Thursday, August 28, 2014

Economic Politics and Expert Judgements

Commonly, economists, actuaries, risk managers and economic decision makers, generally, are both viewed and view themselves, as disinterested, objective purveyors or economic truth.  They simply call it as they see it or rather, make decisions based on market indicators.

However, individual experts may interpret information differently.  Scholarly literature from the social sciences demonstrates that people, laymen and experts alike, rely on desired objectives, culture, and values for decision making.

Thus, expert judgements reflect the relationship between what the decision maker thinks to be desirable and their expectation of what will be.

In short, an expert judgement is indicative of perspective.  

From the political arena of economic policymaking, two recent examples are found.

One recent example comes from the recent speech given by the Federal Reserve System's Chairwoman Janet Yellen,
In my remarks this morning, I will review a number of developments related to the functioning of the labor market that have made it more difficult to judge the remaining degree of slack. Differing interpretations of these developments affect judgments concerning the appropriate path of monetary policy.
The Chairwoman dedicated the majority of her speech to discussing different economic factors and trends that provide a complex picture of the US economy.  

Following Yellen's speech, the FT reported on the mood of the market,
Ms Yellen’s comments on the level of slack in the US labour market were deemed more balanced than had been seen previously – and the mild sell-off in the equity and bond markets appeared to suggest some disappointment among those expecting her to live up to her dovish reputation. 
In effect, these market interests act as a constituency some were pleased and other's displeased by Yellen's interpreation and her foreshadowing of future decision making.

Another example comes from the voting experience of the Bank of England on appropriate monetary policy.

Disagreement by members of the BoE Monetary Policy Committee demonstrates that the same economic information can render different judgements based on perspective.  In addition, the FT suggests that the voting conflict indicates that BoE has a different perspective on appropriate action given information about the global economy,

This leaves the BoE as the only major monetary authority in the world edging closer to a rate rise. In the eurozone, the European Central Bank has pledged to keep interest rates low for an “extended period of time”. The Bank of Japan has pledged to continue with its quantitative and qualitative easing programme until it hits its newly established inflation target of 2 per cent.  

Expert judgement on appropriate monetary policy or means of obtaining monetary policy goals clearly integrate something other than market factors alone.  

The idea that expert judgements about economic matters are somehow objective and not riddled with perspectives, values, desires, personal experience etc. is a form of "boundary work."  The phrase comes from the social science literature and refers to the efforts and practices by some decision makers or practitioners to exclude other types of interests (examples here and here).

Often, boundary work is used to describe the efforts of technological experts to exclude the interests of the public and regulators.  However, delineation between technological decision makers and societal politics is not possible because the two are part of the same social system.

The above examples demonstrates that expert economic decision making is itself political and social. Therefore, decision making is not predetermined by market forces but malleable based on interpretation of information and decision maker's desires about who's values to maximize and how best to do so.  

Tuesday, August 19, 2014

Miami-Dade's Master Plan

From Flickr: Veronique Lee

Miami has a Comprehensive Development Master Plan that is the holy scripture for all that is Miami-Dade County land management.  It is an immensely powerful document.

Its creation and management is generally guided by Florida Statutes Chapter 163.  But specific goals for the Master Plan are set out by County Ordinance Chapter 2, Article XV, Sec. 2-113.  The purpose of the Master Plan is mandated as  follows:      
It is the purpose and intent of this plan to assure for all people of Miami-Dade County safe, healthful, productive and aesthetically and culturally pleasing surroundings; to attain the widest range of beneficial uses of the environment without unreasonable degradation, risk to the health or safety, or other undesirable and unintended consequences; to preserve important historic, cultural and natural aspects of our national heritage; to maintain, wherever possible, environment which supports diversity and variety of individual choice; to achieve a balance between population and natural and man-made resources which will permit the high standards of living and a wide sharing of life's amenities, and to enhance the quality of renewal resources and approach the maximum attainable recycling of depletable resources. 
Obviously land management in the County is intended to meet a smorgasbord of goals.  Policies like these can be difficult to hold decisions makers accountable too because the goals are varied, perhaps conflicting and vague.  It is easy for a decision maker to point to any part of this legislation to argue the morality of their decision.

