Kevin Drum - February 2011

Why You Hate Air Travel Less Than You Think

| Mon Feb. 7, 2011 10:30 AM PST

How much technological progress have we made since 1973? I don't want to drive this question into the ground, but Matt Yglesias makes a point about air travel that bears scrutiny:

Today’s planes are, in fact, technologically superior to the planes of yore. But the travel experience has been made much worse by massive over-investment in airplane security. Inefficient pricing of runway space leads to lots of problems.

True. And yet, which would you take, 1973 or 2011? It's 2011 by a landslide. Fifty years ago, the technological improvement we all expected was faster airplanes. We didn't get that. What we got instead was way cheaper and more abundant flights thanks to deregulation and the computer revolution, which made capacity management far more effective than in the past. One of the results of all this has been crowded flights and crowded airports, and of course increased security has made the flying experience less pleasant too. Still, taken as a whole, I'd say that the airline industry has made tremendous progress since 1973. It just hasn't been where we expected it to be.

Also of interest: the contribution of the airline industry to GDP probably hasn't changed an awful lot since 1973. But its contribution to the increased wellbeing of the median person has increased tremendously. In 1973, the average schmoe simply never flew: it was too expensive and flights weren't always very convenient. Today, nearly anyone can afford to fly at least occasionally. So this is one area where pure measures of GDP probably understate the benefit to the median person. People who are already rich would prefer faster planes, but people who aren't would simply prefer planes they can afford. And that's what we got.

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Arianna Huffington: The $315 Million Woman

| Mon Feb. 7, 2011 9:22 AM PST

Last night I saw a tweet saying that AOL was going to buy the Huffington Post for $31.5 million. Yowza, I thought. That's a pretty rich valuation. Maybe 20x forward earnings? Who knows?

But no! AOL actually bought HuffPo for $315 million. I mentally put in a decimal place where there wasn't one. I don't even know what to think about this. It sounds completely crazy to me. The odds of this being a good deal for AOL stockholders seem astronomical.

Still, maybe I'm the one who's crazy. After all, I haven't paid a lot of attention to either HuffPo or AOL lately. I'm a huge skeptic of synergy arguments of all kinds, but maybe Arianna is right when she says that in this deal, 1+1=11. Anybody in comments want to make the case in favor of this being the deal of the century?

UPDATE: Felix Salmon puts some numbers to the deal and defends it as a good one:

The $315 million that AOL is paying for the Huffington Post is roughly 3X the valuation seen at its last capital raise two years ago, is 10X its 2010 revenues and is roughly 5X estimated forward 2011 revenues. Those are all big numbers, but not insanely so....My feeling, then, is that this deal is a good one for both sides. AOL gets something it desperately needs: a voice and a clear editorial vision. It’s smart, and bold, to put Arianna in charge of all AOL’s editorial content, since she is one of the precious few people who has managed to create a mass-market general-interest online publication which isn’t bland and which has an instantly identifiable personality. That’s a rare skill and one which AOL desperately needs to apply to its broad yet inchoate suite of websites.

Maybe so.

Is 2011 Really Better Than 1973?

| Sun Feb. 6, 2011 10:47 PM PST

Here's the thought experiment of the day: If you could be transported back to 1900 with your current income, would you take the deal? The answer is almost certainly no. Sure, your current income would go a hell of a long way in 1900, but you'd still swelter in the summer because all the money in the world couldn't buy you an air conditioner. Ditto for plane travel, penicillin, automobiles, etc. etc. Even with a lot of money, 1900 looks pretty crappy.

But change it up: would you take the same deal if you could be transported back to 1973? Again, your income would go a lot further (about 5x further, in fact), which means you'd be pretty well off, but you'd....

Well, you'd what? Obviously you'd miss your cell phone and the internet and your HD television with 300 channels. But a car would still basically be a car, and interstate highways are about the same as now. Ditto for plane travel, antibiotics, air conditioners, etc. etc. So what do you say? Would you take the 1973 version of this deal? Scott Sumner says he would. Bryan Caplan, and Arnold Kling say they wouldn't.

In my case, I almost certainly wouldn't take the deal. Partly that's because I've never been much of a money hound and I already lead an upper middle class life, so having 5x my current income just doesn't appeal to me all that much. Also, the biggest difference between 1973 and 2011 — personal computers and the internet — are really, really important to me. It would take a lot of other stuff to make me give that up.

Still, unlike the 1900 deal, it's not a slam dunk. If a big house in a nice location means a lot to you, and traditional entertainment (film, books, theater, etc.) could easily take the place of the internet in your life, then maybe 1973 on a big income starts to look pretty good.

But it depends a lot on circumstances, doesn't it? If you suffer from chronic depression and Prozac has turned your life around, then 1973 doesn't look very appealing. If you like dining out on good ethnic food, 1973 would be something of a wasteland in most parts of the country. If you're a woman who wants a career as a corporate lawyer or a business executive, 1973 probably looks a little grim. If you're gay, you'd be insane for wanting to go back no matter how much they paid you.

