So there’s a proposal in your town to build a new high school (I chose high school construction because it’s where the money’s at). As with just about everything in life where you stand on the matter depends on your perception of what benefits you will receive.
As an economist (or some shut in with a blog who thinks he’s one) your analysis must begin with a complete rejection of the rational expectations theory. The theory states that people will act according to very well thought through outcomes based on maximizing their ‘utility’ or simply put, satisfying their wants and needs.
Having recently been through a multi-year saga of living in a town debating the merits of a new high school, I can tell you that any evidence of rational thought as to why or why not to build was a rare find. In discussions with pro or con factions I felt as if I was talking to Howard Beale (the crazed news anchor played by Peter Finch in the film Network) on a bender. Yes, it gets that passionate.
So in trying to decide where I really stand on this issue I tried to strip out my own beliefs and look at research and hard data on the economics of new school construction. In hindsight I would have had more success looking for hard data on the Loch Ness Monster or the heterosexuality of Ryan Seacrest.
What I found was mostly heavily partisan based research supporting either the benefits of new or refurbished schools or supporting the abandonment of public schools altogether. With only slight hyperbolae I can say that what’s out there for research on this topic is written by, on the one hand, people who believe school facilities should be the equivalent of the Four Seasons in Dubai or, on the other hand, people who believe the government has no place educating children and such matters should be handled by the private sector or by parents blessed with the wisdom of Aristotle and the math skills of Isaac Newton. But hey, lack of data has never stopped me before so here I goes.
When trying to judge the economic benefit to a community from building a new high school one must consider the relationship between school facilities and academic performance, the relationship between academic performance and housing values, and the relationship between infrastructure development and community utilization (value). Think of this as a hierarchy of needs: You can’t have good performance without a good foundation, you can’t derive benefit without performance, and you can’t derive value without benefit.
The Relationship of School Facilities to Academic Performance:
This one is easy to sum up: The conditions of school facilities have a direct impact on everything from absenteeism to teacher job satisfaction and job performance. What is not evident is any direct correlation between capital expenditures and academic performance. However, there is strong evidence that without quality facilities there can not be sustainable improvements in performance.
The Relationship of Academic Performance to Housing Values:
Ask any realtor what the top factor for home selection is and they will say school quality. It may not be number one for every buyer but it is the 600 pound gorilla. If you don’t want to take my word for it (and I recommend you don’t) check out the effort the National Association of Realtors is going through to get members to work directly with communities to improve schools and school performance: Schools and Real Estate. Academic or school performance influence on home values is measurable. According to one study (please see the Federal Reserve of New York’s research paper) that used house prices to quantify the value parents place on school quality, the impact of school quality on housing prices suggested an increase of 1.8% - 4.5% for each 5% increase in standardized test scores.
The Relationship of Infrastructure to Community Utilization:
This relationship isn’t as cut and dry as the other two but I wanted to add it because almost every piece of research I looked at mentioned it. In summary, any capital expenditure undertaken by a community should consider as much benefit to the community as possible. Mixed use facilities are one way to achieve lasting and widespread value for a community. The lesson learned here is if you’re going to build something expensive like a high school, make sure you can get as much use out of it as possible. This does not mean you have to build a Taj Ma High School, it merely suggests considering broader community needs and requirements. Don’t provide a specific group with a Mercedes, provide many groups with a Ford.
I call myself a Libertarian because I believe the government (at all levels) should leave me alone with my guns, bourbon, and discount books. But I’m also a realist. A long time ago the founders of this country believed that public education could provide this country with a key element for lasting freedom. Public education, as much as it has been maligned by all shades of the political spectrum, has helped to create a society and economic system of advancement and achievement seen nowhere else. State of the art school facilities do not guarantee economic success but communities that do not invest wisely in their schools can not expect the same level of benefits as those that do. Choose wisely.
Later….
Tuesday, February 23, 2010
Tuesday, February 16, 2010
Inflation Hesitation
I’ve written about inflation several times because no other area of economic study is as relevant to us. Not knowing how much something is going to increase in cost, especially staples like electricity, water, and the 20 or so HD channels I already overpay for, creates ripples in our everyday lives and in the economy. Add to this the tendency of inflation to wipe out savings and retained value in assets (homes, equities) and you begin to understand how bad inflation really sucks.
However, I’m not as worried about inflation as I used to be. If you pay attention to the mainstream media, or better yet what’s left of it, you’ve most likely heard about all the ‘money’ the Federal Reserve has pumped into the ‘system’. I put ‘’ around money and system because it turns out that the Fed didn’t pump what can be considered money into what we vaguely refer to as the system. Despite the warnings from well known economists like Glenn Beck (he’s one of the reasons I call myself a libertarian and not a conservative) the way the Fed supported many of the ‘too big to fail’ financial train wrecks was not by giving them cash. Instead the Fed used a recently constructed and little known tool to essentially escrow the dough it gave to financial superfund sites like Fannie Mae and Freddie Mac.
