Economist's Notebook: A Green Game Theoretic Conundrum

Suppose you wished to see a greater proliferation and use of 'green' or natural cleaning products.  Would you, as a consumer, do better buying from companies such as Seventh Generation or Ecover that have been solely devoted to green products since their inception, or would you do better buying the green product from the decidedly non-green company?

On the one hand supporting the green companies will hopefully help them get bigger and grab a bigger market share and you would feel reasonably confident that they would stick largely to their green product line since it is such a part of their corporate identity.   This would, in the long run, hopefully lead to their becoming more and more dominant in the cleaning products business and support your original goal.  

On the other hand, you may wish to reward an established company in the hopes that you can prompt them to devote more and more of their energy to green products, will be able to leverage economies of scale and scope to provide a low cost green product that will encourage many new customers to try it.  The risk, I suppose is that they are not really concerned about the greenness of their company but sales and if they can use low priced green products to compete Seventh Generation away, they may just do so and then abandon green products altogether.

Thus was my thought process yesterday when I was confronted with a bottle of Green Works dishwashing soap for $3-something, or the Ecover stuff I usually buy that was $6-something.  I decided to go for the Green Works stuff.  My wife disagreed with me later when I brought it home.  I was convinced by the line of argument that went, if the goal is to get as many people using the stuff as possible, then who cares who makes it, what is important to get the price down to the point where people who only marginally care will switch.  My wife is more persuaded by the whole company ethos argument.  But as an economist I tend believe that good intentions are almost always swamped by market realities, and if you want real change in the habits of American consumer, you have to make it work economically.  Witness the Prius.  It was not until finally a car came along that was affordable, reliable and you didn't have to go the extra yard of plugging in or driving to the Biodiesel station that we saw mass adoption.  

Anyway, apparently the Sierra Club feels the same way I do.  They have taken a lot of flak for their support of Clorox, but I understand where they are coming from.    

Portland's Housing Market: The December CS Numbers

The December Case-Shiller numbers are in and the news is more of the same for Portland. Here is the raw data in graph form for Portland and the 20 city composite:




And here is a sobering picture, it is the average annual appreciation of a Portland home over the last seven or so years. As many near-in neighborhoods are holding on pretty well, it means there is some pretty severe bloodletting elsewhere.



I always wonder, however, what to think of the bloodletting in the new developments. Sure there are people who invested in their own home who see the value go down, but if they are there for the long-haul, this is not necessarily a problem as long as they could afford the original mortgage. Then there are the speculators who bought for investment purposes and it went south, but with limited liability they are not too badly off (one of the reasons for the real tanking of the housing market is the ease at which such investors can walk away).  There were also the liars who used the no doc loan opportunity as a chance to fraudulently obtain a home.  Finally, there are the people who couldn't really afford what they bought but were counting on quick appreciation to allow them to extract equity from the home. These are the folks who are really adversely affected by the downturn and represent people who made a reasonable calculation but extraordinary times dealt them a bad hand. These are the folks I feel for.

There is a bright spot: the Fed is actively working to push long-term rates down and it is working - mortgage rates are insanely low. I think the worm is about to turn. It is crazy to sit on the sidelines too much longer and good deals are plentiful. So, though I have been wrong before, I think we may see some leveling off this spring (remember, these data stop in October).



By the way, as a side note, one of the reasons the Fed is doing this is because banks are still not loaning money like they should be because they can borrow from the Fed at these incredibly low rates (.25%) and buy treasuries that pay about 2%. Not a great return, but incredibly safe and since all other lending seems too risky, that's what they are deciding to do. So the Fed reckons they can buy treasuries and drive the rates down so much that banks will start to switch to the riskier loans. This is quantitative easing.  See a great Marketplace whiteboard video for a nice explanation of this.

Oregon Has a 529 Problem

The Oregonian has yet another front-page article on the 529 debacle.  It raises an interesting question (and on, by the way that I have no idea the right answer to): should the state insure against the losses of the plan for those invested in the conservative fund? 

The reasons not to are obvious: investors take on risk when these investments are made and insurance will only encourage them and the funds to act in a more reckless manner, these are private individuals and their wealth (and the loss thereof) is not a public matter, though administered by Oregon, anyone can participate meaning the state may bail out non-residents, etc.

But a case could be made for at least a one-time insurance payment for these families.  These families are doing the state a favor in some senses - they are being prudent with their money and will therefore be more likely to send kids to college, be less likely to need state assistance to do so and will encourage future families to undertake the same kind of long-range planning that will increase the likelihood that Oregon's children will attend college in greater numbers and need less state assistance.  

Though the actual loss to these families is severe and this could have a measurable impact on Oregon's higher education outcomes, the bigger problem is the fact that the publicity about the losses will be hugely dissuasive and will likely serve to limit participation in these funds.  This is a problem for the state because by encouraging families to invest on their own these families are limiting their reliance on state support and are increasing the percentage of college educated Oregonians.  This is a publicly administered plan and is promoted by the state.

So perhaps a one-time bailout is called for.  Something like 75 cents on the dollar for losses sustained in the most conservative plan.  I realize that this will never happen and perhaps the adverse effects I outline are really not that bad, but it is worth contemplating...I suppose.  At any rate it was a little thought experiment I was running with myself while jogging yesterday and I thought the case could be made for it.  What do you think?

Beeronomics: The 22oz Bottle

[Note: Slow blogging this week as I enjoy the holidays with my family]

As mobile bottlers allow more and more small breweries to sell there wares in retail outlets, the 22oz 'share bottle' has proliferated.  Now in stores in Oregon it is not uncommon to see a selection of these bottles displayed in the refrigerated case.  

But why 22oz bottles?  Mobile bottlers can presumably just as easily handle 12oz bottles, and getting customers to buy a six-pack means you are selling 72oz of beer rather than 22.  

I can think of a few reasons: shelf space is scarce in markets and it is probably easier to get retailers to stock 22oz bottles.  Also, in the space of one six-pack, you could display three varieties.  Finally, the amount of packaging is reduced - lowering costs.

But why do consumers buy them?  They are a pretty bad deal.  Last night I paid $3.39 for a bottle of Ninkasi Total Domination IPA (an amazing beer - in fact, probably my favorite Oregon beer and just one of Ninkasi's outstanding beers so I am delighted they are bottling).  This translates to $11.09 for 72oz - a six-pack.  Ouch.  [But well worth it by the way]  But the thing is most of us don't make these calculations in our head and a little over three bucks for a big bottle of beer seems like a reasonable deal.  Also, there is a nice kind of pre-commitment to opening up a 22oz bottle I suppose: once it's opened you gotta finish it.  Finally, many of these are 'big' beers and perhaps a six pack represents just a bit too much, plus making these big beers are more expensive, so charging $11 for a six-pack might be required should they go that route.  As a consumer, I used to prefer the convenience of the 12oz bottle, but I am beginning to like the 22oz bottle more and more.  Still it is a lot of beer for one person and my wife is not really a beer drinker so I wouldn't mind more sixers.  

