Beeronomics Update: Doing it Yourself

A while ago I blogged about whether homebrewing was a cost minimizing strategy for the craft brew lover in these tight times.  In that post, I expressed doubt about the whole endeavor, suggesting that only for those who really enjoy the process would this be a worthwhile strategy.  

The final reckoning is upon us.  I got a total of 25 22oz bottles for a price of about $60.   Thus the cost is about $2.40 per bottle, a considerable savings over the $3.50 or so that a normal 22oz bottle costs.  Of course, a good economist includes opportunity cost and it does take a lot of time and effort to do this.  So, let's say about a dollar a bottle, which makes this about a break even endeavor.  

But my main objection was the assertion that the resulting beer was sure to disappoint.  A long history of homebrewing years ago taught me that.  But lo and behold, the final product this time is fantastic!  This is the first beer that I actually really and thoroughly enjoy just for the beer (and not for the fact that I made it).  In fact it is so good, that I would choose it over many of the beers I regularly buy in the store.   Part of this is, no doubt, due to my good friend who has tons of experience who guided me carefully through the recipe and the execution.  Nevertheless, I now consider the whole effort a tremendous success.  Save a few pennies and have 25 bottle of great beer to show for it.  Not bad. 

Cheers! 

Crisis in Higher Ed: The Sky is Falling!

Okay, not really, but I did arrive at the stairwell in my building at OSU the other (rainy) day where a sign advised me to use an alternate route due to the ceiling falling in big chunks.  Yikes.  Here is the offending ceiling.

Um...can we have some of that stimulus money devoted to higher ed construction please?  At least it is not a repeat of a few years ago when the ceiling started leaking right on the department chairperson's desk.  

Oh and by the way, I am Captain Danger, laughing in the face of death -- I used the stairs anyway. 

Newspapers in Peril

The San Francisco Chronicle, the Chicago Tribune and the Seattle Post-Intelligencer are all among newspapers teetering on the brink of collapse. They are also papers in a twon with competing dailies. Today, another newspaper from a two-paper town announced it will close - tomorrow. Denver's Rocky Mountain News is shutting its doors.

This comes on the heels of this shiny new downtown office building the Denver Newspaper Agency (the entity that publishes both the Denver Post and the News in a joint operating agreement) built just a couple of years ago.

Does this portend the demise of dailies in one-paper towns? I sure hope not, I don't think we, as a democratic society, can afford for that to happen. Remember, the free market does not provide an efficient level of public goods and, to me, the media's watchdog role is a public good.

While I am talking about newspapers, is it now a common thing for newspapers to employ their own working reporters as columnists? I was surprised to see Anna Griffin's byline recently as I thought she had moved to being a full time columnist for The Oregonian. I prefer her as a reporter as I find her columns to be strange and incoherent - as if she is trying to rant like a columnist, but it does not come naturally. Anyway, I think it is dangerous for the reputation of a newspaper to have the same person reporting and opinionating on the news.

Oregon Unemployment in January at 9.9%

The rapidly deteriorating Oregon economy just keeps getting worse. I was assuming a rate at at least 9.5% and hoping to avoid double digits, so we at least managed that, but it will be worse next month and will probably remain on its upward trajectory at least through the summer.

The job losses are everywhere, even in education and health services which for a time was the lone positive sector. It is just horrible everywhere you look.

Oregon's Gas Tax: 90 Years Ago Today

On this very day in 1919, Oregon became the first state in the union to impose a per-gallon gas tax. [HT: Greg Mankiw]

Given the cost associated with the release of carbon into the atmosphere, it is time to consider a new gas tax that aligns the price of a gallon of gas with its true costs, both private and social. It is certainly better than a beer tax!

Obama's Speech

Perhaps I am getting just too cynical but here are three things that caught my attention from last night's speech to a joint session of Congress by President Obama:

1. The cost of the war in Iraq will now be a part of the official budget of the federal government.
2. The Obama administration intends to slash the federal budget over the next couple of years.
3. The Obama administration intends to bring the war in Iraq to a relatively swift conclusion.

Hmmmm...methinks I see a connection.

Okay, to be fair, just because military operations will cease does not mean we will stop spending lots of money on Iraq and putting the cost of the war in the budget is definitely the right thing to do. So perhaps I have just become conditioned over the last eight years to see accounting tricks everywhere...

Early School Closures and Economic Growth

Yesterday, I cited research from Maryland that shows that the loss of school days has a measurable impact on performance on aptitude tests. There is also a very strong link between scores on aptitude tests and economic growth. Below is a graph from an article by Eric Hanushek, perhaps the leading expert on the economics of education, and co-authors:

Though a measure of years of schooling has a weak impact on growth this is largely due to the fact that years of schooling and education are not the same thing (for many reasons like the fact that grade repetition is common in developing countries). So measuring education by aptitude tests uncovers the very strong link between education and growth.

Portland Home Prices Plunged in December

The latest Case-Shiller numbers are out.  I'll keep it simple and show the data in a graph.  Ouch.  Economists debate about how much people's attitudes about their own economic situations are relative to those around them, so in case yours is highly relative, I include San Francisco.  These are the December numbers, so we are two months behind, and there is evidence that the incredibly low prices are starting to bring investors back into the market.  But here in Portland, on average, homes are back to being worth what they were in September 2005.  Wow.  

Beeronomics: Experiments

This poster from Rogue's Green Dragon Pub in Portland, where they propose raising prices to post-tax levels for a day, made me think of a scheme I thought about and quickly dismissed as too hard to pull off. How could we know the real impact of a beer tax on Oregon's breweries? Run an experiment. Have Rogue, Deschutes, McMenamins, Full Sail and a number of independent pubs raise prices in a randomly selected half of their pubs for a week (by how much to replicate the effects of the tax is a matter of debate). Then switch back to old prices and raise them in the other pubs for a week. Examine sales data for all the different types and prices of beers to understand the price and cross-price elasticity of demand (how sensitive quantity demanded is to price). Not a perfect experiment, but far better than any other data we have. If you could get retailers to do it as well, then we would really be cookin'.

If any brewery owners want to give it a try, I volunteer my expertise in studying the data...

Do Days in School Matter?

YES.

