock from October, ’08 though Oct. ’09.  It then shot up to a 7 1/2 year high in May of 2011.

This can be seen in the red line of Graph 1, which also shows the CPI for all items except food and energy (CPILFESL) in blue.

 Graph 1 YoY Price increases for Selected Food Stuffs and All Items Less Food and Energy

To assume a cause and effect relationship, you have to account for a time lag of a year from the announcement and 6 months from the expansion of QE to the turn around in those price increases from the Oct ’09 bottom.  Remember, through the first 11 months of QE, the YoY change in those prices dropped dramatically.  Between May and November, 2010, while no QE program was in effect, these prices had the steepest part of their rise.  After QE II ended in August, 2011, the YoY price increase remained high for those items until the end of the year, and then fell rapidly.

A longer view reveals that the increase in those food prices oscillates continuously around the All Items Less Food and Energy line.  The trough to trough period is irregular, averaging 3.52 years with a standard deviation of 0.45 year (5 measurements).   The trough to trough time from May, ’06 to Oct., ’09 was a very typical 3.4 years.  It is very hard to look at that graph and see anything unusual about the 2008-2012 region, other than the depth of the trough shortly after the Great Recession.

It appeared to me that the blue line of Graph 1 might be a crude approximation of a long average of the red line.  This turns out not quite to be the case, since the two lines are measuring different baskets of goods.  What we have is the YoY increase for these food items oscillating around its own mean. That sounds like a tautology, but let’s look a little deeper.

Graph 2 shows the same data, along with some long averages of the food stuffs YoY price increase line.   These are the 5 Yr (light blue), 8 Yr (yellow), and 13 Yr (purple) moving averages, and the average for the whole data set, 2.9 (bright green).  I’ve also included an envelope one standard deviation (3.06) above (5.96) and below (-0.17) the mean in dark green.

Graph 2 YoY Price increases for Selected Food Stuffs with Avgs and All Items Less Food and Energy

This (sort of) resembles a control chart.  The +/- Std. Dev. envelope isn’t a hard barrier, but does tend to turn the data path back toward the mean, unless something strange happens.  Frex, the big rise from late ’02 to early ’04 followed the Iraq invasion and resulting disruption in petroleum pricing.  The ’09 trough was the result of the Great Recession.  These are explainable variations.

Note also that the moving average lines tended to run below the CPILFESL line prior to late 2002, and have tended to run above it since.  This is to be expected since these items are basically the top of the food chain and have several layers of fuel dependent contributors in their cost structure.  Recall that until 2002, fuel prices were low, and since then (except for the Great Recession) have increased steadily.

I’m quite sympathetic to the idea that QE has done very little to help ease the economic doldrums following the GR.  But I see no reason at all to believe that it has contributed to the pain and suffering of ordinary citizens at either the grocery store or the gas pump.

Maybe there have been real downsides to QE.  Any thoughts on what they might be and how to quantify them?

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About reporting and water issues…

by David Zetland    David Zetland is a senior water economist at Wageningen University in the Netherlands and maintains a blog on water issues at Aguanomics.

It’s not as simple as selling books

Many people ask me to comment on statements made by journalists covering the water sector. Most of the time, I am happy to see journalists covering water issues, since they tend to promote awareness of the need to change our ways, but there are two big exceptions. The first is when a lazy journalist fails to see that water shortages are not caused by a failure to rain as much as a failure (of managers) to keep demand below supply. In those cases, I often leave comments or send emails to correct them, hoping that they look a little deeper in the future.

The second problem is much more dangerous: a journalist posing as an expert.

But what does it take to be an “expert”? Well, it doesn’t mean you need a PhD or need to spend years studying the topic. You need a decent framework that explains causes and effects within local institutions that also matches the knowledge and intuition of those who have lived with the situation for many years.
Journalists can certainly explain the causes of a problem, how to resolve it, and why resolution may not be occurring. That’s why I admire the work of Fred Pearce and Cynthia Barnett, for example.

But then we run into journalists who turn a few shallow anecdotes into a problem that can be “solved” in ways that won’t work. Although some of these journalists are sloppy (see above), others intentionally over-reach because they are making money.

I’m going to name two here (with specific examples) because I want to call attention to their need to do a better job in their jobs as “experts” (I’m not saying anything about their work as journalists) and our need to bring an appropriately critical perspective to their opinions.


Why is this post important? People with limited attention rely on “prime time” outlets rather than study complex problems. That means that mistakes in those outlets can lead to an abundance of bad decisions.


So, that’s a preamble for why we need to care about journalists’ accuracy, but let me also also clarify why I — as an academic — feel a need to correct their contributions to public discourse. It turns out to be more complicated than “that’s what academics do.”

As you know, I’ve been giving my opinion on water policy for many years, writing on this blog, giving public talks, holding discussions with experts and stakeholders, and so on. In most circumstances, I combine my knowledge of economics, a familiarity with facts, and a sensitivity to other perspectives into an opinion on what I consider the “right” thing to do.

Economists say that I do “normative economics,” i.e., the economics of what should be, but most economists practice what’s called “positive economics,” i.e., the economics of what is. These positive economists may carry out research describing the connection between water service and child mortality, or measuring the efficiency of water markets or the impact of new water tariffs on consumption behavior. I go further, using these results to advocate for policy changes.

In that sense, I am not an academic concerned with the details of reality as much as a pundit* promising to deliver a future to those who follow my advice. I am not alone in that, and thus we arrive at the problem of identifying who’s right, a problem that is often ignored because people standing on high are more often believed than people standing on firm ground.

