More definitive evidence that property rights improve fishing yields and sustainability.

Lynne Kiesling

I've been enjoying this new research from environmental economist Chris Costello and his two co-authors, Steven Gaines and John Lynham: "Can Catch Shares Prevent Fisheries Collapse?":

Recent reports suggest that most of the world's commercial fisheries could collapse within decades. Although poor fisheries governance is often implicated, evaluation of solutions remains rare. Bioeconomic theory and case studies suggest that rights-based catch shares can provide individual incentives for sustainable harvest that is less prone to collapse. To test whether catch-share fishery reforms achieve these hypothetical benefits, we have compiled a global database of fisheries institutions and catch statistics in 11,135 fisheries from 1950 to 2003. Implementation of catch shares halts, and even reverses, the global trend toward widespread collapse. Institutional change has the potential for greatly altering the future of global fisheries.

This is a wonderful result for a whole host of reasons -- good for fish, good for fishers, good for fish consumers, good for the interactions in the fish ecosystem, good for fishery policy, good for economists who argue that institutions matter and that effective institutions for common-pool resource governance can lead to superior outcomes.

At Aguanomics, David Zetland provided more thoughtful and insightful analysis and commentary than I've been able to pull together this week, as well as links to the Economist article and the New York Times article on the research.

See also Ben Muse's post with useful links and a valuable reminder that the primary sustainability driver that comes from better-defined property rights is that it makes the fishers more interested in long-term outcomes.

Neil Netanel's "Copyright's Paradox".

Lynne Kiesling

Cory Doctorow at Boing Boing alerts us to a new book on copyright by Neil Netanel, Copyright's Paradox. I haven't read it yet, but I trust Cory's recommendations, and pass them on to you without further comment as I put it on my "to read" list. Note also that many of the comments on Cory's Boing Boing post are worth a read too.

Gasoline is available in Lubbock at $3.35/Gal..

Michael Giberson

Yes, Texas has a price gouging law, and yes the Attorney General recently has issued a press release warning against price gouging - actually multiple press releases (Sept 16, Sept 19, Sept 24; a second press release of Sept 16 noted that state hotel tax collections were suspended for persons displaced by Hurricane Ike through October 14.) From the Sept 24 release:

Although Hurricane Ike has left the state, the governor's disaster declarations are still active, so the OAG continues to have enforcement authority to pursue price gouging complaints. Under Texas law, vendors are prohibited from charging exorbitant prices for necessities such as groceries, clothing, medical supplies, lodging, repair work and fuel during and after declared disasters.

Although state law prohibits vendors from illegally raising prices to reap exorbitant profits during a disaster, it does allow retailers to pass along wholesale price increases to customers. Thus, in some cases, increased prices may not necessarily signal illegal price gouging.

The AG's office also announced a price gouging case against a hotel operator for price increases during Hurricane Dolly in July of this year.

Nonetheless, at least in West Texas the gasoline seemed barely affected by the market disruption. There was a brief interruption of declining gasoline prices - from early September prices around $3.50/gal. prices jumped back over $3.60/gal. after Ike hit the coast, but this weekend I filled up at $3.35/gal.*

No shortage, no lines, no short tempers.

Another news story suggests the actual positive contributions possible from state government involvement in gasoline markets. Individual wholesalers and retailers might have a hard time coordinating the described emergency planning activities without running afoul of antitrust laws, but working in concert with government emergency planning groups seemed to produce good results.

(*I took a picture of the price with my camera phone to share with you all, but you can't quite see the price in the photo. You'll have to take my word for it.

As per standard consumer practice, I've ignored the $0.009 part of the price to report the price in whole cents.)

Love and money - another west Texas wind energy story.

Michael Giberson

"We used to curse the wind," Max Watt said. "Now we love it."

The aptly named Max Watt is a Nolan County, Texas landowner benefiting from the wind energy boom. The quote is from a Reuters story describing how the boom in wind farm construction in west Texas has led to a boom in school facility construction. More: "It's the greatest thing that has happened here," said James Bible, superintendent of the Blackwell Consolidated Independent School District, where the shell of a new school is rising, financed mainly by tax revenue from windmills. "It's like day and night for the school districts."

[HT to WSJ's Environmental Capital]

RGGI - Results from the first U.S. cap-and-trade GHG permit auction.

