Dan Sutter's Blog

Historic Tornado Outbreak

2011-04-30T06:59:00.000-07:00

We have witnessed a tragic tornado outbreak this week, one for the record books. The fatality total as of this morning now definitely appears to have topped the April 1974 Super Tornado outbreak. The question many people have been asking is why this outbreak was so deadly. As a tornado impacts researcher, the important question is whether the death toll was due to this being a meteorological outlier event, or due to heightened vulnerability. The southeastern U.S. is vulnerable to tornado casualties; meaning that controlling for the strength, timing, and tornado path characteristics, tornadoes in the Southeast kill and injure more people than tornadoes elsewhere. In my recent book on tornado impacts with Kevin Simmons, we estimated state fixed effects for twenty eight states, and constructed a casualty index based on the fixed effects from various specifications. The indexes are based on tornadoes through 2007. A higher value of the index indicates that tornadoes in the state result in more casualties, everything else equal. Here are the index values and ranks (out of 28 states) for the states with fatalities in Wednesday's outbreak:

Alabama 1.63 23
Georgia 2.65 26
Mississippi 0.91 13
Tennseessee 1.78 24
Virginia 0.72 9

The tornado outbreak struck states which historically have been vulnerable. The Southeastern vulnerability is also associated with the off-season, night time, and mobile home vulnerabilities. While we are waiting for the individual tornado paths to be identified and rated, it is hard to draw conclusions about this event. But it does not fit the standard Southeastern vulnerability, as it occurred during the prime tornado season, and during the late afternoon hours. Many of the deaths in Tuscaloosa and Birmingham appear to have been in permanent homes. It appears to have been more of a problem of multiple long track, violent (F4 or F5) tornadoes.

Many observers have been comparing this outbreak with the 1974 Super Outbreak. As a social scientist who studies tornado impacts, it seems that the more significant historical parallel is the 1925 Tri-State Tornado. The Tuscaloosa - Birmingham super cell thunderstorm had a tornado warning on it continuously for over 300 miles. It hasn't been determined yet how long this tornado was more or less continuously on the ground, but I have seen references to a 200 mile long damage path. The Tri-State Tornado had a damage path of over 200 miles, and yet stands out there seemingly as this extreme outlier event, tracking across 3 states and definitely producing F5 damage across Illinois and Indiana. Most meterologists suspect it wasn't on the ground the entire 200+ mile distance, but it clearly was on the ground for most of this length. It was definitely an outlier event, but the question is how much of an outlier - is that a 100, 500, or 1,000 year event. If we do end up with something approaching a 200 mile damage path, this would really indicate that the Tri-State Tornado was perhaps more like a 100 year event, and creates the real possibility of a similar length storm at some point in the future.

Watching Economic Activity

2011-03-20T18:53:00.000-07:00

A house is being built on the vacant lot behind our yard. As an economist we analyze GDP but don't often get to observe it being created.

The housing market I think is a challenge for free market economists. It is a market where reputation should be very important - houses are an experience good, and because of their durability it may be years before you see if a house was really poorly constructed. Houses are also high value items, and so a builder could make a relatively large profit by reducing quality. In a development of even 20 modestly upscale homes, shoddy construction could yield a fairly nice profit for a developer who could then fold their company and leave no asset trail for homeowners to pursue. And yet reputation does not seem to be very important in the market - we don't see homes labeled with brand names. How many homeowners know who built the house they own? There are some national builders now, but the market is extremely decentralized and localized. This seems to be strongly at odds with our theory of markets and the role of reputation.

The small role reputation plays in homebuilding puzzles me. I don't have a satisfactory answer. I discussed this with Randy Holcombe once and he pointed out the importance of owner maintenance. If an owner doesn't maintain the house, quality will deteriorate, but it would be hard for potential buyers or others in the market to know if poor initial construction or a lack of maintenance explains the dilapidated state. This may play a role, but it seems the same argument applies with cars and we see brand names and reputation play an important role there. Indeed, auto makers will tout the resale value of cars in ads. If maintenance was an issue, builders could design minimal maintenance homes, or offer extended maintenance bundled with the initial purchase to credibly demonstrate to subsequent buyers that the home has been maintained.

I suspect (and one day would like to try to demonstrate more formally) that the existence of public sector building codes plays an important role. Home buyers know that there are building codes, and thus that the local public sector is certifying quality. This I suspect results in a lulling effect among buyers - they don't worry about who built the house they want to buy because they figure it must have passed code inspection and be well built. But building code enforcement is quite lax in many areas, and thus the public sector promise of quality may not be very reassuring. And the existence of codes probably increases the marginal cost of assuring a higher quality of construction than offered in the local building code.

