Beeronomics: Why is Beer not Priced According to Cost?

Over on the Beervana blog, Jeff asks an interesting question about beer prices. No doubt his readers will flub the economics badly, so I expect astute economic analysis here.

The question is this: why do we typically see beers of the same brand all priced the same even though it typically costs a more to produce some beers than others, like an IPA versus a Pale Ale?

Part of this can be explained by supply and demand, but I don't think demand systematically falls the more ingredients a beer uses (then again, maybe it does - as you make more and more flavorful beers, perhaps the demand curve falls as fewer and fewer people like them). So there must be something about brand and consumer psychology. My guess is that stores have found that if one Deschutes beer (Inversion IPA) is priced above others (Mirror Pond), few people buy the higher priced one.

Thoughts?

Stimulus: Public and Private Goods

The Oregonian is reporting on a competing stimulus plan by Oregon's republican contingent in the state legislature that would give tax credits for remodels, bigger if they involve green things like solar panels.

Is this a sensible idea? Sure, these tax breaks only come if you spend the money, so it can be expected to stimulate consumption to a greater degree than income tax cuts, only a fraction of which will translate into new consumption. Promoting green home improvements is also beneficial to society. So this can be expected to lead to an increase in consumption spending and to have a stimulus effect which will help reduce unemployment.

But is it better than the democrats plan to spend on construction projects? Direct spending on construction will also have the same positive effect on consumption. So is it a wash? Well, the key difference is in the fact that the democrats plan focuses on public goods while the republican plan is on private goods.

Public goods are those for which there are at least partially non-excludable and non-rival: anyone can use them and using them does not leave less for others to consume. Roads are a prime example. The key to public goods is that they confer benefits on many people beyond the person responsible for their existence. This means the public benefits are much higher than the private benefits and when left to individual economic agents, the private cost-benefit calculation will often lead to the under-provision of public goods. This is why government provides these goods.

Construction on roads and schools are improvements in public goods, a large swath of society benefits from these investments while private remodeling only benefits the owners of the property (save for the small socially beneficial effect of more efficient homes). In other words, the initial stimulus can be expected to be similar for a similar outlay (assuming, of course, people take advantage of these tax incentives), but the long term benefits of providing more and better public goods will provide much greater benefit to society than better kitchens in private houses.

America's Favorite Cities

From The Seattle Times: a Pew Research Center report on Americans' favorite cities.  Is there an  economics link here?  Yes, since Oregon is doing a pretty poor job educating its children, we are very dependent on the importation of human capital from elsewhere.

Portland is number 8 (out of 30), but what I find fascinating is that it is ranked higher among republicans than among democrats.  Strange that, for a city that has such a liberal reputation.  However, when the question is asked of self-reported conservatives and liberals, liberals rank Portland higher.

The fact that Denver is ranked number one suggests that people rate climate and outdoor recreation very high - which is true when the questions about what is important are asked.  So Portland suffers from the former and is good for the latter.  A good place to raise children is most important and we aren't so good about education, so that hurts.

A final interesting aspect is that cost of living is a very small factor.  It seems like people want to live in nice places, and will figure out how to make it work.

The very fact that this survey exists (and the interesting tidbit that about one in four respondents don't consider the place in which they currently live the place "in their heart") speaks to the fact that we are an incredibly mobile society and are willing to consider living anywhere.

My house in Denver was a few blocks from where this picture was taken (The Denver Museum of Science and Nature) and I can confirm that Denver is a perfectly nice place to live, but does not hold a candle to Portland so don't be seduced by the 310 days of sunshine, the great skiing, the professional sports, the cool art museum, the many breweries, the Rocky Mountians...

Seriously, my main complaint about Denver was that lack of a 'there' there.  It seemed to me a city without a soul.  I once read that Denver is the number one test market for chain restaurants - to me that said it all.  In other words, Denver was not "in my heart." But though people in Portland are pretty zealous about what a great place they live in, Denverites are even more so, they have no doubt that they live in the best city in the US. 

Economist's Notebook: More Guns, More Crime

Taking a break from the stimulus debate...

The tragic events that occurred in downtown Portland last Saturday night made me think about a very controversial debate to which economists have made major contributions: does gun ownership promote or deter crime?

For sure, someone like Erik Ayala who chooses to take his own life and others' has many means at his disposal.  But easy access to guns (excuse the economics parlance) lowers the cost of doing so.  So, does it matter?  Does a mentally disturbed individual respond to economic incentives?  And does the high incidence of gun ownership increase the cost of crime enough to counter the lower cost of procuring a gun?  

The answers to the particular questions about Ayala are never going to be clear, but what can we say about guns and crime on average?  For sure it is a complicated question to answer because crime and gun ownership are highly correlated: guns are bought to commit crimes, and guns are also bought because crimes are being committed (and guns are bought for many other reasons as well).  How do we say something about the causality of the effect of gun ownership on crime?   