Oregon lawmakers' cavalier attitude toward early school closures suggests that the marginal impact of days in school on student learning is small. But where are the facts? I have yet to hear or read a quote from one single lawmaker about the marginal impact of school closures, so I decided to go find out for myself.

Understanding the marginal impact of a day in school on student performance is complicated by the fact that school closures are not usually random. For example, if we looked at the impact on Oregon students of the 2003 shortened school year we would have trouble disentangling the effects of the short school year with other effects of the economic downturn in the state like decreased provision of social services, increased unemployment and other disruptions that could hamper student performance. Therefore we could not plausibly attribute any decreased performance to school closings alone.

Two researchers in Maryland, however, use a clever strategy to isolate the effects of school instruction days on student performance by looking at weather forced closures of schools - snow days - on assessment scores. The strategy works because tests are administered in April, before the districts can make up snow days by tacking them on at the end. The fact that snow days are random events and are different across Maryland's school districts allows for a plausible counter-factual: the performance of kids not affected by snow days. But this is not all, the researchers use a panel of data - multiple years variation in school days that allow them to control for differences across schools as well. In other words, they are looking at year over year differences in a specific school's performance based on snow days.

The results are presented in this paper (and some similar results by one of the authors is presented in another related paper). Unfortunately, the measures are a bit crude: they see only the percent of children that pass or fail statewide assessment tests in math and reading. They find that for each lost day of school, the pass rate for 3rd grade math and reading assessment tests fall by more than half a percent. So a loss of five school days (like what is being contemplated in Oregon) would lead to a three percent increase in the failure rate. This is shocking in and of itself, but consider the reduced performance for all students, including those well above the failure line and the implications for the overall performance loss - the total loss of learning - is truly profound.

Now there is a caveat: schools that know they are loosing days can strategize to maximize learning at the end of school, but remember that Oregon already has one of the shortest school years in the nation (and in the industrialized world) - so we are already trying to squeeze as much learning out of the short school year as it is, it is therefore not clear to me that more can be squeezed out of an already dry stone.

It is simply astounding to me that the Governor can talk about positioning Oregon to become a leader in green technology while at the same time disinvesting in Oregon's human capital. I have news for him - Oregon will be a leader in green technology not because of a few selected tax breaks, but because we lead in technological innovation. And we will only lead in technological innovation if we have smart people and excellent schools and universities, this is the lesson of Silicon Valley.

It is time to have a real discussion of the costs to the state of expediency in budget cuts. The obvious alternative to a shorter school year is increased class size. So what is the impact of class size? There is some debate: Hoxby (2000) finds no measurable effect, Hanushek (1998) agrees, but Rivkin, Hanushek and Kain (2005) (in a much better test) find positive, but quite small increases in student performance from reduced class size. The conclusion is inescapable - a shorter school year imposes a much greater cost on Oregon's children than increased class size.

It is time for the Governor and lawmakers in Salem to wake up and start making smart, informed decisions rather than off-the-cuff ones.

Does the Oregonian Not Care about Facts?

I realize there is a lower standard for opinion pieces then for news stories, but I imagine (and would hope) that The Oregonian would refuse to publish an opinion piece that claimed, say, that immigrants spread disease and are predisposed to crime. This claim has no basis in fact and has no place in a newspaper (unless it is in an article that then rebuts be presenting the evidence).

So why are they publishing this opinion piece that makes outrageous claims that are factually incorrect? In it the authors states: "the quality of education being delivered to a majority of students is closer to remedial high school rather than college." [Emphasis mine] There is absolutely no basis in fact for this statement. He goes on to state that half of students in college should not be there.

But what really gets this economist is the absurd claim that there is no real value to a college education and the only reason businesses want college degrees is it makes it easier to 'winnow' applications. Where to start? It is remarkable that businesses would find more applications such a burden and would pay 75% more for a college graduate than for a high school grad just to escape having too many of them. This is clearly an absurd assertion. We live in a world of market determined wages and businesses are not going to pay more for workers that do not have a higher marginal product. The college wage premium is real, huge and increasing precisely because a college education is valuable and ever more so in an increasingly global economy. See the graphic to the right (courtesy of the NY Times) - this is an empirical fact that contradicts the entire premise of the opinion piece.

Higher productivity means growth, so the conclusion we immediately draw from graphs such as this is that we should try and get more kids in college, not fewer, if we are interested in the future health and prosperity of the state and the nation. More college educated kids means a more productive workforce and thus more surplus to devote to many of the private and social needs of the population.

But the real question is why The Oregonian would print such an opinion piece? They should not promote the spread of ignorance. They should instead strive to raise the public debate, not lower it. What's next, a piece on how the Holocaust never happened, or that left-handers are superior beings?

Sam Adams and Self-Fulfilling Prophecies

Mark Larabee's story in The Oregonian on Wednesday about Sam Adams's effectiveness post-scandal brings up a point about self-fulfilling prophecies. There is an echo chamber feeling in many local government types and business people and saying essentially 'I worry about his effectiveness because lots of people are worried about his effectiveness."

This is clearly a self-fulfilling prophecy: because I worry about his effectiveness I will be less responsive to him and in so doing, I make him less effective. So I confirm my own perception.

Though this is a self-fulfilling prophecy, the impacts are real - no less so when the situation is a crisis of confidence in the nation's banks than in the Mayor of Portland, Oregon. In the end Adams is less effective. But it also means that if people would simply move on, the mayor could be completely effective tomorrow. And, yes, I am leaving out citizens and voters who at this juncture are less important than the bureaucrats we have elected.

What is best for Portland? I think clearly moving on and making the Mayor effective is the first best solution at this point - regardless of what you think about his past behavior

Beeronomics: One More Comment About the Beer Tax

Usually taxes such as these are proposed to address some external costs. But the problem with making the leap from a beer tax to alcohol and drug abuse (and related crime and treatment) is that this is an external cost only associated with a small minority of beer drinkers. In fact as I mentioned in my earlier post, moderate beer consumption may actually cause a positive externality, suggesting (economically) government may wish to subsidize moderate consumption.

Other taxes are different. Take a gas tax, there is a large and recognized cost associated with the release of carbon into the atmosphere and it doesn't matter how much you drive, when you drive or how fuel efficient your car is - the carbon content of a gallon of gas is the carbon content of a gallon of gas. When you consume a gallon of gas in any manner of use, the cost to society is the same. Thus a tax on gas is purely Pigovian. We all pay a price that reflects the costs we impose on society.

