Beyond Market Mantras, and the Benefit-Cost Conundrum in Policy.

Takashi Negishi, 2014

 Gov't of Japan Standard ToU (Ver.2.0)

via Wikimedia Commons. 

In a brief post today, Brad DeLong, an economist and historian at Berkeley, shared his thoughts on the importance of benefit-cost analysis in policy-making, largely agreeing with Henry Farrell's views. Farrell's argument in question is that the long-held belief that the market knows best has left government policymakers ill-equipped to intervene in the economy effectively. The focus on neoclassical economics in elite US policy schools has resulted in a lack of understanding about how markets actually work. Farrell believes that the price signal cannot convey as much information as previously thought, and some goods are not efficiently provided by market arrangements. He suggests that the assumption that government actors lack the knowledge to intervene has become a self-fulfilling prophecy. To address this issue, Farrell proposes rethinking public policy education to include not only traditional economic reasoning but also new approaches.

DeLong emphasizes that benefit-cost analysis, or "economistic reasoning," is more than just beneficial; it is essential. This approach requires policymakers to count and compare the benefits and costs of a proposed policy, helping them decide what should be done. DeLong also highlights the value of comprehensive benefit-cost analysis, which takes into account all externalities in a system. By driving shadow and real prices towards social-welfare maximizing values, this framework helps conceptualize policy goals. DeLong believes that checking whether these goals have been achieved is the only way to determine a policy's success. However, he acknowledges that benefit-cost analysis has its limitations, particularly in addressing wealth and inequality.

Despite its shortcomings, DeLong argues that considering wealth distribution and its correlation with political power is essential for effective policy-making. Ignoring this aspect could result in policies that threaten the existing distribution of power, which would make it impossible to implement any meaningful changes. In other words, technocracy can only succeed with the support of raw political power. In explaining this, DeLong turns to the work of Takashi Negishi, whose social welfare weights have been controversialy applied in a series of contexts, including the Kyoto Protocol. I had intuitivelly understood Negishi weights for a long time, but this was the first instance where the articulation of it in terms of his scholarship registered with me. I make this note todady as a marker for the future, and a recognition of a nascent idea in an earlier post. 

Economics and the Mona Lisa Smile.

"Mona Lisa."

Leonardo da Vinci.

Public domain.

via Wikimedia Commons.

The Economist this morning observes that economic forecasting has become increasingly unpredictable, with analysts struggling to accurately forecast many key international measures. Contributing to the confusion are challenges in data collection and interpretation due to Covid-19 disruptions and declining response rates to official surveys. The pandemic caused significant fluctuations in growth, complicating seasonal adjustments in economic numbers. Also, reduced response rates to surveys may have led to increased data volatility and potential bias, as non-respondents tend to be less prosperous, which could distort income statistics. The article uses the ambiguous "smile" of Mona Lisa, painted by Leonardo da Vinci via the sfumato technique, as a metaphor for the difficulty of discerning the true state of the economic environment given this unpredictable data. 

One source of confusion arises from the discrepancy between "hard" and "soft" data—objective indicators such as unemployment rates, and subjective variables like individuals' future expectations. Typically, these two classifications of data are congruent. However, at present, they exhibit a stark contrast. "Soft" measures indicate a recessionary trend, while "hard" measures suggest a reasonable economic expansion. This divergence may be attributed to the public's discontent with inflation. In affluent nations, prices continue to escalate at an annual rate of 9%.

Economic measures really matter for government budgeting, as California's Legislative Analyst's office (LAO) relies upon that data in planning future budgets. Necessarily, many of the points the Economist makes about uncertainty get resolved by the LAO in the "negative" (that is, they accept the more dire forecast). As the LAO (accurately) writes in their 23-24 budget analysis, the U.S. economy experienced rapid expansion from summer 2020 through 2021 due to pandemic-related federal stimulus. However, this growth was (as far as the LAO is concerned, and many others) unsustainable, leading to record low unemployment and supply chain challenges, causing consumer prices to rise 8% year-on-year. To combat inflation, the LAO points out that the Federal Reserve has enacted large interest rate increases throughout 2022. The LAO interprets the hard data it sees, that California is experiencing decreased home and car sales and falling stock prices, as well as weaker state tax collections, and concludes there is a slowdown in the economy. 

The LAO, though, is looking at some of the same data as the writers of the Economist, and thus notes that while overly optimistic projections could result in future shortfalls, an excessively pessimistic projection could lead to premature cuts to public services. Further, despite all the foregoing, the LAO points out that "the state can afford to maintain its existing school and community college programs and provide a cost-of-living adjustment of up to 8.38 percent in 2023-24," which would essentially meet the rate of inflation for educational funding in California. Despite the economy's sfumato, at least that is clear. 

Questions from the Press, April 15, 2023.