One thing we can't do is look at correlations: the fact that gun ownership and crime are positively correlated tells us nothing about the causal link.  So what economist Mark Duggan did, in his groundbreaking paper "More Guns, More Crime" was to find something that is correlated with gun ownership, but uncorrelated with unexplained variation in crime.  In his case he looks at subscriptions to gun magazines.  This is plausibly correlated with gun ownership and unrelated to unexplained variation in homicide rates.  Using these data to instrument for gun ownership he finds that gun ownership is significantly positively related to the homicide rate - almost exclusively related to homicides committed with a gun.  Ayres and Donohue have also examined the evidence on concealed weapons laws and found that the evidence is mixed, but the bulk of the evidence suggests that, if anything, concealed carry laws increase the incidence of crimes. 

Is the debate over?  No, absolutely not.  But the received empirical evidence gives one pause and suggests that tougher gun ownership laws may indeed reduce gun homicides. 

How Does Portland's Housing Market Compare?

A quick re-arranging of a chart produced by the Wall Street Journal shows how the Portland metro area compares to others in the Case-Shiller numbers. I sorted by the year-to-year change in home values. I think that overall we can still say it is moderate.

In the comments to yesterdays post on the Case-Shiller numbers, Gregory takes issue with something I said:

"I would like to see the movement in home values going positive by June, but this is optimistic."

How do you account for home pricing in PDX remaining overpriced? This is true based on affordability or the secular trend in Case-Shiller, before the pricing bubble began in 2004. I think we won't see prices achieve the secular trend until end of 2009 after further declines of 10-12%.

I understand why you want prices to stabilize, in order to end the bleeding of the banks balance sheets. However, restoring conditions for the next housing bubble is not a good idea. I would really like prices flatten, and stay flat for the next 10-15 years. Real estate is not an investment.

This is an interesting comment and I agree that there is good reason to expect home prices to fall another 10%, but I believe that will happen pretty quickly - perhaps not by June, but the acceleration of home value erosion is marked. I also agree that we should not spark another housing bubble, but I am not worried about that at all at this time. I think banks are, if anything, over cautious in the residential housing market and I can't see them returning to the kind of massive sub-prime lending as the market for securities derived from residential mortgages has simply disappeared. In the future, new regulations and more caution on the part of banks and the Fed should forestall any hosing bubble.

But real estate IS an investment. I take Gregory's comment to mean the speculators that were in real estate for a quick buck and in that I agree, they were a main driver of the bubble one the house price inflation heated up. But real estate is an important store of wealth for most homeowners and one that is essential for healthy families, healthy communities and a healthy economy. So a return to the steady, but modest, appreciation of home values is important and desirable. Ten to fifteen years of no appreciation would be very damaging to local economies.

Economic Growth

I try and refrain from cross posting, but this is simply to good to ignore: David Leonhardt's article about growth in the context of the federal stimulus bill in The New York Times Magazine. His section on education and growth (Section VI) obviates my planned blog post on the Katz and Goldin book (and I just received my very own copy - drat!). [Well ignoring sunk costs may be what one is supposed to do, but in this case my investment will prompt me to follow through]

Anyway, kudos to Leonhardt for writing such an exceptional piece.

The National Unemployment Picture

Here is the national unemployment rate map by state for December 2008 (from the BLS):
Oregon has now the 6th highest unemployment rate among the states (down from 5th in November), but is much higher at 9% than the national average of 7.2%. California, Nevada, South Carolina, Rhode Island and Michigan all have higher unemployment rates than Oregon. Wyoming and the Dakotas lead the way with unemployment rates below 4%.

Beeronomics: Pubs and Recessions

Over on the Beervana blog, Jeff has posted a poll about beer drinking habit changes in a recession.  

In a visit to a half full Portland pub on a recent Friday night, he wondered whether pub going is declining in the recession in favor of drinking at home.  In the comments a reader mentions that pub going for her has not decreased as pubs are a substitute for higher priced bars and restaurants.

As I wrote in the comments, it is an interesting question: are brewpubs less expensive alternatives to higher priced bars and restaurants - or are they more expensive alternatives to drinking beer at home? I suspect both, but which is dominant in a recession?

My infrequent pub going experience has been to pretty packed pubs in Portland these days, so I would imagine that the former effect is at least as large as the latter in Portland.

But news from the "Land of Pubs" suggests that this is not generally true.  Apparently in-pub beer sales are down almost 10% in the UK.  Supermarkets and off-licenses (shops that are allowed to sell carry-out alcohol) beer sales are down 6.5%.  So it seems that Brits are substituting carry out beer for pub drinking, but overall the pub industry in the UK is in big trouble.  

What about for you, still frequenting the pubs?

Portland Housing Prices: The Monthly Case-Shiller Update

The November '08 Case-Shiller numbers are in.  Below is a graph of the raw data for Portland, Seattle and the 20 city average - you have to go back to November of 2005 to see home values so low.  But the scale of the erosion is still relatively good compared to the 20 city average.  

 

Next is the year-to-year change in home values.  This is the number that will make the headlines: Portland home values have declined 11.5% between November 2007 and November 2008 and the 20 city composite declined by 18%.  

These data are two months behind, so it will be interesting to see what happens through this spring with the continuing erosion of the economy but with low home prices and low mortgage rates. 