Carolina Homes is building the house on the lot behind us. I hope for the new owners that they are a high quality builder. We've had one hurricane and one tropical storm in the last 3 years in Deep South Texas, so poor construction can lead to problems.

One on One Volume 2

2011-03-20T18:50:00.000-07:00

Natalie and I got ourselves Tony Horton's One on One Volume 2 dvds for Valentine's Day. There are some excellent workouts in there. My favorite is probably Cardio Confusion - Mason's Choice. I like the Hummingbird yoga workout as well, since this yoga is really more like a stretch routine than the other yoga workouts.

More from Tony Horton

2010-12-22T20:03:00.000-08:00

Natalie and I recently ordered Volume 1 of the One-on-One with Tony Horton workouts. We had to move a newer dvd player in the workout room to get them to play, but they are excellent. I miss having the graphics showing the amount of time left in the workout and on each exercise, but the workouts are great. Thirty-Fifteen is a real challenge, and I really like the under an hour yoga routine (although I am not bendy in any way, shape, or form).

The Michael Lewis Challenge

2010-12-22T19:39:00.000-08:00

I recently finished Michael Lewis' book The Big Short and enjoyed it immensely. I thint it would be interesting one day to teach an economics for business class just using his books. A consistent theme in Lewis' books Liar's Poker, Moneyball, and The Big Short is that many people in the business world just don't know their business. As Lewis puts it in the preface:

This woman [Meredith Lewis] wasn't saying that Wall Street Bankers were corrupt.
She was saying that they were stupid. These people whose job it was to allocate
capital apparently didn't even know how to manage their own. (xvii)

The necessity of a division of knowledge makes it difficult to evaluate charges of ignorance. Bosses probably shouldn't understand all of the jobs which people working for their company (or their division even), and so some ignorance is consistent with a well-functioning economy. But the level of ignorance Lewis describes seems to really challenge the efficiency of markets.

What supports such ignorance? In Lewis' view, the potential of all the parties, at least the players in financial markets, to profit from the system:

What's strange and complicated about it, however, is that pretty much all the
important people on both sides of the gamble left the table rich. Steve Eisman and
Michael Burry and the young men at Cornwall Capital each made tens of millions
of dollars for themselves, of course. Greg Lippmann was paid $47 million in 2007
... But all of these people had been right; they'd been on the winning side of the bet.
Wing Chau's CDO managing business went bust, but he, too, left with tens of millions
of dollars ... Hower Hubler lost more money than any single trader in the history
of Wall Street - and yet he was permitted to keep the tens of millions he had made.
The CEOs of every major Wall Street firm ... without exception, either ran their
public corporations into bankruptcy or were saved from bankruptcy by the United
States government. They all got rich too.
What are the odds that people will make smart decisions about money if they
don't need to make smart decisions - if they can get rich making dumb decisions?
(pp.256-7)

Of course not every body in the game got rich - a lot of shareholders in Wall Street companies and other investors lost milions. If all of the regulars - the players who might be subject to government regulation - got rich regardless, then Lewis is right. A part of this is a result of the socialization of risk through government guarantees, whic clearly undermine market efficiency. More of it may be a result of players receiving bonuses when they earn profits but not negative bonuses as a result of losses. And the fact that some of the Wall Street firms were corporations with limited liability for the investors would contribute to this. The result would be an asymmetry which will lead to excessive risk taking. If Wall Street firms are collectively like the house in sports bettin or poker and can cooperate to share the risk, then all of the players can indeed profit.

Often free market economists take it for granted that there is no easy money to be made and that markets punish stupidity. Michael Lewis' book reminds us that this proposition that markets really punish stupidity requires empirical validation, and may not hold, at least in a strong fashion.

The Wit and Wisdom of Tony Horton

2010-11-04T20:00:00.000-07:00

"Rome wasn't build in a day, and Wacky Jacks weren't figured out on the first work out." How does such wisdom not inspire you to do the P90-X workouts?

Professor or Teacher: Is the line being redrawn?