Michael Giberson

The results from the first RGGI auction have been announced, coming in louder than a whimper, but softer than a bang. As the WSJ Environmental Capital blog reports, "Demand was actually pretty strong." About 50 million units were bid upon, while just 12.5 million were offered. The demand pushed the clearing price to $3.07 a ton, higher than the $1.86 a ton minimum bid.

From the RGGI results page:

Auction Number	Auction Format	Allocation Year	Quantity Offered	Quantity Sold	Clearing Price	Reports
CO2 Allowance Auction  1 9/25/2008	Sealed Bid, Uniform Price	2009	12,565,387	12,565,387	$3.07	PDF
CO2 Allowance Auction 2.1 12/17/2008	TBD	2009	TBD	TBD	TBD
CO2 Allowance Auction 2.2 12/17/2008	TBD	2012	TBD	TBD	TBD

The market monitor reported, "We observed the auction as it occurred and have completed our review and analysis of its results. Based on our monitoring of participant conduct in the auction, we find no material evidence of collusion or manipulation by bidders."

As Environmental Capital notes, the $3.07 a ton price is substantially lower than prices in Europe, but as we noted here last week, "I can imagine that the program designers were interested in not beginning with a bang."

Geoff Style on price gouging and gasoline lines.

Michael Giberson

Writing with a calmness and patience not typically seen when economists write about price gouging, here is Geoff Styles, at Energy Outlook, Gas Lines and Bank Runs:

...[W]ith a significant shortfall in deliveries along these pipelines, and US gasoline inventories that were already extremely low going into the storms, local prices should have risen dramatically, in order to balance supply and demand. Yet although an internet search revealed many stations in the Atlanta, GA and Charlotte, NC metro areas pricing above $4.00 per gallon for unleaded regular, the region only averaged 15 cents per gallon above the national average in this Monday's DOE price report. .... Following the hurricanes, the Georgia and North Carolina state governments triggered their anti-gouging laws, subjecting retailers to strict penalties for increasing their margins over the cost charged by their suppliers.

There are two problems with this well-intended approach. First, it impedes the price signal to consumers that would otherwise alert them to sharply-reduced availability and promote conservation. We've learned a lot about the price elasticity of demand for gasoline in the last couple of years. It took an increase of approximately $1 per gallon to reduce average US demand by 5%, and the storm-related disruptions cut supplies to the Southeast by a much larger fraction than that. No one knows how high gas prices would have had to go to constrain demand without gas lines, transaction limits, or other non-price controls, but it is reasonable to conclude that the necessary level would be a lot higher than that allowed by law in these states. By imposing price limits, government makes an explicit choice in favor of gas lines, in order to keep the price of whatever gas is available within reach of lower-income consumers. That may be a popular decision, but it is hardly a market failure.

The other drawback of these "soft" price controls is that they encourage a feedback loop that fosters panic and amplifies scarcity. High prices discourage hoarding, while artificially-low prices amid vanishing availability egg consumers on to get theirs, before it's all gone. ... Moreover, uncertainty about how price gouging laws will be interpreted leaves retailers perceiving an unpleasant choice between running out and being fined or imprisoned. That's a lot of extra grief for a business that usually only clears a few cents per gallon, after expenses.

[Emphasis added, links are from the original.]

Revised bailout plan: OK, now I'm not just skeptical, I'm angry and disgusted.

Lynne Kiesling

Before I read the Senate version of the revised bailout plan, I generally agreed with Tyler Cowen: "The modified Paulson plan was better than nothing -- especially after the market had been scared -- but far from my first choice." I also generally agree with his conclusions (1) on the importance of transparency of derivative instruments, (2) the value of implementing rules that focus on information revelation, and (3) that various financial market deregulations are incorrectly blamed for the severity of this credit crunch. My natural skepticism about both the morality and the efficacy of regulation are what moved me to sign the economist's letter that John Cochrane spearheaded last week.

But now that I've actually read the text of the bill, I'm angry. No, I'm beyond angry, I'm freakin' pissed off. It's completely and utterly disgusting that the "sweeteners" added to the bill to generate more support are all vile examples of mutual back-scratching pork that have nothing, nothing to do with back-stopping credit markets so that parties in those markets can find mutually beneficial transactions again. I agree with John Cochrane's comment on the Newshour this evening that it's a "pinata full of ridiculousness" (MP3) [note that Ken Rogoff also speaks persuasively about the flaws of this bailout, although he's kinder to it than I would be.].