Not all sin taxes are like beer taxes, the effect of cigarette smoke are harmful for even moderate smokers and also for those around them. So a tax is much more efficient in addressing the external costs here. But Beer is simply not the same thing. As a occasional and very moderate drinker of beer I impose no external costs - so making me pay a higher price is not Pigovian but simply an arbitrary, and distorting, tax.

Oregon's Economic Forecast: Grim

The latest numbers as reported by The Oregonian:

SALEM -- The revenue forecast released this morning shows that Oregon will be short at least $855 million for schools, social services and other state programs this year.

Legislative leaders and Gov. Ted Kulongoski have suggested cuts to schools and furloughs for state workers and school teachers in order to make up the gap with four months remaining in the budget period. The 2007-09 budget was set at $15 billion.

The shortfall for the 2009-11 budget period will be even larger, at least $2.5 billion short of maintaining current services.

The governor may be right that we should not dip into reserve funds, but that decision should be made based on a determination of the effectiveness of spending.  Just saying that the budget is going to be worse in the future is not good enough.  Perhaps fewer school days are appropriate but I doubt it.  I would at least like to see a comparison of student performance based on marginal differences in instruction days and class size. 

Econ 101: How Does it all End?

With new and expensive government programs being announced almost daily, I sense a little fatigue already about how much the government is doing. The housing plan in particular seems to be raising questions about moral hazard and how much the public should insure private risk. On OPBs "Think Out Loud" this morning I heard the opinion that hosing prices should be left to fall without intervention and this would help lower income people afford a home.

The problem with this argument is that if the housing market continues to fall and households net wealth continues to drop and banks continue to hoard capital, demand, which is already plunging, will continue to fall, businesses will fail and these lower income people are not going to have jobs to make them able to buy the houses.

But it does lead to a good question (that I was asked the last time I was on Think Out Loud and did a poor job of answering): if the government did nothing in terms of fiscal stimulus, housing market interventions, etc., how would the downward spiral end?

Well the classic Keynesian story is one of depreciation: over time households and firms who have resisted investment due to belt tightening find that their stuff is starting to wear out. For business this is their productive capital - the machines they use to make stuff to sell, and for households these are consumer durables - cars, washers and dryers, refrigerators and the like. Thus after some time people are forced to start to make these investments again and this starts to turn the tide. Add to this the fact that while households can economize, there is generally a minimal level of consumption that they need, so decreases in demand by households can only fall so far. But this can take a long, long time...

It should be noted (and Krugman has a nice piece on this) that the more typical (post-Keynesian) business cycle theory tells a story of recovery that is based on falling prices which makes the money supply too large and forces down interest rates and spurs on more investment and output. However, we are in a situation currently where the interest rate is a low as it can go and it is not spurring on this new investment. Essentially the aggregate demand curve is near vertical so this mechanism is no longer working.

Anna Griffin Needs a Lesson in Public Goods

Anna Griffin of The Oregonian may be right that the PGE park renovation idea is a bad one (though I disagree), but her strange fixation on the term 'blighted' is odd and I find her argument convoluted. From an economics point of view public goods will be underprovided by private markets. The government, then, may have a valuable role to play in providing them. So if a city wants to, say, provide a better, more well-lighted intersection and anticipates that the external benefit of this action will increase the value of surrounding properties, funding it with bonds that will be serviced by the future higher tax revenue from the district makes sense. It doesn't really matter if this is in a ritzy district or a run-down district. Either community will be unlikely to provide it privately and the rationale is no different.

As she says:

In urban renewal districts, communities borrow money to pay for improvements such as better roads or prettier storefronts. When property values rise, the additional tax revenue goes to retire the debt rather than into city, county or school budgets.

The insinuation is that you are taking away from school budgets. But this extra revenue would not exist without the investment in the public goods in the first place. So the real debate should be whether the increased revenues will actually materialize, not whether a district is 'blighted.' Whether this is true for the PGE Park case is an important question for the bean-counters to determine whether this particular source of funding is appropriate, but in my view this is an investment in Portland as a whole not in Goose Hollow...

Calvin and Hobbes on Government Subsidies

This is a cartoon I had on my office door for years. I clipped it when it was first published and I used to include it on the last (and otherwise blank) page of my Intermediate Microeconomics syllabus just for amusement's sake. Recently it has been rediscovered by the blog-o-sphere because of its new found relevance. So I offer it here the day after the US automakers came looking for $14 billion in new government aid.

Portland Housing Market

Ryan Frank of The Oregonian has the story today of home sales in Portland hitting a record low in January. They also have a pretty frightening picture of how long it would take to sell all the available houses at current rates. Here is their graphic:

But this is a bit misleading, home sales will pick up and inventories are adjusting to the new reality. Here is a chart made using the tools available at Altos Research:

Average days on the market started to decline in mid January and the inventory has declined quite a bit likely because of people who once might have sold when the market was robust are keeping properties off the market by delaying moves, renting, etc.

The full brunt of the unemployment situation has yet to hit real estate, however, so this all might start to change rapidly this spring...

Beer Tax Redux: Fred Thompson Weighs In

Fred Thompson, friend of the blog and resident tax and budget expert, sends along his take on the beer tax idea:

Jeff Alworth of Blue Oregon blogged very informatively the other day on the proposed increase in Oregon’s beer tax: Brewing Beer is Not a Sin. To an economist, specific excises raise two additional questions that Jeff did not address: substitution and incidence.

Let’s look at substitution first. As Patrick recently observed, one justification for taxing beer, wine and spirits is that their consumption produces bads and taxing them reduces consumption. People drink beer, wine or spirits to get drunk, which can mean anything from a pleasant buzz to total stupor. For example, although moderate alcohol consumption appears to be good for you, excessive consumption is not. Moreover, even moderate alcohol consumption can lead to negative externalities like dangerous driving. While taxes on beer, wine and spirits are a blunt instrument, the evidence is that they work to reduce the damage associated with alcohol consumption (there is some evidence, that their effects on the benefits of alcohol consumption are disproportionately high, but this evidence is by no means conclusive).

