Thursday, December 31, 2009

R.I.P. '09: The Year When Bad News Was Good

For example, this is what we consider good news these days:

The number of newly laid-off workers filing claims for unemployment benefits dropped unexpectedly last week, another indication that the job market may be healing as the economy slowly recovers.

The Labor Department said Thursday that new claims for unemployment insurance fell by 22,000 to a seasonally adjusted 432,000, the lowest since July 2008. That was much better than the rise to 460,000 that Wall Street economists expected.

The four-week average, which smoothes fluctuations, fell for the 17th straight week to 460,250, the lowest since September 2008, when the financial crisis intensified. The crisis led to widespread mass layoffs, which sent jobless claims to as high as 674,000 last spring.

Economists closely monitor initial claims, which are considered a gauge of the pace of layoffs and an indication of companies’ willingness to hire new work

The number of jobless workers continuing to claim benefits dropped 57,000 to 4.9 million, also better than the increase that analysts expected.

And it is good news for sure, but it is depressing that it is.

This is the traditional day to look back at 2009 and sum it up pithily, but I have no time so I'll pick my favorite summary from an economist much smarter than I: Joseph Stiglitz.

The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world. The world has also learned some valuable lessons, though at great cost both to current and future prosperity - costs that were unnecessarily high given that we should already have learned them.

The first lesson is that markets are not self-correcting. Indeed, without adequate regulation, they are prone to excess. In 2009, we again saw why Adam Smith's invisible hand often appeared invisible: it is not there. The bankers' pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well. It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions of dollars to bail out the banks.


The second important lesson involves understanding why markets often do not work the way they are meant to. There are many reasons for market failures. In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay. Moreover, when information is imperfect, markets often do not work well - and information imperfections are central in finance. Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world.

The third lesson is that Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit - raise taxes or cut expenditures - to "restore confidence." But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence - most recently when the International Monetary Fund insisted on them in East Asia in the 1990's.

The fourth lesson is that there is more to monetary policy than just fighting inflation. Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets. The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.

The fifth lesson is that not all innovation leads to a more efficient and productive economy - let alone a better society. Private incentives matter, and if they are not well aligned with social returns, the result can be excessive risk taking, excessively shortsighted behavior, and distorted innovation. For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them - both economic and social - are apparent and enormous.

Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership - with the consequence that millions have lost their homes, and millions more are likely to do so. Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable. As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.

We will soon find out whether we have learned the lessons of this crisis any better than we should have learned the same lessons from previous crises.

Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010 we may find ourselves faced with another opportunity to learn them.

Well-said. Whatever my defense of Bernanke, the real judge of his tenure will be how well he gets the next bit right: the regulation of the banking industry. We have learned a lot about the nature of financial markets and their failures - now we need to get the fix right. So this is my main hope for 2010.

Tuesday, December 29, 2009

Portland Home Values: Case-Shiller October Numbers

Portland home prices stayed pretty much stable in October and have essentially stayed stable for the whole of 2009 after eroding significantly in 2008.

The graph below is of the raw data and in it you can see the run up in values, the fairly sudden erosion and the bottoming out. The big question is, of course, will this bottom hold? I think that it will, but only if the economy doesn't go into double dip recession, which I think is unlikely.

Here is the graph of the year over year change in monthly home values since 2006. As is evident, we are still down but trending up.

The new homebuyer tax credit was certainly a part of the story but the traction that this had is likely to subside due to seasonal reasons, the cost of financing which is on the rise and the declining population of people who can take advantage of the credit. I imagine that values could decline in the winter months a bit but I think the substantial erosion is over. That said, if unemployment stays high, the erosion will start anew.

Monday, December 28, 2009

Good Business...

...sell crummy securities back by really crummy mortgages to your clients and then bet against the same securities to make sure it is just the clients that take the fall!

On the one had this just makes sense - the firms need to manage risk while individual investors are often looking for exactly the high risk-reward investments. On the other hand it just feels slimy.

What strikes me is how they didn't even get close to covering their losses, so either they didn't think it would get so bad, they could find enough people to cover the other side of the hedge, or they worried it would look suspicious and erode their very profitable securities businesses.

Tuesday, December 22, 2009

Soccernomics: PGE Park Plans Released

The renovation plans for PGE Park have been released and it looks pretty darn great as a venue for soccer. Sadly, my worst fears have been realized and they will be playing on plastic. This means I will only be an occasional ticket buyer rather than a season ticket holder. I understand that the use of the stadium by PSU and high school football is a constraint, but high school football really has no business in the stadium (surely it is far too expensive to use it for this purpose?) and occasional high school football and the regular PSU football schedule can be accommodated as they are in other grass MLS stadiums. Hopefully in a few more years cooler heads will prevail.

But so it goes. I am still very happy that the stadium will have a new and exciting life as a venue for MLS and that the city will have a top flight professional team in soccer to cheer for.

NB: Since it is now a best-selling book, I shall ride the 'soccernomics' bandwagon!

Scroogenomics? The Economics of Holiday Giftgiving

Joel Waldfogel once again pops up at the holidays to tell everyone why they should be giving cash for holiday gifts, after all he is an economist and knows everything, right? [He is also hawking his book "Scroogenomics" as he ties his tired gift giving schtick to the "-onomics" craze in publishing - hopefully Beerononmics will be the next big -onomics book, once I get around to writing it] Here is his entire book in a nutshell: cash lets you buy exactly what you want so it optimizes the value of gift giving. There, I just saved you $10.

The problem is of course that we get pleasure from giving and receiving gifts, but less so with cash. So when he says, 'well if you like giving gifts, give cash and then I will be able to get just the thing I want, and you get your pleasure and I maximize my utility from consumption,' he is assuming the pleasure from giving cash is the same as the pleasure from giving a gift in kind. Which it isn't. How do I know? Few people do it. In economics we call this revealed preference.

What astonishes me is that Waldfogel misses this most important aspect of the holiday gift giving equilibrium and in so doing exposes the worst of economics: if people's utility from gift giving and receiving were lower than the additional value a gift receiver gets from getting cash, we would have long ago resorted to cash giving. But we haven't and there is no outside force prevent this behavior, so the outcome speaks for itself: people like to give and receive gifts in kind, not cash.