Today, Sonoma Valley Unified's board held a meeting to discuss its Superintendent search. Because I generally get questions shortly after meetings from the Sonoma Index-Tribune and the Sonoma Valley Sun, I took the time during the session to write down what I thought happpened, and my meeting notes are below. Also, the photograph included is of my daughter Siena, a lacrosse player for Sonoma Valley High School, of whom I am very proud. 

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The public portion of the meeting concerned the findings in the Leadership Profile Assessment conducted by Hazard, Young, Attea & Associates (HYA) for the Superintendent position. The data was collected from virtual interviews, focus groups, and an online survey involving various stakeholder groups, conducted between March 10, 2023, and April 7, 2023. The purpose of this assessment was to assist the Board in determining the desired characteristics in the new superintendent, as well as to identify the district's strengths and upcoming challenges.

Participation in the data gathering process included a diverse range of stakeholders, with 621 respondents to the online survey, which was offered in both English and Spanish. Parents and support staff were well represented, with 325 individual responses. Sonoma Valley Unified School District's strengths include community partnerships, a value for diversity and inclusion, and talented, dedicated staff. Challenges and concerns facing the district include a pervasive sense of mistrust towards the district, a high rate of superintendent turnover, a need for improved governance practices, and addressing student mental health needs.

The focus group meetings allowed participants to build upon each other's comments and respond to questions regarding stakeholder values, current and future challenges, and desired characteristics in a new superintendent. The search team thanked all the participants and the SVUSD staff for their assistance, and particularly Kyra Sherman for organizing the stakeholder scheduling.

The data presented summarizes the participation of various stakeholder groups in personal interviews, focus groups, and an online survey conducted for the Sonoma Valley Unified School District Superintendent search. The key insights from this data were:

1. A total of 95 stakeholders participated in personal interviews or focus groups, while 621 stakeholders responded to the online survey.

2. The online survey had broad participation from different stakeholder groups, with the highest participation from parents (269), followed by support staff (56), students (22), and community partners (10).

3. Among the interviewed stakeholders, site level administrators had the highest participation (20), followed by teachers (103), and central office administrators (5).

This data indicates that there was considerable engagement from various stakeholder groups, particularly parents, support staff, and site level administrators, during the data gathering process for the Superintendent search.

The profile was essentially that SVUSD is seeking a Superintendent who: 

• Is Visionary and has a student-centered approach, emphasizing instructional focus, special education, and balancing district strategies with classroom innovation;

• Fosters trust, respect, and a positive climate among stakeholders, with an emphasis on relationship-building and engaging with the Latino community;

• Collaborates with the Board, supports teachers and staff, and seeks input from educational specialists in decision-making;

• Involves all stakeholders in strategic planning and implementation, maintaining a track record of positive working relationships and approachability across the community;

• Demonstrates experience in managing enrollment, reconfiguring schools, strong financial acumen, and commitment to biliteracy and biculturalism.

The trustees, before entering closed session, reviewed the analysis of the survey data from HYA. The data revealed a significant disparity between the opinions of administrators and community members, with no clustering observed on the State of the District. In contrast, more clustering was found in the weighted Leadership profile. Interestingly, "understanding and being sensitive to the needs of a diverse student population" ranked within the top concerns for both community members and students. Indeed, the two highest priorities of students were that the superintendent be visible throughout the district while actively engaging in community life, and understanding and catering to the needs of a diverse student population.

The trustees then entered closed session. The closed session adjourned at 12:20, with no action reported.

Santa Rosa's Caritas Homes: Addressing the Housing Crisis Amid Fairness Concerns.

 Mural by Christopher Statton and Megan Wilson, 2015

© Ponderosa Templeton 2017

CC BY-SA 4.0

via Wikimedia Commons.

Sarah Edwards of the Press Democrat writes today about new housing in Santa Rosa. Tenants will soon be selected to fill 33 affordable apartments in downtown Santa Rosa, as part of Burbank Housing's two-phase Caritas Homes development. The project aims to provide 126 units in total to address the housing shortage in North Bay. The first building of the Caritas Homes development is set to be completed by July 1, with half of the first phase's residents being chosen through an April 21 lottery and the remaining units allocated for those experiencing homelessness. The development will be located at 340 and 360 Seventh St., catering to households earning between 40% and 60% of the area median income or those with a Sonoma County Housing Choice Voucher or Section 8 voucher.

Caritas Homes will consist of two identical buildings, each with 63 units, offering studio, one-bedroom, and two-bedroom apartments. The first 30 units in each building will be reserved for people experiencing homelessness. The development will also feature a secured parking garage, indoor community room, outdoor gathering space, and indoor bicycle storage. The first building cost $44 million to build, while the second will require $47 million due to inflation and rising construction costs.