However, if reducing the damage associated with alcohol consumption is the justification for taxing booze, the tax should reflect its potential for doing damage. That means the tax should be based primarily on alcohol content and should be the same for beer, wine and spirits. That is not now the case in Oregon. The alcohol in beer and wine is implicitly taxed at lower rates than the alcohol in spirits (and the tax on spirits is based on the price of the drink not on alcohol content).

The other justification for taxing beer, wine and spirits is that booze taxes generate lots of tax revenues: a means of plucking the goose with the minimum amount of hissing. Booze is an inferior good. Its price elasticity of demand is less than 1, which means that a one percent increase in the price of alcohol will decrease its consumption by less than one percent. Of course, that’s not equally true of all populations. Price affects the consumption of occasional drinkers and teenagers much more than of alcoholics. (Teenagers tend to substitute pot and other tax-free but illegal recreational drugs for alcohol when taxes are increased on beer, which is less harmful for a variety of reasons.)

Since the flip side of price inelasticity is income inelasticity, this takes us to the incidence question. One can estimate the income elasticity of a tax using ordinary-least squares regression according to the following specification: ln(Ci) = a + b(lnYi) + e, where C is tax payment, Y is family income and i represents the ith family. Here, b shows the percentage change in tax payments as a result of a one percent change in family income, which is income elasticity. Elasticities greater than one mean that the tax is progressive; less than one, regressive. It isn’t possible to compute the income elasticity of the alcohol tax in Oregon, but we can use household accounts from the US census to estimate the income elasticity of alcoholic beverage purchases, which indicates that b is approximately equal to .6. That is, a one percent increase in income increases purchases of alcoholic beverages less than one percent, which implies that the tax is regressive.

But, wait, there’s more. There is also some evidence that most of the increase in alcoholic beverage purchases as income increases is not reflected in greater alcohol consumption, but a preference for up-market drinks – Beefeaters instead of Potters gin, fine wines rather than cheap plonk, and designer brews rather than Bud. Consequently, it is likely that a tax on alcohol is not only regressive, but highly regressive.

Is this bad? Hard to say. However, it is somewhat anomalous that the same people who want to increase taxes on alcohol are also big fans of minimum wage increases. One hand gives; the other takes away.

What to do About Newspapers?

I am an economist, trained to appreciate markets, and yet when I start to talk about one of my pet concerns, the fact the newspapers and their 4th estate role are dying (which I have blogged about in the past), normal people who usually mistrust markets tune me out and say things like well it will all be internet based soon, nothing to be done, etc., etc. But the problem there is that no one has figured out how to make internet newspapers turn a profit, so what will happen to real reporting?

My question is: can we afford, as a society, to loose the essential watchdog role of the media? I think not. Partly this comes from my background studying developing countries where corruption is a huge drag on growth. Many countries lack an effective independent media which allows corruption to flourish unchecked. And partly this comes from the fact that I believe a well-function democracy relies on well-informed citizens.

So what to do? I have advocated for the idea that public money should be used to support what is, essentially a public good. And now, or the first time, I find a prominent economist arguing the same thing. The point of this article is that it is the reporting that should be supported, not the papers themselves - I agree entirely. I good friend suggests an NPR-type model of print journalism, member driven and government supported - what do you think?

Education and Growth

A group of interested parties gathered at the state capitol today to advocate for school funding. I agree and I include higher education as well. The causal link between education and growth is well-established. This illustration from The New York Times sums it up:

The forcing of quick and drastic cuts is very costly and damaging - I think the rationale for using part of the reserve funds now to avoid these cuts is strong. Schools can make much more intelligent decisions in the next academic year about ways to cut that are the least costly to the students.

Oregonian on Beer Tax

The Oregonian covers the beer tax idea.  See my earlier post for my take.

Busy...

Suddenly everyone wants to talk to the economists. You can see this economist embarrass himself publicly tonight at 7, and tomorrow at 7, on KGW TVs "Straight Talk". I think you know what I am going to say...

Anyway slow blogging as a result.

Oregon's Housing Market - Foreclosures

Not surprising given the horrendous unemployment situation Oregon, I suppose, but we are (according to RealtyTrac) now number 5 in the nation in terms of the percentage of houses in foreclosure.  1 in every 357 homes in Oregon are now in some stage of foreclosure.   

Beeronomics: Beer Tax

Sin taxes, taxes on things like alcohol and tobacco, are often justified economically as Pigovian because of the adverse health effects that create costly demands on the state-supported medical system. There is a mountain of evidence suggesting that cigarette smoking has severe adverse health effects and these smoking-induced maladies create large costs for the state, so taxes on cigarettes appear to be pretty well-founded (the appropriate level is still a matter of much debate - especially since the effects of secondhand smoke may be much larger than was once thought).

But can beer taxes be justified along the same lines? There is a lot of evidence suggesting moderate consumption of beer is actually good for your health.  But there are also negative health benefits from alcohol dependency and both the health effects and the behavioral effects impose costs on the state.  But I would argue that beer is not the main culprit  (I would at least like to see evidence that it is) for alcohol dependency.  Furthermore a selective tax on beer would simply shift alcohol consumption to other forms of alcohol (potentially more potent ones) which would not solve the problem.  So I don't find much of a convincing economic rationale for a beer tax.

So the news that the Oregon Legislature is considering, once again, a bill to raise the tax on beer is disheartening.  Just because it is politically expedient does not make it right.  The justification of the bill is appalling: alcohol and drug addicts create huge costs for Oregon, yes, but just because you can't tax illegal drug use doesn't justify harming one of the few bright spots in the Oregon economy by placing the burden of drug and alcohol rehabilitation on beer consumers and  producers.  Beer brewing in Oregon is still a relatively small part of the economy, but it is growing and, according to the Oregon Brewer's Guild, represents about 5000 jobs.

At a time when we are trying to stimulate the economy, raising taxes is counterproductive and this one particularly so.

The Compromise Stimulus Bill

The cutting of most of the $40 billion in aid to states from the US Senate’s version of the federal fiscal stimulus bill was a triumph of politics over economics. Senators that claimed that this money does not represent stimulus have exposed themselves either to be woefully ignorant of the basic economic concept of stimulus or more concerned about political considerations than the welfare of the nation and its citizens. Either one is inexcusable.

