Monday, March 31, 2008
I find the arguments supporting the prohibition wanting:
Consumer safety? I don't believe that there is a rash of fires, explosions and injuries in the other 48 states that allow self-service gas.
Mothers with babies? (Why is it always mothers, what about us dads?) First, the many times when I was living in Colorado, schlepping babies and getting gas, I never once had a problem. Second, you could still mandate at least one full-service pump, though I think demand will be so weak that this will end up being mostly unused - which is why you rarely see full-service anymore in the self-service states.
Important for employment? You have got to be kidding, right? Oh, no? OK, well you can still tell gas stations they have to employ so many people per pump, etc. Sound absurd? It is! And no different than the prohibition on self-service gas. Why not tell all retail outlets that they have to employ a minimum number of people and eliminate all unemployment in Oregon?! Why did anyone think of that? Because doing so with either force wages down or (especially with a high minimum wage) eliminate some employers altogether likely lowering overall employment.
I am sure most of you are much more level headed than I about this issue, and perhaps I have it all wrong and this, in fact, is a precious quirk of Oregon that you all cherish. State Rep for Corvallis Sara Gelser seemed to think so when I asked her to please introduce legislation to change the law (she refused saying something crazy about mental health care and child welfare being more important - what is more important than letting me pump my own gas?).
So let me know what you think - vote!
Thursday, March 27, 2008
This beer reminded me a lot of Abita products: mild and nondescript - very timid by Oregon standards. Being early in the microbrew revolution and having a competitive environment for brewers I think palates in Oregon evolved quickly and were also pushed by brewers experimenting with bigger and bigger beers as a way to get noticed. What we have arrived at in Oregon then are very intense, hop-forward beers as a signature style. I notice how far we have departed from the rest of the US and the South in particular when I taste a beer like Yazoo Pale. It has almost no hop aroma, pours a very light caramel and has very little flavor. Yuck.
To an economist, having such distinct regional styles makes sense when you think about the challenges of transportation and distribution. Tastes have not homogenized (and thank goodness for that). But you can buy Yazoo, Sierra Nevada, Bridgeport, etc. all for the same price, so this theory seems perhaps a little suspect. With all of these choices, why have tastes not started to converge? I think one reason is that a big part of the success of microbreweries comes from consumers who like to identify with their own regional breweries. I witnessed this as a graduate student when some friends of mine started the Ithaca Beer Company. The initial beer was pretty terrible (and contract brewed in Chicago), but local sales were very strong. People really bought into the 'local beer' idea, it was clearly part of their satisfaction form consuming the beer.
As more breweries start up in places like New Orleans and Nashville, it will be interesting to see if brewers get more bold in their recipes and if the west coast style will end up being more common in the south, or will it be a different distinct regional style? But for now a distinct style is completely absent. I think next time I am in Nashville, I'll buy the Bridgeport.
Tonight it is off to Boscos, a local brewpub which I have enjoyed on past visits, let's see if they are pushing the style envelope.
Update: I haven't gone yet, but this is seriously cool: I am a big fan of cask conditioned ales so I looked up what is on cask tonight and I found out that for four week-nights running they are serving the same IPA but with different yeast styles. Yeast is perhaps the most important ingredient in beer and is usually unappreciated by the consumer. This is a great way to show consumers what yeast adds to a beer's character. Kudos Boscos! Does anyone know if Portland brewpubs have done this?
Update #2: Boscos cask IPA was very good, lighter on the hops than would be acceptable in a Portland brewpub, but well-balanced and enjoyable. I wanted another, but forced myself to try something different and then I passed up the Oatmeal Stout for the "Irish Red." Oops. Why would you want to make a copy of Killians in a brewpub? Anyway, when at Boscos, try the IPA.
Is it the responsibility of the media, for example, to get the right message across about probabilities when covering accidents? Suppose a fiery car wreck with a large color picture is on the front page of a newspaper, it is the responsibility of the paper to include many pictures of cars making safe journeys and include in the story anecdotes about many other persons who did not crash? I don’t think so. But this appears to be what home builders, realtors and mortgage lenders are complaining about now in the media’s coverage of the housing market. People think the situation is much worse than it is, they claim, due to negative press attention.
