Eco-nomics: The Streetcar and the Incentives of Fixed-Route Transit

[Photo Credit: Jamie Francis, The Oregonian]

The Oregonian reports that the Feds have approved $75 million for the east-side streetcar project.  This begs the question, why fixed-route surface transit?  It is no faster than busses, much more costly to implement, less flexible in terms of scheduling and cannot adapt its route to changing ridership patterns.  I suppose the best answer is that it is a commitment device that can spur development in areas in which such activity is considered desirable.  In so doing it can promote even more density, which is generally a good thing for local economies and the environment.  I suppose it might be more energy efficient, but I am a bit skeptical, especially relative to electric busses like those in SF that get power from overhead lines.  I am no expert or even much of a casual student of transit, so I am wondering why the feds are endorsing it so enthusiastically.  What have I missed or what should be added to the discussion?      

Shameless Cross-Posting on a Busy Day: Weekly Unemployment Claims Fall

Busy as heck these days, but I just had the happy duty to confer a PhD degree on one of our grad students who is off to a tenure-track faculty position in PA.  Good work!  Since I am so busy in general I am going to let Kelly Evans of the Wall Street Journal's 'Economics Blog' cover one little sign that the light at the end of the tunnel may be piercing the darkness:

Another week and another encouraging sign: The Labor Department’s tally of new claims for U.S. unemployment benefits, released this morning, fell by 14,000 last week to a level of 631,000. This is still a high level, of course, but the four-week average of new claims — which smoothes out weekly volatility — also declined, to 637,250.

The four-week average is being very closely watched by economists right now, given this simple series has historically had impressive power for predicting when recessions are coming to an end. As we noted a couple weeks ago, Robert J. Gordon, an economics professor at Northwestern University who sits on the committee tasked with dating recessions, is one who finds enormous value in this series. Going back to the late 1960s, he has found that the four-week average of new claims peaks about a month before the declared end of recessions with remarkable accuracy.

As of right now, the four-week average claims series peaked at a level of 659,500 in the week ended April 4. If that number holds, based on the series’ past performance it would mean the recession ended somewhere between late March and early May — a far more optimistic read on the economy than any consensus forecast (the latest WSJ survey of economists shows on average they expect the recession to end in September). “The end of the tunnel may only be weeks away,” says Mr. Gordon.

Of course, the length and depth of this recession — which began in December 2007 — could mean the series doesn’t have as much predictive power this time around. It also won’t be clear for many months when the recession actually has ended, because even if signals coming from the data improve, theNational Bureau of Economic Research’s dating committee, of which Mr. Gordon is a member, likely won’t declare an “official” end for quite some time. For example, the committee didn’t pinpoint December 2007 as the starting date of the current recession until a full year later.

And meanwhile, the government’s data also contained an increasingly worrisome piece of information: The total number of workers receiving jobless benefits jumped to nearly 6.3 million for the week ended April 18, a far higher figure than has been previously recorded by the Labor Department. With such high levels of workers on jobless rolls, it could keep a lid on any hopes for a recovery, particularly as the unemployment rate, now 8.5%, is expected to hit double digits.

I'll just say that it is the last paragraph that I find myself agreeing with. It is too far early to call the end of the recession - I think we are in for a rough rest of 2009. Also, we should expect some uptick in industrial activity (and thus employment) as inventories have been depleted, but this does not mean demand has recovered.

Ack!

The Portland Business Journal is reporting that the Rose City Cafe in PDX is closing. This is terrible news! It is rare to find such a nice, quiet, relaxing and not-half-bad but reasonably priced restaurant in an airport. My early morning flight routine has always been to check in a bit early and then have a relaxing breakfast there. Sigh, just another sign of the terrible economy.

Should Universities Re-Imagine Themselves?

A reader asks for my take on this opinion piece that appeared in The New York Times on the 26^th of April. The essence of the piece is that the old organizational structure of the university based on disciplinary integrity is outdated and we should move to an interdisciplinary model driven by important questions. It is written by a religion professor at Columbia University.