As always, a reminder that these averages hide a huge amount of variation from neighborhood to neighborhood and even within neighborhoods.  As an anecdote, my house, according to Zillow, has gained in value in the last few months (for what that's worth).  I imagine that places like Happy Valley are seeing a much larger erosion on average. 

Here is some more market data from Altos Research. The first graph is average days on market for houses in Portland proper.   This continues to get worse, but the 7 day average is plateauing so perhaps we are turning a corner.

The second is the housing inventory for Portland proper.  If there is good news it is that the supply is starting to contract - though there are likely banks with foreclosed properties that they have not put on the market yet and future foreclosures.  Fortunately, Portland has a relatively low foreclosure rate.  

Nationally, home sales are up, but many of these are bank foreclosure short-sales and it is hard to know what to make of it all.  A key to starting the recovery is to get this housing market back in the black, and the silver lining of the collapse of the residential construction market is that there is virtually no new supply coming on the market.  But I have seen estimates of 1.6 million excess homes, so perhaps it will still be a while before the market reaches equilibrium.

Anyway, once home values start appreciating again, the 'toxic assets' may start to become less toxic and the credit markets may start to ease.  I would like to see the movement in home values going positive by June, but this is optimistic.

Two Cheers for the Task Force on Revenue Restructuring

Editor's Note: Fred Thompson checks in again with a look at the recently released report from the Task Force on Comprehensive Revenue Restructuring (executive summary here, full draft report here).

Our state, Oregon, has a highly volatile revenue structure, both because of its composition and because of the jurisdiction’s size.

This causes all sorts of difficulties as it moves through the business cycle. State spending doesn’t fluctuate as much as revenue, but it fluctuates more than it should. The problem, however, is not revenue volatility per se but the nastiness that results from trying to adjust spending up and down to match current revenue flows and from trying to find the money needed to stabilize spending during downturns. During booms the state tends to grow spending at an unsustainable rate and then cuts spending way back during busts. As a consequence of these behaviors, the Pew Center on the States at Harvard’s Kennedy School of Government ranked Oregon’s money management practices 43rd out of 50 states.

Recognizing these issues, the legislature authorized the creation of a Task Force on Comprehensive Revenue Restructuring (OR House Bill 2530, June 30, 2007) to examine "Oregon’s tax structure from top to bottom." The task force was appointed by the Governor, Chaired by Lane Shetterly, and charged with assessing several options for change: replacing personal income and/or property taxes with a sales tax or a gross receipts tax and imposing a tax on business assets and/or a value-added tax in place of the corporate income tax. It very quickly became apparent to the task force members that, even if these options were politically feasible, they would not work to correct the problem, but would leave the state with a tax system that was less fair, less efficient, and less adequate than the existing tax structure and not significantly more stable. Moreover, it was obvious that Oregon’s long-term revenue trend was one of the highest in the nation and that its revenues would be sufficient to meet most future needs, if it could find a way to use savings and or borrowing to smooth out spending over time. What was initially hard for the task force to accept is that putting such a system into place requires only fairly modest institutional fixes. But, that is, indeed, the case.

Oregon’s constitution requires the legislature to enact a balanced budget in which planned spending is equal to or less than the revenue forecast. If the forecast is up, the state can plan to spend more; if the forecast is down, the state must scramble to cut the budget. Then, if actual revenue exceeds the forecast in the period in which the budget is executed, the state must return the difference to the taxpayers. If revenue falls short of the forecast, the state can make up the difference from savings or, if necessary, by borrowing. This is looser than the balanced budget requirement found in some jurisdictions, where, if actual revenue is less than forecasted, spending in the period of budget execution must be reduced to bring it into line with actual tax receipts (Hou & Smith 2006). Consequently, smoothing spending in Oregon requires only two changes to its budget process. The first would be to base the state revenue forecast on the state’s long-term rate of revenue growth rather than short-term revenue growth. The second would be to give savings or the retirement of general-obligation debt first priority for the use of revenues in excess of the forecast. And, that is essentially what the task force recommended: amend the method of estimating the end-of-session forecast of state revenue on which the budget is based and apply actual revenues in excess of the forecast to the state's general reserve fund (The Statesman-Journal, January 23: B-1).

However, a more satisfactory recommendation would have specified the method for estimating the end of session forecast. In my opinion, the state revenue forecast should reflect the state’s long-term, sustainable rate of expenditure growth. Otherwise, as one very insightful colleague observed: "If we believe that the problem is caused by the fact that many of our politicians have a distorted time preference … because they care mostly about the current generation and discount the future generation’s concerns too heavily, a debt‐financing regime is optimal. So we are back to square one – the original problem of inadequate reserves and too much spending." Unfortunately, the task force was unwilling to take this step, perhaps, because they weren’t fully persuaded that forecasting a sustainable rate of expenditure growth was workable, perhaps, because they persisted in viewing the problem as one of reduced tax receipts during economic downturns, or, perhaps a little of both.

What they have done is eminently sensible; what they have left undone is potentially very dangerous.

Oregon's Profligate Public Universities?

My office this morning, like most Mondays in winter, is frigid. The current temperature is 60 degrees. By the end of the day, with any luck, it will be up to 65. Tomorrow morning it will probably start at about 63 and get up to 68. It is only by Wednesday that I will be able to work in my office without wearing my winter coat.