This transfer to states represents the very best type of stimulus. It will fill in for lost state revenue, so it will begin to be spent immediately; it will go to existing programs, so it will be spent effectively; and the spending will go to the most vulnerable populations, the very people who are most adversely affected by the economic downturn. Additionally, much of this money would go to save off cuts in education funding - the very best investment we can make in the future prosperity of the country.

In exchange what did we get? Well, $70 billion spent on fixing the Alternative Minimum Tax for one. The AMT might be a bad thing in need of a fix, but a fix is terrible stimulus. It increases income of relatively well-off families and a good portion of this income can be expected to be saved so won't do much to stimulate the economy.

So at the time states are cutting spending and, in some cases, increasing taxes - very direct and powerful anti-stimulus, the federal government is responding with...an AMT fix that provides only a fraction of an antidote. Amazing. Imagine what spending this $70 billion in block grants to states would achieve?

I am very seriously starting to wonder if this bill will do more harm than good. An ineffective bill that saddles us with a huge debt burden is worse than no bill at all.

Schadenfreude

The job market for new PhD economists has tanked.

A Beautiful Mind

MLS in Portland, Baseball at the Rose Quarter?

The Oregonian is reporting that the Blazers have thrown their hat into the ring asking Merritt Paulson and the City to consider a AAA baseball stadium in the Rose Quarter. I think it is a good idea.

I have said before and I'll say it again, don't look to professional sports to drive economic growth overall, but sports teams and stadia can be focal points for local investment. As the Rose Quarter a bit depressingly moribund, I think this idea makes a lot of sense. There is already a lot going on in the area, the city is considering a big convention center hotel and the transportation links are in place. Lents is also a good idea but the chance of subsequent investment that can be transformative is less certain (especially in the short term). Having a local partner in the Rose Quarter will help with overall event planning and related business development.

And, by the way, would a PGE Park renovation and a new AAA ballpark be economic stimulus? Yes, assuming they can get started relatively quickly (within a year) - same can be said of a convention center hotel. Construction costs have fallen considerably (steel prices are much lower than in recent times) and labor should be pretty cheap right now, so there is a lot to be said for undertaking such projects right now. On the other hand, revenue projections in the short term are going to have to adjust for the economic realities of the times which could weigh on the bond servicing issue.

I do think that the rationale for these moves are backed up by economic theory and evidence, but I make no secret to being a soccer fan and MLS supporter so I am inclined to support any effort to land a team...

I Feel Your Pain

The Oregonian reported on the very loud horn on the new WES train causing people fits in Wilsonville.  I know how they feel.  When I lived in Corvallis, I lived close to the Willamette and Pacific line that runs through the OSU campus (current and former undergrads at OSU will remember, fondly no doubt, the dulcet tones of the horn of that train as it crossed campus at 6am).  Near our house was a small driveway to a single house that crossed the tracks.  Though this was a private drive used once or twice a day the train apparently was obliged to sound its horn multiple times.   Oh how I loved that sound!  So melodious and joyful... 

What is Stimulus?

I had an epiphany the other day whilst talking to a reporter about the confusion over spending and stimulus. The reporter was asking me about spending and jobs. It is quite possible that I am very dense about these things and that others have made this connection before, but for me it suddenly made sense why economists' message is not being understood. I think there is a widely held perception that federal spending that you would call stimulus has to be directly linked to a job. So if government says, we are going to hire ten people to fix potholes, or we are going to pay a firm to hire ten people to fix potholes, then people are ready to understand this is stimulus. They also make the link between these particular jobs and the claim of job creation. So if the state claims it will spend money and create 3,000 jobs, I think people think that this number refers to the actual jobs for the actual projects. [And, in fact, the state might be thinking this way]

But this is not what economists talk about when we talk about job creation through stimulus. We are talking about any spending by government regardless of whether it is directly linked to a job, and the job gains we are talking about refers to overall, permanent job creation that comes as a result of increased economic activity. Creating specific jobs in, say, the construction industry directly is nice, because it helps a distressed population and we would expect this population to have a high propensity to consume from their income which helps the multiplier effect - meaning they are likely to spend most of what they earn. Government spending that prevents cuts at the state Department of Transportation by filling in budget holes does exactly the same thing. The difference is that while there will be lags in getting new people hired to fill potholes, the state DOT is ready to go today. Even spending on things like a national health information system is stimulus. It is new spending that will become income for workers, computer manufacturers, software engineering firms, etc. It is the increased economic activity that comes from this stimulus that creates the jobs that helps lift us out of the recession.

Oregon Blogroll

I have been very lax in creating an Oregon blogroll and so I am asking for help. Please inform me about blogs that are Oregon focused, economics and policy oriented, and that I don't already have on my blogroll.

One Piece of Good Economic News: Intel

Not often that I get to hear some good economic news for Oregon, so this e-mail from Bill MacKenzie at Intel (whom I met when we were both on OPB's "Think Out Loud" after Intel announced job cuts in Oregon) cheered me up:

Intel Announces $1.5 billion Investment in Oregon

To support the coming move to its next-generation 32nm chip manufacturing technology, Intel announced today that it will add to its already large factory network with the largest-ever investment in a single process technology…and all the investment will be in the United States.

Intel will deploy $7 billion to upgrade factories in Oregon, New Mexico and Arizona to manufacture silicon wafers with the world’s most advanced 32nm process technology. Approximately $1.5 billion of that investment will be made at Intel Oregon during 2009-2010. This will be on top of $1 billion already invested in 32nm at Intel Oregon during 2008, translating into a $2.5 billion investment in 32nm at Intel Oregon.

The 32nm technology used in Intel’s manufacturing process builds chip circuitry 32nm (32/billionths of a meter) across – incredibly small atomic structures.

This is the kind of investment by American businesses that, combined with well-crafted federal stimulus legislation, will lead the country out of this economic downturn.

The new multi-billion dollar investment will ensure that state-of-the art chip technology will continue to be made in America, where more than 75 percent of Intel’s manufacturing continues to take place. Intel’s investments in Oregon, Intel’s largest and most comprehensive site, send a clear and strong message that Oregon will remain the location where Intel continues to do its most highly advanced technology development and manufacturing.