Anyway, 'tis the season not to worry about it and just enjoy.   Cheers to the new year!

Economist's Notebook: Education, Part 1

This post will be the first in a series of posts in which I try and distill the frontier of economic research on education.  I have talked a lot about how, as a development economist, I think that a state like Oregon should spend heavily on education as human capital is perhaps the most important investment for future growth.  

But am I right that this translates directly to a high income country?  Is more money the solution or are there other things the state can do to improve the human capital accumulation of its children?  And, should the state focus more on K-12 or on higher education?  These are all questions that I realized I did not have good answers to, because I did not have enough knowledge of the latest evidence.  

So in a series of posts over the next few weeks, I hope to focus on some particular pieces of evidence from the economics literature.  Economists do not have all the answers, of course, and bring only one perspective, but economists are particularly good at examining data and teasing out causal links, so I don't claim these to be the last words, just starting points.  

So the first paper I want to introduce to the discussion tries to tackle the very difficult problem of assessing what matters for the quality of primary education.  The difficulty lies in the fact that since families choose to locate in areas in part because of the quality of the school district or a particular school itself, if we see variation in student achievement it is hard to tell whether it is the school that is causing the high levels of achievement or the families.  So, for example, we may see that one school spends twice as much per pupil than another school and has student achievement scores that are twice as high in the well funded school.  The question is whether it is the spending per pupil that is causing the high achievement or that the families of the kids in the better funded school are better educated, wealthier, etc.  Why this matters is that if we see a poor performing school, we might be tempted to say that increasing the per-pupil spending is the answer based on the evidence above.  But we just don't know.  

So how do you tackle this problem?  Well, Rivkin, Hanushek and Kain, in the March 2005 issue of the journal Econometrica use a unique data set from Texas that observes multiple cohorts of children as they move through grades 3 through 7.  This data set allows a very serious examination of some basic questions.  Do schools matter in the achievement of children, or is it all family and peer effects?  Do teachers matter?  Do observable things like class size, teacher education and teacher experience matter?  Finally, if these observables do matter how big are the effects (important if you want to know what to focus on)?   Though these are some pretty basic questions, answers to then have been elusive.  Why?  Well imagine you see that teachers with masters degrees seem to have better performing students than teachers with only bachelors degrees.  You might be tempted to conclude that this means that teachers with masters perform better in the classroom.  But it could be that talented students and their parents seek out such teachers (probably through seeking out well-funded schools that employ such well-qualified teachers in abundance).  Also schools themselves sort teachers and students and often match well performing students to the well-qualified teachers and therefore create a self-fulfilling prophecy.  

How does this data help overcome this problem?  Well by seeing how individual students do through repeated observations over a number of years and by seeing how different groups of students perform in the same teacher's classroom allows an econometrician to control for student heterogeneity and the non-random matching of students and teachers.  Students may have many things that make them better students that are not observable (drive, diligence, intelligence, etc.) but by looking only at individual students through the course of their studies you can effectively control for the effects of these unobservables.  Ditto the non-random matching of students (as long as the policy remains the same through the time of the data).  

So what do they find?  Well, teacher quality is incredibly important.  In fact they find that exposure to high quality instruction can largely offset the disadvantages associated with low socioeconomic background.  However, the quality of teachers is NOT related to their academic background: teachers with masters were not systematically better than those without.  Also, after the initial years in the profession, experience was not related to achievement.  These results help explain a puzzle in the education literature: it is believed that teachers are incredibly important but when we look at things like education and experience of teachers they seem unrelated to student achievement.  So it is true that they are incredibly important, but education and experience are not what characterizes a good teacher. [This poses another puzzle for those who believe in the Spence signaling model, but that is another story...] 

They also find that smaller class sizes do matter, but not as much as teacher quality.  Class size matters most in earlier grades, but other school resources have little to no measurable effect. In other words increased spending on schools seems to matter through the smaller class sizes and in teacher quality, but not in teacher credentials and in other school amenities.  

This research created a policy puzzle, if good teachers cannot be easily identified by their credentials or experience how do you figure out who the good ones are?  It appears that to a large degree, you have to learn their quality by hiring them and observing them.  This argues for considerable flexibility in schools' ability to hire and fire teachers, especially in the first few years of their employment.   Being able to effectively identify the talented teachers and retain them seems to be the first-best solution, but after that, reducing class size seems to be the best way to spend money on student achievement.  I am having a hard time locating recent data on state-by-state comparisons of average class sizes, but the data I can find from the 90s places Oregon near the bottom of all states in terms of class size.  

In the next post in this series, I will look at higher education. 

NOTE: I have updates this post with a link to the article

Grim...

John Foyston on the economy's impact on Portland's restaurant scene.  

Is Going Local an Alternative to Growth?

One of the reasons I became an economist was because of the precision it demanded.  Other disciplines that I explored that addressed the issues I was interested in were too seduced, in my view, by the allure of good sounding ideas without any real evidence or theoretical underpinning suggesting that they would be effective.  Economics is, for some, too rigid for those same reasons, but I appreciated the disciplined thinking economics demanded.  Today, in an opinion piece in the Oregonian is a good example of the kind of sloppy thinking and nice-sounding idea that does not survive real scrutiny in economics.  Unfortunately, I think we are going to see a  lot of this type of rhetoric in these troubled economic times. 

Seth Walker in his earnest opinion piece discusses the plight of an educated but unemployed homeless couple. He claims that 'flawed economic theory' in the form of 'free market economics' was the cause of their plight and the current economic crisis.  Their jobs were, apparently, victims of downsizing and there is a suggestion that globalization and outsourcing could be to blame.  His answer? Investing in local business, but not just local, business that do business with other local businesses.

Now, let me pause here and say that the idea that local businesses should strengthen local ties, source locally when possible, and reinvest locally are all fine.  I have no problem with this idea, nor do I have a problem with the similar idea of local currency.  These efforts can have marginally beneficial effects on local businesses and to the extent that we care about eating locally and the like, it can lead to increased consumer surplus.  But please don't sell these ideas as something they are not, and they are certainly not an alternative to market based growth strategies.  [The piece is a little confused, by the way, talking alternately about not focusing on growth but suggesting that investing locally is the way to economic security]

There are two big problems with this line of argument.  The first is that growth comes from investment and productivity and this strategy offers neither.  The second is that without growth it is virtually impossible to to focus on the "other factors" he identifies such as social benefit and environmental well-being.  