There are three main points I want to make. The first is the flaw of logic that is so large you could drive a cruise ship through it. This is the assertion that we need to break down the old disciplinary groupings and focus instead on cross-disciplinary problems. Religious studies scholars should talk to political scientists, for example, to solve the religiously motivated political tensions that exist in the world. The problem here is: where do the religious studies experts and political science experts come from so that they can get together and solve all the worlds problems? Without training in traditional disciplinary programs, there is no expertise, no canonical education that produces precisely the type of expert that Prof. Taylor speaks of. Without the discipline-based education what you would get are students who are knowledgeable in many things but experts in nothing. This is a huge distinction that is lost on many people. As a public policy student I became very knowledgeable and could have been a very useful member of society in applying that knowledge. But it was in the core economics education I received that gives me the expertise to apply economics to public policy questions. It is people like me, in other words, that create the knowledge that the generalists use. I think an inevitable result of breaking down discipline specific programs would be the prevalence of ‘good sounding ideas’ but no real way to study just how good they really are.

This leads to the second point. It may be that religious studies students are studying things of no real use, but this is a problem of religious studies not academics in general. I have a hard time thinking of any research in economics that is not directly relevant and valuable to contemporary real world problems. In fact, economics is often accused of straying too far into other disciplines so you might think we are eager to see these lines blur, but this is wrong. Without the intense core economics education such intrusions in other fields would be useless, it is precisely the economists eye on a psychological problem that adds value (and a psychologists eye on economics as well). Rather than blaming academia as a whole for the failings of religious studies, Prof. Taylor, the chair of the religion department at Columbia, should be focusing on why his own discipline has been so stuck in medieval ways.

The last point is that economics has already responded to the changing marketplace for higher education and research (which is perhaps why economics is so successful). Our dissertations today look nothing like those of medieval dissertations or economics dissertations of thirty years ago. Economics has become flexible and our dissertations are usually just bundles of papers on diverse topics because this avoids precisely the sub-sub field problem described by Prof. Taylor. Our graduates are in high demand and not just for academic jobs, but in government, business, consulting, banking and even journalism. Clearly the training and expertise we provide have a high value precisely because of how applicable they are to real world problems.

Two other more minor points also need to be made. First Prof. Taylor argues for an end to tenure, but without tenure, the incentive is to avoid researching the hard questions and rather focus on areas that are popular, have good funding and are easy to publish in. This is not what you want out of university scholars. Tenure is not job security for life, but it does represent intellectual freedom. It does have incentive problems but the alternative is not attractive. [And, as pointed out on this blog before, tenure is a part of compensation, without it you would likely have to increase faculty pay]

Second, as is pretty clear from my comments, think Prof. Taylor is startlingly myopic – unable to see past the problems of his own field - but yet he is quite ready to generalize his problems to the entire academy. For instance, teaching via teleconference might be effective when you are just delivering a long speech on say, early Christian thought, but trying to teach economics that way is unlikely to be successful as there is a lot you have to do to build mathematical models, draw the resulting graphs, perturb them to make predictions and quiz student to make sure they get it. There is a lot of value added to being in the same room, not to mention all the help faculty provide outside of class.

All of the problems he lists are really problems of fields like religious studies where, essentially, the problem is lack of jobs. Clearly the presence of PhD students for whom there are no jobs in his department is what motivates Prof. Taylor to write this. It can be read as a desperate attempt to say, "religious studies PhDs really are valuable, it is just that the old structure devalues them!" So the answer is: they should be hired by political science departments... But it is not the structure of higher education that has devalues religious studies, but religious studies as a field itself that has done it. If the important questions are about religion and politics, that is where the field should place emphasis.

Fortunately, economics is very responsive to markets and remains a valuable field both in and out of the academy. Almost all economics PhDs in the US have a job in their field within a year of getting their degree. As I have mentioned before, university graduates earn wages that are about 75% higher on average than high school graduates, so universities must be doing something right. But Prof. Taylor never mentions undergraduate education, funny that...

The Portland Housing Market: The February Case-Shiller Numbers

Sigh...here we go again.  The Case-Shiller numbers are out and they are grim.  There is no end in sight to the erosion of home values in Portland, we just seem to be picking up steam.  Here is a graph of the the raw numbers for PDX, Seattle and the 20 city composite:

Here are the year to year percentage changes in the Portland numbers:



However you look at it, the story is not pleasant. The usual caveats - these are February numbers, heavily influenced by property values in suburban developments, etc. - all apply. But with unemployment so horrendous, it is hard to see where and when it will all end.

Update: From Calculated Risk, something to make you feel better.

What is a Song Worth?

It seems to me, people are always getting into trouble trying the figure out the 'inherent' value of stuff when economics, eons ago, figured out that a good's worth depends on how valuable it is to people and how scarce it is.

This NPR story this morning about music pricing is another example of this phenomenon. Sure, the same music can sell for radically different prices, but the price itself tells you nothing about its value. Its value to a consumer is a function of that consumers tastes, income, ease of purchase, etc.