The reason for my discomfort is the shutting off of the steam for the radiators on Friday afternoons and not restarting the boiler until Monday morning. I understand this decision though I don't like it: academics and, especially, the many graduate students in the building work on weekends very often. The temperature in this building prevents this and decreases productivity. But so it is in our fiscal climate and I won't complain.

I do get grumpy whenever I hear people complain of bloated universities that don't deserve support until they learn to cut costs, however. In these times I think of my office - 60 degrees in January and 100 degrees in July and wonder what they are thinking about. When you add in other aspects of cost cutting - like the two to three months wait for the processing of reimbursement requests - and I think that most knowledgeable observers agree that Oregon's public universities have been underfunded for so long: there is no more fat to trim, just flesh.

Now that I am done ranting, you will have to excuse me, I have to go and warm up my fingers under some hot water (assuming the tap water is now hot).

Sam Adams

My stated goal for this blog is to eschew politics as much as possible and I certainly don't want to get bogged down in the the politics of private lives - nor do I want to be seen as defending Portland Mayor Sam Adams' actions that have led to the scandal.

But I do want to say that as an economist who thinks a lot about public policy, including urban and regional policy, I have been exceedingly impressed with Sam the policy wonk.

His ideas are not always right in my opinion, but almost always. And I have found him to be an exceedingly creative and intelligent thinker and policy maker and I believe he can do great things for Portland and the state of Oregon.

I don't know how this will all shake out but I do know that in this time of great economic turmoil I hate to think of Portland being rudderless. I hope that in the very least, he will let voters decide in a recall if his personal actions warrant his removal. Until then, I hope he keeps working on the good policy ideas he has and his vision for the city. But that's just me...you?

[Photo credit: The Oregonian]

Lefties

From Doug Mills of the New York Times comes this picture, clearly showing that President Obama is a lefty. This had escaped my attention until I saw him signing on inauguration day. Thank goodness, as we all know that left-handedness is a key determinant of intelligence, leadership, humor, insight and good looks. Well, we lefties know this at least...

[OK, this post may disprove the humor part but the rest is still valid!]

Think Out Loud: The Oregon Economy

I will be on OPB's Think Out Loud show tomorrow (Friday) for a show on the Oregon economy. Should be upbeat!

In honor of this occasion, I have created a newly updated unemployment poll. I have left lots of room for the gloomiest among us, I hope. What do you think now?

Education, Part 3: Education and Economic Growth

I am trying to find the time to give this outstanding book its due: "The Race Between Education and Technology" by Harvard economists Claudia Goldin and Larry Katz. Unfortunately, I am not done with it and the library (or more accurately Eastern Washington University's library) wants it back. So I have finally decided to spend the money and order it. As I await the arrival of my own copy, I can talk about the parts that I have read carefully. I did one snippet a couple of days ago and here is another one.

Above is a key table that speaks to the relationship between education and growth (is this acceptable fair use - can someone tell me?). This is a growth accounting that looks at increases in educational attainment and their effect on employment and productivity.

How to interpret this table? Well, column one is the measure of productivity growth (output per hour) and column two is the change in educational productivity. For column three, I'll let the authors say the punch line: "Thus, education directly contributed an average of 0.34 percentage points a year to to economic growth...[emphasis theirs]" They go on the say that between 1960 and 1980 the contribution of educational advancement to labor productivity growth was 0.59 percent per year but then sharply declined to 0.37 per year. This matches the general observation that there was great advancement in the educational attainment of Americans post WWII, but a steep fall off in the eighties and nineties (as can be seen in column 4).

So, are these numbers big or small? Well, when average growth rates of high income countries are a little above 2%, a bump of 0.34 percentage points is a 17% increase in growth. So these numbers are pretty huge.

What I really want to discuss here at length is their treatment of the future of education and technology and how a state like Oregon should view education as a part of its economic (as opposed to social) strategy. Soon - the taxpayers of Oregon are paying part of my salary not to blog but to teach research and assist in the operation of OSU, and the tuition paying students of OSU are always my top priority. So blogging has to take a back seat.

Beeronomics: Bailout Bitter

By way of the Calculated Risk blog I learn of this beer: Bailout Bitter from Howe Sound Brewery in British Columbia.



Tim Geithner could probably use a few of these today...

Poverty and Opportunity

One of the main areas of my research is in child labor.  When I present my work, I often talk about the potential for negative impacts of bans on child labor for families that are so poor they rely on the income from a child's work to survive.  I am often met with skepticism and I wonder if the well meaning people who would like to see bans on child labor understand the nature of poverty in the developing world.  Well, I think New York Times columnist (and Oregonian) Nick Kristof does a good job of illustrating the devil's choice of child labor and poverty.  It is also why I am quick to defend companies like Nike that while we may wish to strive to always do better by its workers we must also realize that they are providing opportunities that are improving peoples' lives.

Education: General Skills and Mobility

In my upcoming post on education I will focus on an in-depth discussion of the new book by Claudia Goldin and Larry Katz "The Race Between Education and Technology." But as I have been reading through the book and thinking about the myriad of issues raised therein I happened upon a blog post by Stanley Fish (or Morris Zapp in his fictional form).  In this post, Fish wonders whether the ideal of learning for learnings sake is dying out as universities face the decline in state support and are under more pressure to become more directly vocationally based.   

