Small Thinking Sinks Immigration Reform Bill

An editorial appearing on the LA Times sums up the regretable fact that the US Senates' Immigration Reform Bill has failed. With all the intransigence from both parties, I am sure that this grand failure has happened in spite of the best efforts from president Bush. As the editorial states, the main points of contention are the proposals to grants amnesty to illegal immigrants on the one side and the effects of immigrants on the wages of US citizens on the other. Without doubt, these are matters that concern a number of senators.

The sorry thing about the claims is that this grand failure resolves neither of them and the failure to take the bill forward through compromise is a classic illustration of posturing. Even if the number of illegal immigrants is a mere fraction of the 12 million estimate, it is highly unlikely that all can be effectively identified, rounded up and effective deportation orders achieved against them. Thinking of the costs to tax payers and the expended time of law enforcement officers, this is obviously not wise use of US tax payers money. As for the second concern that immigrant labor depresses the wages of low income earners, a myriad of studies have shown that the overall effect is not only positive in the medium term, but further that the effect is often temporary and of a low intensity.

What this failure to think broadly should portend for most of the senators is that this issue will have to be brought back for discussion at a later date. Immigration reform ought to be viewed more realistically and should not be an excuse for job losses that will occur anyway (to the Democrats). As for the other argument about the need to flex muscles about to express displeasure at illegal immigration and illegal extension of stay in the US; it may help to consider thinking of that fact as a sunk cost and not worthy of disproportionate expenditure in the quest for a reversal.

Fight the Taliban, not the Poppy Farmers

One of the most puzzling matters for this blogger relates to the outright refusal by governments to learn the costly mistakes that have been made in drug control policies. This article, by Richard Norton-Taylor in the Guardian shows that in spite of the escalated efforts to eradicate the growth of opium poppy, Afghanistan will have a record harvest in this year. As the story acknowledges, farmers in Afghanistan now account for 92% of global illicit production of that crop and the record harvest represents a 49% growth over the preceding year.

This blogger finds it quite curious that the military objectives of defeating the Taliban and affiliated terrorists is being tied to the fight for the eradication of the opium poppy from Afghanistan. To my mind, the rationale for the consolidation of drug policy and security policy is quite wrong-headed and results in an unfair use of a capable military outfit. In the interest of the larger security goals, the separation of the drug control policy and the security policy will ensure that the British forces are deployed more meaningfully in Helmand Province and the rest of that country. Otherwise, the evidence suggests that the loss to the Taliban will eventually follow the increasingly apparent failure in controlling the opium crop.

Just before any further resources are dedicated to the war on Opium poppy in Afghanistan, it may help to be acquainted with this paper: The Economic Theory of Illegal Goods: The Case of Drugs.

Fight the war that you can win. In other words, fight and beat the Taliban. That is the legitimate military target. This law and order approach is not the most beneficial way of facing the cultivation of opium poppy.

A Book on the Chicago School

The University of Chicago's record regarding the number of its students, professors and other associates that have made a contribution to the discipline of economics is altogether enviable. In this book review, the Economist Magazine dissects Johan Van Overtveldt's book, The Chicago School. It mentions the understandable and largely plausible reasons for the rise of this school situated in Hyde Park. The most interesting revelation in the review relates to the peculiar geographical location of the University which the author credits with having left professors and students with no option but to debate issues incessantly. That is an ingenious way of converting the disadvantage of being locked between Lake Michigan on one side and a deprived district on the other. That response is in itself evidence of the keen minds that were resident at the school.

I surmise from the review that the book does not gloss over the fact that Chicago economics, however influential is not without equally erudite dissenters. Indeed, certain professors in the school are leading critics of some of its tenets such as the efficient-markets hypothesis. this blogger will post a full review after reading the text in full.

Are These House Representatives Bullies?

This article in Forbes.com reports that the Financial Services Committee of the House representatives has summoned the five commissioners in the commissioners serving in the Securities and Exchange Commission for a hearing. the real agenda of the meeting is unclear as it is characterized as an oversight hearing. The representatives appear to be concerned about the profitable operations of Hedge Funds, concerns about Chinese acquisition of publicly quoted firms and the problem with sub-prime mortgages.

This blogger thinks that most hedge funds are run by such sophisticated instruments that the house representatives here are unlikely to make much sense of their operations through these hearings. The ostensible concern about the risks that arise from investment of pension funds into hedge funds could be regulated by the establishment of investment limits or fuller disclosure. bullying SEC commissioners is unlikely to cover whatever risks may arise from highly geared hedge funds and neither is the resort to higher taxes justifiable.