The music industry thrived on their ability to make music scarce but this ability is quickly diminishing and they are left to scramble to figure out a new model. But the music isn't less valuable now, it is just not as scarce. This is good news. We are all better off in this new world. The only losers are the few bands and performers that would have been superstars that can no longer corner a market. The rewards to being a good band are still there, just not as humongous.

Robert Frank coined the phenomenon of the huge rewards to the very top performers in markets were performance can be mass produced, 'winner-take-all-markets.' These markets produce a lot of contenders but few winners. I imagine a music industry in the future that has nearly as many contenders but many more winners, all with a modest reward.

Update: A reader points me to this New York Times 'Economic View' article by the aforementioned Bob Frank discussing the role of winner-take-all markets and other markets in the equity of progressive taxes.

Beeronomics and Eco-nomics: Globalization and the Cost of Bottling

[Photo Credit: Angelo De Ieso II of Brewpublic]

Mike Weksler of Portland's Green Bottling e-mailed me yesterday with this dilemma:

In January of this year my cost to purchase a case of 12 22oz amber beer bottles went up $.65. It is less expensive for me to purchase my bottles from China, ship them here, and rent a facility to store them than it is for me to purchase them from the local distributor.

What is worse is that the local distributor gets the bottles from an OI plant that is in NE PDX, 3 miles from our HQ.

I don't like the idea of sending our money away from the local economy, and the extra fossil fuels that I would have to consume to get my glass shipped to PDX.

I could also choose to buy my bottles from a plant in OK for $1.20 per case less than I spend now as well.

I am rushing off to Eugene so don't have time to comment too much, but will try and do so later. The standard trade argument would be: well, we should not want to make bottles here, just the high value-added beer and by letting China make the bottles we are all better off (us and the Chinese) . A rejoinder to this is that the cost of shipping is artificially low as the shippers do not have to pay the true cost of carbon usage, so while it may be privately profitable to source bottles from China it is not socially profitable. [This assumes, by the way, that the China plant is not more energy efficient than the PDX plant, which I think is a safe assumption]

The answer? Well, a global carbon tax that accurately reflected the cost of carbon emissions would get the prices right, but let's get real, that 'aint gonna happen anytime soon. So what do you tell a guy like Mike, who is trying to do the right thing, but who knows that if he goes local, some other person could start another bottling business that sources from China?

What do you think?

My Whereabouts

Slow blogging for the rest of this week.  Tomorrow (Friday) I will be at the economics department of the University of Oregon to give a research seminar.  The seminar is at 3:30 in the department and, I believe, is free and open to the public.

I will be presenting some recent research on the effect of abortion laws on marriage.  This is NOT a paper that takes any stand whatsoever on the abortion rights debate, it simply seeks to understand the incentives abortion laws create in marriage markets and examines evidence that these incentives matter in the real world.  

You can view it here. 

The Name is Arshavin

The team is Arsenal.

This is for the benefit of the far too many students who have confided in me their support of Manchester United. You can have your Ronaldo, Portuguese Poser, we'll do just fine with our little Russian fella.

OK, OK, I'm a Portland homer too:

Two-Sided Risk and the (Portland) Paulson Plan

Merritt Paulson is obviously weary of sounding like he is threatening the city so, in his opinion piece today in the O, he very carefully makes a point that I have mused about before: without this deal to bring MLS and build a new baseball park, will the city be considerably worse off then it is today?

People who criticize the deal seem to assume that Paulson (or a new owner) can afford business as usual, but I am not at all sure that is true. Beavers crowds are paltry and Timbers crowds are not much better - are these franchises viable in the long run as tenants of PGE park? I doubt it. The Beavers are probably going to need to move anyway and the Timbers are not going to service the debt to PGE park. Without a permanent tenant in PGE park, the city is on the hook for all of the past debt. So while the risk of doing the deal has been discussed ad-nauseum, the risk of not doing a deal seems pretty high as well.

The risk to the servicing of the existing debt exists in either scenario, the appropriate question is: is it higher or lower with the plan? This is the story I wish the The Oregonian would cover.

Eco-nomics: Renewable Energy and Carbon Taxes

[Wind, wave and solar power all in one! Photo/graphic credit unknown]

In my previous post I discussed how wind power does not necessarily displace carbon emitting power generation, but, here in the Northwest, often displaces clean hydro power. In the comments, reader Brian talks about the problem more generally. Here are his comments in their entirety:

The problem with the wind tax credit is that it is an indirect approach toward reducing coal generation. The direct impact of the credit is to make wind more profitable, but the indirect desired result is really uncertain, and if you re-read the WW article you will notice that it is completely silent on the success of the system on reducing coal generation, and the dependence on the hydro system isn't mentioned at all.