In Goldin and Katz, they examine the nature of the US higher education system and its emphasis on general knowledge as opposed to, and quite distinct from, Europe in the twentieth century which was largely focused on specific vocational training.  They argue convincingly that this emphasis on general knowledge was beneficial to the US because of its high degree of occupational and and locational mobility (again quite different from Europe).  Citizens with skills and knowledge are more flexible and able to deal with changing technologies, a changing economy and workplace disruption.

So what does the twenty first century look like to you?  A era where you want to see kids invest in very specific skills ready to remain in one profession for the entirety of their lives, or an era where you want to see kids instilled with the knowledge and aptitudes that make them adaptable and able to change with a changing economy?  

I prefer the latter.  

President Obama

This cover was from before the election and now seems a bit foreboding (as in "it's time to walk the walk").  President Obama is about to confront immense challenges to the prosperity, health and safety of our country and quite soon we will know how deftly he can maneuver through the political landscape and deliver the critically necessary fiscal stimulus bill and then follow up with a comprehensive health care plan, an environmental sustainability strategy and on and on and on. 

Back home in Oregon, the landscape is turning bleaker by the minute and we are staring down the real possibility of sacrificing our future to meet immediate budgetary challenges.

Needless to say there is a lot of very hard work ahead both for Obama and Kulongoski and national and state legislators, but this too shall pass and with a clear focus on the future and a commitment to protect the most vulnerable in society we shall weather this moment and emerge stronger.  But it will take time.

Good luck and godspeed President Obama.

[Note: Tomorrow or Thursday, I shall post the last of my three part education series of posts with an overview of what we know about education and the future of prosperity in America]

Oregon Unemployment Hits 9%

The latest jobs report for December has been released by the Oregon Employment Department and the news is predictably grim.  9% unemployment rate, up a full percentage point from November and representing 9,700 jobs lost in December, up from 8,400 in November.  

Grim grim grim.

Beeronomics: In Hard Times, Doing it Yourself

It has been years since I brewed my own beer, but recently my son asked me the question I have been waiting a long time to hear: "how do you make beer?" "Well son," says I, "I'll show you." So off we set to FH Steinbart to load up on supplies.

[I had in mind something modeled on Ninkasi's Total Domination, which without a doubt is the best beer brewed in Oregon and possibly the country. On this I am sure there will be no debate. And by the way has Ninkasi, in a short time, become the best Oregon brewery? I think it might. Kudos to Jamie Floyd.]

Anyway Steinbarts on Saturday was absolutely crammed with people buying supplies. Unfortunately I was after Centennial, Cascade and Chinook hops to make a classic 'Three C' IPA but the Chinooks were gone. Thoughts of substituting Willamette, Newport and Zeus were also dashed, so I decided to pitch a curveball: up the hops (to compensate for the lost alpha acids) and use Mt. Ranier instead. I'll let you know how it turns out. But the point is that this economic naturalist started to wonder whether, as incomes get strained, people start to make their won rather than buy it in the bottle. Does it make sense to do this in tight economic times? 

Let's do some back-0f-the-envelope calculations. To get all the ingredients for my beer, plus a few sacks for the grain and hops but basically nothing else (including bottles and caps) I spent about $65. Blame the hops which are not only scarce but expensive. I had some leftover ingredients and I have all the other equipment from before so we will consider it a sunk cost and ignore it. So let's say $60 for the ingredients. From this I make a five gallon batch and I will probably yield about 4.5 gallons after ditching the sediment - maybe less because I dry-hopped - and then some spillage due to inevitable personal blundering, so let's say 4 gallons at the end or about 7 six-packs or 23 22oz bottles.  

A six pack of good beer is about $7-$8 in my local supermarket.  So the retail cost of this beer is about $50.  If I manage something sublime perhaps I can compare to Total Domination which costs about $3.30 for a 22oz bottle, so my beer would retail for about $75.  

On a broad scale then, the cost of the ingredients are about equivalent to the retail price of the finished product.  Include the opportunity cost of my time, the certainty that my beer will fall far short of Ninkasi's and the extremely high probability that I will have managed to acquire an unwelcome bacteria that gives my beer an off flavor, and it seems clear that brewing your own is NOT a way to save money.  

The crowd at Steinbarts could still be an indication of a bad economy: many people with unwanted time on their hands might turn to brewing which is a nice hobby and also has the appealing aspect of providing a large amount of alcohol at the end.  

This calculation is, by the way, why I have largely stopped brewing: for about as much money as brewing my own I can get super-fantastic beer in many varieties and I don't have to wait for it. 

Oregon's Revenue Woes

Uh-oh...

Local Stimulus: Some Quick Unemployment Math

In the same spirit as Paul Krugman, who in his New York Times Blog did a quick back-of-the-envelope calculation on the expected effects of the Obama federal stimulus plan on unemployment, let's take a look at Mayor Adams's plan to stimulate the local economy.  My question is: is the claim that 5000 new jobs will be created by this spending reasonable?