To their credit, it may well be that the legislators are intent on protecting individual investors but that is no reason to seek to punish successful enterprises merely because their business models are not comprehensible to a majority. successful enterprises are built on that fact; accomplishing tasks that other cannot and ensuring that they do not catch up. As for the real risks that a number of hedge funds would fail,I am certain that this law and order approach is less likely to reduce those risks one bit. Let hedge fund managers and investors be.

Judge Determines Ridiculous Suit

Henry Cauvin of the Washington Post reports on the decision about the ridiculous suit yesterday with a fairly predictable outcome. Having posted about the case here a while ago, the gratifying part for a dispassionate blogger is that the plaintiff's demand for US$ 54 million was not only outrightly dismissed but that the hearing judge determined that the plaintiff was entitled to zero dollars. Noting that the plaintiff retains the option of an appeal, I hope that it all comes to an end here. Let the judge get back to his work.

Can Toyota's Model Fix the Health Care Industry?

An earlier blog post concentrated on the reasons why it is increasingly difficult to provide adequate health care under a universal care approach. One of the reasons that was alluded to is that there are a large number of technological developments or surgical techniques whose costs are high but for which alternatives may be available. However, surgeons and the hospitals have understandable incentives to recommend the most expensive one because the profits that are generated from them are high. On the other hand, patients are more likely to insist on receiving the most sophisticated and costly procedures especially when another person is making meeting the financial costs. What results is an oversupply of medical care at the most expensive side of the spectrum.

Thus an attempt to institute a publicly funded health care insurance program would be faced with ever increasing costs and ultimate bankruptcy. A clever idea that has been introduced is the creation of an autonomous institution to determine the relative merits of new treatment procedures relative to the costs.

Writing on the Washington Post's Think TankTown page, Tom Emswiler reiterates the problems with health care provision and looking at the manufacturing methods successfully deployed by the Toyota Motor Corporation. Among these is the principle of adopting only reliable and fully tested technology which provides further justification for establishing the comparative effectiveness institute.

The requirement for this institute is undeniable but this blogger is cautious about the tendency to elevate every corporation and adopt its internally developed logic more widely. In essence, Toyota Motor Corporation is hugely successful but that is no reason to presume that wholesale adoption of its principles would engender similar success elsewhere.

Ridiculous Suit About a Suit

The conventional wisdom regarding vexatious litigation is that clients often resort to suing needlessly or perhaps making outrageous demands that foreclose the possibility of commercial settlement. This blogger has stated in an earlier post about the rising tendency for residents of the UK to become "litigation junkies" more recently.

I have had to rethink the view that most vexatious litigants are not only ignorant of the law but are often driven by the need to be vindictive. The New York Times reports this story about Roy L. Pearson junior who has sued a couple running a dry cleaning service for purportedly misplacing a pair of pants. The ridiculous part of the suit is not only that the costs of the suit have gone above the replacement costs of the pant, but that the plaintiff initially filed for US$ 67.3 million.

As the piece reports, the plaintiff is a judge and has been a legal aid lawyer. Absent a new revelation to this case, I am led to ask whether this is a really judicious judge as he declined to accept settlement for US$ 12,000 offered in March this year. Granted that the plaintiff later adjusted his claim to US$ 54 million, I think that the substance of this case is such that it is a mockery of the judicial process perpetrated by an officer of that court. Get a fresh pair of pants your honor and get back to work.

Double IP Protection for Software

Timothy Lee argues in this OP-ED piece in the New York Times that patent applications for software have gone too far. The thrust of the argument appears to me to be that patents are now being sought by software firms merely to use in strategic ways to extract rents from users and restrict competing firms from innovations.

It is not too difficult to see why corporations resort to patent applications for software when similar legal protections would inhere from copyright protection which is automatically available. This is pure strategic behavior calculated to raise the costs of any challenge to that patent. As this blogger has maintained, the proper welfare effects of stringent IP protection is increasingly becoming questionable because patent protection has gone too far generally and especially in regard to software. That this stringent protection is absolutely necessary for further innovations is a patent lie. Bill Gates used to know this.

Is Universal Health Insurance Affordable?

Judging from the commentaries, this blogger gets the very distinct impression that campaigns for the US presidential elections next year and the Democratic Party's candidate will need to say a lot of really sensible things about the possibility of universal health care. A highly impressive article by David Leonhardt of the New York Times assesses the conventional wisdom and debates regarding universal health insurance and finds that it is informed by the wrong assumptions.