 Digging deeper into the Master Plan, one comes across naturally conflicting statements and double-speak.  For instance, the Master Plan's section on Land Use sets out the objective of development that encourages
"contiguous urban expansion when warranted, rather than sprawl."
Sprawl however, is generally synonymous with expansion of urban areas.   Galster et al (2001) define sprawl as,
a pattern of land use in a UA [urbanized area] that exhibits low levels of some combination of eight distinct dimensions: density, continuity, concentration, clustering, centrality, nuclearity, mixed uses, and proximity.  
 Despite the double-speak in the Master Plan objective, it is clear that the concept of sprawl or urban expansion is seen as in conflict with higher order goals developed by the County for the creation of the Master Plan.

Further, there is reason to believe that Miami land management planning is failing miserably at meeting those goals set out in by the Land use objective and the County mandate.  For one, Miami is seen to have one of the greatest degree of sprawl in the country (Galster et al. 2001).    As well, it is seen as one of the most stressful places to live.  It also, is notorious for its risk.

Can Miami-Dade County decision makers be held accountable to the public policies they are intended to uphold?

Update, later today:
Other scientific work by Lopez and Hynes (2006) indicates that Miami has very low sprawl.  Lopez and Hynes use a different process of defining and measuring sprawl.  Both Galster et al and Lopez and Hynes offer lengthy discussions about the difficulty of defining sprawl.

Without a clear definition offered as a policy goal, it is difficult to evaluate if a policy has produced sprawl or not.  This is akin to affordability issues in Florida insurance.  Without a quantitative definition of affordability, evaluation depends on the mood of the public.  

Public discontent about the environment, risk, sprawl, blight etc.  perhaps, has less to do with any of these specific ill defined goals than with discontent about land management practices.

Friday, August 15, 2014

Flood Risk and the Miami-Dade Urban Development Line

Several days ago I wrote about how Miami's climate change flood risk is the latest rational for development.  Much akin to the 1970's urban blight.   I'd like to follow up on the assignment of Commissioner Rebeca Sosa to the Sea Level Rise Task Force.

In 2013, Sosa voted to move the Miami-Dade's contentious Urban Development Line westward.

The switch from Ruvin to Sosa for chair of the Task Force is telling of Miami-Dade County's politics.   Ruvin has long been a proponent of environmental protection and specifically to that pertaining to the Everglades.  His Task Force report advocated for protecting the Everglades.  Sosa, clearly does not feel quite the same about the importance of leaving the Everglades undeveloped.

As shown in the satellite image above, the region is wetlands.  To build on it requires draining the land.  More recent residential development shows the land drained to create "waterfront" properties.  These are high flood risk properties.

The image below (taken from this report) shows regions of Miami-Dade and the era of which they were developed.  The red shows progressive movement into the Everglades.

Florida's entire economy is rests on the assumption that population will continue to grow.  Population is assumed to drive real estate development and jobs.  The below image is frequently reproduced by the Florida Legislature's Office of Economic and Demographic Research.  
However, the wetlands are prone to flooding and impacts from sea level rise.  So, while Florida grows its population and Miami puts them in flood prone areas, the state's flood risk grows.

This puts Miami in an interesting situation.  On one hand it advocate for a perspective of growing flood risk due to climate change.  On the other they seek to develop high flood risk areas while the state attempts to develop an "affordable" private flood insurance market.  These goals are incompatible.

It will be interesting to see how this continues to develop.

Tuesday, August 12, 2014

Are catastrophe bonds worth it?

Earlier this year, the Wall Street Journal had an article on catastrophe bonds.  At the end of the article, they mention that over the lifetime of the market (since 1996) the cumulative total risk is $51 billion.  At Artemis, they estimate the total risk at about $61billion.

The WSJ reports that total losses from natural hazard events is $682 million.  Assuming that some losses came from somewhere else too the total loss over the last 15 years is likely somewhere between $682 and $1B.  The latter is a nice round number so I will use it.

Over the last 10 years, the average yield on catastrophe bonds has been about 8% (dat from same WSJ article).  That is the money paid to investors in the bond.

So, estimated total paid out to investors since 1996 is somewhere around $3B (taking into consideration the $1B loss).

Since 1996, for every dollar an insurer pays the investors to make the risk worthwhile, they have seen a return of about 25 cents (all unadjusted dollars).

Obviously, this seems a good deal for investors.  It is a nice trickle of money from policyholders, to insurers, to the capital markets.  But what are the opportunity costs policyholders?

In recent years, CPIC has offered the largest catastrophe bonds ever.  This year, the bond is $1.5 billion.

