Archive for March 2006

Enron, Week 5

Tom Kirkendall has another excellent roundup of the Lay/Skilling trial.  According to Kirkendall, the prosecution is having some trouble, and in fact have wandered pretty far afield from their original indictment (a document that the prosecution now actually has disowned).  In effect, Lay and Skilling seem to be being tried for different things than they were ostensibly brought to trial for.  Most interesting is this:

On the other hand, the Task Force's case to date has wandered away from
the SPE's, so there is a decent chance that a difficult-to-control
Fastow could end up being a not-so-important witness in the
ever-changing big scheme of this corporate criminal case of the decade.

If Kirkendall is reading the trial correctly, and the SPE's and Fastow's testimony are becoming irrelevant, then the trial has virtually nothing to do with anything we have heard about in the media about Enron.

Barrionuevo and Eichenwald, who have been following the trial for the NY Times, agrees that the government case is shifting but believe it is due to the strength of what has been presented so far.

A steady drumbeat of damaging testimony in the five-week-old criminal trial against the former chief executives, Jeffrey K. Skilling and Kenneth L. Lay,
has led legal experts to praise the government case presented so far.
That has raised questions about the risks prosecutors would run by
putting Mr. Fastow, the former chief financial officer, on the stand as
early as Tuesday.

I haven't followed the testimony in any depth, so I can't choose from these two point of views, except to say that the government tactics of essentially changing the charges mid-trial and suppressing defense witnesses by naming a record number as unindicted co-conspirators may or may not be effective, but strike me as fairly scary abuses of the justice system.

I Told You So (Health Care Edition)

For about a year now, I have been arguing that public funding of health care will be used as a Trojan Horse to introduce a near fascist micro-regulation of our lives.  I argue that if the government is funding health care, then they will claim a financial stake in your health, and begin regulating everything from your food intake to your exercise habits, even your risk choices (e.g. snowboarding).  I made this argument here and here, among other places.  The general reaction has been, "gee Coyote, nice theoretical argument but you can put your tinfoil hat away now.  You are being paranoid."

Well, check this out:    (via Reason)

Another doctor who examined the journal report was Dr. Brian
McCrindle, a childhood obesity expert and professor of pediatrics with
a pediatric hospital in Toronto.

He warned that the looming problem must be addressed.

"The wave of heart disease and stroke could totally swamp the public health care system," he said.

He warned that lawmakers had to take a broader view of the looming
problem "” and consider doing things such as banning trans fats and
legislating against direct advertising of junk food toward children.

"It's not going to be enough any more just to say to the consumer 'You have to change your behavior,'" he said.

Notice that he left the second half of his last sentence unsaid.  That second half is "the government is going to have to force them."  Of course, none of this is an issue if we all have personal responsibility for our own health care costs and therefore for the consequences of our own decisions.

Postscript:  By the way, for anyone older than 30 who grew up in the sixties and seventies when all the intelligentsia were painting pictures of Malthusian starvation nightmares, this is GOOD news:

The percentages of overweight children also are expected to increase
significantly in the Middle East and Southeast Asia. Mexico, Chile,
Brazil and Egypt have rates comparable to fully industrialized nations,
James said.

He estimated that, for example, one in five children in China will be overweight by 2010.

The reason for this is not because of some evil corporate conspiracy (though that's what the article attributes it to) but due to the fact that these kids are simply not starving to death any more.  I am absolutely sure that the public health "crisis" from these overweight kids is less of a problem than the public health crisis of 30 years ago, when they were all malnourished and dying of being, well, severely underweight.  I mean, are there any of you out there in the over 40 crowd who didn't get the "there are starving kids in China" guilt trip growing up when you didn't eat your dinner?

Edward Glaeser on Urban Economics

Check out this very nice NY Times article (I think it is outside the firewall) on Harvard economist Edward Glaeser and his takes on urban economics and housing markets.  One study of his that resonates with me is his research about just how much modern regulation and zoning is contributing to the high cost of housing:

Glaeser and several colleagues considered two explanations. First, the
possibility that builders in the metro area were running out of land and that
home prices reflected that scarcity. The second hypothesis was that building
permits were scarce, not land. Had the 187 townships in the metro area created a
web of regulations that hindered building to such a degree that demand far
outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has
previously noted (with a collaborator, Matthew Kahn) that 95 percent of the
United States remains undeveloped and that if every American were given a house
on a quarter acre, so that every family of four had a full acre, that
distribution would not use up half the land in Texas. Most of Boston's metro
area, he concluded, wasn't particularly dense, and even in places where it was,
like the centers of Boston and Cambridge, there was ample opportunity to
construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the
housing crisis was man-made. The region's zoning regulations "” which were
enacted by locales in the first half of the 20th century to separate residential
land from commercial and industrial land and which generally promoted the
orderly growth of suburbs "” had become so various and complex in the second half
of the 20th century that they were limiting growth. Land-use rules of the 1920's
were meant to assure homeowners that their neighbors wouldn't raise hogs in
their backyards, throw up a shack on a sliver of land nearby or build a factory
next door, but the zoning rules of the 1970's and 1980's were different in
nature and effect. Regulations in Glaeser's new hometown of Weston, for
instance, made extremely large lot sizes mandatory in some neighborhoods and
placed high environmental hurdles (some reasonable, others not, in Glaeser's
view) in front of developers. Other towns passed ordinances governing sidewalks,
street widths, the shape of lots, septic lines and so on "” all with the result,
in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon,
he says, has inflated prices in metro areas all along the East and West Coasts.