It is clear that the proposals by Sentors Obama and Edwards respectively highlight the fact that universal coverage, while popular, is not the solution because part of the problem is caused by medical professionals pushing expensive medical procedures whose benefits are far from proven. It is clear then that the Edwards proposal would cover everyone but the costs would be unmanageable and wasteful while the Obama proposal that is concerned with efficiency probably will not ensure the coverage of the last person in the US.

Adding these clear contradictions to the fact that health economists cited in the piece are certain that health costs are growing faster than real incomes, one concludes that no easy solutions are at hand. So as all these candidates consider their proposals, the unpalatable fact may be that absolute universal health coverage may not be affordable. David Leonhardt makes it clear that a purely ideological orientation will lose to dispassionate analysis. It is beginning to look as if absolutely universal health insurance is even too costly for the most productive economy in the world. The politics of it is easier than the the economics of it. I figure that at one point, the discussion will have to get to what can be made really universal.

No More Internet Cafes in China

Most people take it entirely for granted that China's impressive growth and export success implies that its bureaucrats and public sector workers are very savvy. While the GDP growth, exports and poverty reduction data is certainly impressive, I sometimes think that in some respects, this government tries to be too clever and turns out to be clever by half.

This story in the Business Week reports that the government of China has ceased issuance of licenses for new internet cafes and that its inspectors will investigate whether existing license holders are renting out their licenses or failing to register the identities of users. One wonders how a nation that has achieved unprecedented feats in economic development can have such small thinkers for bureaucrats.

This is completely wrong-headed policy that leads one to question what the magical number of Internet cafes ought to be. Cant most bureaucrats find better things to regulate?

Quoting William Lewis

"That so many people live in low-income countries and so few in middle and high-income countries indicates that economic development is hard." William W. Lewis

I am reading through this book by William W. Lewis and I found this quote on page 135 quite profound. I consider it an important point to recall as India, China, Brazil and the whole lot of African countries consider raising incomes and improving welfare. Development is not fluked and neither is it the result of centralized planning and disproportionately large government.

How Not to Rebuild Mumbai's Dharavi Slum

This blogger visited India for about a week in March this year and passed through both New Delhi and Mumbai cities. My major conclusion is that despite the fact that the country has recently maintained an admirable GDP growth path, the visible problem of housing for the low-income city dwellers is evidence that development is both chaotic and very complicated. I saw the unplanned settlements in which some of Mumbai's most indigent residents dwelt in and concluded that there's yet work to do.

Now, this piece by Ramola T Badam in Forbes.com reports that the Maharashtra State government has sent advertisements seeking foreign and local builders to undertake a project to replace the shantytown known as Dharavi. It intends to build free homes for its 57,000 dwellers over seven years. Understandably, there is already controversy about the number of dwellers with some insisting that the total number of dwellers is closer to a million.

This need to assist the indigent dwellers of these neighborhoods notwithstanding, it appears to be a directive based on the development of a solution and foisting the same on a problem. The project is to be financed entirely by a private sector builder and is calculated to cost US$ 2.3 billion. This works out to a nominal US$ 40,350 for each household if the numbers anticipated by the government are accurate. This would be extremely generous but I am certain that this kind of approach constitutes very poor use of these resources.

Assuming that the money is available, the option ought to be given to each household to determine whether it would prefer to accept the money in cash or take up the intended dwellings when they are complete. A similar argument was presented by Professor Edward Glaeser of Harvard University following the devastation of New Orleans by Hurricane Katrina in 2005. Professor Steven Landsburg also presented a similar argument on Slate Magazine here.

In short, the problem of uninhabitable housing need not be resolved with a big construction project. As the main article contends, there is a great likelihood that this project will only be a bonanza for builders. Granted that the Dharavi may have up to 1 million residents, a good number may still prefer a check or voucher for a nominal US$ 2300.

Formalizing Mumbai's Meal Couriers

I am fascinated by the rise of entrepreneurship in many developing countries and the existence of the Dabawallas in India is worthy of more incisive study. To the extent that I can tell from the article in the New York Times, it is an altogether efficient even if informal courier service that delivers hot meals from homes to specific areas in Mumbai city. I surmise from the article that it does an excellent job of ensuring that the meals are safely conveyed and the containers returned through a color code on the containers. The rest of it is pretty labor intensive and thrives because the cost of labor in Indian cities such a Mumbai is comparatively low.

This business idea must have survived from delivering excellent value to its clients as the article traces its existence to the period of the British Empire. While I would classify it as an informal business that delivers high value and quite efficiently, it is apparent that it is only partially merged with aspects of the formal economy such as the railway and infrastructure network in Mumbai and its innovative use of text messaging and e-mail.

I consider that further value could inhere from the adoption of bar coding, standardized containers and a database of deliveries and GPS in addition to expansion beyond the delivery of meals.