The idea that if everyone were to concentrate on local investment we can make the local economy better is simply wishful thinking.  This is not net new investment in the local economy, just a shift in investment capital (assuming everyone everywhere took his advice) and it represents investments in an ideal (localism) that presumably would lead to lower returns -  since efficiencies from comparative advantage would be sacrificed.  Thus the return on these investments would be lower, future investment would be muted and so on.  So the end result would be slower growth.  There is also no reason to believe that this investment strategy would spur the development of new technology that would promote efficiency gains that could be growth promoting.  In fact, if new capital is not chasing the best ideas wherever in the world they may be, there is good reason to believe this would stifle the development of new productivity enhancing technology.

The suggestion that we shift our focus away from economic growth to 'other factors' ignores the inconvenient truth that all of these other factors are inexorably linked to growth. Without increasing productivity and growth we have no way to combat serious issues such as global poverty, malnutrition, low life expectancy, political disintegration and the environmental degradation emanating from developing countries like China.  With about one billion impoverished people in the world, I have to admit that as much as I like the idea of localism it is, for me, a second-order concern.  It is also quite possibly harmful to the environment.  Sourcing everything locally suggests that we need to make everything locally even if it is less efficient.  Doing so would leave a larger carbon footprint.

So these nice sounding ideas are not much help to the unemployed couple mentioned in the piece, without growth where are their new jobs going to come from? Their story perhaps (if indeed their jobs were outsourced) is one of a lack of government provided retraining opportunities in response to the disruptions increased globalization can bring. 

The ironic thing is that these ideas are not new.  During the 70s and 80s many developing countries, such as Brazil and India, pursued a strategy of 'import substitution' where they tried to develop local industries to provide goods that were being imported from other countries.  The results were disastrous.  Growth stalled and these became lost decades for these countries with real and dire consequences for the millions of the resident poor.  It was not until this strategy was abandoned that these countries have experienced the rapid growth that has allowed them to lead serious campaigns to eradicate poverty, address environmental degradation and the like.  

Not all is rosy about the recent growth of these countries, Brazil, for example, is one of the most unequal countries in the world.  So even though it is now considered a middle income country, it still have a massive poverty problem.  So growth is not the end goal, you can have growth and still see little progress on the other dimensions, but it is the means by which you can achieve these goals.

While it is true that the current economic crisis has revealed some egregious flaws in the way we regulate the banking sector, and the unequal returns we have seen from the latest growth episode in the US is also a problem, to suggest that it has shown free market economics as a whole to be a failure is misguided. It is only by harnessing the power of markets that we can seriously hope to deal with the earths biggest challenges. The key is in becoming better at recognizing the limits of markets and addressing these limitations with appropriate policy.  We need to embrace globalization and free trade but better manage the global economy so that we can tackle these problems - problems that are global, not local.

Snowbound

I am not sure when I'll be able to ski from my front door to downtown again, so yesterday I made it almost all the way down the Springwater trail in Portland (had to turn around to avoid being late for dinner - hopefully tomorrow I can make it).  There is about 10" of snow in my yard and it has reached the point where my car would have trouble going anywhere, chains or not.  But since I can walk to just about anything I need - I have made two trips to New Seasons in the last two days - and classes are over for the term, I can just sit back and enjoy the beauty of it all.  We can also walk to a great sledding hill, so the kids are happy.  Strange to see that Corvallis and OSU are without any snow at all given the sheer volume of the stuff in Portland.  

Anyway, here is a picture of the wonderful scene in my neighborhood (this was yesterday actually, it is significantly deeper today).  Happy snow for those who are able to enjoy it.

Beeronomics: Honest Pints in Britain - or - Still Imperial after all These Years

There has been a lot of attention paid to my good friend's Honest Pint Project here in the US as people start to wonder what size glass of beer they are being served. Now from the UK comes this tidbit: after a battle with the bureaucrats in the European Union, the Brits won the fight to keep the imperial pint. Doing so preserved an essential part of their culture: to drink an ungodly number of true imperial pints in one sitting. [I honestly don't know how they do it - I was once in Heathrow Airport in the early morning in the international departures lounge watching a group of English holiday makers down beer and each had about 6 empty pint glasses in front of them, and they hadn't even left yet for their vacation! Truly astonishing, and pity the poor Spanish who have to put up with the louts. Me mum's English so I know of what I speak.]

From the BBC: "Innovation, Universities and Skills Secretary John Denham, who is responsible for national weights and measures, was delighted. He said after the European Parliament vote: 'People in Britain like their pint and their mile. They should be able to use the measures they are most familiar with, and now they can be sure that they will continue to do so. '"

I have two comments. First, why don't we label the glassware used in bars so we know what we are being served? Second a minister of innovation, universities and skills?!? How cool is that title? Of course, that the secretary of I, U and S is involved in the imperial pint fracas kinds puts lie to the title, doesn't it? Still, it doesn't seem like such a bad idea to institutionalize the idea that a country should have a coordinated approach to education and research and development.

Ah well, its Friday, so cheers! Have a good weekend.

Is Investing in Weatherization a Good Stimulus Plan?

An editorial in The Oregonian this morning touts a plan proposed by Joe Cortright to invest in weatherization of private homes as a way to stimulate the economy.  But is this really such a good idea?

Sure weatherization is good: saving money on energy costs and dependence on fossil fuels, reducing the carbon footprint of the state and injecting money into the economy in a downturn are all noble pursuits.  But is this plan the best way to address the very serious economic crisis in the state of Oregon?

The problem with this proposal is that the public goods aspect of this plan is minimal at best.  These are investments in which the costs and benefits are almost all private and thus there is not much justification for governmental involvement.  By contrast, investments in transportation infrastructure, education, and creating an infrastructure for a sustainable energy industry all have very strong public good aspects, the benefits are enjoyed by everyone, not just (in the case of weatherization) the private home owners.  The difference between something that basically replaces private investment and one that adds new public investment is precisely the difference in real stimulus versus little to no stimulus. In economic terms, the multiplier effect of this type of spending, on something that replaces private investment, is likely to be low.   By way of contrast, the governor's proposal to attack deferred maintenance at public colleges and universities has the same attributes of being quick to implement and a strong potential to suck up excess labor supply in construction, but it also represents a large and lasting public goods investment.    

Sure there is a social cost to the use of fossil fuel based energy and this is a problem.  But if you want private home owners to make these kinds of investments there are much more effective ways to do it - tax incentives, for example, or, even better in my view, a carbon tax on fossil fuel-based energy.  It is important not to confuse other goals with the immediate problem of fiscal stimulus in a horrendous downturn in the economy.  There is a way to align the two goals - like the aforementioned investment in sustainable energy infrastructure - but just because something is easy and sounds good, does not make it good economic policy and The Oregonian does itself no favors by not asking the hard questions when analyzing a proposal like this. I am actually fairly surprised that an economist has proposed this because in my view it does not survive the economics litmus test.

What troubles me most is that this is exactly the type of kind of nice sounding policy that becomes politically popular but that is actually damaging in that it stands in the way of better policy options and has the potential of, therefore, prolonging our misery in this terrible economic crisis.