Estimates of the Okun's law coefficient, or the relationship between real GDP growth and declines in the unemployment rate are generally between 2 and 3 for the national economy.  Let's take the best-case scenario, 2, which stipulates that a 2% increase in GDP will lead to a 1 percentage point decrease in unemployment.  I think this is reasonable, though I am not sure how to think about leakages: presumably leakages are greater the more localized is the stimulus spending so perhaps 2 is too high, but I'll stick with it for the time being.  

The Adams administration proposes to spend $500 million on local stimulus.  The latest Bureau of Economic Analysis estimate of Portland metro area GDP is around $100 billion.  Thus the proposed stimulus amount represents about a half a percent of local GDP.  

How much will this increase local GDP?  For this we have to think about the multiplier effect we expect from the spending.  The multiplier refers to the fact that money that becomes income for one person is spent, at least in part, on other things and becomes income for someone else, and so on.  How big is this multiplier in reality?  Mark Zandi suggests slightly more than 1.5 is a reasonable estimate.  Let's be conservative and use 1.5, which means that a $500 million injection of government money would represent about a $750 million boost to local GDP, or about 0.75 percent.  

Using the Okun's Law coefficient of 2, this suggests about a 0.375 percentage point decrease in unemployment from what it otherwise would have been.  

Finally, the latest local jobs report from the Bureau of Labor Statistics shows the Portland metro area labor force at about 1.19 million, of which 85,700 are currently unemployed (for a rate of 7.2%).  Using the current rate as a baseline, the proposed stimulus could be expected to reduce unemployment to 6.825%.  This represents about 4,460 new jobs.  Slightly lower than the Mayor's claim, but well in the ballpark.  

However, if you use the more pessimistic Okun's Law coefficient of 3, you get a .25 percentage point decrease in the unemployment rate which would yield about 3,000 new jobs, which is considerably under the Mayor's projections.

So the conclusion seems to be that they are being optimistic, but not wildly so.  

What is interesting to think about now is the interaction between federal stimulus, state stimulus and local stimulus: will they be complements or will there be some type of crowding out?  Perhaps public finance-types have some insight...

Stimulus and Discrimination

As I was busy embarrassing myself on KGW's "Live @ 7" (yes the ampersand is part of the title) last night, the host, Stephanie Stricklen relayed a interesting question from a viewer who asked, in essence, "if infrastructure construction is traditionally male-dominated (think road crews), will federal fiscal stimulus that concentrates on such projects be gender biased?"

I tried my best to provide a quick answer to the question (video is above - but I am going by memory because I can't stand to watch), but thought I would take this opportunity to expound here.   There are two main reasons for the observation that construction tends to be male dominated: it could be because of discrimination, or it could be the result of self-selection.  

Discrimination means that employers hire men ahead of more-abled women because they simply have a preference for men and thus more men are in construction than women.  Self-selection means that the employers are picking the best workers among the people who apply, but as most applicants are men, most of the hires are men as well.  I don't claim to know which it is (though I suspect both).  Also there is probably some endogeneity involved, if there is discrimination, discouraged women will not bother to apply so it may look like self-selection when it is not.  

If there is discrimination in construction then the viewer is correct, fiscal stimulus dollars will end up going to firms that discriminate and there could be even more and the growth in employment will be gender-biased.   

If it is self-selection, however, then there maybe a larger pool of women applicants as other opportunities that they might prefer are not available (if the only hiring going on is in construction) then we should see more women in construction.  [With an important caveat: as there will likely be more men than women with experience and specific skills in construction, we could still see a disproportionate number of men being hired even without discrimination]  

Now you try saying all of that in 30 seconds.

And, by the way, in an act of shameless self-promotion, if you are interested in discrimination, see this paper that I wrote with a colleague where we use a unique data set and novel statistical test to reveal racial discrimination in the NFL. 

Education: Bravo

Ted Kulongoski, in yesterday's state of the state speech:

“Only by creating the best-trained, best-skilled, best-educated workforce in America will we be able to create the employment opportunities that are this state’s future. … The way to turn despair into hope, and uncertainty into prosperity, is to build a protective wall around funding for education.”

The Fiscal Stimulus Plan Analysis from the Obama Camp

An economic analysis of the Obama fiscal stimulus plan. Remarkable for its even handedness - the work of professional economists not political operatives (what a nice change).

Here is the picture that says it all:



What is scary about this picture is that with or without stimulus, unemployment is not predicted to return to under 6% until 2012.

I think the question is not is it too much, but is it enough? As an economist I would like to see a bit more, but as a realist, I realize that getting it done politically is a challenge and there is no time to waste.

Education, Part 2: Higher Ed

Finally, after many delays it is time to get off my duff and post the next installment of the education series that I have promised. Today I want to focus on Higher Ed and how the state should think about its investments in different types of higher ed. I am not suggesting there is a zero-sum game here (in fact the opposite is true, they are all strong complements), but there is often a debate about priorities in tight budget times, and it is useful them to think about objectives and how to effectively reach them.