At a time when job preservation and creation is of paramount importance, the jobs associated with this investment are high-skill, high-wage, high-tech manufacturing jobs that are the economic engines of the states where they are located. The investment will also support thousands of contract jobs for technicians and workers who reconfigure the factories.

Intel anticipates that the Oregon investment in this technology process, consisting of new process technology equipment and facility upgrades, will occur at its D1C and D1D fabs on its Ronler Acre Campus in Hillsboro and at its Aloha Campus. The initial stages of the investment have already begun and are expected to continue into the first half of 2010.

This investment is designed to preserve hundreds of high-wage jobs currently in Oregon and jobs in Oregon that are tied to Intel’s continued success. It is a significant upgrade to the facility and takes advantage of the skills of the existing workforce. The Oregon upgrade will also lead to the employment of 1,500 contract workers.

Business spending and investment in the U.S. fell at a 12.3% rate in Q4 2008. In that same period, spending on equipment and software dropped at almost a 30% rate, the highest rate in 50 years. This commitment by Intel to $5-7 billion in capital investment should be seen as a positive indicator for the US economy. Real stimulation of the American economy will come from private sector investments such as this.

Economist's Notebook: IKEA

Over the holidays I found myself in IKEA shopping for some cheapo furniture. I had not been to an IKEA in about 16 years. It was quite an experience, but what struck me the most was a sign that read (paraphrasing): "Why is there no one around to help me? If we employed more staff to help we would have to charge more for our furniture. That's why."
This struck me as quite remarkable. There are other businesses that aggressively cut costs to provide cheap wares - Wal-Mart being the most notable example. But they don't like to point out to customers where they are cutting corners, they would just assume you didn't notice. IKEA is different and there are signs all over the store that explains exactly how they are saving money and reminding customers that they are passing it on to you. [This particular sign was apparently just there for the holiday rush because when I went back to take these pictures, it had been removed - dang!]

I find this fascinating. You economic behaviorists can help explain, no doubt, but it must be that IKEA has found that by explaining to customers their cost cutting strategies (including he less obvious ones) the customers are more excepting of this cutting of corners. But if they think it is a good idea, why don't other businesses do it? Airlines, for example, seem like a perfect candidate for this. Heck, US Airways is about to start charging for pillows and blankets! [Insert your joke here about charging for floatation devices]

Signs such as this one that seemingly excuses the company for selling furniture that is mostly flat, this other one that apologizes for making you haul it yourself might be seen as just serving to draw attention to areas in which customers might not have noticed. But based on IKEA's success, it must be working.

One wonders if it has something to do with the fact that it has, as far as I can tell, one business blueprint for the whole world. It could be that marketers have figured out that Americans don't generally like acknowledging cost cutting but that Europeans don't have the same aversion to it. I don't know a lot about behavioral economics, but I would be interested to know if there is a big difference in behaviors across the pond.

As for me, I don't mind, I was looking for something cheap and efficient, and I got it, the $2.49 kiddie meals came in handy too, and I didn't even mind busing my own table...

Economist's Notebook: We Are All Keynesians Again

When I was in graduate school in the late nineties, the field of macroeconomics was having a bit of an identity crisis. Early twentieth century Keynesianism was out because it did not rely on the careful building up of a theory of aggregate economics from the simple rational economic agent that was the basis of modern neo-classical microeconomics. How could you, the argument went, have a macro theory that is disconnected to micro theory and still call it well-founded?

Thus, Robert Lucas, at the University of Chicago, and others set out to re-invent macroeconomics based on 'microfoundations.' Starting with the individually rational decision maker and adding up, in essence, led to a new macroeconomics that has been called many things but is most commonly described by the rubric 'real business cycle' theory (RBC). It had its origins in the monetarism of Milton Friedman, but was (is) a much more fully realized theory (and in that I mean, among other things, highly mathematical - which I consider a good thing in that mathematics helps prevent logical inconsistencies). A number of graduate programs became associated closely with it, Chicago, Rochester, and, most prominently (or perhaps better said, the department whose identity is most deeply enmeshed in RBC theory), the University of Minnesota.

It was a fresh Minnesota PhD who taught me most of my graduate macro (after a breathtaking few weeks with Bruce D. Smith who was an amazing teacher and researcher). The lessons from this training was clear: markets are efficient and people are rational. This means that the government has little role in the economy and will generally muck it up if it tries. This is a strong departure from the Keynesian macro of the past which implicitly assumed that markets had lots of frictions and would often find themselves in less than efficient outcomes, so the federal government has a very necessary role to play.

By the mid 1990s RBC macro was ascendant and Keynesians were struggling trying to proffer arguments why frictions existed and incorporate them into models that looked nothing like Keynsian ones. The most compelling of these frictions was the idea of 'sticky prices' - that prices and wages were slow to adjust to changing economic circumstances like the RBC models assumed. Union contracts, cognitive dissonance and the simple cost of reprinting menus we all given as evidence of this phenomenon (as was a wealth of empirical evidence).

It wasn't until a new class of macroeconomists came along, most prominently Michael Woodford and Julio Rotemberg, who were able to construct a microfounded model of Keynesianism (essentially a melding of the RBC models and some Keynesian principals) that this gulf was bridged -partly. This is still process and will take a generation - Minnesota is still pretty orthodox RBC, for example - and, unfortunately it came too late for me (Woodford's now canonical book Interest and Prices: Foundations of a Theory of Monetary Policy was published in 2003). These new 'Dynamic Stochastic General Equilibrium' models (DSGE) incorporate less than fluid prices but are essentially still based on monetary policy, not fiscal policy. [If you want a more thorough treatment of DSGE models, there is no better place than this]

These DSGE models are still mostly based on rational agents but with economic frictions. One way to view the current crisis is that it is being driven by a panic. This implies a degree of irrationality. The only place to turn for theories where agents are behaving less than perfectly rationally is to the macroeconomists working in the area of 'bounded rationality' who reject the perfectly rational agent in favor of agents who have a hard time figuring it all out and so use rules or learning mechanisms. George Evans of the U of O and his student, and my colleague, Bruce McGough of OSU work in these areas, but many mainstream macroeconomists are uncomfortable with such departures from the basic rational agent framework we are used to in economics.