Economist's Notebook: Incentives and Leaves

There have been a few recent news stories about Portland's leaf collection program. As an economist I obsess about incentives and am inclined to believe (much to the derision of other social scientists) that people's behavior is usually most easily understood through the prism of incentives. So it amuses me to see frustrated Portlanders angry with their neighbors about raking leaves into the street.

It is simple really. It costs $1 do bag your leaves and haul them to a collection point that only operates a few hours a month. However, it is free to simply rake them into the street. You are not 'supposed' to do this, but there is no law prohibiting it nor will any fies be levied. So what do you expect.

[In my defense, I may be an economist, but I try to include social responsibility in my utility function so I took two car loads of leaves to the drop-off. However, I did do a little raking of the front yard into the street as well, so I kinda am a semi-scofflaw. But my inner economist really wanted to just rake it all into the street - which shows you why undergraduates who take principles of economics end up more selfish as a result]

But I digress. Fallen leaves are clearly a public goods problem, they make the streets dangerous, clog storm sewers, etc. We could just tax trees to lessen the problem, but we like trees. Mayor-Elect Sam Adams wants the city to consider a Leaf-Tax Surcharge. Hmmm, I am not sure how you collect a special leaf tax, as this would cause people to feel more justified in raking into the street - what you don't want. As this is a general public goods problem, the city should probably start by simply not charging people to drop off their leaves and perhaps have weekly yard waste pick ups with allowances for extra bags.

In the end though, leaves will simply be a city problem that should be thought of as no different than any other street problem: city wide and something that matters to everyone. So trying to niggle with taxes and surcharges is not a good approach.

Detroit and Chapter 11

I have argued in earlier posts that the government should allow Detroit to go into Chapter 11 but provide credit to avoid Chapter 7. The White House and Treasury seem to have come to the some conclusion. This news story seems likely to be a trial balloon, we'll see how it flies with the punditocracy and on the mythical 'main street.'

The Fourth Estate Redux

I have fretted in the past about the decline of newspapers and, unlike some, am not convinced that blogs and on-line media will be able to fulfill the same roll that newspapers play in a democracy.  Anyway, more fuel for my paranoia, Washington News Bureaus are shrinking and disappearing.  The link is to an excellent New York Times article - highly recommended - and addresses some of the issues about why I think that local dailies are indispensable.

Oregon's College Savings Plan Takes a Hit

I have a 529 account for both of my children in the Oregon College Savings Plan.  [Why?  See my earlier post about cost disease - I am sure college is just going to get relatively more expensive and I am trying to prepare]  Luckily my kids are years away from enrolling in college because these funds have taken a hit thanks to the stock markets shedding of value (as they are years off, most of the investments are in stocks).  Surprisingly, however, The Oregonian breaks the news that the supposedly 'conservative' funds (which are supposed to be mostly invested in bonds) managed by Oppenheimer have lost 38 percent of its value!  Holy smokes, that is inexcusable.  These are the funds you switch the money to as your kids get close to enrolling in college to be safe.  There is no problem with returns in the bond market - so what happened - why would a fund manager play games with a fund that no one expects high returns from anyway?   This is bad news for Oregon's higher education aspirations, at the very moment the state is trying to maintain its investment in its kids educations.  It also seems indicative of a real problem in the culture of Wall Street (as if we needed more evidence) where ego and personal reward is more important than the business itself.  

Aw Shucks...

I had stocked up on supplies, the kids schools were closed and we were all ready for the GREAT BLIZZARD of 2008.  At 7 am, no snow, but soon we were assured a tremendous onslaught of the white stuff would descend.  At 10 am a few flurries and some wind.  By Noon, nothing.  A few moments of wind and snow in the afternoon, but essentially nada.  Dang it.  I don't blame Portland Public Schools for closing I suppose, but geez, how could the forecast have been so wrong?

Now I know how most people feel about economists at this point in time (or perhaps in all points in time).    

Slow Economic News Day

Blogging hampered by school closures caused by weather these last two days and looks like tomorrow might be worse. No matter, not much going in the economy these days.

Oh, there are a few notes. First look at this excellent graphic from The Oregonian.
This really reveals the sequence of the contraction in Oregon. Starts with construction and then brings down financial activities (makes sense - mortgages, etc.) and manufacturing and high tech (manufacturing first, now high tech is crashing). Then comes the steep declines in trade, retail, leisure and hospitality.

Here are the rest of today's headlines:

Here it comes: deflation.

Oregon's housing market is wallowing.

And finally the Fed hits the zero interest rate bound.

Like I said, not much happening today, perhaps tomorrow will be a bit more interesting...

Oregon Unemployment Going Over the Cliff...

Graphic from The Oregonian. Enough said...

Detroit

I have said it before in this blog, but why can't the federal government offer a line of credit as a part of a Chapter 11 bankruptcy plan? I am not a lawyer, so don't understand the issues that well, but I do understand that we have this mechanism which is set up to specifically deal with Detroit's situation. The benefit of Chapter 11 is the restructuring of all of the obligations the companies have. The drawback in this case is the worry over the companies ability to raise capital in this credit crunch. So, why don't the feds just act as that type of lender and let the bankruptcy court do its thing (and do away with the micro-managing by the government, especially the odious "Car Czar" idea).

There must be something wrong with this line of thought because it is so obvious and yet not being talked about.

What am I missing?

Uh Oh...

...Powell's is hurting.

New Poll: Oregon's Unemployment Rate

For all you dismal scientists out there, how more dismal can you get than a poll on unemployment? Register your pessimism in the new poll by the end of the year.

The last poll ended up at 68% in favor of allowing self-service gas to 31% opposed. But I suppose now is not the time to talk about allowing gas stations to cut their staffs...

By the way, I only went up to 12%, did I allow enough room for the uber-pessimists out there?

Beeronomics: Krugman, the Nobel Prize and Beervana

So this blog post has been brewing in my head for a while now (rim-shot please), but now that Paul Krugman is in Sweden to collect his much-deserved Nobel, let's think about how his ideas explain Beervana.

[From Paul's NY Times page: The marquee for his talk at the Bagdad - Paul , Beer, Oregon - get it?]

Paul's most influential insights came from the idea that there may be increasing returns in trade. When applied to trade this insight helped explain why we see two-way trade in things like cars and was the principle reason he won the Nobel. But this insight quickly spilled over into other areas as well - for example, why is Silicon Valley still the center for high tech industry given that it is perhaps the most expensive place on earth to do business? Paul's answer has a lot to do with heads starts and learning curves: It may be cheaper to move Silicon Valley to Bangalore if you could do it overnight, but you can't - it takes time to build up the knowledge base and skilled work force and while that is happening, Silicon Valley can compete the nascent Bangalore away. This helps explain that while Bangalore has been able to chip away a little bit at Silicon Valley's dominance it hasn't done that much. This story is half trade and half economic geography. Economic geography talks about increasing returns that come from concentration: part of why Silicon Valley is so successful is because of the close connection inventors, entrepreneurs and venture capitalists have by virtue of being neighbors and part is the concentration of skilled workers to populate the firms.