Why this represents the worst of economics is that this type of logic - assuming everyone is deluded and irrational and it takes a smart economist to help them out - is not only insulting, but precisely what we teach our students not to do in social science. The equilibrium speaks for itself, the task is to uncover the mechanism or incentives that lead to the equilibrium.

I think the only way to justify this assertion is through a prisoners dilemma game in which, by acting in our own self-interest, we reach a sub-optimal equilibrium. But what about shopping for and giving a gift in kind is self-interested? Surely cash is simpler and easier. So, no, I think he has it all wrong and instead of calling it the deadweight loss of Christmas, he should call it the lower bound on the value of the utility we get from holiday gift giving. So give away and enjoy - you have this economist's blessings.

Happy Holidays.

Monday, December 21, 2009

American Manufacturing - Hurt By Market Flexibility?

An interesting piece and follow up by Noam Scheiber the The New Repubic:

In my piece today about the ways the American managerial class has failed the U.S. manufacturing sector, I included a slightly elliptical riff about the superiority of managers in other advanced economies: "By contrast, European and Japanese manufacturers, who lived and died on the strength of their exports, innovated relentlessly."

The logic of this comes from the Harvard Business Review piece by Robert Hayes and William Abernathy that I cite. Hayes and Abernathy basically make two points. First, because the Europeans and Japanese rely so heavily on overseas markets, where the prices of their products can fluctuate owing to factors beyond their control, like exchange rates and tariffs, their manufacturers are forced to focus on quality and technological superiority. Technological advantages remain even when an exchange rate cuts against you. By contrast, American companies have always had a huge domestic market, so they could afford to mostly compete in terms of price. (They certainly don't have to, but they can get away with it, whereas the Japanese can't and the Europeans couldn't for decades.) As a result, managers at American industrial companies have tended to think a bit more in terms of short-term costs--ways to undercut the other guy rather than outperform him.

Second, because labor markets tend to be less flexible and hourly labor costs tend to be higher in Europe and Japan (consider Germany's famously powerful industrial unions), manufacturers there couldn't traditionally cut costs very easily even if they wanted to. Whereas American manufacturers could often lower costs simply by lowering wages or axing employees, the Germans and Japanese had to either make their workers productive or have them produce more valuable products. It's not that American manufacturers never did the latter, of course. But some of our foreign competitors simply had no choice, and they were very good at making virtue of necessity.

Finally, an unrelated point: I think some readers are slightly misinterpreting the point of my piece. I'm not saying that the shortage of managerial talent caused the decline of U.S. manufacturing. (I think it played some role, but that role was swamped by more important factors, like the forces of globalization and other countries' aggressive industrial policies.) What I'm saying is that, even if we decided to spend a lot of time and resources reviving the manufacturing sector--aggressively subsidizing research and development, coordinating the supply-chains for new industries, providing credit for new firms, pushing back hard when other countries try to poach U.S. companies, etc., etc.--all of that effort might be wasted if we don't have a competent managerial class in which to entrust these industries.

It is an interesting hypothesis, but I am not sure I am totally convinced. The idea is not new, the report he cites is from 1980, and I am not sure how robust the argument is that it is manufacturing innovation that is responsible for the overall decline in manufacturing in the US - which he doesn't. But I do think that to the extent that you hold on to manufacturing in high cost countries is because you can do something the other countries can't.

But the idea that the rigidities in the European labor market create incentives to innovate is provocative.

Temp Hiring Surging - A Good Sign

For those looking for good news about the recovery, here is a big one: hiring of temporary workers is surging, which is generally seen as a key leading indicator. This is so because businesses will often bring on temporary workers as business picks up before they commit to permanent ones so that they can wait and see whether the new demand will persist. It appears that this time they are waiting much longer than in the past to make that commitment, however, suggesting there is still a lot of nervousness about the future direction of the economy.

The New York Times reports:

As demand rose after the last two recessions, in the early 1990s and in 2001, employers moved more quickly. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for four months, the economy is growing, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.

“When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business.

The rising employment of temp workers is not all bad. However uncertain their status, they do count in government statistics as wage-earning workers, adding to the employment rolls and helping to bring down the monthly job loss to just 11,000 in November. Indeed, the unemployment rate fell in 36 states in November, the Bureau of Labor Statistics reported last week, partly because of the growing use of temps.

The bureau, which issues the monthly employment reports, does not distinguish between permanent and casual employment, with one exception: it has a special category for temp workers, the men and women supplied by Manpower, Kelly Services, Adecco and other agencies.

Last month 52,000 temps were added, greater than the number of new workers in any other category. Not even health care and government, stalwarts through the long recession, did better.

Friday, December 18, 2009

In Defense of Ben

In response to my post yesterday castigating Jeff Merkley for his outspoken stand on Ben Bernanke, a few commentators have stated that they may be willing to accept that his actions post-crisis are commendable, but what about his pre-crisis actions? To this I have four responses:

1. The liberalization of the nations banking laws, most notably the Gramm-Leach-Bliley Act, which repealed parts of the Glass-Steagall Act in 1999 and allowed the merger of commerical and investment banks, and that played a major role in the crisis, were done far before Bernanke's time as a public servant. The lack of regulation of collateralized debt obligations is ostensibly under the SEC's purview, not the Fed's so to pin that on Ben is also misguided.

2. The idea that he should have seen the bubble for what it was and 'popped it' basically suggests that he should have had more foresight than millions of investors that controlled investments in the trillions. For if the bubble really was so obvious to everyone, short-sellers should have popped it long before the crisis. Why didn't they? It is easy for a lot of people to look and say, wow housing prices seem too high - but how do you really know, by your gut instinct?

3. In order to 'pop' the bubble Bernanke would have had to raise interest rates to very high levels which would have given us, perhaps less painful, but very real recession and would have hurt main street for which he would have been roundly condemned - 'who is this guy to decide the economy needs correcting when everything is going fine?'

4. The idea that Bernanke needs to look out for consumers and main street represents a misunderstanding of what the Feds role in the economy is: promote full employment and control inflation. During the real estate boom both were just fine, thank you very much. What he has done since the crisis is to do just that, prevent a depression which disproportionately hurts the most vulnerable in society.

I am troubled by the suggestion in general that we want some technocrat in the Fed who feels that they need to be an economic 'oracle' and act on feelings about the future of the economy. What I think is that we need regulations and reforms that control the ability of any one or few financial entities to leverage up so much and to take on so much risk as to pose a threat to the entire financial system should those risk turn out to be too great.