So where does the modern macroeconomist turn for guidance on the effects of fiscal policy? Well, it appears that most of them are turning all the way back to 1936 and Keynes's General Theory. International economists (like Krugman) will claim that New Open Economy Macro (NOEM) does talk about fiscal policy, but I would argue that it is still mostly monetary based, and doesn't tell us a whole lot about our current situation. Keynes, on the other hand, speaks to just these types of systemic economic crises and offers solutions.

So we are all scrabbling around and opening up our intermediate macroeconomics textbooks (that still rely heavily on Keynes's model as a pedagogical tool). What I wonder is if the 'great moderation' in business cycles showed us that modern RBC theory was essentially right or was it the other was around, the serendipitous moderation of business cycles gave us false confidence in the RBC framework. Either way, we are in new territory now and virtually all modern, cutting-edge macro models don't help much in guiding us through these troubled times.

We are all Keynesians again.

OPB Pledge Drive

I don't begrudge OPB its need for a fund drive, but could it come at a worse time? There is so much important news right now that is being preempted by the endless blather that is the hallmark of public radio fund drives across the nation (do they all read from the same script?). I guess the answer is to get them to their goal as soon as possible, I renewed my membership quickly in hopes it would get the news back on.

Anyway, to fill in the gap, here are a few important stories that I have found on the NPR website that I have not heard on OPB:

Story on toxic assets.

Job cuts at Nissan.

Airline industry update.

More price discrimination on airlines!

Is it That Centrists Don't Understand Stimulus or Don't Care?

The compromise Senate stimulus bill has shaved $40 billion for state aid. This cutting was done to 'appease' centrist Democrats and Republicans who claim that this is not stimulus. Come again?

Stimulus requires quick and effective spending of borrowed money. States, constrained by law to limit deficit spending, are quickly cutting back on essential services. Federal money would immediately stop some of this cutting - it would get spend right away - and it would prevent cuts to enormously effective programs, like education - so it would be spent effectively. This is precisely what good stimulus spending does. In fact this is so effective that I think it should be priority number one. In addition, as I have said repeatedly, we cannot sacrifice our future prosperity by shortchanging our children's education. A good chunk of this $40 billion would have gone to education, which is exactly what we need most. So this $40 billion represented quick and effective spending for a public good that promotes future growth.

So are centrists just economically illiterate and truly just don't get it, or are they more worried about politics and perceptions in the midst of the biggest economic crisis since the great depression? Either one is inexcusable.

Economist's Notebook: An Economist Faces an Economic Crisis

Excuse me for engaging in a wee bit of navel gazing.  But as a development economist I think about the effects of economic turmoil on people a lot, and most of my research has to do with populations that are severely impoverished.  I like to think that the research I do will have a tiny but real impact on policy in the future and that this will help people.  Self-serving, I know, but it is part of what motivates me.  

So how does an economist react to economic turmoil at home?  Well, partly I think I have a role to play to both educate people about economics and promote good economically sound policy.  But on a personal level, it is hard to sit and watch the economy crash so severely and not be affected by it in a very human way, rather than in an academically disinterested way.  I cringe sometimes when I hear myself say what a great teaching moment this is.  Though this is true to an economic professor, it sounds a bit callous to the many families that are already starting to feel the pinch. 

This economic crisis has already shown itself to be devastating (especially in Oregon) and as an academic economist I feel particularly impotent.  On the radio this week I was asked to give the listeners some good news and the best I could do is "this shall pass...eventually."  So perhaps just as a way to make myself feel better I have volunteered as a driver at the Oregon Food Bank.  In the past I have been content to give charitably and have made excuses about my volunteerism being devoted to my children's school and activities.  But I don't feel I can be as self-interested anymore when the economy is collapsing - it is time to refocus. Since I feel that there is nothing that diminishes us as a society more than having hunger in our midst I have decided that if I can be some small part of the solution, I must act.

I hope you will too in whatever way you see fit.  This crisis is going to affect us all and it is going to be long and deep.  I hope this will be a moment when we all give a little bit more.  That's all I am trying to do. 

Unemployment Soars to 7.6%

Here is the BLS US Unemployment graph with recessions denoted by the cross-hatched areas.

Not much I can add to what is out there except to say that 600,000 jobs lost in January suggests that the downturn is still picking up steam, not slowing down. This it truly frightening, suggesting that we are really truly on the verge of a deflationary episode. The U6 rate which includes under-employed and discouraged workers is at a stunning 13.9%. Based on the increase in national unemployment, we can expect Oregon's unemployment rate to reach at least 9.5% for January when the data come out on Feb 23.

Stories like this one about Washington State Ferry workers agreeing to wage freezes is the first step, the next is wage concessions like this one requested by Eugene's Register-Guard. This is how it all starts, lower wages leads to lower prices which lead to low business investment which leads to lower wages, which leads to.....you get the idea. The problem is that once it starts it is very hard to stop.

We need stimulus now, before it all starts in earnest.

State Stimulus Package is Done

The Oregonian is reporting that Governor Kulongoski has signed the $175 million state public works spending bill into law.  Given that the state GDP is in the range of $150 to $160 billion, this is not going to do much to stimulate the state economy on its own (but then again nor will it be a big burden when the bill comes due).  But coupled with federal fiscal stimulus, its marginal impact will hopefully be greater.  

What is striking is how quickly this got done, if only our federal government was so efficient...

A Better Stimulus Plan?

I am having an internal debate about stimulus. Though I believe in the traditional stimulus formula, federal spending on public goods, I am quickly loosing faith in the government's ability to pull it off. I am wondering if we would not be better served by a massive liquidity infusion into credit markets. The Treasury could, in essence, continue the monetary policy that have been doing and buy lots and lots of commercial paper, MBS, even fund mortgages at low rates.

I think that in a perfect world this is second best, but the world (especially in Washington) is very flawed. The benefits of this plan are that it can be done almost immediately and quite effectively (well, not the mortgage bit) and though job creation would lag, this could jolt us out of what I think can be best described as a coordination failure - we are all scared to commit to credit on either side.

Thinking this way puts me in the camp of the Chicago school folks, which makes me a bit uncomfortable, but though my support has more to do with my worry about Washington's competence than doubt about the idea of fiscal stimulus, I am beginning to see their view a bit more favorably.

Thoughts?