So what does this have to do with Beervana - Portland (and Oregon's) disproportionate number of breweries and beer drinking? Well the same stories about Silicon Valley can be told here: brewing and beer drinking are both learning processes and ones that benefit from concentration. Brewing takes skill and practice and a there are a lot of knowledge spill-overs that comes from brewers talking and sampling each others products. Beer drinkers have to learn about the ingredients, how they taste and develop a palate and taste for the more robustly flavored beers. So the punchline is you tend to have concentration rather than dispersion and that places that get early starts tend to hold onto that advantage - familiar themes from Paul's work.

So really, beer drinkers of Oregon, this Nobel's all about you! Let's toast to that...

By the way, just to complete the circle - Beervana blogger Jeff Alworth left a comment on the same Krugman blog page that includes the picture above.

Crisis-o-nomics: Gold, Inflation and the US Dollar

While I was in Brazil, a former student sent me an e-mail with this question (sorry for taking so long to answer it):

"I'm curious what your opinion or knowledge is of currency commodities like gold and silver in inflationary or deflationary periods. Does gold or silver really hedge against the risk of inflation by giving similar purchasing power over time while a paper currency is losing purchasing power over time? I've been thinking over some issues revolving around these ideas a lot in light of our current economic situation. It seems as if there is a possibility for some high inflation in the near future. Will the infusion of capital into the market through different means such as the economic bailouts cause inflation? Also, as consumer confidence lowers and international confidence in the dollar is lost - the desire to hold something other than dollars would flood the supply and cause inflation of the dollar, right?"

This is a great and timely question, in fact, Bloomberg just today has an article about the surge in gold prices.

First let's address the question of gold as a hedge against inflation. Before I start with this, let me just say that right now, I am more worried about deflation than inflation. While it is true that loose monetary policy (and it is as loose as we can make it at the moment) could ignite inflation, we generally look at wages as the key channel, and with unemployment going berserk I am not expecting wages to be going up any time soon.

Okay, so there is some truth to the idea that gold has some 'intrinsic' value: it is awfully pretty and malleable so works well for jewelery, it is a good conductor and doesn't corrode, so good for electronics, etc. And there is only so much of it in the world and mining adds to the total stock of gold about 2% a year (from one estimate I have read) so it does not, in general, keep up with average growth. That is to say, there is a fundamental demand for it more than just because it is pretty and there is a limited supply which means that there is a sense in which its value is secure. But one must be careful with this logic, for the demand for gold can fluctuate wildly for many reasons, one of them being investors trying to hedge against inflation. Below is the 30 year dollar gold price graph. Notice that during the high inflationary period of the late seventies gold prices skyrocketed, but they collapsed almost as quickly after Volcker put the clamps on the money supply.
So if you got it just right and bought gold in Jan 77 and sold in Jan 80, you did really well, but if you bought in 80 and sold later, you did not. Another thing to keep in mind is that we have learned many lessons from the late seventies loose monetary policies, and should not ever expect a repeat of that again. Monetary policy for the last 25 years is almost always first and foremost used to keep inflation low and predictable. By the way, notice that gold has risen quite a lot in the last few years, partly because of the huge pools of money looking for outlets, partly because of high industrial and consumer demand and partly because of the relatively weak dollar. So buying now (while the price is already high) does not to me seem like a very good bet. As soon as the panic subsides, people will be looking for investment opportunities and pulling out of gold.

The next question is whether the bailout plans could ignite inflation. Well, in theory yes, but the economic situation is so terrible right now, even though we are talking about potentially billions of dollars being spent, it is still unlikely to do much more then staunch the bleeding. There will come a time, however, when the recovery begins, lots of hiring happens along with lots of new investment and this will be the crucial time for the Fed to keep money loose enough to allow this to happen robustly, but not too loose as to cause high inflation (higher than 3%).

The third question is about whether loss of confidence in the US and in the Dollar will lead to Dollar depreciation. Yes, we should see a loss in the Dollar in general when the US economy goes south, interest rates in the US are near zero so there are better returns elsewhere, etc. But, up until just recently we have actually seen an appreciation in the Dollar. This is coming from the fact that, one, the credit crisis is so terrible, people are hoarding their cash and putting it in the safest place on earth: US Treasuries which are Dollar denominated. And two, that this economic downturn is global, so while the US economy is tanking, so are most of the rest of the major economies in the world. So there really isn't a lot of competition for the Dollar right now.

So, I don't recommend investing in gold if you are worried about inflation and trying to protect yourself from a high inflationary episode. If you want to do this, there are extremely effective ways that come straight from the US government: Treasury Inflation-Protected Securities (TIPS). But, in general I would not be worried about inflation at the moment - I would be (as I am) deeply distressed about the potential for a deflationary episode. I believe we need fiscal stimulus big time and right away.

Economist's Notebook: Public Goods and the White Stag Sign

I am not really sure what the purview of the Historic Landmarks Commission is in the kerfuffle over the University of Oregon's attempt to rewrite the White Stag Sign to read "University of Oregon." From what I understand they are charged with preserving the historic and architectural heritage of Portland - so I guess this qualifies? I am pretty sure they don't think too much about the economics of this type of decision, so I'll try.

This falls squarely in the 'public goods' realm of economics (what luck - exactly what I am obsessed by). Clearly there is a private goods aspect, U of O would like to advertise both the institution as a whole and their Portland campus. This benefits the U of O. But this is one of the most prominent signs in all of Portland and thus is reflects the city as well - and this is the public goods aspect of the sign. The sign benefits the city and its citizens as well. In allowing the U of O to use the sign for their own purpose it represents both a tacit endorsement of the university and influences how the city is perceived.

To the extent that the fate of the city and the fate of Portland State University are intertwined (and I believe they are), allowing the U of O to use the sign damages both the image of PSU as the city's university and the city itself. There are other institutions of higher ed in Portland as well: Reed, L&C (my alma mater), U of Portland, etc., allowing this aspect of the 'public square' to be co-opted by one (yes, still, out-of-town institution) is a bad idea and violates the spirit under which the sign was preserved and made part of the public goods of the City of Portland.

Good Time to Sneak in a Gas Tax Hike?

The downside to lower gas prices: people are driving more. Which is why I always say that if you really want to tackle the environmental consequences of automobile gas consumption and emissions, the ONLY way is through higher gas prices. A tax is appropriate in the Pigouvian sense, and is more palatable right now than when gas was $4 a gallon. It will be $4 a gallon again in a year or two, so let's get the tax in now while we can. Go Ted go!

Public Finance: MLS and Convention Centers

I guess I'll admit at the outset that this post doesn't really have a single, solid point, just musings about two Portland public finance issues in the news in the last day or so.