This is a particularly good time to write about this as there have been a number of high profile pieces in the media about public higher ed in Oregon. Dave Sarasohn’s opinion piece in the Oregonian today is one, the OPB “Think Out Loud” two-part show with the presidents of EOU, OSU, PSU and UO is another (they don't seem to have a link to the second hour), and Tom Potiowsky’s address to the Portland City Club on Friday is a third.

So how should we think about higher ed and the growth of the state’s economy. Virtually no economist has thought about this more than Philipe Aghion of Harvard University. He started with theoretical work and has now moved into examining the theory with empirical evidence.

Like I did last time I am going to use one paper as a focal point. Aghion, et. al., "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth." (The link is to the shorter version of the paper). The title refers to the fact that since we expect growth and investment in higher education to be correlated, so it is hard to isolate causal the link between investment in higher education and subsequent growth caused by that investment.

The essential message from his work is this – you can be a innovator or an imitator. Innovators drive economic growth and imitators play catch up. Silicon Valley is full of innovators, the Silicon Forest, I would argue is full of imitators. What Aghion argues is that if you want to be innovators - which we very much want to be in terms of green technology - then you must invest heavily in higher education, but not just higher education, graduate research universities.

There is another side of course, if you are not going to be at the frontier (and you can do pretty well being an imitator), then it is potentially wasteful to spend too much on this type of higher ed and you would do better investing in undergraduate only universities and community colleges. Please keep in mind that the latter are not unimportant even if you are an innovator, it is really about the question: should a state prioritize investments in graduate research universities? If you are an imitator state, the most bang for the buck in terms of growth effects of education spending is two and four year undergraduate education, but if a state is on the technological frontier then the biggest bang for the buck is in graduate research institutions.

There is also a positive feedback effect in that if a state establishes itself on the technological frontier it will get the benefit of in-migration of highly skilled individuals (and thus reap the benefit of out of state investments in human capital). It also exacerbates the difference between leader and follower states. So if you can become an innovation state, you get into a self-reinforcing cycle. This helps explain the long dominance of Silicon Valley (and California in general) in high tech.

Arguably Oregon has made large strides to establish itself on a few frontiers: there is no doubt that the Portland areas has become a place of in-migration of highly artistic and creative types and the city has established itself as a center for design and advertising. The state has tried to establish itself on the frontier of computer technology (the Silicon Forest) but success here has been minimal and it seems pretty easy to argue that in high tech the state is still in the imitator category (and the link with this and the underinvestment in higher ed is pretty clear – you can’t depend entirely on in-migration, you have to create talented people at home as well).

Through innovative statistical analysis the authors of the current paper find that a thousand dollars per person in additional spending on research universities raises a frontier state’s per-employee annual growth rate by 0.269 percentage points but only 0.093 if that state is an imitator state. Conversely a thousand dollars per person in additional spending on undergraduate education in four year colleges raises imitator states annual growth rates by 0.198 percentage points but innovator states growth by only 0.053. They also find that migration accounts for about half the difference between the frontier and far from the frontier states. [And, by the way, lest these seem small, remember with national annual growth rates of about 2.5% over the last 50 years, something that increases growth by a quarter or half a percent is a ten to twenty percent increase in growth rates – pretty huge and it is hard to imagine another investment as effective at doing this] And though the argument may be made that in tight budget times it is necessary to focus on K-12, it is worthwhile to remember that with good economic growth come the resources for future investments in K-12.

The message for Oregon seems clear: if we are serious about being an innovator state in green technology or anything else, we need to invest in its research universities. Tax breaks and inspiring speeches are not enough.

Fiscal Stimulus and Oregon

In the opinion section of Sunday's Oregonian, Bill Conerly makes a number of inaccurate and misleading statements in his attempt to argue against fiscal stimulus. The most egregious example is the claim that most economists believe that the economy will turn around by the third quarter of 2009. Most economists believe that with a stimulus package the economy will turn around by the Fall of 2009. In fact, most economists believe that without stimulus the downturn will be significantly more severe and prolonged, perhaps not returning to positive growth until late 2010 or beyond. Furthermore, economists arguing for stimulus do not believe that there will be a multiplier of 4 or 5. In fact, most empirical evidence suggests we should see a multiplier of about 1.5. It is true that the positive effects of stimulus are temporary and, in fact, we should see a drag on growth in the future from having to service the debt incurred with stimulus. But the very idea of stimulus is to arrest the downward spiral of the economy and get it moving in a virtuous growth cycle again – a temporary jolt to the economy. Lags are a concern for all economists leading to the stressing of the need to avoid projects that would take time to roll-out, but the magnitude of this crisis is so great that even with significant lags, economists believe that fiscal stimulus would still do a lot of good.

Conerly’s description of how an economy self-corrects is also lacking: the current systematic collapse of credit markets has rendered standard Fed policy ineffective, even the multitude of non-standard programs have yet to get any real traction. Eventually Fed policy will gain some traction, yes, but how long are we willing to wait as our economy melts down? And the claim that consumers are not spending but eventually will is naïve: with unemployment rates skyrocketing to levels not seen in 30 years and still going up quickly, there is no reason to believe that consumer spending will rebound any time soon. Finally, leakages exist in all state spending, this is not new nor is it a reason to not spend – the multiplier estimates take these leakages into account. Money spent could be directed to programs that have the shortest time lags and the greatest local impact. Leakages overseas are minimal and leakages from Oregon to other states would be matched by leakages from other states to Oregon.