Thus to damn Bernanke for not doing enough to prevent the crisis is unfair. A good thought experiment for those who do is to ask just exactly who would have been better and what exactly would you have had them do? And don't forget that financial innovation, while run amok in other areas, did manage to get credit in the hands of individuals that would not have otherwise have had access - read the working class and the poor. Yes, it got to the point of over-extension, but it was not just the fat cats on Wall Street that were benefitting.

Thursday, December 17, 2009

Stupid, ignorant, populism...

Getty Images

From the Wall Street Journal:

Sen. Jeff Merkley of Oregon became the first Democratic member of the Senate to announce that he’ll vote against Ben Bernanke’s nomination to a second term as Federal Reserve chairman.

In a statement ahead of Thursday’s Senate Banking Committee vote of President Barack Obama’s nominee, Merkley said Bernanke “failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.”

“For too many years, federal regulators turned a blind eye to signs of an impending financial crisis,” Merkley continued. “Tricks and traps proliferated in the credit card and consumer lending industries. Predatory mortgage loans exploded, fueling an unsustainable housing bubble. Regulators lifted rules requiring banks to keep adequate capital, and a laissez-faire approach to securitization, derivatives, and proprietary trading encouraged excessive risk-taking on Wall Street. As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.”
Never mind the fact that Bernanke has never worked on Wall Street, comes from a family that ran a small business (on Main Street no less) and, oh-by-the-way may be THE reason we did not have a global collapse of the banking industry that would have left main street mired in depression for years thanks to stunningly bold and swift action. To lay the blame of all of the excesses of Wall Street at his feet is just plain stupid, to accuse him of acting in the interest of Wall Street and in so doing hurting Main Street is just plain ignorant, and to do both in this manner is crass populism. What I would like from my Senators is leadership not pandering and political theater.

For shame.

NB: It appears to be playing well to the intended audience. Interesting that lefties that understand economics, like Krugman and DeLong, support him and understand his contribution.

Wednesday, December 16, 2009



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Two Bits of Good News

1: New residential home building permits are up - this is a classic 'leading indicator' (though it is not at all clear that we need new homes at the moment in the US) and thus a good sign about the direction of the economy for 2010.

2: Core inflation was essentially zero. So after yesterday's scare about the PPI, the fear that inflation concerns would motivate the Fed to tighten monetary policy has now subsided.

Tuesday, December 15, 2009

Economic Recovery: Good News / Bad News

Data released by the fed today suggest that the recovery, while slow, is starting to get some traction as industrial production rose 0.8 percent in November. The graphic above shows recent history. This is good news. However, data from New York state showed a strong contraction from recent trends in manufacturing. This is bad news.

Tempering that somewhat we much higher than expected producer price inflation. This can be written off as a energy cost created spike, but if it keeps up the fed will have to reconsider its loose monetary policy. That said, I don't think this by itself will cause that much concern in the Fed - the recovery is still much too weak. So this is not bad news yet, but could become bad if it keeps up.

All in all, more signs of an economy struggling to get real traction in the face of high unemployment and a still weak housing market. Graphics from the Reuters wire story.

Economist's Notebook: Economic Growth - Explained

Sometimes deep economic insight pops up in unexpected places. Over the weekend my oven decided to put on a spectacular show as the main heating element fried, sparked and smoked (and in so doing, spooked the wife). So, with a batch of clay ornaments waiting to be baked, I high-tailed it over to Ankeny Hardware. A great place I had never noticed before (it is between 11th and 12th on SE Stark), Mosee had the parts and the advice I needed and in no time we were baking away again.

But before that happened I had a good time chatting with the owner of the part store/hardware store. He told me about the history of the place and his business model ('It works, I try not to think about it too much'). But then he began to tell me about his philanthropic activities and said this (and I am paraphrasing from memory): "We give 10% of our profits to charity, mostly kids charities because they are going to be paying into Social Security, and I am going to need Social Security, so we better get 'em educated."

I was startled for two reasons: one, this is essentially the topic of my most recent research project; and two, this is a pretty keen insight. Educated people are more productive people and more productive people earn more and thus contribute more into Social Security, so if we fail to invest at the front end, we are going to suffer later. Maybe I should add him as a co-author.

This is, of course, a pretty good example of economic growth in general: it takes abstinence from consumption in order to invest, and it takes investment in order to increase productivity and to grow.

Monday, December 14, 2009

Oregon November Unemployment: 11.1%

Oregon's November unemployment rate was 11.1%, down marginally from October's revised rate of 11.2%, but job losses increased, losing 4,600 jobs compared to Octobers more modest 1,800.

The surprisingly mild US November job loss numbers didn't seem to translate to Oregon. Sigh.

Sunday, December 13, 2009

Paul Samuelson

Robert Spencer for The New York Times

From the New York Times:

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.
In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.

When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson,” said Robert M. Solow, a fellow Nobel laureate and colleague.of Mr. Samuelson’s at M.I.T.
His technical work — especially his discipline-shattering Ph.D. thesis, immodestly titled “The Foundations of Economic Analysis” — taught professional economists how to ply their trade. Between the two books, Mr. Samuelson redefined modern economics.

There is really no other figure in all of economics in the 20th century and beyond that even come clost to the impact Samuelson had. He quite literally transformed the discipline - and for the better, adding the precision and rigor of mathematics to the logic of economics.

Friday, December 11, 2009

Hopheads Rejoice: Hops May Help Prevent Prostate Cancer

USA Today reports that an ingredient in hops, xanthohumol, may help prevent prostate cancer by acting as a testosterone blocker. From the article:

An ingredient of beer may someday help ward off prostate cancer, new animal experiments suggest.
The compound in question, xanthohumol, is found in hops — the bitter flavoring agent in beer — and is known to block the male hormone testosterone, which plays a role in the development of prostate cancer.

"We hope that one day we can demonstrate that xanthohumol prevents prostate cancer development, first in animal models and then in humans, but we are just at the beginning," said lead researcher Clarissa Gerhauser, group leader of cancer chemoprevention in the division of epigenomics and cancer risk factors at the German Cancer Research Center in Heidelberg.

The findings were to be presented Dec. 9 at a conference of the American Association for Cancer Research in Houston.