I submit into evidence one portion of the bill: Division B: Energy Improvement and Extension Act of 2008. This division has 4 titles and assorted subtitles. For example:

TITLE I--ENERGY PRODUCTION INCENTIVES

Subtitle A--Renewable Energy Incentives
Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.

Subtitle B--Carbon Mitigation and Coal Provisions
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability
Trust Fund.
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers
and exporters.
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code.

Many of these provisions extend existing tax or investment credits for several more years. None of these provisions is directly relevant to confidence in credit markets. Why are they here?

One of the provisions of Title III of Divison B is something that I support:

Sec. 306. Accelerated recovery period for depreciation of smart meters andsmart grid systems.

This provision is not directly relevant to confidence in credit markets. Why is it here?

This one wins the "Too Absurd To Believe" prize:

Division C, SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.

Do our elected so-called "representatives" require all of these expensive and tangential bribes to induce them to support an expensive bailout, which is likely to be a large wealth transfer to the people who made the incorrect risky decisions, by making the plan that much more expensive?

Moreover, the rhetoric blaming this credit crunch on "deregulation" is disturbingly factually incorrect, as Steve Horwitz explained. Decades of government policy have contributed to this credit crunch, and that fact should not be overlooked. Furthermore, as Steve points out, companies will not hesitate to use political processes to increase their profits if given the opportunity, and sadly I fear that the lobbying for this bailout plan shows the extent to which we have to save capitalism from the so-called capitalists.

This massive wealth transfer and money waste of a bailout bill is likely to pass, if the amount of lobbying for it is any indication:

According to the Center for Responsive Politics, a campaign finance watchdog group, the U.S. Chamber of Commerce alone has spent $28 million on lobbying this year. The group's top lobbyist, Bruce Josten, says it's now in "full-court press mode" to get the bailout bill passed immediately. The National Association of Realtors has spent nearly $7 million lobbying this year. The political action committee for the American Bankers Association spent $2.1 million influencing politicians from 2007 to 2008, the center says.

Sadly, as a financially responsible homeowner with investments primarily in indexed mutual funds, I have little opportunity to belly up to the trough that the Congressional "pinata full of ridiculousness" creates. But I feel my taxes going up, and I feel the desperate urge to go take a shower.

In addition to the comments from Tyler and Steve linked above, I also recommend Arnold Kling here and here; Arnold has extensive expertise in this area.

An alternative approach to the bailout: enable fast recapitalization.

Lynne Kiesling

Fast recapitalization, removing the signaling penalty by having the government require banks to stop giving dividends in the short run ... those are the kind of policies that economists have been discussing, fleshing out, and encouraging over the past two weeks. Of course, the challenge to those proposals is that the parties who end up paying are precisely those firms and industries that are politically powerful.

The public choice economics lesson in this? Mancur Olson was right about concentrated benefits and diffuse costs:

... large groups will face relatively high costs when attempting to organize for collective action while small groups will face relatively low costs. Furthermore, individuals in large groups will gain relatively less per capita of successful collective action; individuals in small groups will gain relatively more per capita through successful collective action. Hence, in the absence of collective incentives, the incentive for group action diminishes as group size increases, so that large groups are less able to act in their common interest than small ones.

The book concludes that, not only will collective action by large groups be difficult to achieve even when they have interests in common, but situations could also occur where the minority (bound together by concentrated selective incentives) can dominate the majority.

Alex Tabarrok has done us all a great service with his post aggregating and summarizing the proposals from a variety of economists:

The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization. Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan and many others all advocate some form of recapitalization as do Tyler Cowen and myself. Krugman would prefer a recapitalization in the form of nationalization. In my view, there is still plenty of private money to buy banks at the right price and my preferred model is the FDIC leading a speed bankruptcy procedure, as was done brilliantly with Washington Mutual (Cochrane also supports this model.) In the middle are most of the others who have a variety of good ideas to require the banks to raise equity in various ways.

Sadly, I fear it's too little too late. It's not too little because of the lack of substance in the recommendations; I have read all of the above and can support the core ideas they have in common. But it's too little because it's up against all of the concentrated financial industry and business lobbying that I mentioned in last night's post.

It's also worth pointing out that Wells Fargo is buying Wachovia in its entirety, which means that this salutory recapitalization is already happening. Policies that facilitate this kind of activity that is already occurring are much, much better than the proposed bailout.

Also, both Glenn Reynolds at Instapundit and Rich Sweeney at Common Tragedies have noted the absurdity of having alternative energy and carbon tax provisions in a credit market bailout bill.