A tax credit for wind is far more politically palatable than increasing the tax burden on coal generation, but we risk the possibility that we are picking favorites, and we are not allowing the market to find the right mix of conservation and alternative sources. It is highly likely, from an economics perspective, that the resulting outcome is inefficient.

Spoken like a true economist, and absolutely correct. The point is that supporting one particular type of clean energy circumvents the markets ability to reward the most cost effective and cleanest energy source. It also poses the risk of substantial public investment in a technology that ends up not being the most successful and thus has the potential of being wasteful.

Which leads us right back to a carbon tax. If we tax carbon appropriately, we 'get the prices right' and the market can be expected to produce an efficient outcome, just as Brian says. This is also part of the point I have made a number of times about the Governor's plans to create a 'green economy' for the state: it can't be based on particular businesses or industries, but rather creating an environment that is attractive for whatever firm has the next great idea. This means high quality schools and research institutions, a good infrastructure and a efficient and flexible government that is ready to support any new business.

And, of course, revenue from carbon taxes can fund such investments...

Eco-nomics: What Are the True Benefits of Wind Power?

A friend called me when the WW cover story on wind energy came out. He thought Jacquiss missed a big part of the story. I have been meaning to post on this for a long time (as you can see by the date on the story) but I have not had time to poke around more.

The basics are thus: Jacquiss points out the heavy subsidy that wind energy gets through things like the Business Energy Tax Credit. This is often thought of as a good thing because wind energy displaces environmentally damaging coal and natural gas based power generation. But the reality is not nearly so simple.

Since we get a lot of our energy from hydro we have a source of energy that is easily adjustable - much easier than a gas or coal fired power plant which can't just stop and start easily. So PGE and other wind utilities pay Bonneville to spill water when the wind is blowing hard.

This is not at all to say that wind energy credits are not worth it, or that in the long run we are better off if we subsidize the infrastructure now, rather it to simply say that if we are going to accurately weigh the cost of all of these subsidies to the state (and Jacquiss does a good job of this) we need to be clear about the actual benefits of wind power.

So if you are a customer of wind energy (like I am) it might come as a surprise that your wind sourced power is not offsetting coal and natural gas at anything close to one-for-one, in fact you might be offsetting hydro much more than coal and natural gas.

As I said above, I thought it might be fun to poke around and see what I could find out, but then I remembered that I have a real job. So if you know something about this chime in and add or correct at will.

[Photo credit: Thomas Boyd/The Oregonian]

How Bad is the Current Crisis?

From Menzie Chinn at Econbrowser comes this graphic lifted from the IMF's latest World Economic Outlook. Menzie makes two points that I have made as well: a recession is bad enough but a recession with a credit crisis is worse and a recession with a credit crisis and a worldwide downturn is even worse.



The answer: really, really bad.

Federal Fiscal Stimulus

I was chatting the other day with a friend who works in a federal agency that is in line to get a bunch of federal stimulus money. He made a couple of interesting points. First, he said that federal agencies are not set up to deal with windfalls of cash. They are structured to operate within a budget and so it is not that easy to just 'ramp up.' His, like other agencies, has a prioritized list of projects, but the ones that did not make it on to the actual 'to do' list with the normal budget were shelved and not ready to turn on like a switch. Second, he said that they basically have not received any money yet and initial monies will be small to see how well agencies do at spending it quickly and effectively and future allocations will depend on this evaluation.

That all speaks to two points. First, when asked about bright spots, I mention that the federal stimulus hasn't really gotten started yet and so we can expect that the stimulating effects of this spending to be on the horizon. Second, given the terrible shape of state budgets, I still can't believe that a big part of federal stimulus was not block grants to the states. Every $1 states cut back in spending counteracts a $1 of federal stimulus money. If you want quick and effective stimulus, block grants are the way to go. Is it too late to shift some money to this purpose? I don't think so and I can't understand why it is not part of the discussion (but then I am not a particularly savvy political observer).

Spectator Sports and Economic Growth

I have said this before but as The Oregonian has once again put it on the front page it bears repeating: No evidence for the positive is NOT evidence for the negative.

