Good for Greg Mankiw...

..for supporting marriage equality.

Why is the luxury housing market recovering so well?

The fashionable thing to say is because of foreign money.  I suspect the actual reason is that the one percent have gotten 122 percent of the recovery (h/t/ Tim Noah).

The demand curve for housing among the rich has shifted out.

The future of efficient transportation

Might look like this:

I heard a lecture from Alain Bertaud on how networked, scheduled transportation is not a good solution for many people--even in poor parts of the world.  And I can testify that auto rickshaws are often the best way to get around cities in India--they are quick, cheap, and when fueled by natural gas, environmentally not too bad (those with two stroke engines are a whole other matter).

One of the most provocative things I learned from Alain is that buses are often less fuel efficient than cars--for a bus system to work, they have to run at periods where demand is fairly low.     As it happens, while sitting at dinner in downtown Los Angeles last night, we watched bus after bus on 6th Street go by nearly empty.

Where's the monopsony?

President Obama, Paul Krugman and Robert Reich have all been pushing for an increase in the minimum wage.  I want to agree with them, and Krugman is certainly correct that the preponderance of empirical evidence shows that the minimum wage's impact on total employment is negligible.

But the question is, why?  Krugman's statement that human beings are not Manhattan apartments is true, and allows him to support the minimum wage while being appropriately skeptical of rent control, but it doesn't give a satisfactory answer as to why putting a floor on the price of labor would not create excess supply of labor.

There is in economic theory a set of circumstances, however, under which an increase in the minimum wage might raise employment.  If an employer has a market largely to itself--if it has monopsony power--then it will both pay its workers less than their productivity warrants and not hire enough workers to be at the most efficient level of employment.  Raising the minimum wage would then both increase pay and induce more workers into the labor market, hence increasing employment.  If government could nail the minimum wage to the marginal revenue product of the least productive  workers, the minimum wage could produce a first-best outcome--one where pay and employment levels were efficient.

For the argument to work, the demand for labor needn't be perfectly monopsonistic, but rather less than perfectly competitive.  The fact that wages and labor productivity seem to have less and less to do with each other is evidence that the demand for labor is not competitive, but it would be nice to have further, detailed evidence of the industrial organization of labor demand.  

Should college be subsidized?

Mark Thoma has a very nice piece today about how Cal State-Chico changed his life.  One of the reasons it changed his life is that he could afford it--it cost $100 per semester when he went there.  The story is heartwarming, to say the least.

I have always struggled with how much college should be subsidized.  People who go to college almost certainly create positive externalities, and so Pigou would say there should be some subsidy.  But people who go to college also earn substantially more over their lifetimes than those who don't.  Low income people who pay state sales taxes thus subsidize high income people.  Hence the idea that people graduate with debt seems reasonable to me, because the value they get from college far exceeds what they need to invest in college, and it means they are reducing the tax burden of those who don't go to college [I should note that I was among the lucky people whose parents paid for college, so perhaps I am in no position to comment].  On the other hand, if high prices keep 18 year olds from going to college, one of the most important routes to social mobility is blocked.

In any event, a government economist friend of mine has the obvious solution to the problem of the regressive nature of subsidizing college: progressive taxes.  

Will smart phones be the end of built in automobile NAV systems?

Four years ago, my wife bought me car for my birthday.  She reasoned that as a newly minted Angeleno, I would be spending more time in my car than ever before (she was right), and so that I might tire of my slightly beat-up Corolla.

She got me a Honda Accord with all the trimmings, including a NAV device, which I enjoyed very much.  And four years later, I continue to love the car.  But I recently downloaded WAZE to my phone.  WAZE provides crowd-sourced information on traffic, and allows one to find the fastest route from place to place with remarkable dependability.  It provides turn by turn directions, but will change the directions on the fly when traffic conditions change, a regular feature of life in LA.

WAZE is, by the way, a free app.  It also takes us one small step closer to self-driving cars.  By guess is the built-in NAV system, as it currently exists, is a dinosaur.

Bankers and tail events

I participated in a panel last note hosted by the German American Business Association.  Overall, I had a nice time.

But before the panel, a managing director from a very large bank gave a speech, and he was trying to make some sort of point about tail risk.  The example he used is going to jail in Monopoly, an event for which the average probability is four percent.

Maybe I am being picky here, but two points.  One: four percent is not that far out on the tail.  I suppose it would be good if banks tried to avoid things that happen four percent of the time or less.  Two, and more important: random events in Monopoly come from a finite state space, so risk can be completely characterized.  We know with a great deal of certainly the probabilities of particular events happening in Monopoly.

Banks have to deal with uncertainty--random shocks that are not easily characterized by well defined distributions of outcomes.  The Monopoly metaphor is thus a bad one.