(This conversation was originally kicked off by a discussion of how impressive productivity gains have been since 1973, something that this thought experiment is meant to help us get a handle on. So you might object that social inequities really shouldn't count. But I say they should. Progress is progress, and the utility of a person's life depends on a lot of things, not just material wealth. So this stuff counts for everyone who's not a straight, white, WASPy male.)

Of course, we're all so used to our current goodies that it's hard to imagine that we'd be happy without them. That's loss aversion for you. But what if you'd never experienced them before? Would they sound all that great? Or would you be happy with your current stuff? Things probably look a little different from 1973 looking forward than from 2011 looking back.

And income level matters too. If you choose a middle-class 2011 income level, then 1973 gets you an upper class lifestyle. But the difference between middle class and upper class isn't all that big, so you'd take 2011 because of all the goodies we have. But if you choose a poverty-level 2011 income, then 1973 would turn that into an upper middle class income — and that makes things look a lot different because the difference between middle class and abject poverty is huge. All the goodies in the world probably don't make up for it.

POSTSCRIPT: Alternatively, this just means that nominal dollars are a lousy way of comparing eras. It would be pretty easy to convince me of that, in fact.

UPDATE: Edited considerably a few minutes after posting to remove some fairly dumb stuff.

Why Investors Want Higher Inflation

| Sat Feb. 5, 2011 3:25 PM PST

I'm back. But I've been busy catching up on crossword puzzles this morning, and either this week's puzzles were harder than usual or else my brain is slowly decaying, because they took me a while to finish. Probably the latter.

And speaking of brain decay, before I left I posted a chart showing that, starting in 2008, inflation expectations suddenly started to correlate really well with stock market prices. Scott Sumner and Paul Krugman say this demonstrates that our sluggish economy is due to a slowdown in aggregate demand, and although I'm happy to believe this, it wasn't clear to me why this correlation had anything to do with aggregate demand. So I asked for help.

Unfortunately, two posts were waiting for me when I got home, each disagreeing with the other. Here's a nickel summary:

Kash: Normally, high inflation leads to high corporate profits, which makes investors happy. But they also realize that high inflation will cause the Fed to raise interest rates and this will slow growth. So they're also unhappy, and these two reactions cancel out. However, when interest rates are at zero and the Fed has made it clear they aren't going to raise them, there's nothing to be afraid of. So higher inflation is a purely good thing, and therefore high inflation expectations lead to high stock market growth.

In other words, this doesn't have anything to do with aggregate demand. It's merely a reaction to the fact that interest rates are at zero and everyone knows they aren't going up anytime soon.

Karl Smith: Normally, inflation expectations are just inflation expectations. They don't really affect the underlying productive capacity of the economy, so investors react neutrally. However, in 2008 the stock market suddenly started reacting positively to inflation expectations. Why? If it wasn't because anyone thought it would affect the underlying capacity of the economy, it must have been a reaction to the Fed's announcement that it planned to print more money — and the only effect of printing more money is to induce people to buy more stuff.

In other words, investors were convinced that the economy's problem was a lack of demand, and printing more money (and therefore causing more inflation) would increase demand and fix things up. So whenever inflation went up, the stock market went up.

I score this one for Karl. Kash's explanation seems incomplete: After all, if investors think high inflation will genuinely lead to high corporate profits, not just a rise in the overall price level, they must think those profits are going to come from increased consumer demand for the stuff corporations are making. So they must be associating inflation with increased demand.

Plus Karl frames his answer in the form of an amusing Socratic dialog, so he gets points for that too. In any case, I've linked to both arguments, so you can read them for yourself. Like Glenn Beck, I insist that you do your own homework and not take my word for anything.

Friday Cat Blogging - 4 February 2011

| Fri Feb. 4, 2011 1:00 PM PST

The fence is becoming an increasingly popular hangout spot. A couple of days ago both cats hopped up at once and created a logjam. Domino couldn't figure out how to get down with Inkblot in the way, so she headed off in the wrong direction and got stopped by the rose bush. After convincing herself there was just no way through a big mass of thorns, she turned around and hopped down onto the air conditioning unit. Apparently Inkblot hadn't counted on that bit of trickery, which meant there was no longer any point in blocking the way. So he headed over to the bird bath and hopped down too. I still don't know for sure how they get up there, though.

Housekeeping Note

| Thu Feb. 3, 2011 8:00 AM PST

I'll be up in San Francisco today and tomorrow hobnobbing with the powers that be at Mother Jones. I might have some free time to post a thing or two, but I'm not sure about that. At best, posting will be light — though catblogging will appear at its regular time. I'll be back on Saturday.

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Anti-Urbanism, Take Two

| Wed Feb. 2, 2011 5:38 PM PST

Earlier today I wrote about the anti-urban bias in American public policy. Is it the fault of the Senate, which overrepresents the interests of rural states? Stephen Smith comments:

I think all this talk of federal policy is misguided. Writing about the federal government sells well in journalism since it reaches the widest audience, but even taking into account the feds’ massive power grab over the last century, the real action is still at the local level. Local property tax distortions favoring single family homes are widespread and egregious, but orders of magnitude more ink gets spilled about the relatively ineffectual mortgage interest tax deduction. Fannie Mae and Freddie Mac’s refusal to fund mixed use developments is unfortunate, but it’s nothing compared to the almighty parking minimum. So while obviously the rural-biased Senate isn’t doing urbanism any favors, the nation’s Greatest Deliberative Body is next to meaningless when compared to lowly municipal governments.