Xanthohumol is a flavonoid, a group found in many plants, fruits, vegetables and spices. Studies of xanthohumol have shown that it blocks estrogen by binding to its receptor, which may lead to prevention of breast cancer, the researchers say. It's known that estrogen and testosterone receptors react in similar ways.

As always, I bring such good news at perfect moments in which to conduct your own experiments. Quick, run out and get yee to Belmont Station and load up with a crate full of Hopopotamus® and hunker down for the ice storm of the century! Your prostate will thank you (and will probably get a lot of exercise as well as you make many trips to the bathroom - okay, a little too much: getting giddy from the end of the term euphoria).

Thursday, December 10, 2009

Eco-nomics: $1.4 Billion GE investment in Wind Power Coming to Oregon

From General Electric themselves:

NEW YORK, NY -December 10, 2009-GE announced today it has received a $1.4 billion contract from independent power producer Caithness Energy to supply wind turbines and provide services for an 845-megawatt (MW) wind farm project to be located in Oregon. The wind farm, called Shepherds Flat, has received the majority of the necessary government permits to operate and is ready to be built. When completed it will be larger than any wind farm currently in operation around the globe.

The biggest wind farm in the world, wow, I hope the bats will be safe!

Now, of course, the question: would this have happened in the absence of tax credits? And for bonus points, if not, how much is the appropriate credit amount? Tricky questions, which is why the whole tax credit game is hard.

And, hey green wonk types, is it the proximity to hydro, which can more easily adjust to the vagaries of wind power supply, that makes Oregon so attractive?

Economist's Notebook: Dutch Disease

The term 'Dutch Disease' in economics refers to an incident that occurred in the Netherlands: in 1959 a massive natural gas field was found beneath the North Sea. What was supposed to be a boon for the Dutch economy, massive revenues for the exportation of this gas to other countries, turned out to have an unanticipated side effect. Countries that wanted to buy the gas needed the Dutch currency, the Guilder, to pay for it. Demand for Guilders rose substantially and the price of the Guilder rose - the exchange rate increased. Because it now took more Dollars (or Pounds or Deutsche Marks) to buy a Guilder, this made all Dutch exports more expensive on world markets. Suddenly, Dutch manufacturers found themselves at a competitive disadvantage and the manufacturing sector in the Netherlands declined. Whether the causal relationship is as tidy as the story would like is a matter for some debate, but it strongly suggests the possibility that what was supposed to be a boon, ended up being a double-edged sword.

As an aside, the more general 'Resource Curse' story is familiar in development economics for many developing countries economies started with the exploitation of natural resources. But in the developing world concentrated natural resource wealth has also been associated with conflict and concentration of pow: if there is but one gold mine in a country, for example, everyone knows who controls it controls the wealth and thus the country and it often makes for irresistible temptation.

Ed Glaeser, in his continuing series of interesting articles for The New York Times wonders whether a similar "resource curse' can be told of cities as well, after all just look at Buffalo and other former great industrial cities that are now a shadow of their former selves. Does too much of a single good thing retard the development of other sectors?

This is particularly relevant in Portland as a city and Oregon as a state: did over reliance on timber retard the development of other industries, did it distract the state from education as decent jobs were abundantly available for young unskilled workers? Perhaps.

Wednesday, December 9, 2009

Okay, so it's cold...

...but it 'aint this:

This here is one of my former homes, Madison, Wisconsin. Which actually doesn't get that much snow...usually. Days like the ones we are having in Portland are generally much more common: arctic high pressure, bright sun, brutal cold. Actually come to think of it, my neighborhood in Portland looked a lot like this just about a year ago:

Everything is all topsy-turvy! Still, part of me would love to be in Madison right about now...

Tuesday, December 8, 2009

Eco-nomics: Carbon Tax

Why do most economists favor a carbon tax as a way to address the harmful consequences of carbon emissions? Efficiency.

Here is a smart and succinct defense of carbon taxes over cap-and-trade by Ted gayer of the Brookings Institution, it was his testimony before the U.S. Senate Committee on Energy and Natural Resources on December. It is all about the incentives... [HT: Greg Mankiw]

1202 Carbon Tax Gayer

That said, cap-and-trade is a heck of a lot better than nothing, and a pretty good second best: I am not that convinced that the incentives problem Gayer talks about is going to be that important (the plant a tree so you can say you saved a tree - you are still creating one more tree which in this case stands for carbon reduction). Here is Paul Krugman's defense of cap-and-trade:

A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.

The key is reduced carbon emissions, cap-and-trade gets you there and appears to be the only thing politically feasible. The world is getting warmer as we speak, it is time to act.

Oh, and one last thing, if we are really going to address this problem, the wealthy countries are going to have to help out emerging economies.

Monday, December 7, 2009

Job Market for Recent College Grads Improving-A Little

From the Wall Street Journal:

The job market is looking a little friendlier to recent college graduates than it has in past months.

The National Association of Colleges and Employers’ college hiring index rose to 87.2 in November, up from 86.8 a month earlier.

NACE’s monthly poll showed that 28% of the employers surveyed said they are planning to increase college hiring, two percentage points higher than the previous month. It’s a marked improvement over the 17% of employers who said the same thing in August.

The Labor Department’s employment report brought good news as well: The unemployment rate for college graduates between 20 and 24-years-old dropped to 7.5%, down from 8.7% in October.

While the jobless rate is still high for everyone, secondary education has paid off during the recession. The unemployment rate for 20 to 24-year-olds with only a high school diploma hovered at 20.7% in November, only a slight improvement from the 20.9% rate a month earlier.

And don't forget, one of the best subjects to major in when it comes to getting a job and getting paid well is...economics.

Friday, December 4, 2009

World Cup

A moment on a Friday to think about a minor sporting event taking place this summer: the 2010 FIFA World Cup.

The draw was held today and the USA did pretty well, but are paired with the mother country England, which will be a tough match for the new worlders to win.

This theme continues as Brazil and Portugal are in the same group. Normally this would be one of, if not the, match of the group stages, but Portugal have been unusually poor throughout the qualification and are lucky to be in at all.

Spain and any latin american country would also be similar and there they are with Chile and Honduras.

Perhaps I have a theme for my cheering: go new worlders!

