Today's NYT has an editorial by Todd G. Buchholz, a former economic advisor to the White House. He has the first well-reasoned critique of PAM and the "terrorist futures" market we've read thus far. Unlike the other analysis in these past two days, this is grounded in some solid thinking. In short: the market is a fine idea, but won't work because it must be "deep and liquid," meaning that there must be a high transaction volume and many participants. There are also problems with the frequency of terrorist attacks: they're so rare, that the market would have difficulty speculating on them. There are also unpleasant side-effects: if the payouts are too large, there's incentive to fix the market. In his words, "market manipulation can show up not as a forged buy order but as a bullet." He also asserts that the market is, in fact, unnecessary. The existing financial markets already incorporate PAM-like analysis: South African instability, for instance, is reflected in the trading price of the rand. It seems that a more sophisticated analysis of the markets already in place would yield similar results, without the attendant problems. His final point is the most important: that DARPA, which collaborated with the Economist Intelligence Unit on PAM, is doing its job. It was chartered to come up with groundbreaking ideas exactly like these. In the past, DARPA has given us revolutionary technologies -- not the least of which is the Internet. We should be encouraging this, and it's important that yesterday's Congressional rebuke doesn't stifle its initiative.

Admiral Poindexter's Office of Information Awareness is at it again. Fresh from the sound drubbing they received in Congress for their Orwellian information-collection program, they have a new tool they think will help predict terrorist events. Rather than collecting more information, which the intelligence agencies are already drowning in, this program intends to improve the analysis of that information -- which is where the agencies have been failing. The tool is the Policy Analysis Market. It's a joint venture between the venerable Economist Intelligence Unit and the Defense Advanced Research Projects Agency (DARPA). This should be familiar to anyone who's played the Hollywood Stock Exchange. It is a futures market for events in the Middle East. Traders place bets on when certain events occur, collecting money when they're right and losing money when they fail. The idea is that markets can be excellent indicators for future events -- each analyst's individual opinion is aggregated with the others, creating a consensus which is represented by the price. The OIA wants to harness the analytic power of this market by opening a seperate market for terrorism futures, alongside the markets for stability and military posture in Syria, Iran, and elsewhere. "Spending taxpayer dollars to create terrorism betting parlors is as wasteful as it is repugnant," say Senators Byron Dorgan (D-North Dakota) and Ron Wyden (D-Oregon). What's more, they feel that the market would actually influence the terrorists themselves -- if they know when the market thinks the next attack will be, they will obviously try to beat the oddsmakers. They have a fair point, in that individual actors can more easily subvert the predictions of a theoretical market than any single person could influence the price of gold. Their revulsion at the premise of the market itself, though, is short-sighted. The market would provide a valuable service, in the form of relatively accurate predictions. They are not revolted by the other markets, like the date of the overthrow of the Jordanian monarchy, and it is foolish to say that a terrorism futures market is qualitatively different. Other comments from the Senators belie the other forces at work: "They still didn

Wired New York, via No Data Source, has a running discussion on rent controls in New York. Briefly: New York's rent controls are distorting the market. Single widows hold on to three bedroom apartments, causing artificial shortages. Apartments allowed to float must subsidize the rent-controlled units, creating exhorbitant rents. The example of Cambridge, Massachusetts is held up as an example of the healing power of the marketplace. An MIT study cited in almost every piece concludes that after deregulation, housing investment increased 20%. The Cambridge model is presumably the best-case scenario. New York would lift all controls at once, and allow the market to sort itself out. Investment in new housing would increase 20%, with a commensurate increase in available units, driving down the price of apartments. Retired widowers would no longer knock around in three bedroom apartments. Everyone has presumably won: the construction industry is happy with the new investment, landlords now have the flexibility to respond to market pressures, and tenants benefit from new, cheaper apartments. Floating the 1 million rent-controlled units would certainly eliminate distortions in the market, but is this really what we want? Markets are excellent for delivering the best price-point to the widest possible audience, but terrible at instituting social policy. There are other forces at work, however, which complicate the rosy scenario. At the heart of this deregulation-induced revitalization is the increase in supply. This means more people. Many more people, which is exactly what New York doesn't need. This assumes, of course, that the 20% increase in housing investment is devoted to new construction, which is unlikely. It is far more likely, that new investment would be devoted to upgrades. New construction is messy and complicated. It is far easier and more lucurative to add hardwood floors, bay windows, and dishwashers to dilapidated apartments, and charge a higher rent for a tidy and newly unregulated profit. This does nothing to relieve the housing shortage, which is the presumed goal of deregulation. Lo and behold, this is exactly what the MIT study claims will happen: deregulation creates better apartments, but does not increase their availability. Better, more expensive apartments come at the cost of driving out lower-income tenants, creating homogenously affluent neighborhoods. Deregulation, it seems, works nicely for the construction industry and landlords, but works to the detriment of lower-income tenants. Under the current system, these tenants are subsidized by more affluent residents and an unpleasant market inefficiency. Faced with a choice between this, and a Manhattan reserved for old- and new-money New York Brahmins, we would gladly accept the former.