But people make mistakes of inference like this all the time: it is what economists call a small-sample bias. Technically, this is where a set of observations are too few to get an accurate average measure from the sample. Suppose I fly to Nashville and find that it is quite cold on the day I arrive in mid-March. Based on that one observation I might conclude that March in Nashville is very cold. But then the next three days are warm and I realize my inference might have been wrong – I concluded too soon. If I spent many years in Nashville, I would probably be able to make a guess about the average March temperature that was quite accurate.
This is similar to what happens when we read a story of a person loosing money on a house – we tend to give the one observation too much credence. But this works both ways, during the housing bubble, stories of people making a lot of money buying and selling houses caused people to conclude that it was almost impossible not to make money.
Do newspapers have some sort of responsibility to respond to these errors of inference by always pairing one bad with one good story? I think not - it is up to readers to understand the errors they are making.
It is worth noting that it might not be an error to see a single story about someone who made a lot of money buying and selling a house and believe that this informs them about the state of the world. If lots of other people read the story and making and gain confidence which leads to investments in property, then the inference based on this single story might turn out to be correct. It is the story itself that made it so. In this sense news coverage is endogenous to the market it can move the market and market movements can cause coverage to appear. It is all part of the bubble process.
What is the answer? Good economics and econometrics training for everyone of course! Look at data, not anecdotes, when making inferences and try and look at data in ways we know eliminates or minimizes biases. Absent that, try and understand that anecdotes are not good ways to make inferences about the state of the world.
Tuesday, March 25, 2008
The latest Case-Shiller data shows definite softening of the Portland market in January. This happened last year too, though not nearly to the same extent. It will be very instructive to see what happens through the spring and early summer months. Especially after these latest moves to inject liquidity and ensure stability of the mortgage market. This is quite a big drop and my recent confidence is being shaken, but I shall await the spring numbers to come to a final conclusion. It seems as if the supply of home for sale is really starting to grow (as seen below), which could be a bad omen.
Thursday, March 20, 2008
When I was the victim of a burglary at my old apartment at NW 23rd and Glisan in Portland (this was long ago when the area was hip and cool, way before the gentrification that exists now), the thief took the only things of any value in my apartment: my VCR and my SLR camera. These would be absolutely worthless now and the whole endeavor would be pointless.
Over at Marginal Revolution, Tyler Cowan notes that economics actually predicts this phenomenon - through an idea known as Baumol's cost disease (and once again MR steals my ideas, and yet somehow before I write about them - I have to keep the tinfoil on my head!). The basic idea of cost disease it that there are some things that we naturally don't see much productivity gains through time (Baumol's example was a symphony orchestra) while in many other areas (consumer electronics for example) we do. This helps explain why the cost of tuition at a university keeps rising faster than inflation - I am not that much more productive than a professor 100 years ago when it comes to the hard work of teaching and learning (though as a researcher I am, but tuition is reflective of the teaching part and my research is an externality). What is becoming relatively more valuable through time, therefore, are services, like teaching college students economics, but these cannot be captured by a burglar very easily.
So cheap overseas labor is apparently putting burglars out of work as well. What is a poor meth-head to do? Apparently more and more identity theft.
Wednesday, March 19, 2008
Now, some caveats: this was mostly about the "typical American diet" which is heavy in processed foods, dairy and meats and comes mostly from supermarkets - nonetheless, it does give one pause. There is one thing that the two researchers did not factor in: that in walking regularly one improves ones health and thus may need much fewer health care interventions throughout life and this may mean a considerable energy savings. It also brings up another conundrum: farmers markets may definitely be the best place to go and get local produce that is in-season and climate appropriate, but what is better, a local hot-house that grows tomatoes in the winter, say, or shipping tomatoes from a hotter climate? (By the way, the obvious rejoinder, that an Oregonian perhaps should not eat tomatoes in the off-season is not particularly helpful - assuming there is a demand, we need to decide how best to deal with it?)
What is particularly interesting here is that conventional wisdom says that high priced properties will feel the pinch more than lower priced ones as the market is thinner and non-conventional mortgages are harder to come by. But not in Portland it appears.