Eco-nomics: Wave Energy in Oregon

From the New York Times, a story on efforts to get a wave energy project going in Oregon:

Oregon is moving ahead with plans for the nation’s first commercial wave energy station.

On Friday morning New Jersey-based Ocean Power Technologies announced that it has contracted with Oregon Iron Works to start building what it hopes will become a 10-buoy test system in the waters off Reedsport, Ore.

“We’re thrilled to be underway,” said Mark Draper, O.P.T.’s chief executive, in a telephone interview before the announcement. “We hope this is just the beginning of a new phase in capturing a major source of renewable energy.”

Mr. Draper said that the first buoy is expected to deploy in a year. Two years after that, nine more buoys should go into the water. The fully deployed, $60 million system is expected to have a capacity of 1.5 megawatts — about half that of a single giant wind turbine (though the waves should be able to provide plenty of power around the clock, unlike the intermittent wind). Mr. Draper said his company expects to develop a much larger wave farm nearby that could have as many as 200 buoys.

The project will sit 2.5 miles offshore, and connect to a Bonneville Power Administration substation. It is being paid for with a combination of funds from O.P.T., as well as federal dollars, Oregon tax breaks and money from an electric company, PNGC Power, which has agreed to purchase the power for its customers in Douglass County, Ore. Mr. Draper said that he hoped to sell the power at 15 cents per kilowatt-hour — which, he said, is comparable to other renewables except for wind (which is cheaper).

However, getting working wave-power projects into the water is no easy feat. A wave-power device from another company, Finavera, sank off the Oregon coast two years ago. In California, state regulators last rejected a wave power project (also Finavera’s), saying that the technology was “pre-commercial” and that the “contract price is not reasonable.” The world’s furthest-along wave project, off the coast of Portugal, ran into financial difficulties earlier this year.

US Unemployment Falls to 10%

The US unemployment rate fell last month to 10%, but the headline number is not the good news, the really good news is that the entire US economy shed only 11,000 jobs. Compare this to January when the US economy shed over 700,000 jobs to get a sense of the scale of the thing. The Oregon economy alone shed 23,000 jobs in February.

But this is the dismal science so it is worth noting two things: the stimulus is at its full effect right now and will dissipate and producers are catching up after drawing down inventories but catching up to a new lower overall demand than before.

But this could signal that we have finally reached the most important turning point of the recession but I'll make that call when the jobs number actually turns positive.

Wednesday, December 2, 2009

Education Causes Growth

Two new papers by Hanushek and Woessmann provide powerful new evidence of the causal link between cognitive skills and economic growth:

IZA DP No. 4575

Eric A. Hanushek, Ludger Woessmann:

Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation

We investigate whether a causal interpretation of the robust association between cognitive skills and economic growth is appropriate and whether cross-country evidence supports a case for the economic benefits of effective school policy. We develop a new common metric that allows tracking student achievement across countries, over time, and along the within-country distribution. Extensive sensitivity analyses of cross-country growth regressions generate remarkably stable results across specifications, time periods, and country samples. In addressing causality, we find, first, significant growth effects of cognitive skills when instrumented by institutional features of school systems. Second, home-country cognitive-skill levels strongly affect the earnings of immigrants on the U.S. labor market in a difference-in-differences model that compares home-educated to U.S.-educated immigrants from the same country of origin. Third, countries that improved their cognitive skills over time experienced relative increases in their growth paths. From a policy perspective, the shares of basic literates and high performers have independent significant effects on growth, and the estimates suggest that the high-performer effect is larger in poorer countries.

IZA DP No. 4576

Eric A. Hanushek, Ludger Woessmann:

Schooling, Cognitive Skills, and the Latin American Growth Puzzle

Economic development in Latin America has trailed most other world regions over the past four decades despite its relatively high initial development and school attainment levels. This puzzle can be resolved by considering the actual learning as expressed in tests of cognitive skills, on which Latin American countries consistently perform at the bottom. In growth models estimated across world regions, these low levels of cognitive skills can account for the poor growth performance of Latin America. Given the limitations of worldwide tests in discriminating performance at low levels, we also introduce measures from two regional tests designed to measure performance for all Latin American countries with internationally comparable income data. Our growth analysis using these data confirms the significant effects of cognitive skills on intra-regional variations. Splicing the new regional tests into the worldwide tests, we also confirm this effect in extended worldwide regression! s, although it appears somewhat smaller in the regional Latin American data than in the worldwide data.

Economist's Notebook: Tipping

I was working at the OSU Portland Center offices yesterday and decided to lunch at the nearby Kenny & Zukes. When my credit card receipt came I encountered something new: a handy-dandy guide to help me calculate an appropriate tip. (Blurry photo provided above) Tipping after a meal is a well-known economic paradox: if you are not a regular there is no incentive to reward good service after the fact (this is the subject of one of my all-time favorite New Yorker cartoons). But in this case I was more amused about the decision to include the guide on the receipt and the particular choice of which percentages to list.

First, the decision to include the guide is an interesting one. My guess is that people who have difficulty calculating tips will deliberately err on the side of generosity, and so it is more likely that people will tip more, not less, if they are not mathematically inclined. So putting a guide on the receipt may in fact reduce tip income all else equal.

But all is not equal. In the US 15% is considered a pretty standard tip, a default if you will. My personal default is closer to 20% because I have lived on tips before, but I am also a believer in incentives and even if it is only to help the next customer rather than me, I will signal good and bad service through my tip. So if the service is really bad, I will tip 10% - which is a generally accepted bad tip. So it is interesting that they do not calculate 10% for you, they start at 15% and go to 25%. I imagine that this serves to reset customers expectations about what a good and bad tip is. It resets the equation in your head and gives you the idea that 15% is a low tip, 20% is a average tip, and 25% is a good tip. I also imagine that it works pretty well.

So the net effect is, I would guess, an increase in the tip income of servers at K&Z. Nice.

By the way, I had already calculated my tip before I realized the little guide existed (the picture is of the customer's copy) - my tip: $2.50.

As another aside, this is probably much more effective in Oregon where the sales tax does not provide a guide. In states with an 8% sales tax, say, doubling the tax is a pretty handy way to figure it out.