The Fed didn’t print money and ship it in trucks to banks in the hope that they would lend it out. The Fed was able to keep its eyes on the liquidity it created by buying up mortgage-backed securities, bonds, and Treasury notes from financial institutions. It then made the banks park much of the proceeds (to the tune of about $1.1 trillion) with the Fed. It ‘incentivized’ these transactions by increasing the interest rate on excess reserves – the money the Fed pays the banks on the reserves the banks must keep with the Fed to protect their collective bottom lines.
Consider this the security deposit banks pay the Fed in order to use the Federal Reserve system to borrow and move money around. The banks will behave better with the Fed’s money if they can make more interest off of it and keep up their reserves so they don’t blow it all.
The banks and other financial institutions can take the money the Fed has provided but as the incentive grows, most banks will leave it be to ensure their balance sheets meet tougher standards. When the economy picks up, the Fed can adjust up this interest rate without significant impact to the economy due to the fact that the banks will be able to generate capital from ongoing operations. Eventually the Fed can either let this money flow back into the economy without contributing to inflation (as the economy expands and can soak it up) or it can pull it back in by raising interest rates.
So there, I feel better about inflation rearing its ugly head just as the economy recovers. And it’s good to know that there are creative and somewhat pragmatic people working at the Federal Reserve.
Later
PS: I feel guilty for not being as entertaining as I usually am (I know you laugh at me not with me) so here’s something I hope can fill the gap:
http://www.youtube.com/watch?v=d0nERTFo-SkMonday, February 1, 2010
What?
Last Wednesday the SEC (Securities and Exchange Commission), on a 3 – 2 party line vote, decided to “encourage companies to disclose the effects of climate change on their business”. According to the New York Times and the Wall Street Journal:
“SEC Chairman Mary Schapiro, an Obama administration appointee, said the agency wasn't weighing in on the global-warming debate and wanted to ensure that investors get reliable information.”
The agency “wasn’t weighing in’? Right, and monkeys just flew out of my butt. What we have here is the Obama administration acting prudently to ensure that, no matter what happens to any proposed climate change legislation, steps will be taken to increase regulation aimed at reducing so called green house gas emissions.
By the tone of the fifth grade level prose above you may have gathered that I’m an anthropogenic global warming skeptic. Correctamundo. (For the breakdown of your humble shade tree economist’s official position on climate change please look below.) Skepticism aside, what really bugs me about what the SEC did is the smoke and mirrors use of a supposedly free market device to enact not so free market regulation.
Here’s how my thinking goes (you might want to break here for a couple of whip hits to help your brain function for a moment the way mine works all the time); The SEC requires public companies to disclose certain information when reporting financial information. The intent is to provide context for all the numbers that don’t make sense in financial statements detailing balance sheets, cash flows, etc. Many of these ‘notes’ disclose potential risks not reflected in the made up numbers in the financial statements. Usually these disclosures are things like “There are potential revenue fluctuations due in part to our CEO being a degenerate gambler who likes to raid the accounts receivables for meth money.” Or “We don’t really make any money, we just keep issuing stock and borrowing wads of cash to make it look that way”.
These disclosures are sensible when they directly relate to the revenue or expense generating activities of a firm. With Wednesday’s decision the SEC, under pressure from activist groups like the Social Investment Forum, has further politicized the disclosure practice by trying to relate an abstract risk to a tangible business impact often referred to as ‘material’. The SEC defends its decision by saying “…a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather.” An SEC staff paper further detailed the justification stating that a company should make disclosers to the public if it believes a new law or international treaty limiting carbon dioxide emissions might increase operating costs. Now that’s interesting. Why? Remember, disclosures are rarely seen as positive, so if pending climate laws or regulations potentially impact your business and you’re forced to take a guess on what may or may not happen, you are put at a competitive disadvantage.
Who cares? It seems reasonable to make a company tell its investors that proposed regulation may add risk or detriment to its operations. But here’s the rub, the SEC can punish a company for failure to disclose and therefore gets to make a judgment call on who they, or any wronged party, believes is a potential green house gas emitter.
In the recent housing market bubble and subsequent crash we saw what happens when multiple government agencies target a specific social outcome and use regulation and policy (often uncoordinated) as means to an end. If you liked what you got as a result of the regulatory gumbo produced for the housing market, you’re going to love the coming onslaught of green based government initiatives.
Later.