Two things. First, it's the world's Greatest Deliberative Body, pal, and don't you forget it. And second, good point!

But what's the breakdown? I think everyone agrees that local land use regulations are a big issue, but are they really the predominant issue? I don't know. But Stephen makes an interesting argument that it all goes back to the early 20th century, before the feds had any involvement at all, and comes down to anti-el sentiment. I guess I'd question that, since Europeans and Asians built up pretty dense urban areas without els (at least, none that I've ever seen), so I don't know how that could really be the key factor. But it's interesting anyway! Go read it.

Yes, Our Problem is Low Demand

| Wed Feb. 2, 2011 5:07 PM PST

Normally, there's not much correlation between inflation expectations and asset prices. However, David Glasner has published a new paper showing that, beginning in 2008, this changed dramatically. If I understand his explanation correctly — and I'm not at all sure I do — the mechanism is fairly simple: when you enter a period in which real interest rates are low and investors expect very low inflation (or deflation), cash becomes your best investment. So investors pull their money out of assets and asset prices fall. In Glasner's paper, the S&P 500 is a proxy for asset prices, and he finds that, indeed, there's no correlation of the S&P 500 with inflation expectations through 2007. Then, starting in mid-2008, when interest rates go to zero and inflation expectations fall, the correlation suddenly becomes almost perfect: When inflation expectations drop, so do asset prices. Conversely, when inflation expectations go up, asset prices go up. Scott Sumner is excited:

There is no way to overstate the importance of these these findings.  The obvious explanation (and indeed the only explanation I can think of) is that low inflation was not a major problem before mid-2008, but has since become a big problem. Bernanke’s right and the hawks at the Fed are wrong.

....In my view the time-varying correlations between inflation expectations and stock prices are one of the most important pieces of evidence we have that [aggregate demand] became a problem after mid-2008. It will be interesting to see if those economists who are skeptical of demand-side explanations can come up with a plausible alternative explanation for this pattern.

Paul Krugman agrees: "It’s demand, all the way." Sadly, neither Glasner, Sumner, nor Krugman explain in terms someone like me can understand why this correlation implies that aggregate demand is what's behind our economic woes. I feel a bit like a dummy, since they seem to expect this to be obvious, but hopefully someone out there in the econ blogosphere will take pity and explain this in laymen's terms. When they do, I'll write a followup. In the meantime, apparently we have one more piece of evidence that our big problem right now isn't regulatory uncertainty or the federal debt level or structural unemployment. It's low aggregate demand, just like you'd expect.

Endgame in Egypt

| Wed Feb. 2, 2011 11:46 AM PST

I'm not quite sure who wrote this, but here's a report on the Egyptian protests from someone on Jon Chait's blog:

Today President Mubarak seems to have decided to crack down on the democracy movement, using not police or army troops but rather mobs of hoodlums and thugs. I’ve been spending hours on Tahrir today, and it is absurd to think of this as simply “clashes” between two rival groups. The pro-democracy protesters are unarmed and have been peaceful at every step. But the pro-Mubarak thugs are arriving in buses and are armed — and they’re using their weapons.

In my area of Tahrir, the thugs were armed with machetes, straight razors, clubs and stones. And they all had the same chants, the same slogans and the same hostility to journalists. They clearly had been organized and briefed. So the idea that this is some spontaneous outpouring of pro-Mubarak supporters, both in Cairo and in Alexandria, who happen to end up clashing with other side — that is preposterous. It’s difficult to know what is happening, and I’m only one observer, but to me these seem to be organized thugs sent in to crack heads, chase out journalists, intimidate the pro-democracy forces and perhaps create a pretext for an even harsher crackdown.

At the White House, today's events are causing a rapid change in emphasis: Mubarak needs to turn over power immediately. "Now means now," Robert Gibbs just told reporters. Stay tuned.

Why Do We Hate Our Cities?

| Wed Feb. 2, 2011 11:10 AM PST

Matt Yglesias on American urban policy:

Anyone actually interested in the subject will swiftly see that (a) American public policy is strongly biased against high density living and (b) that this outcome is predictable from the structure of American political institutions. That people don’t realize this is largely a matter of willful ignorance.

Here's a chart showing where the United States ranks in the world in terms of urban population:

We're 42nd out of 199, which makes us fairly urban, and the other advanced economies clustered around us include Germany, New Zealand, Denmark, Sweden, Canada, South Korea, Norway, and France. On this measure, we seem fairly typical. However, the density of our urban areas is quite low compared to other similar countries.

So is our rural/suburban bias due to our political institutions — in particular, the U.S. Senate, which overrepresents the residents of sparsely populated states? Or is it mostly due to geography and the relatively recent founding of our country, which have produced fairly low-density urban areas and therefore a naturally weaker constituency for high-density living? Is there some evidence on this point?