Tuesday, December 1, 2009

Successful Cities are Educated Cities

From Ed Glaeser and Albert Saiz:

For more than a century, educated cities have grown more quickly than comparable cities
with less human capital. This fact survives a battery of other control variables,
metropolitan area fixed effects and tests for reverse causality. We also find that skilled
cities are growing because they are becoming more economically productive (relative to
less skilled cities), not because these cities are becoming more attractive places to live.
Most surprisingly, we find evidence suggesting that the skills-city growth connection
occurs mainly in declining areas and occurs in large part because skilled cities are better at
adapting to economic shocks. As in Schultz (1964), skills appear to permit adaptation.

Monday, November 30, 2009

Eco-nomics: GDP is Growing in the East but CO2 Emissions are Growing Faster

Grether and Mathys demonstrate the inconvenient truth of global CO2 emissions: the rapid growth of middle income countries in Asia (particularly China) is very carbon-intensive.

Figure 1. Projection of the world’s polluting centre of gravity on the Earth’s surface

Wednesday, November 25, 2009

Say What? More Tax Silliness

Can we have a honest debate about the tax increases? In last Sunday's Oregonian, Harry Esteve quotes the general manager of Gresham Ford claiming that the company's tax bill will go from $10 to $30,000 if the tax increases are approved. Huh? This makes no sense at all. If this is true it can't have anything really to do with the new taxes for if the company was paying the corporate minimum it should only go up to $150 - the new corporate minimum under the proposed new taxes. She also claims that this will require that the company lay off an employee. Huh again? If this is 'one of the busiest car dealers in the state' how does a $30,000 hit to the profits necessitate a lay off? Companies usually make staffing decisions based on what is optimal for operations, in this case given the volume of cars they sell. As the tax should have not affect demand or supply, this volume should not change. Thus the profit maximizing level of staff should be the same.

In other words this is just ridiculous on both counts and is nothing but a scare tactic. Now I know that this is a quote, but the tax burden stuff makes no sense and I would expect a reporter to think about the motivation and veracity even of a named source. Is good reporting really just getting a couple of quotes?

By all means let's debate the taxes, but let's do it honestly.

Is the US the Home of Big Government?

Well by this metric, from the OECD, our overall tax burden is low by high income country standards. So, no, we have a relatively small government.

And yes, I just can't seem to take a break, the world is too interesting...

Tuesday, November 24, 2009

Portland Home Values: Case-Shiller September Numbers

Okay, so I try to take a week off and something always happens, in this case the Case-Shiller September numbers. So here are two snapshots. The first is the raw data showing an ever so slight increase in the 20 city composite and in Seattle, but a every so slight drop in Portland (12% unemployment anyone?).

The second is the year-over-year change in the monthly numbers, and here we see the trend is still improving but weakening...

This is consistent with what I expect from the unemployment situation and what I talked about on OPB.

Monday, November 23, 2009

Thanksgiving Break

I will be taking the week off from blogging. Have a happy Thanksgiving and see you next week.

If I see anything particularly interesting I will Tweet a link. Don't yet follow my Twitter feed? Click on the box in the right hand column and start today!

Thursday, November 19, 2009

Thursday Tidbits

Busy, busy, busy. Here are a couple of nuggets to keep the mind engaged:

Economics: There have been discussions on this blog about whether GDP is a good metric of economic health, now Hugo Chavez wonders as well. Now that his country is experiencing negative GDP growth that is, Chavez: “We simply can’t permit that they continue calculating GDP with the old capitalist method.”

Beeronomics: The old discussion of whether price is a signal of quality in beer has risen again on the Beervana blog, my take in the comments.

Eco-nomics: Akin to the question of whether everyone driving fuel efficient cars will increase or reduce emmissions, The New York Times has a similar story about carbon offsets for airline travel. Don't assuage the guilt and give people a reason to fly more! Or so some say.

Tuesday, November 17, 2009

The Decline of Manufacturing

From the New York Times' Economix Blog, this nice picture which shows that the US is not exceptional in the relative decline of manufacturing in employment. Why? A big part of it is that more and more often, manufacturing is happening in developing countries instead of developed. Another reason is that manufacturing itself is becoming relatively less important as a part of GDP as technology has made services more important.

This trend will continue in my opinion as what will become particularly valuable in the 21st century economy are technologies that make us more efficient.

Monday, November 16, 2009

Oregon October Unemployment: 11.3%

Oregon's October unemployment rate was unchanged from a revised September level of 11.3%. The best news is that non-farm payroll employment dropped by only 1,900 (September's drop was 6,000). However, manufacturing and construction (along with leisure and hospitality) saw significant job losses. Professional and business services and financial activities saw substantial gains.

So overall, a picture consistent with the general consensus: the recession is ending by the recovery is still a ways away.

Friday, November 13, 2009


The Oregon unemployment report will be released. I will be on OPBs Morning Edition discussing the implications of high unemployment and what the Oregon experience portends for the US as a whole with Geoff Norcross (or some fragment of this - or not at all if they decide to cut it all out).

I don't expect unemployment in Oregon to change significantly, but for the other stuff, you'll have to tune in.

Have a good weekend.

Is Journalism a Public Good?

Yes, says Leonard Downie and thus the government should subsidize newspapers.

No, says Howard Gleckman, no business should be subsidized, apparently never having heard of public goods, externalities, and the like.

Regardless, Gleckman may be right about papers, at least in their current form. Perhaps the answer is not to subsidize newspapers, but journalism itself. How to do so is a challenge that I have no good answer for because journalism is so immediate, competitive grants and the like are not really reasonable.

Let's All Throw Mud!

Well since I bothered to mention it in the first place, I suppose I should mention that Dubner and Levitt have responded publicly to Kolbert (well, at least Dubner has, but I suspect that these things are done in tandem):

For a good recent summary of the upsides, downsides, and governance challenges posed by geoengineering, see this report from The Daily Climate.

And for a great illustration of just how repugnant some environmentalists find the very thought of geoengineering, consider this scathing review of our book in The New Yorker. The author, Elizabeth Kolbert, seems to disdain everything we’ve ever written on any topic, and claims we utterly fail to understand climate science (unless of course we don’t). She is a feeling and passionate environmentalist who, seemingly so disturbed by geongineering, is compelled to cast our own horse-dung story right back at us with a splat. Here is my favorite line from the review: “Neither Levitt, an economist, nor Dubner, a journalist, has any training in climate science — or, for that matter, in science of any kind.”