With the assumed average 8% yield, if CPIC doesn't end up needing the bond, then it pays investors somewhere around $120 million.  If they do need the bond, they get $1.5 billion.

With at least some possibility that CPIC will exhaust their total claims paying capacity (bonds and all), is there something more productive that can be done with $120 million of policyholder money (aka taxpayers)?

Where resources are limited, such is the case with policyholder pocketbooks, and public policy is to manage risk for the public welfare, policy makers ought to consider if this scenario is an effective use of public funds.

Especially considering that capital markets are fickle- what is relatively cheap and available now can become scant and pricey in a matter of moments.

Would $120 million invested elsewhere have an improved return, reduce the total risk in Florida and thereby contribute to social stability over a longer term?


Mitigation, infrastructure and education come to mind.  I have no doubt there are innovative ideas that could arise if the question was critically examined.

Wednesday, August 6, 2014

Miami, Sea Level Rise and the Resurrection of "Urban Blight"

Harvey Ruvin, the long serving Miami-Dade County Clerk of Courts, has been active in Miami-Dade County politics and environmentalism since at least the 1970’s.  As a county commissioner, early in his career, he sought to restrict building on Fisher Island to preserve the natural environment and create a public park.

At that time, there was a great deal of political controversy over how to develop Miami Beach. The fight was over how best to overcome "urban blight" on South Beach. One side wanted parks and community centered rejuvenation.  The other side wanted high-rise condominiums and tourist centered rejuvenation.

In his memoirs of sleazy South Florida politics, Miami Beach ex-Mayor Alex Daoud, reported what most Miami residents already know: real estate and tourism won the battle.

Perhaps, Mr. Ruvin had the foresight to understand the public costs of basing the area's economy on developing luxury private real estate.  Just a couple of years ago, the county approved $77 million of public funds to replace the water and sewer lines running out to the very private and populated Fisher Island.  

Currently, Miami-Dade County is actively replacing many of its water and sewer lines.  Since their original installment over 50 years ago, population in Miami-Dade has doubled.

Updating infrastructure is part of community living.  The built environment only lasts for so long and needs repair and replacement.  Some argue that nearly all of nation needs infrastructure updates because much of it dates back to around 1950- give or take a decade.

But where public financial resources are in limited supply, as they always are, questions arise about what should get fixed, when it should get fixed and who has responsibility for fixing it.

Today, Miami Beach is again facing tough decisions about its future development.  Current debate uses public concern over sea level rise in much of the same way debate in the 1970’s used urban blight.

Mr. Ruvin is again at center stage of the development debate as chairperson of the Miami-Dade Sea Level Rise Task Force.

The Task Force recently released a report using sea level rise predictions to support the need "not just to update, but in a sense, to reinvent our urban infrastructure."  

Like the Rorschach inkblot tests used by psychologists to understand a patient's motivations and thought processes, interpreting necessary actions from predictions of future sea level rise indicate the underlying interests of those using the predictions to advocate for public policy change. 

The Task Force is not the first to use estimates of coastal risk to encourage specific financial investment and land management practices.  But developing a land management plan that incorporates public concerns about the environment and community well-being is significant enough to warrant its own discussion regardless of concerns about changing flood risk. 

Public funds spent on reinventing infrastructure cannot be spent elsewhere such as, improving county schools, public parks or whatever the public would like to see in their community. 

Still, the sea level rise predictions bring up many important issues, moral and economic, that the South Florida public needs to discuss.  For instance,
·      Given the report’s use of a predicted two-foot sea level rise by 2060, is it reasonable to invest the public's limited financial resources into infrastructure for a city that is effectively (and rapidly) sinking?  
·      If the public is footing the bill for keeping the sea at a safe distance, who should benefit from the investment and what should that benefit look like?
·      What does adopting a larger view of flood risk mean for the equitable distribution of that risk in accordance with National Flood Insurance Program goals?

These tradeoffs are central for political debate.  Yet, they have been easily masked in discussions about flood science as issues of zoning, preservation and community were once hidden behind quick declarations of ill-defined urban blight.

Recently, Ruvin announced that Miami-Dade Commissioner Rebeca Sosa will be taking over his position as Task Force Chair.  Sosa has been active in Miami-Dade County politics since at least the mid-90's and served on several committees responsible for county planning and "revitalization."  Figures as much.