Economics in the Service of the Environment

Everyone seems to have a highly charged opinion about whether stopping Global warming and its effects is a policy that is worth pursuing. The global nature of the challenge is one of the reasons that hammering out sensible responses is difficult. Whereas consensus on the causes of global warming is still being debate on the fringes, that it is an empirical fact is irrefutable.

Dependence on petroleum fuels largely for generating energy on the one hand and for fueling automobiles makes it imperative that prescriptions that deal with ensuring the cost of increased driving must now be paid by motorists. Professor Edward Glaeser of Harvard University presents a well-argued and pithy piece in the Boston Globe addressing the need to consider the costs against the benefits of environmental policy in order to ensure sound and effective policy responses.

The two most profound points in the argument are the indispensability of a carbon tax to ensure that polluters pay the real cost of the externality of pollution on the one hand, and the need to offer large public prizes that reward innovations that could then be utilized throughout the planet.

What next for Daimler and Chrysler?

Reading this article today, the following thoughts occurred to me:

I have no data to post here right away but I am given to the view that in spite of the great affinity and demand for automobiles that characterizes this and the past century, there is an obvious surfeit of automobile manufacturing corporations. I cannot recall precisely the reasons given for the merger of Chrysler and Daimler when it occurred but I am certain that it was a critical event in that industry and one that was largely expected to change the automobiles landscape in both the Us and Europe. Here was the merger of great German engineering with the large market in the US. It quickly became evident that the expected efficiencies not only failed to work, but that Mercedes was in turn affected by quality problems.

In the article above, Andrew English traces the merger and recalls, with the benefit of hindsight, early signs that the merger would most probably fail. I am a skeptic of this kind of hindsight for the reason that while the merger was then considered quite risky, a good number still considered that it would enhance value if it could be made to work. as one can tell, at that time, there was no mention of the health care and pension liabilities that prominently feature as the explanation for the poor performance of the automobile manufacturing firms in the US.

Chrysler has a number of divisions with varying levels of profitability. Impliedly therefore, not all of these divisions are losing money. Competition is now faced from established Japanese manufacturing firms and the overtures from Chinese firms are also indicative of the fact that there are profitable areas. At the same time, these also support my view that given the number of automobiles manufacturers and the price competition, there may be far too many automobile manufacturing firms already. Noting that the Porsche's annual returns of 17% are the industry's highest, the message for Chrysler ought to be clear, take out the unprofitable divisions.

Private equity firms are increasingly taking over many corporations with the intention to restructure them and sell them out with huge returns. Andrew English correctly anticipates what Cerberus Capital might do when it acquires Chrysler. My guess is that it will very separate the profitable divisions from the rest and carve out the firm and thereby prove that the sum of its parts is probably greater than the whole. The advise for Daimler, with the benefit of hindsight is that corporate hubris often precedes the inevitable fall.

New Crime Fighting Policy

That a preponderant amount of crimes that are committed are often motivated by the quest for economic gain is beyond debate. Police forces around the world are therefore thinking of more sophisticated approaches to emasculating organized criminal groups and individuals. An interesting story by Paul Lashmar in The Guardian reports that Law Enforcement agencies in the UK recovered 125 million Pounds Sterling from an assortment of convicted criminals over the year running from 2006-2007.

While I agree that crime is without doubt a social menace that also disrupts economic life, this blogger is unsure that this approach by the police represents correct approaches to the reduction of criminal behaviour. As the story states, the recovered sum was based on a target and the reason for the celebration is because of the attainment of that arbitrary target. To my mind, that is no reason for celebration because it merely implies that far from keeping the targets for law enforcement action away from committing crime in the first instance, this approach means that the police and other agencies would merely be looking to react after the acquisition of fortunes.

The policy is made even worse by granting a direct stake to the specific departments and the courts that succeed in recovery because they become entitled to a portion of the same. It is not an overstatement to expect that conviction rates could rise where courts may gain from ensuring that recovery takes place. In addition, the quest for recovery by the Asset Recovery Agency through the civil law process not only reduces the burden of proof but may divert police resources disproportionately towards the specific crimes that allow for the application of the Proceeds of Crime Act, 2002.

In my view, police forces ought to concentrate on ensuring that crime does not take place in the first instance and having failed to do that, should then apprehend the criminal and ensure prosecution. Placing judicial officers and police forces in a position of interest in the resolution of a specific case and not another based on arbitrary targets for asset recovery is plainly bad policy. It may succeed momentarily in hurting selected criminals but more importantly, it would corrupt the law enforcement agencies. Criminals and these agencies in the UK may be on the same side now. They want the money!