It’s well-known, for example, that there are two ways to become a famous blogger: be famous or work hard.
This definition will raise a warning signal to those interested in maximizing the quality of debate. There may be, for example, hundreds of people qualified to advise on improving urban water management, but these people may not get as much attention as a single tweet from Madonna (“OMG, I’m no virgin, but showering in recycled toilet water? Yuck. Gimme NATURAL water”).

That tweet will be heard by many. Most will ignore it, but others will change their opinion about recycled water. In the resulting debate over indirect potable reuse, experts are buried under an onslaught of collective ignorance, the motion to recycle water is denied, and the utility continues to overpump a river full of wastewater into the drinking water system — to the future regret of everyone.

The problem of short and clever vs 78 pages and precise is widespread. We see it in political debates, cocktail chatter, and the know-it-all friends with the same solution to every problem (some variation of education, regulation or markets).

These opinions may be 50, 70 or even 90 percent right, but they tend to leave out caveats, qualifications and limitations that can render the opinion irrelevant or counterproductive. The trouble comes when readers and listeners assume the opinion is 100 percent right — perhaps more right than even the author would admit, given his attempt to present the essence of a complex idea while still understanding its limitations.

That’s why academics can provide a useful service by recognizing the limits to what they know or can claim and explaining how complex systems are neither simple enough to understand nor manipulate. Academics, in short, are trained to be humble with their ideas.**

So what can we learn from academics?

  1. Take the position of the other side, to understand and address their objections. This process means that you will need to either admit or correct your weaknesses.
  2. Contextualize your idea within the conditions where it is appropriate while acknowledging that those conditions are not universal.
  3. Think very carefully about how your idea will interact with existing policies, taking into account the ways that people have tried to deal with the problem — or not — in the past.

Now, after all that long introduction and context, let me get to the journalists whose opinions are not expert in a few recent pieces.

In my review of Charles Fishman’s Big Thirst, I said “his journalistic style was too breezy.” Indeed, his op/eds at National Geographic and the New York Times are oversimplified and misleading. In the former, he omits the facts that Ireland has charged residential users for water in the past and that non-residential users pay for metered water. Besides these omissions, which make his claims sound more significant than they are, he forgets (or does not know) that meters are not always cost-efficient to install and that customers always pay for meters, either up-front or in the long run.

In his NYT piece, Fishman’s “obvious” command and control “solutions” have been tried in many places. In some they work, in others they are inefficient from a cost or water perspective. He also omits the more fundamental discussion of why other, more effective actions are not taken (raising water prices in Las Vegas, for example) — an omission that makes me wonder if he’s looked any deeper than press releases and speeches by water managers and politicians. Journalists sometimes get a little over-used to dealing with the contents of the box they are given instead of looking outside the box — a job that academics (and activists) are accustomed to executing. His over-simplified perspective may sell books, but his solutions are more likely to be counterproductive than useful.

Frederick Kaufman expresses a fear of water markets in Nature and Wired magazines that is straight out of science fiction: global water markets in which derivatives allow traders to hedge shortage in Kazakstan with grain production in Australia by borrowing against wetlands in Canada. His working hypothesis is weak on many levels. I responded to his Nature piece and Wired interview with several comments, but these will do here:

  • Water is NOT EVEN CLOSE to fungible. Are you kidding about “icebergs and aquifers” as interchangeable? Go get $1 of tap water (about one cubic meter) and then move it to the other side of the room. Hard to do? Sure, since 1,000 liters weighs one ton. Water systems — let alone markets — will NEVER be integrated like oil, gold or computer ship markets because the costs of transactions are so high.
  • The greatest distortions in the efficient use of water are caused by political interference. In this sense, bad water management is the same as bad financial management, but don’t blame markets for bailing out “too big to fail” fools or failing to get water to efficient farmers or taps in poor countries. Blame politicians.
  • Water markets have been VERY useful in reducing water waste and directing water from the powerful and rich to the poor and powerless – because the rich are getting water at a lower price than the poor are willing to pay…

Go read these pieces and ask yourself: Do these guys know what they are talking about? Should politicians and citizens turn their views and ideas into policies for managing our water? More fundamentally, remember that some people put out uneven work (I know I do). These pieces may not represent the norm for these guys (I sure hope not), but they risk damaging reputations built on solid work that combines relevant facts into a plausible narrative to explain how a situation arose and how it might be improved.
No matter your answer, please leave comments here (or there) to tell me and them what we got right or wrong.

Bottom Line: Journalists can cause a lot of damage when they misdiagnose problems, offer the wrong solution and appeal to fear, uncertainty and dread. What they need to do — and what I try to do — is explain the facts and barriers to change before suggesting gradual reforms to improve our water management.


* “Pundit” comes from “pandit,” a Hindi word for a scholar or teacher who has mastered a topic (classically Sanskrit language, vedic scriptures, Hindu law, etc.) under a guru. This definition could be applied to any “doctor of philosophy,” since PhD programs are designed to impart mastery over a topic to a student under supervision. I wouldn’t be surprised if pandits were also supposed to possess wisdom, a characteristic not required of PhDs.
** I may be giving academics too much credit, as many of them disregard their training when it comes to arguing that their opinion is right “because I have a PhD.” Academics, OTOH, are routinely absent from debates in which they could make a useful contribution, due to a combination of shyness (PhDs are known for long hours of study not extroversion), professional incentives (professional publication is more important than social impact), and aversion to debate with non-academics who may neither respect their credentials nor engage in “structured fair play.”

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