One of his other areas of research was new to me.  Glaeser argues that the long-lived nature of housing is part of what keeps cities like Detroit and St. Louis around long after the economic and demographic logic would have had them die. 

Glaeser and Gyourko determined that the durable nature of housing itself
explains this phenomenon. People can flee, but houses can take a century or more
to finally fall to pieces. "These places still exist," Glaeser says of Detroit
and St. Louis, "because the housing is permanent. And if you want to understand
why they're poor, it's actually also in part because the housing is permanent."
For Glaeser, this is the story not only of these two places but also of Buffalo,
Baltimore, Cleveland, Philadelphia and Pittsburgh "” the powerhouse cities of
America in 1950 that consistently and inexorably lost population over the next
50 years. It is not just that there were poor people and the jobs left and the
poor people were stuck there. "Thousands of poor come to Detroit each year and
live in places that are cheaper than any other place to live in part because
they've got durable housing still around," Glaeser says. The net population of
Detroit usually decreases each year, in other words, but the city still attracts
plenty of people drawn by its extreme affordability. As Gyourko points out, in
the year 2000 the median house price in Philadelphia was $59,700; in Detroit, it
was $63,600. Those prices are well below the actual construction costs of the
homes. "To build them new, it would cost at least $80,000," Gyourko says, "so
there's no builder who would build those today. And as long as those houses
remain, the people remain."

There's a lot more in the article, including a positive economic take on the role of roads and automobiles that he sets in counterpoint to the typical aesthetic arguments against sprawl. 

I found this next bit supremely ironic, though it matches my observations of these cities as well:

Zoning and housing supply ultimately determine not only who lives in a city but
also the very nature of these places. Boston, San Francisco and Manhattan are
obviously becoming rarefied destinations, mostly for America's elites (Glaeser
calls the cities "luxury goods"), with housing floating beyond the reach of the
young and the middle class. These cities' economies are in the process of
becoming boutique, too, accommodating only the most skilled and privileged.
Their desire to limit construction and grow not in buildings and population but
in prices has, in effect, begun to shape their destiny.

Residents of these cities turn up their noses at the aesthetics and red-state politics of places like Houston and Phoenix, piously believing that all the while they are the true friends of the poor, while at the same time putting in place a government-enforced housing system that only the rich can afford, driving those of moderate incomes to, well, Houston and Phoenix.

This last observation provides a fitting conclusion:

And what surprises him is that the changes in how we have treated property
rights for the last 40 years "” who gets permission to build, the size and
location of what owners are permitted to build "” have been the subject of
virtually no national dialogue, even as the effects on prices, in his view, have
been extraordinary.

Blogging is Light

Blogging has been light of late.  If you are confused about why, see here.  I am also working on the first annual Coyote Blog NCAA bracket challenge, so stay tuned.

Follow-up on Health Care

As a follow-up to this post, I wanted to take on the argument that people use against the US's health care system, arguing that it must be worse than other countries socialized approach because it costs so much more.  Well, I am the first to agree that reduced regulation and a better matching of who is paying the cash to who is receiving the services would result in huge cost savings.  However, it may also be true that you get what you pay for, as discussed in Cafe Hayek.  The key chart is shown below:


One thing I forgot to mention in the previous post was a bit of background of exactly why we have a model where health care is payed for by the employer.  This structure of company-paid health care was not a natural market evolution, but was in fact a direct result of several very distorting government regulations.

Company funded health care plans began in the 1930's and 1940's as a way for companies to try to get around government controls and freezes on wage rates, first instituted with the NRA and later during WWII.  In particular, during the incredibly tight domestic labor markets in WWII, employers struggled with government-mandated wage controls, and used the promise of employer-paid health care as a way to provide higher effective compensation to attract employees, since these non-cash benefits were not counted in the wage freeze calculation.  After the war, the government locked in this practice when the IRS and Congress agreed that company-paid health care was not taxable as regular income, meaning that such health plans were given a strong tax-preference over cash wages.

Finally, if you are not familiar with the appalling experiment in fascism that was the NRA, I wrote about it here.