How Seriously Should We Take the Coase Theorem?

Economist Ed Glaeser, in Triumph of the City, writes:

Cities should replace the current lengthy and uncertain permitting process with a simple system of fees. If tall heights create costs by blocking light or views, then form a reasonable estimate of those costs and charge the builder appropriately. If certain activities are noxious to neighbors, then we should estimate the social costs and charge builders for them, just as we should charge drivers for the costs of their congestion. Those taxes could then be given to the people who are suffering, such as the neighbors who lose light from a new construction project.

Planetizen's response (I took the above quote from them as well) sums up the animosity against Coase: "But should developers be able to build whatever they want by giving a one-time payout to the neighbors? That sacrifices comprehensive, intentional planning for a one-time infusion of cash, and later generations may not thank us."

The fact that it sacrifices comprehensive planning is, of course, precisely Glaeser's point. There are generational issues to consider, and how you price the present value of perpetuities can be complicated, but the proposal shouldn't be dismissed outright. Just further proof that the Coase Theorem is an economic idea that's hard to popularize.

The Dispersion of Hourly Wages

CBO just issued a report, Changes in the Distribution of Workers' Hourly Wages Between 1979 and 2009, that contains some interesting data on the economic return to education (Summary, Full Report, blog post), which is pretty easy to see the in the figure below:

Can we Hope for Stable Democracy in Egypt?

As a back of the envelope guide, here's a quick check. According to Przeworski, et al (1996):

If a country, any randomly selected country, is to have a democratic regime next year, what conditions should be present in that country and around the world this year? The answer is: democracy, affluence, growth with moderate inflation, declining inequality, a favorable international climate, and parliamentary institutions.

More specifically:

Poor democracies, those under $1,000, have a 0.22 probability of dying in a year after their income falls (giving them a life expectancy of less than five years) and a 0.08 probability (or an expected life of 12.5 years) if their income rises. Between $1,000 and $6,000--the middle range--democracies are less sensitive to growth but more likely to die if they stagnate: they die at the rate of 0.059 when they decline, so that their expected life is about 17 years, and at the rate of 0.027, with an expected life of about 37 years, when they grow.

Egypt's per capita GDP is estimated at just over $6,000 for 2010.* Therefore, if the transition goes okay over the next few months and genuine, contestable elections are held in the fall, the prospects for continued democratic rule don't look too bad. This is especially true if the new government is able to tap into the large pool of skilled labor and create the opportunities for entrepreneurship and innovation that their people deserve.

* I have not adjusted the data for inflation. Przeworski et al use annual per-capita income, expressed in purchasing power parity (PPP) U.S. dollars in 1985 international prices, as given by version 5.5 of the Penn World Tables. I simply looked up per capita GDP in current international prices, so the data may overstate Egypt's prospects a bit. The IMF maintains the most recent data, available here.

What can we know?

Recent events in Egypt (#Jan25), Tunisia and Jordan remind us that human behavior makes prediction possible over certain dimensions, but not others, such as time. To wit, here are a few great minds on the inevitability of the Egyptian protests:

“The events of the past two weeks in Egypt were not a surprise, but no one could have predicted the timing,” said Osman, one of a few authors whose new Egypt-related books come at a fortuitous time. “A socio-political eruption in Egypt, from within the middle classes, led by the youths, was inescapable."

“I have much to say, and the last chapter in my book talks about my view that neoliberal Cairo under Mubarak is a like a bomb in the tomb of a longer Egyptian history,” AlSayyad wrote in an email. “I predicted in the ‘Cairo’ book, as well as in my ‘The Fundamentalist City’ book released back in November, that it will ultimately detonate. I just could not have expected it to happen so soon.”

Both quotes come from this piece in the Washington Post. And from Twitter, we get the succinct (@auerswald):

How predictable was #Egypt #Jan25? Put heat on, water will boil. Seal lid, pot will explode. Moment unpredictable. Outcome not.

Also see this longer post, which includes a great quote by Gregory Bateson. The CIA expressed similar views (Wired). The inevitability of human freedom has become a resurgent topic given recent events and it is a theme we will explore in future posts.