2010-11-04T19:33:00.000-07:00

People sometimes think that professors are like teachers, but as I will explain to them, a professor is an expert in a field not in teaching. Traditionally the line between relying on professional educators and experts in the field for instruction has been drawn after grade 12. Several developments in higher education - increasing use of community colleges, online courses, and for-profit universities - all are leading to instructors not having freedom to develop their own course. If the instructor for a course does not choose the textbook and design the syllabus, then there is no reason that the instructor needs expertise in the field as opposed to in teaching. The rise of teaching specialists at research universities could also contribute to this shift. The reason for having experts in a field teach is an evaluation that mastery of research in a field (and perhaps an ability to conduct research) is more important than expertise in teaching. Perhaps the time has come to rethink where the line should be drawn. The proportion of the population going to college has risen steadily over the last 100 years; it may be that the percentage of attending graduate school now is around what the percentage attending college was a century ago. Perhaps expertise in the field becomes more important than expertise in teaching only for the 10 or 20 percent of the students who go the furthest in education. If so, we may easily be witnessing a transition of the first two years of college instruction or perhaps all of undergraduate education from professors to teachers.

The Puppy is Here

2010-05-06T19:57:00.000-07:00

We have adopted a new puppy. We are calling her Diane and she is about 9 weeks old, a lab mix. Pictures will be coming soon. She looks just like the Cottonelle puppy. We got her from Cinderella Pet Rescue, a local no-kill shelter, and we highly recommend them.

The Wisdom of Tony Horton

2010-05-06T19:51:00.000-07:00

I have been doing P90-X since last summer and really think it's great. In addition to the workouts, I really enjoy the daily sessions with Tony Horton. He has some tremendous formulations, and I will share some of my favorites from time to time. Today's words of wisdom: "That's a short uncle."

Will This Model Work?

2010-04-08T19:06:00.001-07:00

I receive and enjoy the weekly Clarion Call from the Pope Center for Higher Education Policy. I recently read The Lindenwood Model on their recommendation. The book describes the changes implemented by Lindenwood University in St. Louis in the 1990s which staved off financial collapse. In brief, the University abolished tenure, increased faculty teaching loads to five classes per semester, and eliminated support for faculty research. I don't know if I agree with these recommendations, but am willing to consider that this could be a viable mode of operation for colleges and universities, at least in some segment of the higher education market.

My bigger concern is whether this is a viable option for many universities in the long run. I believe that many people pursue a Ph. D. in hopes of eventually landing a job as a professor for the purpose of being able to do research. Lindenwood is eliminating the main attraction to the professorate for many would-be professors. A person can teach high school, which from my perspective Lindenwood amounts to, without spending 6 years in graduate school. One university can always employ this model and hire people who have made the sunk investment of earning a doctorate and are unable to secure regular faculty employment else where. But these people went to grad school hoping to land a job at a school where they could do research. So even if one grants that the model works for Lindenwood, it is not clear that it offers what the book's subtitle suggests, An Antidote for What Ails Undergraduate Education.

Michael Vick’s “Mistake”

2009-08-19T15:27:00.000-07:00

As a proponent of individual freedom and individual responsibility, I think we are responsible for our mistakes and crimes. And I also think that people should be allowed to try to have a normal life when they complete serving their sentences. So in principle, I suppose that Mike Vick should have a chance to play in the NFL again, although I would have liked to see the NFL suspend him for one full season after he completed his prison sentence. But the annoying aspect of the Vick coverage over the past week has been people referring to the “mistake” he made, and how he should now be allowed to resume his career. If you read the Federal indictment against him two years ago, you know he was in the dog fighting business for six years. Excuse me, but active participation in an enterprise for six years is not a “mistake.” Missing your exit on the freeway is a mistake. Running over a sprinkler head with the lawnmower is a mistake. Vick might deserve a second chance, but he made a whole bunch of mistakes over six years, not one little mistake.

Really Hiding Insurance Subsidies (Originally posted on danielsutter.com on August 17, 2009)