I am, of course, referring to the link between investing in spectator sports and the economic growth of the city.  Here is what we know: when you look carefully at the basic measure of economic growth, GDP per capita through time, and introduce a sports stadium and/or new sports franchise there is no apparent 'bump' in the data.  Or more precisely, sometimes you see a bump from the direct construction spending, but it is temporary.  From this you can conclude that there is no evidence that such investments create a measurable spurt in local economic growth.  You CANNOT conclude, however, that such investments do not spur growth because you cannot compare it with the counterfactual (like you could in a lab - see yesterday's post).  The fact is that any sports franchise investment is a relatively small part of any city's economy and finding a measurable effect on overall growth would be so extraordinary as to rouse suspicion that the correlation is spurious.  

Think of a study which looked at the the GDP of Denver over the last 50 years and controlled for many other factors that effect the local economy including, for example, revenue from natural resources.  Then you add the addition of the Rockies baseball team and see if there is a jump in the time series.  Nope.  But does it mean the rockies did nothing for the local economy?  No, it means that there is no identifiable boost, but since we don't know what growth would have looked like absent the Rockies we can never truly say anything meaningful about what their presence has meant for growth.  

My guess is that investments in sports franchises are not considerably more or less stimulating for growth than any other average business investment in the short and medium term.  The difference in my mind is the much bigger social welfare that spectator sports provide than, say, a new restaurant.  Just look at the folks that turned up for the Blazer rally yesterday.  What this means is that you may not get outsized private returns on the investment but you may get outsized public returns.  

What I don't know, and will probably never know, is what such franchises do to the long term trajectory of the growth of a metro area.  Would Portland be any different if the Blazers never arrived?  I don't know, but I suspect that, just like theaters, museums, concert halls, spectator sports make a place a nice and stimulating place to live and are part of the decision to live somewhere.  So I suspect that the Blazers have had a small role in making Portland a desirable place to live over the past 30 plus years and this cumulatively has created a different growth trajectory than there would have been without them.  Since Oregon does a particularly bad job of educating its residents, we benefit from the flow of educated people who choose to live here, and cultural amenities, including spectator sports, are important in this regard.  

This leads to the argument that we should spend more on education.  This argument is powerful, but the city's investment in the stadium is an investment in a revenue generating asset paid for by borrowing from the future.  Conflating this with current investment education is a mistake - it is not a zero sum game.  I would love it if investments in public school buildings could lead to increased future revenues that would pay for such investments, but the reality is that they don't - or at least not ones the city can capture.  

The essential story of economic growth is the mixing of educated workers, technology, capital, infrastructure, etc.  To put it simply, you need to create educated people AND a local economy in which they can be productive.  I think that given the relatively small cost to the city and the potential benefit to the residents of the city it is worth it.  But as always, I get a lot of personal benefit from spectator sports and soccer in particular, so I am inclined to think the overall benefit is large. Judging from the movement of the poll, I am in the minority.

Oregon's Taxes

From Kari Chisholm comes this graphic produced by the (partisan) Oregon Bus Project:



A nice simple breakdown of where the money comes from and where it goes.

Economist's Notebook: Cooking Stoves

While we are on the topic of development, The New York Times has a story today about the use of cooking stoves in low-income countries and their effect on the climate. The basics are that the stuff they burn: wood, dung, charcoal, releases lots of soot or black carbon and this soot can act as a heat absorber and help warm the surface of the earth.

But there is another problem with these stoves: they appear to be extremely detrimental to the health of users. The aforementioned Poverty Action Lab has a working paper that summarizes the current research.

Photo Credit: Adam Ferguson for The New York Times

Economist's Notebook: Development Economists in the Laboratory

I have conducted research in a wide array of fields of economics: urban economics, industrial organization, labor economics, growth, international economics, environmental economics, political economy and public policy. But I am, first and foremost, a development economist. Like any academic discipline, economics has trends and fads that come and go and development is no exception. The latest trend is in randomized experiments. The leading institution for this work is MIT where the Poverty Action Lab supports studies based on randomized experiments. There is a growing debate about the value of such experiments, due, in my view, in large part to the zealous promotion of such research by its champions and their concurrent dismissal of natural experiments and other attempts to tease out causality from data.

The problem is, in essence, the fact that the world is complex and messy and as most human actions and interactions do not happen in a controlled environment, understanding the mechanisms that govern human actions and interactions is exceedingly difficult. Mostly we do as careful a job as we can, present as convincing a story as we can, but we never prove anything. However, in the standard empirical analysis, we are often dealing with data from a large population which makes generalizations relatively straightforward.