Official Shady Climate Change Position Statement: It seems average global temperatures have risen over the past century. Not disputing that. Anyone who thinks the majority or sole contribution to this rise is the result of human activity is delusional. Anyone who thinks human activity has zero impact on the environment at large, not just climate, is delusional. Therefore, most people who argue about climate change/global warming, no matter their position, are delusional. Talking to, let alone arguing with such people, is akin to trying to get a tennis ball out of the mouth of the Boxer-Rottweiler mix that lives across the street.
Addendum to the Official Shady Climate Change Position Statement: Delusional thinking aside, if you think you can alter future global climate and weather patterns by drastically reducing your carbon footprint or by forcing your friends and neighbors to buy into your delusional life choices, you’re on the bullet train (green of course) to disappointment central. It is the opinion of this completely clueless and unlearned person of all things climate and weather that for millions of years the climate has swung from extreme to extreme without coal fired electricity generation and Ford F350s. Therefore, to believe that human action can have a greater impact on long term climate trends than impacts from solar activity, the position of the earth relative to the sun, global ocean currents, and terrestrial phenomena (everything from volcanoes to the migration of the earth’s magnetic pole) is nutty. Furthermore, if you think we’re smart enough or technologically advanced enough to actually predict these trends through modeling, go ask the fantastically smart folks who used to work for BearStearns about how all that modeling stuff plays out in real life.
Addendum to the Addendum to the Official Shady Climate Change Position Statement: Why do so many smart people (as well as journalists and college professors) believe that human activity is the predominant, even sole cause for climate change/global warming? Some of them are convinced and have completely sold themselves on this. Don’t ask why, it is what it is. Most are taken with the possibilities created by the perceived need to change human behavior to address the ‘crisis’. Simply put, the thought process goes like this:
We’re fucked. Wait a minute, maybe we fucked ourselves. If we fucked ourselves we can un-fuck ourselves by stopping, or better yet reversing, the behavior that got us here. Let’s fuck with everybody to make sure those other fuckers do what we want so we can control all the fucking around that got us fucked in the first place. Since merely existing as human beings causes activity that in turn causes global warming, or better yet climate change, almost every aspect of our daily lives should be overseen by someone who really knows what the fuck their doing. The wicked smart people who think like this honestly believe that the vast majority of mouth breathing resource consuming humanoid locusts on this planet need to be instructed (told) how to behave. Climate change/global warning is the latest and perhaps greatest opportunity to be leveraged by these real life Ellsworth Tooheys.
Final Addendum: To be honest, I’m in favor of most of what the global warming/climate change crowd wants. More investment and tax credits for green energy, clearing the way for increased use of non-carbon energy sources (solar, wind, nuclear, etc.), and basically anything that moves our economy away from imported oil and gas. However, my rational is quite different from theirs. I do not fear an apocalyptic end to humanity from bad weather. Rather, I fear an elongated demise of western civilization from the continued transfer of wealth from a creative, progressive, and pluralistic group of societies to an enrichment of largely repressive, intolerant, and static group of societies. Mix in the fact that many of these petro-states want to harm us by any means possible and you’ve got a heck of a good reason to invest in a Prius and a pellet burning stove.
If you think Cap and Trade is the answer you should delve deeper into the way the current system works. I won’t go into it hear (NPR’s Fresh Air does one of the best covers on C&T I’ve seen: Cap And Trade And The New Carbon Economy) but it’s a mess with no measurable returns to date that has created a speculative market that makes real estate derivatives look like green stamps.
“SEC Chairman Mary Schapiro, an Obama administration appointee, said the agency wasn't weighing in on the global-warming debate and wanted to ensure that investors get reliable information.”
The agency “wasn’t weighing in’? Right, and monkeys just flew out of my butt. What we have here is the Obama administration acting prudently to ensure that, no matter what happens to any proposed climate change legislation, steps will be taken to increase regulation aimed at reducing so called green house gas emissions.
By the tone of the fifth grade level prose above you may have gathered that I’m an anthropogenic global warming skeptic. Correctamundo. (For the breakdown of your humble shade tree economist’s official position on climate change please look below.) Skepticism aside, what really bugs me about what the SEC did is the smoke and mirrors use of a supposedly free market device to enact not so free market regulation.
Here’s how my thinking goes (you might want to break here for a couple of whip hits to help your brain function for a moment the way mine works all the time); The SEC requires public companies to disclose certain information when reporting financial information. The intent is to provide context for all the numbers that don’t make sense in financial statements detailing balance sheets, cash flows, etc. Many of these ‘notes’ disclose potential risks not reflected in the made up numbers in the financial statements. Usually these disclosures are things like “There are potential revenue fluctuations due in part to our CEO being a degenerate gambler who likes to raid the accounts receivables for meth money.” Or “We don’t really make any money, we just keep issuing stock and borrowing wads of cash to make it look that way”.