Sonoma County behavioral health services and Catholic Charities will be available to support tenants who were previously homeless. The project, which provides around 90 units per acre, is different from the existing construction in downtown Santa Rosa. The development was initiated in response to the chronic housing shortage, which was further exacerbated by the 2017 Tubbs Fire, destroying 5,000 housing units in Sonoma County.

Two items struck me about this article. Firstly, the development doesn't look like 90 units per acre at all; instead, it looks attractive and friendly, with a mix of two, three, and four-storey elevations. The architects should be commended for that. Secondly, a more challenging and emotional point is that housing allocation is being determined here by a lottery system. Deciding where someone lives is a very high-stakes matter to decide on chance. The article mentions that around 10,000 people are on waiting lists for housing in the county, and nearly 3,000 are homeless. In a society that emphasizes distributive justice, resources should be allocated unequally only to the extent that it benefits the least advantaged members of the community. Instead of a lottery system, a  better way would involve assessing needs and prioritizing those in the most vulnerable situations. Only then will our shared sense of fairness be addressed, one of the crucial requirements of any effort to address our housing crisis.

Red States, Blue Cities, Dynamic America.

     

     

"President Barack Obama and Cabinet."

White House East Room, September 10, 2009.

Public Domain.

via Wikimedia Commons.

In today's New York Times, David Brooks discusses the trend of people migrating from blue states to red states in the US. Between 2010 and 2020, the fastest-growing states were mostly red, such as Texas, Georgia, Florida, Tennessee, and South Carolina. This growth is attributed to lower taxes, fewer restrictions on home construction, lower housing prices, and more pro-business policies. However, the growth in red states is concentrated in metro areas, often blue cities in red states. The dynamic success stories are a result of a red-blue policy mix where Republicans provide a business-friendly climate and Democrats influence education, social services, and civic atmosphere. The column argues that no political party is currently embracing this policy blend, which has proven effective in creating a dynamic and cosmopolitan society. The author suggests that the Democratic Party's growing strength in Southwestern states could potentially give rise to a new kind of Democrat that promotes this policy mix.

David Brook's career began as a police reporter in Chicago, and he recognizes the significant impact it had on his perspectives. His experiences on the crime beat shifted his views from a more liberal standpoint to a more conservative one. Brooks seems to be highly conscious of the concept of black-and-white morality, which leads him to seek a balanced approach where both sides of an argument have valid points. In essence, Brooks proposes that a third option, which incorporates ideas from both sides, is often attainable.

Here, I think Brooks misses some of the essential characteristics of how cabinet-style dynamics function, which I generally accept as a starting point for analysis of most government decisionmaking. In "The English Constitution," Walter Bagehot highlights the significance of blending old and new minds in the British parliamentary cabinet system for effective governance, emphasizing the importance of secrecy and trust in maintaining unity and functionality. By combining experienced ministers' continuity and institutional knowledge with new ministers' fresh ideas and energy, the cabinet can adapt to changing circumstances and address contemporary issues. Secrecy ensures confidential cabinet discussions and disagreements, fostering open dialogue and consensus-based decisions. Trust among cabinet members is essential for upholding collective responsibility and loyalty, even when personal disagreements occur. Ultimately, Bagehot argues that the balance of experience and innovation, combined with secrecy and trust, contributes to the effective functioning of the government.

Bagehot argues that the most dangerous person to a cabinet government is the disloyal insider. A disloyal insider can undermine the collective responsibility principle, where all ministers must publicly support cabinet decisions, even if they personally disagreed during internal discussions. By breaking this trust and revealing confidential information or dissenting opinions, the disloyal insider can weaken the solidarity and unity of the cabinet, disrupt its decision-making process, and potentially harm the government's credibility and stability. Thus, Bagehot emphasizes that disloyal insiders pose a significant threat to the cabinet government's effectiveness and overall political structure.

Bagehot's central argument highlights the importance of consensus in a government composed of both cautious old minds and and fresh energetic ones. Brooks fails to consider that a political party's drive to act stems from their shared values and the aspiration to advance them. Brooks appears to suggest that experienced and fresh minds together would embrace a logical compromise on the very shared values that unite them. However, it is more probable that both groups would view this approach as flawed and dismiss those promoting it.

Brooks doesn't offer realistic solutions for a feasible third way, and his argument appears at odds with the realities of media influence and political communication. Rather than individuals blending positions, a stronger argument would recognize that blue cities in red states play a vital role in holding their governments accountable, encouraging debate, and preventing complacency in the ruling red-state governments. By remaining committed to the nation and their democratic values, these blue cities enhance the political system's stability and effectiveness while pushing the red-state governments to improve and refine their policies. Ultimately a stronger America emerges from that dynamism, as has been noted in the Economist recently. 