Randomized experiments, like for example, talking a set of schools in India and randomly selecting some to get computers and then studying the effects allows economists to (somewhat) control the environment and make a stronger causal statement. However, the generalizability of such trials is questionable. So too is the economic underpinning of the trial itself. Without having some ideal of the overall economic mechanism we might not really understand much at all. For example, do households respond to their kids access to computers in certain ways that has spillover effects that are positive or negative.

My take is that more data is always good, but that experimentalists (many of whom are the most influential voices in development economics) are wrong to dismiss more standard empirical work. I think experimental evidence is interesting, but often does not tell us much about the world in general. Empirical work based on theory is not always convincing but much of it provides good evidence to support or dismiss theoretical hypotheses and tells us a little more about the world in general. In other words, both have a role and a place in economics. What is distressing to me, then, is how much attention is paid to randomized experiments and how little attention is being paid to theory and related empirical testing. I don't think it is healthy to focus so narrowly on one approach.

I was happy, therefore, to read Steve Levitt's take:

A few months ago, Princeton economist Angus Deaton offered his vision for development economics.

In his piece, he rails against the movement toward relatively atheoretical, randomized experiments, calling for closer ties between theory and empirics. “The great economists should be trying to do something that is harder.” Now, in an excellent new paper, Harvard economist Guido Imbens fires back.

Imbens argues that Deaton is too dismissive of the special value that randomized experiments have in assessing causality, and that natural experiments, while not as good as randomized experiments, are far better than Deaton gives them credit for.
While it might seem difficult to mostly agree with both Deaton and Imbens, given that they espouse polar opposite views, strangely enough that is where I stand in this debate.

On the points Imbens makes, I think he is exactly right. However, what Imbens minimizes, in my opinion, is the importance of models and theory for motivating empirical research, including randomized experiments.

Given a question, of course you want a randomized experiment to give you the best answer possible. What I think has happened too much in economics recently is that the availability of experiments has trumped the asking of good questions. Or, put another way, anyone can do program evaluations based on true randomization, so why should some of the world’s best economists be devoting so much of their time to such exercises?

The great economists should be trying to do something that is harder.

Here is Poverty Action Lab's Abhijit Banerjee and Esther Duflo's take.

Is Economic Growth Good or Bad? Redux

In an earlier blog post I included some preliminary back and forth between me and Rob Dietz of the Center for the Advancement of a Steady State Society. On Monday we had our discussion at the Corvallis City Club. Here is how it was reported in the Corvallis Gazette-Times.

Note, however, that my middle initial is not 'D' but 'M' for MUNRO:

Casteal Foulais na theine!

To Save or not to Save?

Architects, preservationists, design-types are up in arms about the proposal to demolish the Memorial Coliseum to make way for a AAA baseball park. They cite it as a shining example of the International Style of architecture. I'll admit that this is a style that I often think of as functional, ugly, boring, abrupt, etc. But I do have a soft spot in my heart for the Coliseum - I attended Blazer games, rock concerts and other events there and I was always impressed by two things: One, when you are inside, the wall of glass creates this wonderful transparency that is unmatched in any other arena I have been in. There is not the feeling of being enclosed when you are on the concourses like you are in the Rose Garden. Two, the structure is so simple - a big box around a concrete bowl - that it allows you to think about structure and design at the same time.

But it is aging and doesn't really have a major tenant, so it is worth saving? There have been proposals to turn it into a number of other things, most notably perhaps a multi-sports recreational facility. But though discussion have gone on for years, no obvious use for which it is the appropriate size and shape has arisen. Do we really need two arenas? Is there an economic model to support substantial investment in the old structure? It is worth noting, perhaps that many sports arenas of similar vintage have been demolished, off the top of my head I can think of Denver, Philadelphia, Indianapolis, Houston and Boston as cities that have said goodbye to (sometimes) beloved arenas - Boston especially. If these cities could not justify a secondary use for their arenas, I am not sure Portland can. Still, I do wish there were a way to save it.

What I wonder, as an economist, is if there is such a deep seeded attachment to the building among the general population of Portland. I suspect not, which destroys any public good argument for preserving the building. But I could be wrong. What do you think?

A Note About Oregon's Unemployment

The latest Oregon unemployment number caught me by surprise but not because of job losses. Unemployment is a measure of all those residents who are actively looking for work and cannot find it. I knew the job loss number would be roughly 14,000, what I didn't expect was the surge in people looking for work.