The second graph is price and inventory trends which is very interesting. Notice that in the last half of '07 inventories shot up and median prices declined in response (as we would predict if median price is a good proxy for same sales prices). This price decline eased inventories but they are now on the increase again - will another price decline follow? Perhaps not if mortgages keep falling...
Monday, March 17, 2008
The canary in the coal mine (which many are suggesting is currently the role that Bear Stearns is playing) may actually be the Northern Rock bank in the UK, which was nationalized after facing a liquidity crisis. While Bear Stearns is not being nationalized, much of their risky debt is. So what is next? I remain relatively optimistic (but that is not saying much) - it appears liquidity is creeping back into the long-term mortgage market (see graph), thanks to the feds unusual recent efforts, but they may run out of ammunition soon. That fiscal stimulus plan is still set to roll out, but now you see why many economists think such measures are usually too little and too late to do much good - and at an enormous expense.
What of the state of Oregon? Well today we learned about the unemployment picture - the unemployment rate is unchanged but the state has shed 1,400 jobs so far this year, which is not a good sign. The leading economic indicators are not looking good either. The housing market is OK relatively in Portland, but is no so hot in Bend and Medford. Even if it were going to remain strong overall in Oregon, there is no natural buffer from the national economy. Decreasing demand for what Oregon makes will hurt. The one bright spot is in exports, where the low dollar will make Oregon products more competitive abroad. But this is only a fraction of the market for Oregon's products.
Buckle your seat belts, this one could get rough...
Friday, March 14, 2008
Thursday, March 13, 2008
She says that the shipping cost would have been borne by the New Yorker anyway - but it is not irrational to care about saving the place you work money. I do it constantly - I am about to fly to Nashville to do research with a colleague at Vanderbilt. The state approved travel agent found a flight for $800. I could have just said yes and been done with it. Instead I did my own search, 'wasted' and hour, and found a flight for $300. I am happier now because I did that, so it was worth it to me (of course my flight is on Southwest and they just grounded almost 40 planes, so maybe I messed up).
This idea that economists believe that individuals are only motivated by money is common. This is nicely evidenced by this letter to the New Yorker about Kolbert's article. In it, the writer exposes the stereotype: "People’s behavior is governed by feelings. No one would even bother to buy a house or a candy bar unless he wanted to. And one important measure of a successful purchase is how you feel about it, damn the numbers." But this describes how economists view behavior perfectly. Economic theory only demands that people's decisions are internally consistent. Lets run with this example. You buy a house because you feel good about it for, say, $300,000. Now, do you feel good enough about it to spend $350,000? $400,000? $500,000? At some point the good feeling you get from owning the house is eclipsed by either the cost outweighing the good feeling or the price exceeding your budget. Aha! So, I can predict that when the house price rises, there will be fewer people who want or are able to buy it.
And sure enough, when economists have looked into all kinds of areas of human behavior you might not think as being governed by the laws of economics, we find behavior that matches exactly our predictions: marriage, divorce, sex, drugs, crime, you name it. My favorite example, written by a friend of mine, is a study of births right around the new year. You might think that there is no way economic incentives could influence that most sacred of human activities: bringing a new life into the world. You would be wrong. You see, if you have a baby born in a calendar year, regardless of when in that year it is born, you get the federal income tax credit for that child. That means that if you are in the ninth month of a pregnancy and due right around new year's day, there is a strong incentive to induce or have a c-section before the clock ticks midnight on December 31st. Sure enough, in the US there is a spike of births in the last week of December and a trough in the first week in January.
As for the irrational behavior uncovered in the book, we are learning all the time that we often make decisions that are influenced by things we might not have expected - for example framing choices (as Kolbert mentions). The strength of neo-classical economics is how flexible the theory is - these are things we can incorporate into the theory, not things that destroy the very foundations. In addition, we are studying these things within the discipline, not ignoring them. We are constantly testing our assumptions as any good academic discipline should do, so this speaks to the health of the discipline, not the sickness. Lastly, much of what we find in laboratory experiments does not coincide that well with observed behavior in real life, suggesting that it is important not to make too much of the magnitude of laboratory evidence - but we should pay close attention to the qualitative evidence. So framing might not be that severe in real life decisions, but it certainly occurs.