The time has probably come to admit that neither of us were Ku Klux Klan members either, or sumo wrestlers or Realtors or abortion providers or schoolteachers or even pimps. And yet somehow we managed to write about all that without any horse dung (well, not much at least) flying our way. Kolbert, meanwhile, has written widely about the perils of global warming, both in The New Yorker and in book form (see Field Notes From a Catastrophe: Man, Nature, and Climate Change), and seems to be extremely well-regarded in the field of environmental journalism. And yet, if her Wikipedia page is correct, she somehow accomplished all this with a degree from Yale in … literature.

Which kinda gets to a point that I made in the comments: is Superfreakonomics a book of journalism, advocacy, provocation or is it somehow otherwise authoritative? Kolbert is an exceptional journalist but one with an obvious agenda and to me that is fine. She reports on the science and effects of climate change and accepts that the debate about human induced climate change has been settled (as do Dubner and Levitt). She is mad that they report something that Myhrvold says without checking that his science is right.

But if the book is designed to give a forum to the geoengineering types, what is wrong with that? Instead of attacking the messengers, debate the claim, in my ever so humble opinion. Perhaps it is the economist in me, but while I find the geoengineering stuff fanciful, I am fascinated to learn about it and am not threatened by new ideas. I guess I believe in markets even for ideas. After all, the debate about climate change is essentially over, isn't it? The truth will out.

Thursday, November 12, 2009

Rail Traffic Indicator

Maybe it is because I am a nerd, but this fascinates me.

Look at the collapse in rail traffic in Q4 of 2008. Wow. But 2009 has stabilized and is showing an slightly upward trend in the second half of 2009. Why do we care about this particularly? Well, because this is a real time correlation with agricultural, mineral and industrial production in the US - output measures of economic activity for short.

So the story here is generally consistent with GDP and other measures of industrial output.

Are All Economists Jerks?

After my post yesterday on the ad-homonym attacks directed at Steve Levitt and Steve Dubner by Elizabeth Kolbert in the New Yorker, commentator Chuck reminded me of something that appeared on Greg Mankiw's blog a couple of years ago.

It was interesting to re-read it as I have recently been in a number of situations where other social scientists have been at best weary and at worst openly hostile to economists. Economists tend to be direct. In fact, this is often what attracts people to economics in the first place. I was just talking yesterday to a group of new public policy students and was asked what attracted me to economics originally. I told them of my experience studying as an undergraduate in India. Many fellow students on the trip (all Lewis & Clark College students in one of their numerous exceptional overseas study trips) were, to my mind, too ready to make blanket statements and accept them as truth without any real data. For example, the colonial malfeasance of the British was roundly condemned and accused of being the source of India's then current misery (this was 1988-89). That could be true, I thought, but how would you know? The colonial experience did leave India with a pretty impressive rail system, advanced bureaucracy and the like, so on balance was the colonial experience good or bad?

I got impatient with what I perceived to be lazy thinking and wanted to be able to provide more concrete answers. My personality type was well suited to economics. We are often, and sometime justly, accused to over-formality and over-confidence in our results, but this adherence to formality is also what keeps us precise and allows us to quickly get to the essence of each other's work. So when you see economists banter, something that seems entirely friendly and stimulating to me can seem quite aggressive and impolite to others. And inevitably, when we don't tone down our act to people in other disciplines, we can do quite and efficient job of pissing them off (excuse my language).

Anyway after that preamble here is the provocative Mankiw post that I offer with no further comment except to say that 'we are the smartest' is just stupid and therefore contradicts the proposition from the start:

The Sociology of Economics

A reader sends this interesting letter:

Dear Professor Mankiw,

I'm a resident at one of the Harvard hospitals. In the past couple of years I've had the chance to attend a number of inter-disciplinary seminars where you have statisticians, physicians, sociologists, anthropologists, epidemiologists and economists present. I've been impressed with what your discipline has to say: in virtually every seminar the economists are able to say something useful. Without inflating your ego, I've also noticed that the economists present better papers and are less likely to be caught off-guard in a seminar. They are also more likely to discover problems in the work of others. I've been trying to educate myself on the economic way of thinking by reading your blog, Freakonomics, and now, by slowly reading your textbook. But clearly, there's no substitute to being formally trained as one.

My question to you doesn't concern economics, but more its sociology. So feel free to ignore this email. At the seminar that I attend most often, I've noted the following:

1. The economists are the most aggressive people in the room. They have little patience for introductions, motivation, or "being nice". They want to spend the first 10 minutes trying to figure out the -entire- talk. If they're not happy, they tend to disengage. I will note that they're like this with each other also. Why are things this way in economics? There must be pluses and minuses to this way of interacting.

2. The economists are the only social-scientists in the room that are willing to argue with the statisticians. This could be that you are a more argumentative lot in the absence of substance, but also that you know something. I'm not qualified to tell who wins these disputes, but the statisticians seem to regard the economists with a high degree of regard. Why do you think that different disciplines view the importance of statistics differently?

3. There seems to no love lost between the economists and other social-sciences. Some of this has to do with the nature of interferce in the two disciplines: your colleagues are always concerned about confounders. Other disciplines like "to tell a story"; confounders are certainly of concern to them, but the issues of bi-directional causality, and omitted variables seem of second-order importance to them. As a physician, I share your colleagues view of the importance of "selection bias" (nice term, incidentally). Why do you think that different disciplines weight the role of confounders differently?

I posed these questions to one of the economists who regularly attends. His response (that I have permission to send to you) is as follows:

"In general, economists are smarter (we may be better looking too). It's fashionable not to say such things, but I will bet that if you look at the GRE and SAT scores of incoming PhD students at BU, Harvard and MIT, the average economist will sit at a higher percentile than the average (non-economist) social-scientist. Given that all the other disciplines are trying to recruit students with higher scores, I'm not willing to believe the explanation that these disciplines value other attributes that aren't measured in the GRE. Higher salaries in economics will tend to reinforce the "economists are smarter" phenomena. Smart people don't have the time waiting for the less-smart to catch up. If we can finish up the seminar in 10 minutes, then why not do it?