I was chatting with a colleague the other week and was lamenting the fact that it was going to be a long time until we saw unemployment numbers like we enjoyed over the last few years. My argument was standard, once the recession bottomed out and economic activity started to pick up many people who were waiting out the recession would re-enter the job market which would put a damper on unemployment numbers and slow the recovery in the job market indicator. But what we are seeing is a much sooner surge in job seekers than I had anticipated which signifies that the downturn is having an especially severe effect on household budgets. [This may also be an artifact of the over-leveraging households engaged in over the last few years]

So what the March number signifies to me is the degree of distress Oregon households are in. Waiters can no longer afford to wait, spouses and children are looking to contribute to household income, retirees that have seen their retirement income plunge with the stock market are looking for jobs and, especially distressingly, college age kids are probably no longer able to afford tuition and are instead looking for work. This is why I called the number horrendous - not because of job losses (which decreased significantly from Feb - though this is traditionally a time of strong job gains) - but because of the job seekers.

I know economics is called the dismal science, but this is really upsetting. Oregon families are in deep distress and it is hard to see a light at the end of the tunnel right now.

So, what does this mean for future unemployment? It is really hard to say as unemployment is a combination of seekers and jobs. I expect the erosion of jobs to cease by the end of the year at the latest, but what about the job seekers? Are all those that can be forced to seek already out there or are there more out there? Will people start to leave the state to look for work elsewhere? These are questions that are hard to answer at this point. I really thought we would be able to avoid the 12% barrier, but now I have a hard time predicting. If the seekers side stabilizes or subsides we still may avoid 13% but I wouldn't put any money on it.

One bit of hope is that the effects of the federal stimulus are only just barely starting to materialize. Over the next two years, this should help significantly.

Horrendous

Oregon March Unemployment at 12.1%. This crushes my (I thought) pessimistic estimate of 11.5% and is truly shocking. All along I had a hope that we would remain under the peak of the 12.1% unemployment we saw in November of 1982. Nope. And there is every reason to expect this to continue to worsen through the bulk of the remainer of this year.

Beer and Gas

All of the Honest Pint hullabaloo got me thinking about asymmetric information and government regulated and policed standards. Gas pumps are a typical example: certified and tested by the state to be sure you are getting a gallon of gas. But clearly this is a much bigger deal than beer, right? Well, yes, overall it is orders a magnitude bigger, but then when I started to think about my own budget I came to the...what, terrible, delightful, embarrassing, impressive?... realization that I spend about as much on beer as on gas. This is largely because I go for quality beer and beer in pubs over quantity (honest - I swear) and I try and drive as little as possible (though I do drive an awful lot between Portland and Corvallis during the academic year).

Hmmm.....something about this seems so wrong, or so right, I can't decide.

Kids are not Recession Proof

"Uptick in Vasectomies Seen as Sign of Recession" reads the New York Times' headline. My first thought was, ummm...come again? Sure kids are expensive, but so are vasectomies and if incomes are tight why should there be an increase? Should they not see a decrease and less expensive alternatives like condoms see a big increase? I didn't think most insurance covered an elective surgery like this. Besides, as retirement accounts crash, and with future social security payouts likely to go down, children are a good form of old-age insurance, right?

Well, no it turns out. Most insurance does pay, or so claims the reporter, and in our society the present discounted value of the cost of kids is surely much higher than the expected present discounted value of the insurance aspect. So perhaps this is evidence of recession effects - kids as luxury goods, you might say.

However the cost (in terms of money, time and discomfort) seems really low and it strikes me that perhaps this has seen a big change in recent years which would, of course, lead to an increase in quantity demanded. Is this true? Anyone?

I am not ready to accept the hypothesis of the article, but it is an interesting theory...

My Office is Now as Clean as it Will Ever Be

Here is proof for all eternity that, yes indeed, my office is not always a mess. 

NB: To my students, the Magic 8 Ball on my filing cabinet is what I use to determine answers to questions like "can I turn my problem set in late?"  So now you know.

I once, with a friend who shall remain anonymous, dissected and then tried to reconstruct an 8 Ball.  Surprising what you will find should you try the same thing.  Even more surprising how difficult it is to recreate.  Hint: coffee is not a good way to replicate the dark liquid...  

Econ 101: The Coase Theorem and the White Stag Sign

Ronald Coase won the Nobel prize in 1991 for his work in understanding the role of property rights in efficient market outcomes. Stealing a page from Bob Frank at Cornell, it is easiest to understand the Coase Theorem by simple example. Suppose two people share an apartment, Jacob and Chuck. The only problem is that Jacob likes to smoke and Chuck is disturbed by smoke. It is worth $150 to Jacob to be able to smoke in his apartment and it is worth $200 to Chuck to live in a place without cigarette smoke.