Conerly’s advice to essentially wait out the economic crisis is not particularly helpful to those 8.1% of Oregonians who cannot find a job. Add in the number of people who have given up searching and people involuntarily working at less than full-time and the number is likely to be well over 14%. These Oregonians cannot wait for two or three years for the economy to self-correct. There is always the risk that stimulus will not be as effective as we hope, but the risk of doing nothing is much worse.

The State of the State's Unemployment

Today the Bureau of Labor Statistics released the latest unemployment figures for the US for December, and they are predictably grim.  The US unemployment rate is now at 7.2%.  While the individual state figures for December won't be out for a few days, here is a look at some data released a few days ago: this is the unemployment rate for November in selected metro areas in Oregon.  Note that adjustments are still being made (and it looks like Oregon's November rate is now estimated at 7.9% rather than the 8.1% from earlier).  But here is a good look at which areas are faring better and which are faring worse. 

Not surprisingly, the areas that experienced the biggest real estate bust, Bend and Medford, are doing much worse than the state average, but Eugene is worse than average as well - something I would not have guessed.  Corvallis is very healthy at 5.6% and Portland is a little below average but still at a depressingly high 7.2%. 

Beeronomics: Complements - Beer and Cigarettes

OK, so I had to find some excuse to post this picture which is all over the Oregon beer-o-sphere. It is Don Younger striking a familiar pose on the last day smoking in bars was allowed in Oregon. How will the ban affect Oregon's bars, pubs and breweries?

Matthew Engle in the Financial Times, writes that beer sales in Britain have declined 10% since the smoking ban was imposed there. Why should this be so? It is certainly true that the two, beer and cigarettes, are complements and so increase the cost of one [smoking is more costly because you have to go outside and do it] and the demand for the other falls.

Will this have as big an effect in Oregon as in Britain? I think it unlikely as most of the ever-so-popular pubs and brewpubs are generally non-smoking establishments anyway. But I do imagine that some small bars could find business down. I guess the bigger question is: given that there are many alternatives to patronizing and working in non-smoking establishments, is the ban necessary? The free market side of me suspects not. But the ban is no so much about this, I assume, as about public health and the cost of caring for smokers later in life. If this ban manages to reduce overall cigarette consumption, then it could easily save the state a lot of money down the road.

Mileage Tax Redux: Mankiw and Thompson

It turns out that Greg Mankiw has blogged about Oregon's mileage tax proposal and, lo and behold, frequent guest blogger and friend of the blog, Fred Thompson has chimed in with some clarification. The essence of which is that congestion pricing is indeed a major motivator of the whole GPS idea and (as Fred rightly notes) without such motivation, the GPS doesn't make much sense.

But I still wonder how you deal with the problem of non-residents. Since the bulk of the congestion problems in Oregon are in Portland, particularly the I-5 and I-205 crossings of the Columbia river, it is not clear how something tied to Oregon registered vehicles will work. A lot of the congestion in these areas is apparently coming from Washington residents that work in Oregon, which means that the GPS in Oregon cars won't be effective in dissuading these drivers.

London has famously instituted congestion pricing, but there the tax works based on photographs of license plates. So if you enter London you pay, regardless of where your vehicle is registered.

Given the cost, complexity and incompleteness of this system, I still cannot see why it trumps the simple and effective gas tax. It strikes me as a wonderful idea of you are an engineer (especially a traffic engineer) because you get to play with new toys and tools, but I remain unconvinced in my mental cost-benefit analysis of the idea.

Unemployment Poll

Just back from a quick trip to San Francisco (where it was delightfully sunny), the poor unsuspecting city that was just invaded by a plague of Economists [which I shall now coin as the official collective noun for economists - inspired by Louise Erdrich's "Plague of Doves"].

The fact that the new term starts today probably means slow blogging for this week, but I will try and get to part two of my little education series which will look at the wisdom of investments in higher ed.

However, there is one self-referential news item, which is the official poll results from my little on-line unemployment poll. And the news is that for the self-selected group of readers of this blog that bothered to vote, pessimism rules the day. A whopping 40% of you selected 12% and I suspect that there is some censoring going on - meaning that some of these voters would have gone higher if the choices were available. Wow. I thought 12% was a real extreme, and should we hit that, I will be breathing into a paper bag. I fear that we will indeed reach the 10% range in unemployment in Oregon (which was my vote), and hopefully we won't stay there too long. But then I was wrong about what the depth of the current crisis would be 6 months ago, so perhaps I still don't get it. There are some votes for 7% (which we had not reached when I fired up the poll), so some optimists were there at least in the beginning.

Though self-selected, it seems to reflect the overall pessimism of the populace these days and that is a problem. The Consumer Confidence Index is at a new low and without getting consumers a little more optimistic, it is hard to get businesses optimistic and banks optimistic about businesses, etc.

I hope congress can get its act together soon and get a stimulus bill for Obama to sign immediately, for I fear that without massive federal stimulus, the global economy is headed off a cliff.

Happy New Year!