First there is the convention center hotel project. Now I understand the basics: to attract big out-of-town conventions, it is necessary (it is argued) to have a adjacent big hotel to house conventioneers and potentially have additional banquet and lecture space. Building such a hotel privately is more expensive because private debt is more expensive than public debt, so the idea is to have the city finance the construction and then contract with a major hotel chain to manage the property.

I have lived through just such a project in Denver where they undertook a major expansion/renovation of the convention center and built an 1100 room hotel across the street with public money. Apparently, it has all gone very well: bookings have doubled and the hotel not only pays for the servicing of the debt but actually returns money to the city from excess revenue. I found a Dallas News article claiming that many cities have had considerable success doing these projects.

But does it make sense for Portland? I don't know but there seem to be some major challenges. First, the Oregon Convention Center is small. Really small. Denver enlarged their convention center by 50% before the hotel to assure their ability to attract large conventions. [The American Economic Association's annual conference - a gigantic affair - is going to Denver for the first time in 2011] Second, the competition for conferences is pretty fierce and while Portland in the Summer is a lovely place to visit, it is going to be hard to compete against places like Phoenix (and even Denver) for bookings in the other times of the year. Third, the bond market at the moment has gone haywire and the cost of municipal bonds may be far too high if they can even find buyers. Finally, the convention market may be hit hard by the economic downturn, though I think this will be a couple of years at the most, so by the time the hotel comes on-line, we should be getting back to OK times again.

So the moral here is it CAN make a lot of sense and be a huge boon for the city, both financial and in terns of redevelopment. The area around the convention center in Denver was awful but the renovating of the center and the new hotel rejuvenated the area and attracted new private investment as well. Of course, this was in the downtown core so it was a bit of an easier sell than in Portland. But it is by no means certain that it WILL make a lot of sense.

The second public finance issue in Portland is Merritt Paulson's proposal to remake PGE park for an MLS team and build a new baseball stadium for the (Portland) Beavers.

I have blogged about this in the past. I have two points. One, the view that there will be net positive investment in the city from this does not reveal itself in the data, though it can be an effective way to focus investment (as is the idea for the Lents location for the baseball stadium). Two, the benefits for Portland may not all be pecuniary and there may, in fact, be long-term pecuniary benefits that we don't see in studies of the impact of stadium investment. The non-pecuniary stuff is the exposure, the civic pride and involvement, the utility Portlanders get from having an MLS team. This could be negligible, but it may not. I was surprised in Brazil, the cradle of soccer civilization (sorry England), to see MLS shirts on young hipsters. This may lead to long-term pecuniary benefits just the same way we think of arts and cultural assets in a city. You create a place creative and energetic people want to live and work, you attract businesses and even tourists. I admit, MLS is a very small star in the sports universe of the USA, but I believe it will become huge and worldwide within my lifetime. Merritt Paulson, a smart guy, is betting $40 million on the same thing.

[I do have one HUGE concern: it used to be that MLS had a no-artificial turf policy, but they have abandoned this unfortunately. I hope Paulson is not planning on turf for PGE park, because I, for one, will not pay to see pinball soccer played on turf. It is painful to watch.]

The challenges for this project are similar to the hotel: uncertain economic times ahead, a bad bond market, and questions about the net revenue projections.

I often think that electoral cycles make the government too myopic and this leads to too little investment in the medium and long term economic health of the cities and states that they serve. So I am pre-disposed to think that taking some risks for future investments is a good thing, and I am here as well. I personally hope that Portland can find a way to do both.

Economic Woes Hit Economists Too

The job market for newly minted PhDs in economics is nicely coordinated by the American Economic Association (AEA) which publishes a virtually all-encompassing job openings listing for institutions that have positions to fill.

This year, for the first time (as least that I know about), the AEA is posting a special bulletin of cancelled job postings. It is already long, but is missing many others that I have heard about through the grapevine.

You have got to love the first cancelled job search (as of the time of this post): Senior Risk Modeler - Home Equity Risk, for Bank of America. You CAN'T make this stuff up!

Things are bad all over...

By the way, if you are in the market for an economist, this year should be a buyer's market!

Econ 101: Game Theory and Car Dealers

The Oregonian reports today on the Oregon Automobile Dealers Association request to lawmakers that they prohibit the sale of cars on Sundays. Huh? Why on earth would dealers want lawmakers to limit how they operate? Isn't this the antithesis of allowing free markets to produce efficient outcomes?

Actually, in economics, game theory provides some useful insight into situations in which, when strategic interactions exist, the free market might lead to inefficient outcomes.

Let's try and see how auto dealers might be in just such a situation using the canonical example of the prisoner's dilemma game. Even though the title of the game refers to a particular story told with it, the canonical nature of the game is actually in the payoffs and outcomes. Here goes:

Suppose, for simplicity, that there are only two auto dealers. I shall describe their interaction with a payoff matrix (shown below). The two dealers are Honest Moe's and Crazy Larry's. Their strategies are either to stay closed on Sunday or to be open on Sunday. Honest Moe's payoffs from each of the four possible outcomes is the first number written (let's call it weekly profits) and Crazy Larry's is the second. Thus if both Honest Moe and Crazy Larry close on Sunday they will both get 120 and so on.



So what will happen if they are both left to their own devices? Well if Honest Moe knows Larry will close on Sunday, Moe will stay open because he can get 140 instead of the 120 he would get if he stayed closed. If Moe knows Larry will be open on Sunday, then Moe will open on Sunday because 100 is better than 80. The exactly same calculations apply for Larry. So, no matter what the other does, it is always better for each individual dealer to stay open on Sunday. Thus the outcome of the game is that both will be open Sunday and they both will get 100.

But is this the best outcome for the two dealers? No, they would both be better off if they both stayed closed on Sunday. This would give both of them payoffs of 120. This is the essence of the prisoner's dilemma: individual incentives lead this market into a sub-optimal outcome and thus the efficiency of the free market breaks down.

Just agreeing to stay closed on Sunday won't work, because each has an individual incentive to cheat and open up and get 20 more at 140 than at 120. In other words, the very best individual outcome is the be the only one open on Sunday.  So they need the option of opening up in Sunday removed from their choices and then they can both be made better off.

Whether consumers are better off is another story...

Income Tax and the Current Economic Crisis

A while back I engaged in a whole series of blogs that tried to investigate the question: should Oregon have a sales tax? I learned a lot from that exercise. But due the particular quirks of the current economic crisis it just may be that we are very lucky to have what we have.

I have heard it stated, by no less than Oregon's Chief Economist Tom Potiowsky, that currently Oregon's revenues are in good shape relative to other states thanks to our reliance on income taxes. Contrast this with Washington which relies on sales taxes and is resorting to fairly draconian measures to deal with their budget crisis.