2009-08-19T15:25:00.000-07:00

Really Hiding Insurance Subsidies

The U.S. House of Representatives is considering again this session the Homeowner’s Defense Act which would create a Federal backstop for catastrophe risk through Federal reinsurance for catastrophes like hurricanes. Many coastal states currently subsidize wind insurance through state run wind, hurricane or beach pools. The subsidies are troublesome because they are hidden: policy holders pay premiums for wind insurance each year that might seem high and look on their face to be similar to regular insurance. But because the wind pools can impose assessments (or taxes) on other insurance policies in a state, the rates do not have to be high enough to build up a sufficient reserve to cover losses from a major (or sometimes even minor) hurricane. States subsidize coastal property owners each year (they pay less than they would if buying insurance on a free market), but the subsidy is hidden from view until the losses occur. In the meantime, supporters can claim that since the pool hasn’t imposed assessments since the last hurricane, the pool really doesn’t subsidize residents. Unless you are an actuary or have access to a pretty sophisticated catastrophe model, you will have difficulty “proving” that the current rates are too low.
The Homeowner’s Defense Act would get the Federal government into the reinsurance business, as the state of Florida has with their Hurricane Catastrophe Fund, or the Cat Fund. Government run reinsurance provides another level of cover for coastal insurance subsidies. When reinsurance (or insurance for insurers) is sold a subsidized rates say to state wind pools, supporters of the wind pool can now claim with a relatively straight face that the pool does not subsidize homeowners. The pool now purchases sufficient reinsurance to cover their losses. Of course the reinsurance is being offered at below market rates, but citizens would need to dig past the initial level of insurance to find the subsidy. In the mean time, claims that wind pools are no longer subsidizing coastal property insurance obscure the truth more effectively than before.
The Competitive Enterprise Institute has set up a website to combat a Federal bailout of state wind pools which I highly recommend. It can be found at http://nobeachhousebailouts.org/

Who Saw the Ideological Shift Coming? (Originally posted on danielsutter.com on March 17, 2009)

2009-08-19T15:24:00.000-07:00

Who Saw the Ideological Shift Coming?

Why has there been such a dramatic shift in the public intellectual climate in the past few months? Government spending has increased by more than 10% of GDP. There has been a dramatic extension of political decision making in the economy – manipulating real estate values comes close to price controls for homes, the Federal government has assumed an ownership position in leading banks, bailouts have been provided for automakers and others, Congress seems likely to take over setting executive salaries, and the nationalization of banks certainly seems to be on the agenda as a real possibility. This is a massive shift in the relationship between government and the private sector. People talk about economists not letting us know in advance about the impending financial crisis and recession. But who foresaw this ideological shift? Less than twenty years ago Francis Fukuyama wrote that we had reached the end of history, that there were no intellectual challenges to market democracy. Apparently the support might have been there for a sudden socialization of the economy. What might be behind this sudden ideological collapse for the market economy? Here is some speculation.
The economics profession was never as pro-free market as publicly portrayed. Dan Klein’s work I think convincingly shows that the median economist was certainly not a free market economist. Theoretical models of asymmetric information and network externalities (among others) provide the basis for considering much of a market economy to be inefficient. There was probably substantial preference falsification among economists in the 1990s who felt that they had to follow the consensus about markets.
Economists in the socialization vanguard probably have a very inaccurate vision of what politicized decision making is going to be like. Many of these people probably naively think that they will call the shots when the government is running much more of the economy, but history shows that this is unlikely to happen. The economists providing the academic cover for the growth of government will find themselves being pawns.
Intellectual hubris is probably at work here as well. If you have read any of Joseph Stiglitz’ book Whither Socialism?, do you think that he thinks that he could centrally plan the economy. Stiglitz, Krugman and these folks are very smart, but they suffer from the fatal conceit of all planners.
The compromised status of the opposition party. Republicans engaged in extensive spending and the expansion of the power of the Federal government for the war on terror, and the invasion of Iraq was based on a right to engage in preemptive war. The Bush administration seemed there should be no constraints on their power, which should include the power to hold American citizens as enemy combatants and to torture alleged terror suspects at will. The Republicans expanded discretionary spending during their control of government; the party of Alaska’s bridge to nowhere cannot take a principled stand against government spending. George Bush began much of the socialization at the end of his term in office. The inability of the opposition party to offer meaningful opposition could lead to a temporary dramatic shift in the public intellectual spectrum.

Catching Corrupt Politicians is a Good Thing, Right? (Originally posted on danielsutter.com on December 12, 2008)

2009-08-19T15:17:00.000-07:00

Catching Corrupt Politicians is a Good Thing, Right?