A Salty Solution to Lithium Woes?

     

"Containerized Vanadium Flow Battery"

UniEnergy Technologies

CC BY-SA 4.0

via Wikimedia Commons.

The New York Times' Keith Bradsher writes today about the development in China of batteries that use sodium instead of lithium, a far cheaper and more abundant material. Sodium batteries have the advantage of keeping almost all of their charge when temperatures fall far below freezing, which is an issue for lithium batteries. Recent breakthroughs mean that sodium batteries can now be recharged daily for years, which has been a key advantage of lithium batteries.

Sodium batteries are being developed at Central South University in Changsha. Chinese companies are leading the way in commercializing the technology, and they have figured out in the past year how to make sodium battery cells so similar to lithium ones that they can be made with the same equipment.

A significant challenge, however, is where to get the sodium. While salt is abundant, the United States accounts for over 90 percent of the world’s readily mined reserves for soda ash, the main industrial source of sodium (Chinese ventures generally use expensive synthetic soda ash). Another question hanging over sodium is whether lithium will remain costly. Lithium prices quadrupled from 2017 to last November, but have since dropped by two-thirds.

As Bradsher notes, utility companies could benefit from using sodium batteries, but they face unique challenges due to the regulated nature of their operations. These companies have to plan well in advance because they need regulatory approval to recover costs and adjust prices. Furthermore, utility assets like power plants and transmission lines can last for decades. Many of the facts that need to be ascertainable for utilities to implement sodium batteries are still question marks, as there's no prior history or long-term operational record.

Batteries are an increasingly important technology and the investment is definitely news. It's a tough area for a reporter to work in because a pair of the subjects (Technology, China) have familiar tropes that can get in the way. The national security implications of battery technology, though, do appear to be ones that the United States is taking seriously, as NPR's All Things Considered reported in August of 2022 in the case of vanadium redox flow batteries. Batteries are a component of green energy, and expecting foreign direct product rules to come into effect concerning the same may be a mere matter of time.

The Nature of the Firm and the limits of Economics.

     

Ronald Coase

University of Chicago Law School

via Wikimedia Commons

https://tinyurl.com/26ffzfkp

This week's Economist includes an article by their Free Exchange columnist, regarding the "The Nature of the Firm," Ronald Coase's classic 1937 work. Despite the belief in the 1990s that economics could command a unified science of business, three decades later, it has not progressed in understanding the inner workings of firms. Neoclassical economic theory primarily focuses on markets and the allocation of scarce resources, but it does not account for the fact that much of the allocation of resources in economies occurs within firms, where employees are directed by administrative fiat rather than price signals. The theory that firms are profit-maximizers is also challenged by the reality of "bounded rationality," as no business could process all the information needed to extract maximum profit.

Economists have made strides in understanding firms through concepts such as team production, incomplete contracts, and the principal-agent problem. However, these theories still fall short of providing practical advice on corporate strategy. Economics often fails to capture the importance of corporate culture, shared values, and pride in the workplace, which are essential to a flourishing business. Moreover, economics is limited in its ability to address the specificity of business problems, as they require detailed knowledge of various fields outside the discipline. While economic ideas can offer some insights, the study of business remains an outpost that economics is unlikely to conquer fully.

It was beyond the scope of the article, but a government agency (or, as a shorthand, an "agency") can also be viewed as a firm responsible for providing public goods or services and implementing policies. Like traditional firms, government agencies coordinate resources and make decisions under the principle of "bounded rationality." The major difference is that these agencies differ in their objectives, as they aim to maximize social welfare and address market failures, rather than seeking profit maximization, but which I would note, makes the insights of the Free Exchange column even more trenchant. Further, because government agencies also face unique challenges in terms of bureaucracy, political influences, and accountability, their efficiency and decision-making processes are even less susceptible to an economics-based analysis. 

While apocryphally attributed to Twain, William S. Burroughs' advice to "write about what you know" leads me to look at my home in light of this. I note, over and over, that the critical issues my community encounters are almost always decided in an interchange and an interplay between firms and agencies. If anything, economics is something of a base meridian used to calibrate during the continuing conversations with multiple actors that are directed by fiat using bounded rationality to either pursue profit or improve social welfare, a problem only marginally susceptible to economics-based analysis. 

Almost all of the important questions instead require detailed knowledge of various fields outside of economics. Indeed, to the extent that economics is used after the point-of-reference stage, it is of limited utility by itself. The dozen other factors noted above, including but not limited to corporate culture, shared values, pride in a workplace, bounded rationality, team production, incomplete contracts, the principal-agent problem, political influence, bureaucracy, accountability, market failure, and social welfare, are generally the factors to address in any analysis of the (for lack of a better phrase) political economy of most local decision-making that I have encountered -- a nice checklist for future reference.