The basic theory is this: right now consumers are retrenching and consumption spending has dropped dramatically, aided in part by falling home values. Unemployment is rising, but not by nearly as much as consumption is falling. So, this time at least, we are fortunate to rely on income taxes and not sales taxes.

Is this theory supported by the facts? Perhaps. The BEAs national figures seems to support it - personal income is stagnating but consumption is plunging.

Of course, new data out today show Oregon's unemployment surging to 7.3% so this trend might not last for long. I don't think state personal income figures are out yet, so we'll have to wait and see.

Of course time can change everything as well, as we recover from this recession it may be that consumption spending picks up faster than incomes. But given the nature of the bubble that burst, it is hard to say. Also, if federal stimulus includes lots of job creation, Oregon might again be well positioned.

Food for thought. Comments?

Oregon Unemployment: 7.3%

From the Bureau of Labor Statistics, Oregon Unemployment Rate:Ouch. This is .6 percentage points higher than the national rate. This represents almost 20,000 newly unemployed in Oregon from September to October.

Note: These numbers are preliminary and are subject to revision.

Wither Saab?

It seems more than likely. GM has not been able to make it viable for the US market. I think the likely scenarios are that some european buyer will take it and will pull out of the US, or that it will just be folded into Opel and assets and the brand will die. Either way, as a Saab owner and enthusiast, I will be sad. What will the professoriate drive?

But the question remains, why on earth continue to focus on Buick and GMC. Buick's audience is dying and serious luxury buyers will look to Cadillac, which GM resuccitated nicely, and GMC is just rebadged Chevy trucks, no? Chevy and Cadillac are the the core of the GM empire (with Opel in Europe), who needs anything else?

Newspapers and Public Goods

On Monday, I received my Oregonian with the notice that, starting with that edition, the Metro section would be cease to exist and would become part of the A section. On Blue Oregon, Paul Gronke see it as a sign that it is time to abandon the paper. This is just another indication of the sad trend of dying dailies. Some see this as the inevitable result of market realities and we should let the market decide how and where people get their news. This is wrong.

Markets only 'decide' efficiently if they are complete and this means, among other things, that all costs and benefits of a product are private. But there are clear public goods aspects to newspapers: they provide oversight of government (the 4th estate); they inform the population which, especially in a democracy, leads to better policy; and they enhance community through their coverage of local events.

So why then don't we offer public funding for such a public good just as we do things like parks and schools? I fear for a state that has virtually no professional reporters covering the government, the community, etc. For such a vital role that we assign newspapers we should be much less indifferent to their decline. And, no, blogs are not a good substitute. Nor are the electronic versions of the papers, because without reporters, the web-sites won't have much news.

It is hard to imagine public subsidies to newspapers given the long tradition of leaving it to private market forces (and vast fortunes were once made in the newspaper business when there were few other ways to advertise widely), but I am beginning to worry that the health of our democracy will suffer if we don't start thinking creatively about how to preserve the papers. Look what cable news has done to public discourse and our democracy...

Perhaps we need an on-line national public newspaper similar to NPR. Partly funded by taxpayers, this would ensure that 'print' journalism would continue and could include, as a big part of its mission statement, local state-by-state coverage. I don't know the answer, but I am worried.

Econ 101: Cost Disease

This provocative picture from the New York Times show just how quickly college costs are outpacing inflation. [Though it is important to note that this is the sticker price, many students get some form of financial aid which reduces their cost considerably]

This type of data is not new and always begs the question, are colleges and universities to blame for not being able to keep costs under control?

Perhaps not. In economics we talk about something called cost disease. Cost disease refers to industries that do not see productivity gains over time similar to other industries. Take a simple example (and the classic example of Baumol who coined the term): A string quartet takes the same amount of time and the same amount of people to perform a piece today as it did 100, 200 or even 300 years ago. Compare that with, say, the amount of time it takes to produce a knit sweater - a fraction of the time on a big mechanical loom than it did 200 years ago. Thus the string quartet has become relatively more expensive over time - in the same amount of time it takes to perform the piece we could now knit 100 sweaters, rather than 1/2 of one we could have knit 200 years ago. So what we would experience over time is the cost of performing by this quartet would vastly outpace inflation. Why? Well, inflation, or the CPI, is a measure of AVERAGE price increases. So industries that have below average productivity gains, like string quartets, will see their prices rice faster than average, or outpace the CPI.

To restate this more generally, over time most industries see productivity gains, some faster than others. How cheap or expensive a product becomes in relative terms is largely a function of this productivity gain. And this works both ways as well. For example, personal computers today are a much smaller purchase as a part of a budget then they were 10 or 20 years ago. If I were to draw a graph like the one above with computing power per dollar versus the CPI, the CPI would be going up but computing per per dollar would be going down sharply.

Universities have economized in many ways (for example the use of computers in registration) but the essential function of teaching and learning is still relatively the same as it was 100 years ago. Sure we have bigger lecture halls aided by microphones and video screens, this helps a little but, but the process of teaching and learning is not conducive to huge productivity gains over time. Since most of a college or university's budget is tied up in professors, there is not a lot of economizing that can be done.

Which is to say that it is natural for university costs to increase faster than the CPI. 30 years ago, an Apple IIE might cost the same as one semester's tuition. Now, you can buy about about 10 desktop computers that are about 100,000 times more powerful than that Apple for the price of one semester's tuition.

The point is that there is nothing necessarily sinister about this increase, and, more importantly, it will NEVER go away. What we must do is accept it, while being ever vigilant to get as much efficiency improvement as possible, and start coming up with better policy solutions for it.

In the end it is all a matter of perspective. For $300 I bought an iPhone that is more stocked with technology than I could have even imagined 20 years ago - that is the payoff to living in the 21st century - I get to pay much less for this stuff. The other side of this coin is that classroom based learning is pretty much the same as always and so I have to pay more for that. The hard part is that what is by far most important in the 21st century is the hard stuff - the education - and not the iPhone.

Credit and the US Auto Industry

We all know how badly managed the US auto industry has been, willfully oblivious to the obvious: that huge demand for big trucks and SUVs were not going to last forever and that fuel efficiency was not the the enemy. If they had spend half the time, energy and money into design, R&D and engineering that they devoted to ensuring protection from Washington they would probably not be in this mess (or at least not nearly as bad off).

We also know that they represent a pretty significant part of the manufacturing base in the US, especially with all of the links to suppliers. This makes a pretty compelling case for the government coming to their aid.

But is their trouble all their own fault? It can be argued that the credit crisis hurts their industry much more than most because of the fact that most auto purchases rely heavily on credit. Since traditional consumer credit sources have dried up (including home equity lines of credit), it is possible for them to argue that they are in a special position as sufferers from the credit crisis that the government allowed to happen.

I don't know how much water this argument holds, but I have been interested that this point is not being made much. One thing is for certain, the US auto market has cratered. Above, from Econbrowser, is a chart of US domestic car sales. Look at how far off are current year sales to previous years. Ouch.