It is amazing to me that at a time when computing power and data are such that we are now finding evidence of behavior that corresponds to economic theory in so many areas there should be such a desire to suggest that we have it all wrong, but I think it is perhaps evidence that we all like to think of ourselves as exceptional, not beholden to the same incentives as everyone else. Economics, perhaps people feel, reduces people to simple calculators, which does not coexist with the 'humanness' we all feel defines us.
So let's play what Robert Frank calls the 'economic naturalist.' I'll leave you with an irrational puzzle and you play the economist: In my local Safeway, they constantly have "two for..." sales. The big red tag will say something like "two tubs of salsa for $5" and then in smaller print, "$2.50 ea." So really the sale is just $2.50 per tub of salsa. Why on earth do they bother with the 'two-for' ruse? Wouldn't economic theory predict that it should not matter one wit? Can economic theory explain this? You tell me...
We shall all be kind and speak not of the Oregon State Beavers.
Wednesday, March 12, 2008
I don't know the exact answer obviously, but I can think of a few economic theories that could help explain the phenomenon.
The first is the relatively high fixed cost of starting a brewery the scale of Deschutes, Full Sail, Bridgeport, etc. This takes a sizable investment and the investment won't be made if the size of the market new brewers can carve out for themselves is small. This is in contrast to an industry where fixed costs are very low (blogging for example) and even a very tiny market is enough to justify the small cost.
The second are the rigidities in the distribution and retail sales of beer, some created by law (having to use a distributor) and others created by the vagaries of retail groceries (competition for shelf space). It is hard to get distribution and shelf space which again makes it hard to justify the start-up costs.
[By the way, this makes Ninkasi's strategy very intelligent. By starting as a distributing brewery in kegs only, apparently they can distribute themselves, now that they have established a reputation, grabbing market share with bottles should be a bit easier. Plus the overhead is a lot lower in kegs than in bottles (save for the kegs themselves, which are becoming more and more valuable as scrap metal). ]
The third is the fact that beer is an 'experience good' (something I have mentioned before) which means that people have to actually consume it to tell how good it is. Thus the purchase if an unknown beer carries risk for the consumer and, in general, people avoid risk.
Finally, entry deterrence by established breweries probably plays a role. This has been found in the behavior of the macrobreweries, but might also be true with the littler ones as well. To prevent new entrants, established breweries can do a number of things. They can lower price when a new entrant arrives and even take a short term loss to try and prevent the establishment of a long term competitor. They can also increase capacity more than is necessary. This can be an entry deterrent because it means that a brewery can increase output with no fixed cost whereas a new entrant would have to incur a fixed cost to enter, thus the excess capacity is a commitment device that signals it will compete fiercely against a new entrant.
To sum up then, the first breweries each got a significant market share of a relatively untapped market (a first-mover advantage perhaps), but subsequent breweries have to face high fixed costs, constraints on outlets, struggles of getting customers to try their beer and possibly strategic behavior by other breweries.
I think these theories can also help explain the explosion of brewpubs rather than distributing breweries. Yes, fixed costs are high, but you create your own sales outlet and are competing not just on beer alone, but location, food, atmosphere, etc.
Mmmm, I'm thirsty...
Tuesday, March 11, 2008
According to the Pew Center on the States, a part of the Pew Research Center at Harvard’s Kennedy School of Government, only eight states fared worse than Oregon in a study of government money management practices. They are about half right and pretty much all wrong. They are right that we haven’t faced up to one very big, long standing problem: the extreme volatility of state government’s revenue structure. They are wrong when they confuse policy advocacy with problem diagnosis.
What don’t they like about us? We don’t have a sales tax; our ‘rainy-day’ fund is insufficient; and we have the kicker. All true; but adopting a sales tax and eliminating the kicker would still leave us with a revenue volatility problem, which is the main concern driving the Pew Center’s assessment, and it is too late to build a big enough‘rainy-day’ fund to make a significant difference the next time revenues go south(probably, next fiscal year), even if that were a good idea, which it is not. Moreover, as my previous column noted, we can deal with the revenue volatility problem directly.The great things about Oregon’s revenue structure are that it is fair and adequate.