Economics of Information Security

Given the way in which new viruses spread and easily infect PCs, it is clear that the security industry is forever chasing a moving target. The reason for this being that certain programmers are dedicated to producing and circulating worms quite regularly. in spite of all this, the ease with which PC systems are regularly infected and the failure to regularly update anti-virus programmes ensures that viruses remain in circulation and on occasion explode as epidemics infecting networks throughout the world.

Many blame the ubiquity on the Windows operating system since this enables the creators of these viruses to identify points of weakness in the unduly large operating system. However, the more persuasive assessment of the lack of security in IT systems is because the costs of security failure are largely borne by the users and not by the creators of products. Naturally therefore, there is insufficient incentive to ensure that the most dominant operating system is as secure as possible. As one sees therefore, it would not constitute good expenditure for Microsoft corporation to spend its money in ensuring security because it can easily externalize the cost of the failures. A complete argument is made by security academic and consultant Bruce Schneier here.

Taking the ubiquity of the operating system on the one side and the ability to externalize the costs of its security flaws on the other, I venture that the last factor of the human element is considerable too because it allows for the circulation of viruses. This article from Reuters describes how a computer expert placed a very clear advert on the internet offering downloads of free viruses and had 409 people click on it. In my view, even a small fraction of this number would suffice in sending the virus through networks and systems and thereby generate an an information security systems epidemic.

A Very Expensive Embassy Building

The Guardian today reports that the US government has largely completed an embassy building to house both the residences and offices of US officers in Iraq (Baghdad). The impressive fact about it all is not only that in spite of the difficult conditions this has been the single project that has been completed rather promptly and on budget, but that it is the most expensive construction of an embassy by the US.

If it were not for the fact that the construction costs of embassies and ambassadorial residences are not easily identifiable, this blogger would provide a list of the most expensive buildings just to get the perspective. That notwithstanding, at a reported cost of US$ 592 million, it is one expensive building. In fairness, this is a building whose costs represent the peculiar risks attached to maintaining an embassy in one of the most dangerous patches of real estate in he entire world today. I would wish to know whether its sturdy bomb-proof construction has taken due account of the diverse security risks that diplomats would face. All I am certain about is that its construction is a signal that the US will have a good number of staff in Iraq for quite a while.

From the public interest point of view, to what extent does the design differ from known economic principles for the construction?

Quoting George Stigler

"It is to be observed that economists who defend monopoly in antitrust cases are better paid than the governments economists: Do sinners always earn more than the virtuous who combat them? Probably yes; one must be compensated for bearing the opprobrium of sinning." George Stigler

Anyone with interest in regulation of firms and industry must have encountered George Stigler, to who was awarded the Nobel Prize in the Economic Sciences in 1982 for "his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation." The quote above, extracted from the very capable economist's publication, Memoirs of an Unregulated Economist on page 95 is undeniably perceptive. The text is particularly clear in the description of the Chicago School as a method of study and a policy position with emphasis on rigorous microeconomic analysis. An interesting explanation of what economists refer to as the compensating differential.

A five star book written by a five star economist and a good entry for the 50th post on this blog.

Britons Sue and are Sued

As simplistic as conventional wisdom tends to hold, many believe that US citizens are especially litigation crazy and that this is perhaps correlated with the high number of lawyers in that country. An article in The Times now quotes a survey and makes the claim that Britons are becoming "litigation junkies" too . It uses the fact that every year, 2 million people seek legal advice and that thousand consult lawyers weekly.

On its own, this blogger sees no reason to conclude that that makes for a nation of vexatious or over-exuberant litigants. However, when one sees that 1 in 500 visits to the hair salon results in a legal dispute, with a further 1 in 1000 visits to a restaurant leading to a court battle over the menu, then perspective sets in. Added to this is the interesting fact that 1 in 20 has taken legal advice over rogue traders or shoddy builders.

While wondering whether increased isolation may be a driver, I encountered the data that the same survey revealed that 1in 50 of the instances in which advice was sought was against a family member and even this was with divorce excepted.

Apparently, when people are not in conflict with one another, then they are faced with infractions of the criminal law, a trend driven by increased regulation of people's lives through law and the creep of the nanny state. Men are more prone to committing crime and lead in committing motoring offenses while women are far more astute at altering price tags while shopping. I wonder why.

The greater point in this fine article by Frances Gibb is not as much that there's a spike in litigation but that the subject of litigation appears to be getting particularly petty. On the other hand, it also shows an expansion of the quest for advice across many more frontiers in people's lives. Concern about the outcomes and costs are also significant factors and this is proof perhaps that legal action is a strategic game.