These disclosures are sensible when they directly relate to the revenue or expense generating activities of a firm. With Wednesday’s decision the SEC, under pressure from activist groups like the Social Investment Forum, has further politicized the disclosure practice by trying to relate an abstract risk to a tangible business impact often referred to as ‘material’. The SEC defends its decision by saying “…a company must disclose the significant risks that it faces, whether those risks are due to increased competition or severe weather.” An SEC staff paper further detailed the justification stating that a company should make disclosers to the public if it believes a new law or international treaty limiting carbon dioxide emissions might increase operating costs. Now that’s interesting. Why? Remember, disclosures are rarely seen as positive, so if pending climate laws or regulations potentially impact your business and you’re forced to take a guess on what may or may not happen, you are put at a competitive disadvantage.
Who cares? It seems reasonable to make a company tell its investors that proposed regulation may add risk or detriment to its operations. But here’s the rub, the SEC can punish a company for failure to disclose and therefore gets to make a judgment call on who they, or any wronged party, believes is a potential green house gas emitter.
In the recent housing market bubble and subsequent crash we saw what happens when multiple government agencies target a specific social outcome and use regulation and policy (often uncoordinated) as means to an end. If you liked what you got as a result of the regulatory gumbo produced for the housing market, you’re going to love the coming onslaught of green based government initiatives.
Later.
Official Shady Climate Change Position Statement: It seems average global temperatures have risen over the past century. Not disputing that. Anyone who thinks the majority or sole contribution to this rise is the result of human activity is delusional. Anyone who thinks human activity has zero impact on the environment at large, not just climate, is delusional. Therefore, most people who argue about climate change/global warming, no matter their position, are delusional. Talking to, let alone arguing with such people, is akin to trying to get a tennis ball out of the mouth of the Boxer-Rottweiler mix that lives across the street.
Addendum to the Official Shady Climate Change Position Statement: Delusional thinking aside, if you think you can alter future global climate and weather patterns by drastically reducing your carbon footprint or by forcing your friends and neighbors to buy into your delusional life choices, you’re on the bullet train (green of course) to disappointment central. It is the opinion of this completely clueless and unlearned person of all things climate and weather that for millions of years the climate has swung from extreme to extreme without coal fired electricity generation and Ford F350s. Therefore, to believe that human action can have a greater impact on long term climate trends than impacts from solar activity, the position of the earth relative to the sun, global ocean currents, and terrestrial phenomena (everything from volcanoes to the migration of the earth’s magnetic pole) is nutty. Furthermore, if you think we’re smart enough or technologically advanced enough to actually predict these trends through modeling, go ask the fantastically smart folks who used to work for BearStearns about how all that modeling stuff plays out in real life.
Addendum to the Addendum to the Official Shady Climate Change Position Statement: Why do so many smart people (as well as journalists and college professors) believe that human activity is the predominant, even sole cause for climate change/global warming? Some of them are convinced and have completely sold themselves on this. Don’t ask why, it is what it is. Most are taken with the possibilities created by the perceived need to change human behavior to address the ‘crisis’. Simply put, the thought process goes like this:
We’re fucked. Wait a minute, maybe we fucked ourselves. If we fucked ourselves we can un-fuck ourselves by stopping, or better yet reversing, the behavior that got us here. Let’s fuck with everybody to make sure those other fuckers do what we want so we can control all the fucking around that got us fucked in the first place. Since merely existing as human beings causes activity that in turn causes global warming, or better yet climate change, almost every aspect of our daily lives should be overseen by someone who really knows what the fuck their doing. The wicked smart people who think like this honestly believe that the vast majority of mouth breathing resource consuming humanoid locusts on this planet need to be instructed (told) how to behave. Climate change/global warning is the latest and perhaps greatest opportunity to be leveraged by these real life Ellsworth Tooheys.
Final Addendum: To be honest, I’m in favor of most of what the global warming/climate change crowd wants. More investment and tax credits for green energy, clearing the way for increased use of non-carbon energy sources (solar, wind, nuclear, etc.), and basically anything that moves our economy away from imported oil and gas. However, my rational is quite different from theirs. I do not fear an apocalyptic end to humanity from bad weather. Rather, I fear an elongated demise of western civilization from the continued transfer of wealth from a creative, progressive, and pluralistic group of societies to an enrichment of largely repressive, intolerant, and static group of societies. Mix in the fact that many of these petro-states want to harm us by any means possible and you’ve got a heck of a good reason to invest in a Prius and a pellet burning stove.
If you think Cap and Trade is the answer you should delve deeper into the way the current system works. I won’t go into it hear (NPR’s Fresh Air does one of the best covers on C&T I’ve seen: Cap And Trade And The New Carbon Economy) but it’s a mess with no measurable returns to date that has created a speculative market that makes real estate derivatives look like green stamps.
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