The Stimulus Plan in Crisis

I am beginning to wonder if the US government can really pull this off - at a time when the economy is in total meltdown, politics seems to be trumping good governance. Even if a good stimulus plan were to be passed and signed today, I wonder if the government can really handle spending all that money without a huge amount of waste. I am starting to think our government has become almost totally incompetent. We are on the verge of a deflationary episode that could spark a real depression and our own 'lost decade.' We cannot wait anymore and simply must act now. By the way, if anything the stimulus package is too small, so the latest efforts to trim $50 to $200 billion is a waste of valuable time.

Why is Washington falling into the old partisan routine and letting political concerns overwhelm concern for the welfare of Americans?

I don't know, but I hope it stops. Perhaps the latest unemployment report, due tomorrow at 8:30 am will be a wake-up call.

Econ 101: Paradox of Thrift

You may have heard this term used recently (Paul Krugman, among others, has been talking about it), it is an old term coined by Keynes which describes a type of self-fulfilling prophecy. In a recession, we all do what is individually rational: we pull back on discretionary spending and build up savings as a buffer against the vagaries of a turbulent economy. However, taken together, all of this thrift on the part of citizens creates a drop in aggregate demand that prolongs and deepens the economic downturn. So we become thrifty to guard against bad economic times, but by doing so we actually ensure bad economic times.

But wait, you careful economists will say, becoming thrifty increases savings which should lower interest rates, increase investment and will actually help lead us out of the economic downturn. Plus, decreased demand will cause prices to fall and people will be enticed to spend again. These are both valid criticisms of the paradox of thrift though neither necessarily invalidate it - it depends on how much the aggregate demand fall is countered by the increased investment. But it is certainly true that in this particular economic crisis, low prices have not enticed consumers back in to the market very much (look at the deals you can get on cars versus car sales), and banks are still largely sitting on the money they are getting from savers and the federal government as they continue to try and shore up their balance sheets and worry about the effect the economy is having on borrowers solvency.

Another rationale for federal fiscal stimulus...

Beeronomics: Signalling and Beer Pricing

The discussion about beer pricing strategy continues at the Beervana blog with an interesting comment from one of the pre-eminent beer retailers in the nation: Belmont Station (no longer on Belmont, but why quibble?). Here is an interesting tidbit:

Some breweries (like Rogue) are quite proud of their beer, and regardless of whether or not Dead Guy cost significantly more than Inversion they want to project an image high quality, expensive beer, so they price it higher.

Nobel prize winner Michael Spence won his prize for developing the theory of signalling. The idea is this: if you are a high productivity person (because perhaps you are especially smart), how to you credibly convey this to a prospective employer. You can't just say "I'm very smart" because if this increased the likelihood of you being hired or getting a higher wage, everyone would say it even if it were not true. So you have to find other ways to let them know, or 'signal' your type. One way to do this is to obtain more education. This works because acquiring this education is easier for those that are smarter. Less smart individuals will decide not to invest in education, because it is costly and, after employed, employers learn your true type. So in equilibrium there is a natural sorting, smart people get educated and less smart people don't and, here is the punchline, employers can use education as a real measure of smarts.

[By the way I tested this model (with Mike Conlin now at Michigan State) using new players in the NFL and found that players with some private information about their ability can signal this through holding out and delaying agreement on a contract. The idea is that missing some training camp is more costly for less able players than for more able players.]

This basic model has been translated into advertising. Why do some manufacturers spend a lot of money on ads that tout the superior cleaning ability of their laundry detergent? Any manufacturer can claim this but consumers figure out whether this is true. Since what manufacturers of laundry detergent want is to get customers to become loyal to their brand, if spending a lot on ads does not get consumers to keep coming back, it is pretty wasteful relative to those brands that do get consumers to become repeat customers. Thus, again, there is a natural equilibrium, high quality brands will do a lot of advertising and lower quality bands will not and, again, the punchline is that the ads themselves are credible signals of the true quality.

What does this have to do with beer? Well, if Chris of Belmont Station is right, high price is itself a signal of true quality. Since consumers figure out beer quality by trying it once, price itself may be a reliable signal of the quality of the beer. To put it another way, if consumers didn't think Rogue was exceptional beer, they could not get away with their high prices, so the fact that they can is a signal that they do indeed make exceptional beer.

So it is not necessarily just a matter of projecting high quality, but informing consumers about quality as well...

Is College Aid Stimulating?

Andrew Taylor of the Associated Press had a 'news analysis' this weekend that states that $15 billion for college scholarships is not stimulating the the economy (this was published in The Oregonian on Saturday). As someone who has been sounding the drumbeat for education spending I take issue with this statement.  

I would argue that rather than being no stimulus, this is the very best type of stimulus. This money would go immediately to consumption spending and would also be an inexpensive way to keep unemployment down (working age adults that take this money and enroll in college would stay out of the labor market - not the same as job creation but limiting the supply of job seekers helps those left in the labor market).  As a bonus it is a huge investment in the nation's human capital and thus its long term growth prospects, more important and more long-lasting than infrastructure.  Money spent on college will translate into jobs in academics so I see no reason to expect the multiplier to be lower in this area then in infrastructure.

I am not really sure why this reporter doesn't think college scholarships is stimulating - after all, think of all the stimulated minds that will eventually drive the economy forward.

Kids and Restaurants

On Saturday, Anna Griffin had a nice column in The Oregonian about taking kids to restaurants.  In it she suggests that restaurants that are kid friendly do so at the cost of profits. I don't buy it.  Kids surely impose higher costs on the restaurant than do adults (both in cleaning and in deterring kid unfriendly customers), but the revenues from families surely outweigh these costs or else few restaurants would cater to kids.  A handful may do it simply out of the goodness of their hearts, but market realities are what they are and the fact than many restaurants (including many 'heartless' chains) cater to kids means it is clearly a profit maximizing strategy.  Those that don't see higher profits by catering to kids don't, like the coffee shop in the article.  In equilibrium there will be places that make an effort to shun children and many that do the opposite.  Customers that dislike dining with kids will seek out the former and those who wish to dine with kids, or don't mind kids, will seek out the latter.  So I make no apologies when I bring my children to a kid friendly place.  Sure, I am grateful to restaurants that do cater to kids, and I show my appreciation by bringing them my custom.  End of story.  

Is College Aid Stimulating?