The big political news this week has been the arrest of Illinois Governor Rod Blagojevich on corruption charges for attempting to “sell” the U.S. Senate seat being vacated by Barack Obama. The FBI began wiretaps before Obama’s election to the presidency, which clearly suggests that this was not Blagojevich’s first corrupt act. Although some economists and political scientists will debate whether political corruption is necessarily bad (the tough case is when corruption allows evasion of a wealth reducing law), let’s suppose that this corruption is definitely bad. Certainly then the FBI should be saluted for rooting out such bad acts and likely removing a corrupt politician from office, right?
Not necessarily. Tolerating corruption may play a beneficial role within the political system, as I explore in a paper with Marc Poitras published earlier this year in the Journal of Economic Behavior and Organization. Suppose there are two types of politicians, angels and knaves, compete in a political hierarchy, with say the presidency as the top prize. Only knavish politicians will behave badly, but knaves will behave to opportunistically pursue higher office. In this framework a knavish politician reveals his or her type by engaging in corruption. This may disqualify him from advancing to higher office. Corruption benefits the political system by allowing citizens screen out knaves before they reach higher office and can really cause harm. But how do we induce knaves to reveal their type? In part by ensuring that low office corruption pays. Quickly detecting corruption by governors reduces the payoff, and may induce the knavish politician to behave in hopes of reaching a higher office where the benefits of corrupt acts are even greater. Indeed it may even be beneficial to ensure that knavish politicians who engage in corruption are returned to their local office.

After the Flood (Originally posted on danielsutter.com on August 17, 2008)

2009-08-19T15:13:00.000-07:00

This column was originally published in the Guardian's online American edition.

After the flood
Without comprehensive homeowners insurance, Hurricane Katrina and other flood victims are left footing the bill
By Daniel Sutter

Recently Nationwide Insurance proposed that it and other insurers be allowed to sell comprehensive insurance for homeowners that would protect them against all manner of hazards, natural and manmade. Most homeowners probably think this is nothing new, but the fact is that virtually no US homeowners insurance policies cover flood damage, making Nationwide's proposal nothing short of revolutionary.In the United States, homeowners and flood insurance are regulated and sold under two completely different schemes. Homeowners insurance is regulated by states and sold by different competing companies. Flood insurance, by contrast, is regulated exclusively by the federal government and sold through the National Flood Insurance Program (NFIP). Instead of one point of contact for all damages suffered, homeowners with flood insurance must file claims with both the NFIP and their homeowners insurance company and wait for adjusters to determine how much damage came from wind and what percentage came from flood. When the roof has been ripped off your home by 150 mph winds, figuring out what water came in through windows and doors and what water came in from the sky is clearly absurd. It might even be comical if it didn't destroy peoples' lives. Mercatus Centre Scholar Emily Chamlee-Wright refers to this as the "flood-no flood tango", and the result is major delays in rebuilding as policyholders wait for their insurance payment. Homeowners who don't have flood insurance must wait to see if they will receive any insurance payment.A dual system of insurance creates two other problems. First, it creates an incentive for insurance companies to try to shift losses to the NFIP by attributing them to flooding when they were really caused by wind. Second, it increases uncertainty for insurance companies because federal policy on proving that damage was indeed caused by flood waters can vary over time. Insurers may still end up having to reimburse the NFIP for damage from Katrina that was initially categorised as flood damage if future investigation proves the damage resulted from wind and rain before the levees broke. The NFIP has its own problems as well. The program was created in 1968 as a means to reduce the nation's vulnerability to floods. However, per capita flood losses in the US, adjusted for inflation, are now twice their pre-1968 levels. And despite the fact that NFIP policies are priced below actuarially sound rates, surprisingly few people in flood plains actually buy insurance. The NFIP has just over 10,000 policies in force in all of Iowa, and Mississippi had some of the lowest rates of purchase of insurance of any areas along the Gulf or Atlantic coast prior to Katrina.To some degree, this is the fault of poor communication about the likelihood of flooding. Residents who live behind levees, like many homeowners in New Orleans' Lower Ninth Ward, are told that they are outside of the 100-year floodplain and do not need to buy insurance. But this determination depends on the assumption - foolish in retrospect - that levees and floodworks were built up to specifications and would therefore protect the area. Clearly, this was not the case.But, more importantly, insurance agents don't have an incentive to sell appropriate flood policies. All mortgage companies require mortgaged properties to carry homeowners insurance, but few require flood insurance for homes outside what FEMA designates as "A" zones - the 100-year floodplain.The NFIP has, by most measures, been a failure. Not only has it not reduced flood losses, but it has created uncertainty for both homeowners and insurers, slowed down recovery efforts after disasters and left the taxpayers holding the bag. Lawmakers should seriously consider Nationwide's proposal as a means toward moving flood insurance out of the public sector and towards more sensible, single-policy hazard coverage for homeowners. In order to move to an insurance system that works - one that provides actuarially fair rates, gives homeowners the peace of mind they want and doesn't leave taxpayers on the hook - policymakers would be well-advised to consider Nationwide's proposal. Just as we don't have health insurance that covers everything besides, say, broken limbs, or auto insurance that excludes collisions with red cars, it makes no sense to separate flood damage from other damage.