The Pew Center damns Oregon’s professional money managers with faint praise, saying thestate “employs an impressive number of talented individuals. Unfortunately for them, allthe good intentions in the world can't overcome the state's thoroughly unwieldy fiscalstructure.” Frankly, their accomplishments deserve better than that. Oregon’s Treasury functions (investment management, debt management, and cash management) are among the best in the nation (as judged by their treasury officers in other states and financial analysts in the private sector). Oregon’s budgeters and revenue forecasters are equally respected. The state’s accountants and internal auditors consistently produce the top-rated general-purpose financial statements and a squeaky-clean, government largely free of financial scandal. Much the same thing can be said of many of Oregon’s state agencies and departments, including the often-maligned Department of Human Services,which has recently made dramatic improvements in its money management practices.
Oregon’s fiscal structure is a lot of things, but unwieldy it’s not.
Wednesday, March 5, 2008
So now, how do you pay for such a bridge? Suppose we assign the task to government and the government proposed an equal tax of $300 per person which the citizens could vote on? The vote would fail because both B and C would oppose such a tax given that their benefits are lower than the tax. What about a fee for use. You could charge $500 and only A would buy access which would not pay for the bridge. You could charge $250 and both A and B would buy access and $500 would be raised in revenue, still not enough to pay for it. At $200 all three would buy access and $600 would be raised. This is true, by the way, even if you charged it as a per use toll.
What if you asked for voluntary donations? Would A contribute $500? No, if A knew B and C's valuation, A would know that $450 is enough if the others contributed their full amounts. B would know that $200 is enough and C would know that $150 is enough and a total of $850 would be raised. This is known in economics as the free rider problem. This seems a bit contrived in a three person example, so think about a large number of citizens and the free rider problem is clearer: no one individual feels as if their single contribution will make or break the project so many do not donate (think OPB).
So you see, it becomes a real challenge to provide a specific public good. This is why we must empower government to make the purchase for us and it is also why I am generally opposed to taxes for specific goods, the more you tie taxes to specific goods the harder it generally becomes to provide the socially optimal level.
This brings us to the Sellwood Bridge, seen above, which is well past its sell-by date and desperately needs replacement (hopefully before the current one falls into the Willamette). Public good problem? Sure, the local government is struggling trying to figure out how to pay for it. Free rider problem? Yes, again, some local governments are not cooperating on a fee plan. Then there is this letter to the Editor from Eric Fox in The Oregonian today:
Collect toll for new bridge
A toll would solve every problem and argument out there concerning the problems of the Sellwood Bridge. A toll would pay for a new bridge, provide money for future maintenance and repairs and reduce traffic through Sellwood. We could even build a beautiful landmark span (like the St. Johns Bridge) instead of am ugly utilitarian cement hulk. If a Clackamas County citizen or truck driver (truck tolls should be higher) does not want to pay, he can find another route. Only the people who use the bridge would pay for the bridge.
I hate to be a naysayer, but I don' t think this will work, partly because of the theoretical example above and partly because it is pretty easy to substitute other bridges for the Sellwood.
Finally, here is an interesting new wrinkle. I guess my dad, whose old condo (not in the building in the story but in the yellow one above) can be seen in the picture above, sold at the right time: a year and a half ago.
You are probably saying to yourself, who cares?, the Ivy League is elitist and snobby and all that. That is definitely true of all the other Ivys, but Cornell is cool: it is the land-grant institution of the state of New York and a mix of public and private colleges. Many of the undergrads at Cornell are working-class New Yorkers who get in-state tuition in what must be the best deal in higher education in America. It is definitely neither elitist nor snobby. So go Big Red!
Tuesday, March 4, 2008
So, other than protecting certain lands from development, what can government do? Pigouvian taxes to get the real social and environmental costs reflected in the price of the house is one way, increase the desirability of living closer to the center (transit, investment in downtown areas, incentives for high density development) and promotion of business investment to concentrate jobs in core areas, are others. Other creative ideas out there?