Oh, and I'm still angry and disgusted.

A bailout for bicycle commuters? Sweeeet!.

Michael Giberson

Great news! I was reading through some bailout, uh, rescue commentary this morning, and found this political advice from Joel Stein at the L.A. Times:

If I were in Congress, I'd hold out. Every representative who voted no on the bailout got something totally sweet in the bill that passed the Senate. Jim Ramstad (R-Minn.) changed his mind once he got the health insurance for mental illness he's been fighting for. The Senate is trying to bribe Gabrielle Giffords (D-Ariz.) with tax breaks for Arizona solar companies. Earl Blumenauer (D-Ore.), who rides a bicycle, is supposed to be tempted by a tax deduction for bike commuters....

There's more, but I stopped reading right there because that was such exciting news. The Senate version of the Emergency Economic Stabilization Act has tax deduction for bike commuters? Sweeeet! I've been biking to work ever since moving to Lubbock over two months ago.

It is kind of hard to find the provision, since it is embedded in Title III, Section 303, which is described as "Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness." Scan down to Division B, Title II, SEC. 211: "TRANSPORTATION FRINGE BENEFIT TO BICYCLE COMMUTERS." I don't quite see the connection between bicycle commuting and the discharge of qualified principal residence indebtedness, but no matter. This is a bigger deal than even Title III, Section 303, Division C, SEC. 503: "EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN."

And, when you think about it, it is a provision that will pay off whether the bailout of Wall Street rescue plan works or not. If we do, in fact, manage not to tumble into the depths of depression, each bike commuter will gain a small tax break. And if, despite spending $700 billion $820 billion $??? billion (or maybe because we spent that much), the economy enters into a tailspin, you can sell your car to pay bills and bike to work (assuming you have a job) and get to exclude certain expenses from your taxable income (should you have any) up to $20/month.

You really must applaud the Senate. Even while the President, the Treasury Secretary, the Chairman of the Federal Reserve, and numerous politically-connection wheelers and dealers are screaming that they must pass this emergency bill now, a few brave, kind Senators stop to think of the "little guy" - the lowly college teacher who bikes to work - the kid who wants to buy wooden arrows not made of laminate or other "artificial means of enhancing the spine of such shaft", but can't afford said arrows because of an excise tax.

So here's to you, members of the Senate, who had the courage to say "I'll refuse to support any emergency bill to keep the economy afloat, unless bike commuters also get to exclude up to $20/month in expenses from their income tax in taxable years beginning after December 31, 2008."

[NOTE: I've been reminded in the past that not every reader will recognize when I am being sarcastic in a blog post. In case you have any doubt, let me assure you that I am indeed being sarcastic in many of my comments above.]

Most erudite comment on bailout.

Lynne Kiesling

Welcome to Hit & Run, Instapundit, and Volokh Conspiracy readers, and thanks to those respective parties for their links.

Pro Libertate's comment from Katharine Mangu-Ward's post yesterday that linked here wins my prize for the most erudite comment I have seen on our current political environment:

Will no one rid me of this troublesome government?

Hah! He shoots, he scores! Brilliant. If you don't recognize the reference, you should.

Shoring up the commercial paper market.

Lynne Kiesling

In light of Tyler's observation yesterday that things are going badly if the Fed guarantees commercial paper, I offer without comment this news item:

The Federal Reserve announced Tuesday a radical plan to buy massive amounts of short-term debts in a dramatic effort to break through a credit clog that is imperiling the economy.

The Federal Reserve, invoking Depression-era power under "unusual and exigent circumstances," will buy "commercial paper," a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.

But at least gas prices are falling ....

Lynne Kiesling

Global economic weakness and the end of hurricane season mean that gasoline inventories are rising and prices are falling.

Lessons from the Depression: emergency policies can prolong weakness.

Lynne Kiesling

When Steve Horwitz says that we have to control the narrative in the wake of the bailout plan's approval, here's one example: following up on a link to a 2004 UCLA press release, I found this paper:

"New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis"

Harold Cole and Lee Ohanian, UCLA

Journal of Political Economy Vol. 112, No. 4 (2004), pp. 779-815

Abstract: There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak, and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution to the persistence of the Depression of New Deal cartelization policies designed to limit competition and increase labor bargaining power. We develop a model of the bargaining process between labor and firms that occurred with these policies and embed that model within a multisector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the failure of the economy to recover back to trend.