India

I have a particular connection to, and affection for, India, having spent a good deal of time their particularly as a college junior living and studying there. So it was with great horror that I witnessed the terrorist attacks on Bombay and their aftermath. [Yes, I said Bombay, ignoring the Hindu-nationalist inspired name change] I have dined at Leopold's restaurant, I have sat at the India gate gazing at the Taj Hotel, and I have traveled through Victoria Terminus - the train station that was attacked - so this really struck me.

I have to admit, I have never had any faith in the emergency services in India and many times while there have I thought "please don't let anything happen where I would need assistance" because I was quite convinced in the futility of such a need. The police seem hopelessly incompetent and vaguely violent (occasionally resorting to thrashing a beggar with their canes without provocation), the firefighters nonexistent and in general the government seems obsessed with bureaucracy and hierarchy and uninterested in competence. I have stories upon stories of trying to get things accomplished only to be completely stymied by layers upon layers of bureaucratic machinations and endless middlemen.

It came as no surprise to me as a development economist, then, that when there was finally some liberalizing of the commercial bureaucracy the economy skyrocketed. Unfortunately this has not translated yet to other parts of the government. Perhaps this unfortunate event will do the same. India, an ancient civilization steeped in caste and class, is not eager to see this eternal protection of the upper castes place in society disappear - at least not among those upper castes who still control the country. But a new culture of competence must arise. India cannot long sustain its economic progress without addressing its lacuna in governance in other areas. The central government must work to create new mechanisms through which talent and performance is rewarded - regardless of position or caste. I am not optimistic that this will happen quickly though. But I hope it happens quickly enough, because to sustain this society, more economic progress is needed.

I also worry about the success of these terrorist attacks. These will surely test the fragile fabric of what is a magnificent achievement: a diverse, democratic, pluralistic, secular country of over one billion people. It is in all of our interests to assure the success of this grand experiment in democracy. As the new home minister, Palaniappan Chidambaram, said so eloquently to reporters on Monday:

“This is the threat to the very idea of India, the very soul of India, the India that we know, the India that we love — namely a secular, plural, tolerant and open society, I have no doubt in my mind that ultimately the idea of India will triumph.”

I hope and believe it will, but it will take much hard work - and some help.

Bravo!

Good news about Oregon's budgetary priorities in this time of scarce resources. Governor Kulongoski is absolutely right to protect education, something I have blogged about twice in the recent past (here and here) and not just K-12 education - university education and research are critical to success in the 21st century. I would only add that just protecting budgets is not enough, but giving more money for scholarships is a good idea for fiscal stimulus and long term economic growth.

And, by the way, others have jumped on my education bandwagon.

Bravo!

Economist's Notebook: Random Thoughts from Brazil

Some random thoughts I never had a chance or the will to turn in to full posts:

1. GM has a HUGE presence in Brazil, all under the Chevy brand, though almost all the cars they sell are European designed Opels (the German car company which is owned by GM). Unlike most of the crap sold as Chevys here (and mostly fleet sales and to rental car agencies it seems), these cars are relatively stylish and well engineered. One wonders why US auto makers are so content to make great cars for Europe but bound and determined that US consumers won't like them and instead sell their crap to us. GM has awoken to this and has now transformed Saturn into basically Opel USA to widespread acclaim in the auto press. It is time for these companies to consolidate and start leveraging their European designs. But the Latin American presence of Chevy is a very good thing for the future of GM (if there is to be one). Time to jettison all of the other brands in the US and just be Chevy.

2. VW has the biggest presence in Brazil dating back to the days of the Bug and the Combi (which is still made and very common in Brazil - making me wistful for my old bus). Fiat is relatively new, I'm told but now huge as well and the french companies are pretty big. But Japanese and Korean cars are not - they are just now trying to break in. This is curious given the fact that the largest Japanese ethnic community outside of Japan is in Brazil.

3. Brazil is a huge and amazingly diverse country and the three places I have spent time, Salvador, Sao Paulo and Rio are as diverse as California, New York City and Florida (in that order). You just can;t generalize too much about the county from a visit to any one place, and there is still the huge interior agricultural and ranching regions and the Amazon - it is a truly wonderful and wonderfully diverse country.

4. I was told by residents of Rio that though one often takes the admonitions to tourists to be careful in Rio lightly (must be an overabundance of caution one is apt to think), on the contrary, Rio is VERY dangerous and you have to be VERY careful. Hard to imagine living that way and one wonders why it is so hard to fix. A big clue lies in the fact that Brazil is a fairly rich country but one of the most unequal on earth.

5. Sao Paulo has got to be on par with NYC, Paris and London as world class dining spots. Yes, I said London - been there recently?

6. What do you do when land is enormously expensive but labor is relatively cheap? Well in one trendy Sao Paulo neighborhood, a new supermarket decided not to build a parking lot, but offer free delivery to your home.

7. A draft beer is called a "Chopp" and good luck finding anything but pilsners. I did try a Brazilian wine, but Brazil has a long way to go to catch up to the Argentinians and, especially, the Chileans.

Econ 101: External Economies of Scale

Note: I am back in the Oregon after a long trip home from Brazil. Much now to catch up on, but will try and keep the blogging active as much as possible because there is so much to talk about. Please be patient.

The New York Time's website this morning has a lead story with a fascinating headline: "Ford Says It Can Get By if Rivals Survive" Huh? Isn't being having bigger market share the goal of all auto manufacturers? If so, why not hope for your two domestic rivals to go away? Turns out, Ford is worried about something economist's call external economies of scale.

Scale economies are most often talked about as internal to the firm. As firms get bigger they can specialize workers tasks more more (a la Henry Ford) and make them more productive, they can get volume discounts on inputs, they can economize on warehousing and shipping costs, and productivity improving technology has a bigger payoff for bigger firms so they are willing to invest more in developing and utilizing such technologies (welding robots for example), and so on.

But there are also external economies of scale - efficiencies that occur when the entire industry is large. As the auto industry grows, suppliers of parts can also get bigger and exploit their own internal economies. So can the suppliers of raw materials for many of the same reasons listed above. Iron ore miners, steel manufacturers, stamping businesses can all become more efficient with greater scale that a large auto industry and the resulting large demand can provide. Also manufacturers of technologies like welding robots will have an increased incentive to come up with the next iteration of productivity improving technology because the payoff is bigger when there is a larger potential demand. Storage and shipping economies can also depend on the size of the industry.

So it is interesting that Ford believes that these economies will suffer if GM and Chrysler go under given the presence of many other manufacturers in the US (which would surely increase if GM and/or Chrysler went away). Ford also believes that the loss of these economies are more severe than the potential gain arising from market share - probably because the foreign competition is already fierce enough that it doesn't matter if GM and Chrysler are around.

Interesting times...