"To this ex ante advantage, add the role of superior and more rigorous training. Economics graduate school is not for slackers. It's like boot-camp in the Army. One example of this is that we are provided a much deeper understanding of statistics than every other social-science. Consequently, economists are able to publish in journals like JASA and the Annals of Statistics. No other social science is able to do this with the same frequency. This superior training, complemented by a generally higher comfort-level with mathematics is the principal reason for why economists will not shy away from statistics. I wish I had concrete evidence for my argument. At present, it's indirect evidence. But this "economics know more stats" argument is another reason for why we are more aggressive; we are able to see the strengths and weaknesses of a study faster than others who're not as fluent in the methods.

"Third, the set of advocates who are economists is quite small (I don't know if this reflects treatment or selection). In general, economists are more likely to make up their minds about whether a particular policy works based on theory or data. They may have priors, but not the the sort of "do-gooder"priors that advocates have. One of the reasons that economists are so aggressive with the non-economists is that we want to expose all the priors immediately. In my view, a lot of non-economics social science is straight advocacy. There is an important role for advocacy. It may influence policy more than science. But the nature of advocacy is to simplify and ignore nuance and confounding. But our (economists) beef with advocacy isn't its lack of nuance. We just get really upset when advocacy masquerades as science.

"Fourth, the economics job-market is just that -- a market. This means that the best people are more likely to be at the best programs. In other disciplines there are more "bad matches" (good people at bad places). What this means is that Harvard and MIT's economics departments are more likely to have the top economists than the Sociology Department is likely to have the top sociologists. This is important because what you're seeing at the Harvard seminars is an exchange between the best economists and not necessarily the best sociologists. The best sociologists may be able to clobber a mediocre economist."

I'm curious if you have some of your own observations to add to the above.

Best regards,
[name withheld]

These are fascinating questions. I see a lot of truth to the observations described in the letter. I have heard many others note, for example, that economists are generally more aggressive in seminars than other academics. I am not sure how to explain this fact.

To the hypotheses in the letter, let me add one additional conjecture, which is less charitable to me and my colleagues: Perhaps the skills that make a good economist are, for some reason, negatively correlated with the attributes associated with being an agreeable human being. That is, economics may attract people with a particular set of personality attributes, and perhaps these attributes are not the same set of attributes you might choose for your next dinner party.

This is not entirely conjecture on my part. For example, this study
"explores the relationship between student's personality types, as measured by the Myers-Briggs Personality Type Indicator, and their performance in introductory economics. We find that students with the personality types ENTP, ESTP, and ENFP do significantly worse in Principles of Macroeconomics than identical students with the personality type ISTJ."
What is this personality type ISTJ that excels in economics class? Check out this description, which say in part:

The ISTJ is not naturally in tune with their own feelings and the feelings of others.
Sounds like any economist you know?

Note the overconfidence the economist has in the economics job market - typically Harvard, where many of the faculty were trained at Harvard in the first place. Most schools don't do this as a matter of policy (inbreeding is bad it is thought) but since all the smartest students go to Harvard for their Ph.D. it is natural that this is whom they should hire... An academic job market is a complicate matching process that clears quickly, a good economist knows that final placement is not a perfect reflection of smarts and talent. Plus affiliation helps a lot in publishing so do the best economists work at the best departments or do the best departments help define who is good?

Wednesday, November 11, 2009

Oh Ouch! Kolbert Smacks Down Levitt and Dubner and All Economists in the Process

Elizabeth Kolbert in her Dubner and Levitt smackdown piece in The New Yorker throws in this haymaker:

"Neither Levitt, an economist, nor Dubner, a journalist, has any training in climate science—or, for that matter, in science of any kind."

This is in reference to the now infamous chapter in their new book about geo-engineering solutions to climate change. I am not about to touch that with a ten-foot pole, go knock yourselves out with a little google search, but this is a low blow.

Okay, so economists like to think of themselves as a type of scientist - we make models, we test them in 'nature,' heck we even do controlled experiments, so we use scientific method - but we are merely social scientists. One presumes that Kolbert considers science to be only of the natural kind (though one could argue that the distinction between human and non-human is not terribly relevant when we look at behaviors influenced by incentives - are dogs and humans much different?). So even though economists have pretty advanced training in math and statistics, apparently in Kolbert's mind, these are 'formal' sciences and are, therefore, inferior.

But Kolbert says "science of any kind," and this is simply untrue. Besides I bet that at least as undergrads Levitt and Dubner had classes in natural science so what do we consider that? Taking this kind of snarky and superior attitude, and resorting to ad-homonym attacks is beneath Kolbert and The New Yorker. But it interests me because this, and the greater outrage over Levitt and Dubner's book chapter, seems to me a symptom of the poisoned debate that human induced climate change has become. Sure, it is true that for years climate scientists had to struggle to be heard and taken seriously, but that has now, finally, changed. The correct thing to do is take the high road and not engage in the same type bad behavior that was directed to them. It is hard to see how progress will be made without it.

For the record, Levitt and Dubner push this 'economists are coldly rational and can therefore see what the rest of you emotional weenies can't' thing way, way too far and in this way are a bit of an embarrassment to economists in general, who are generally pretty nice (really!) but do tend to tell really bad jokes.

And also for the record, I call myself a social scientist - you can make of that whatever you like - but I make no claims to omniscience (except to my kids).

Tuesday, November 10, 2009

Economist's Notebook: Is Portland Really a Safe Walking City?

The Oregonian reports on the Transportation for American and Surface Transportation Policy Partnership's report on the safest walking cities in America. Portland was #9, but is it really a safe walking city?

Perhaps, but the methodology is seriously flawed and clearly designed to make a political point and not provide meaningful data. The way they compiled the ranking was to divide the number of pedestrian deaths divided by the number of people who walk to work. What you would ideally want is some measure of total pedestrians or, better yet, total pedestrian-hours. So proxying this by using walking to work may seem like a good idea, but I doubt that it is. Clearly walking to work is very, very highly correlated with urban density but I don't think it is terribly correlated with the population who walk for any reason at any time. So you skew the statistics and, not surprisingly very dense cities are great, sprawling cities are not. Which is, I imagine, their point.

Now, I hate sprawl as much as the next guy, but it is not necessarily bad for walking safety in general. Yes, you can't walk to get anywhere, but walking around inside of the little cloistered neighborhoods that were the rage before the new urbanism ethos kicked in is probably pretty safe. What it is bad for is walking in general. I don't think conflating the two is helpful.