In English: Cole and Ohanian find that policies meant to cushion the effects of the Great Depression by raising wages actually prolonged it. Recovery was weak and prolonged, and wages were higher than is consistent with the levels of labor productivity at the time. Policies that did not allow wages to adjust downward contributed to the weakness of the recovery.

The origins of these "cartelizations" and higher-than-optimal wages were in the National Industrial Recovery Act (NIRA), one of the New Deal provisions that President Roosevelt implemented in 1933. NIRA relaxed antitrust prosecutions and encouraged labor's collective bargaining with employers until the Supreme Court declared it unconstitutional in 1935. But the high wages persisted; why?

On May 27, 1935, the Supreme Court ruled that the NIRA was an unconstitutional delegation of legislative power, primarily because of the act's suspension of the antitrust laws. Roosevelt opposed the court's decision: "The fundamental purposes and principles of the NIRA are sound. To abandon them is unthinkable. It would spell the return to industrial and labor chaos" (quoted in Hawley [1966, p. 124]). This subsection shows that the government continued anticompetitive policies through new labor legislation and by ignoring the antitrust laws.

The primary post-NIRA labor policy was the NLRA [National Labor Relations Act -- LK], which was passed on July 27, 1935. The act gave even more bargaining power to workers than the NIRA. The NLRA gave workers the right to organize and bargain collectively through representation that had been elected by the majority of the workers. It prohibited management from declining to engage in collective bargaining, discriminating among employees on the basis of their union affiliation, or forcing employees to join a company union. The act also established the National Labor Relations Board (NLRB) to enforce the rules of the NLRA and enforce wage agreements. The board had the authority to directly issue cease and desist orders.

The NLRB exists to this day.

These New Deal "bailout" policies were labor-related, not financial-related, but there's still an embedded lesson: policies designed to cushion and modulate natural feedback effects in economic processes can have negative unintended consequences, and can prolong downturns. It happened in the 1930s when New Deal policies prolonged and weakened those feedback effects, and it can happen again today.

An ungated version of the Minneapolis Fed working paper version is available.

Hat tip to Glenn Reynolds for the original link, and I second his recommendation of Amity Shlaes' The Forgotten Man: A New History of the Great Depression.

The fallacy, and danger, of blaming deregulation.

Lynne Kiesling

In Monday's Washington Post, Sebastian Mallaby argues that blaming deregulation for this financial crisis is both false and dangerous:

So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed's track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times -- and then be rescued by the Fed when they got into trouble.

Of course, the financiers did create those piles of debt, and they certainly deserve some blame for today's crisis. But was the financiers' miscalculation caused by deregulation? Not really.

Please do go read the whole thing; it's got a level of nuance in its logic that makes it very persuasive, and is a salutary corrective to the false anti-deregulation invective that has been swirling around for the past couple of weeks.

As his primary source Mallaby also cites my old friend and former professor Charlie Calomiris here and here.

Bailout in the news, or, 'Why it is a good thing that journalism is just the first draft.'.

Michael Giberson

The recent "first rough draft of history" will need some editing to smooth out the narrative.

Pity the poor newspaper reporters and headline writers who daily examine stock market movements and then try to write an account of what it all means.

Last Tuesday, the Wall Street Journal featured on the front page: "Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis."

WASHINGTON -- The House of Representatives defeated the White House's historic $700 billion financial-rescue package -- a stunning turn of events that sent the stock market into a tailspin and added to concerns that the U.S. faces a prolonged recession if the legislation isn't revived....

The 228-205 vote, which defied a full-court press from the president and the Treasury secretary, marked a dark moment in a month that has shaken the financial system to its core and forced the government to take a host of ad hoc measures to shore up confidence.

That was then, this is now. On Friday the House passed the 'sweetened' version of the bill, and the markets fell some more. Today, the WSJ: "Markets Fall on Doubts Rescues Will Succeed."

The global financial crisis has taken a perilous turn: As government efforts to tame it grow more aggressive, markets are becoming less confident those efforts will succeed.

On Monday, the Federal Reserve and European governments stepped up relief efforts, above and beyond the $700 billion rescue package approved by the Congress last week. But markets around the world responded with a massive vote of no confidence. European stocks saw their biggest drop in at least 20 years, and the Dow Jones Industrial Average dropped below the 10000 mark, a stark sign that the crisis may be outpacing policy makers' ability to contain it.