There are two ways to get the efficient outcome, which is to not have any smoking (because collectively they are $50 better off with this outcome than the other). We could give Chuck the right to live without smoke, or we could give Jacob the right to smoke. Say what? The first is obvious but what about the second?

Think about what would happen in the second case: Chuck would offer Jacob some amount of money between $150 and $200 (let's say $175) to not smoke inside and Jacob would accept. No smoke would happen and this outcome would be efficient. Why? Well, Chuck is $25 better off paying $175 and not having smoke and Jacob is $25 better off not smoking but collecting $175. So they recover the $50 in surplus. The second case is worse for Chuck and better for Jacob relative to the first, but both are efficient.

This is the essence of Coase. As long as negotiations are costless and property right are well defined, an efficient outcome occurs no matter which party has the property rights.

What does this have to do with the White Stag sign? Well suppose that the sign with UofO on it benefits the UofO a sum of $100. But such a sign would negatively impact Portland residents collectively a sum of $200. The efficient outcome is for the sign not to read UofO. If UofO did not have the right to change the sign, problem solved. If the UofO had the right to put whatever it wanted there, residents could offer a sum of more than $100 not to. The problem is it is hard to negotiate such a transaction - it is not costless. Residents would have to come together and propose a deal with UofO and this takes time, effort and resources - all real costs. In the end then, this would not happen and an inefficient outcome would occur.

This is precisely why we have rules and regulations governing such large public displays. In the case of situations where it is hard to negotiate laws are written to impose the burden on the lowest cost participant.

As Frank says: "It is often impractical to negotiate solutions to the problems created by externalities. Hospital patients, for example, are unable to negotiate with passing motorists about not blowing their horns. In such cases, the law tries to impose the burden of adjustment on the party that can accomplish it at lowest cost. Not blowing his horn is a cost to the motorist, but a benefit to the patient. Because peace and quiet is especially valuable for hospital patients, the law prohibits horn blowing in the vicinity of hospitals. "

This is also why I supported Commissioner Leonard's exercise of authority on behalf of Portlanders. Essentially what he did was to assert the appropriate property rights and this led to negotiation on behalf of Portland residents and what is a reasonably efficient outcome.

Econ 101: Nash Equilibrium in a Non-Cooperative Single-Shot Game

Via Greg Mankiw, a wonderful illustration of almost the precise game I used to describe the no stop sign intersection. The outcome is ... predictable.



What would you have done? Are you sure?

White Stag Sign: UO and PDX Agree on Compromise Solution

From the Portland Business Journal:

The sign, which currently reads “Made in Oregon,” will instead just include the word “Oregon” in the sign’s main body. A banner below the single word will read “Old Town - Portland” on a green background.

Umm, its a little awkward but a pretty good compromise?

Trying a New Widget

The widget is called LinkWithin. This was promoted as a good way to resurrect old posts. Of course this is a problem when you make the same basic economic points over and over. Anyway, I'll be curious to see what the link with THIS post, and may terminate the experiment if it does not seem to be helping anyone enjoy the blog.

Let me know what you think.

Note: I think one drawback is that it only links to posts with pictures. Hmmm...

UPDATE: I think it sucked. It is gone. I found it more distracting than helpful. Anyone know of another widget that is similar but better?

When is Racial Profiling Discrimination? Rosie Sizer Channels Her Inner Economist

The related question to my provocative title is "and does it matter?" In other words, even if racial profiling is not discriminatory, it might still be morally wrong. I am not going to address this related question here, it is beyond the scope of my little economics blog.

The question in the title comes from this story from OPB's April Baer (whom I haven't quite forgiven for her decision to leave the Morning Edition host spot - no one is quite as good) on Portland Police Chief Rosie Sizer's comments about tracking the success of searches by race.  I know all about where this comes from: a famous paper by John Knowles and Petra Todd that looked at the conviction rate, by race, of vehicles searched from traffic stop data in Maryland.  Good to know Chief Sizer is keeping up with the economics literature as we all know that economists have all the answers.

But let's start from the start.  Suppose you see that police in some jurisdiction are stopping and searching cars driven by African-American (black) drivers just as often as Caucasian (white) drivers even though only 10% of the population is black.  [In Maryland 63% of cars stopped were driven by African-American drivers, while only 18% of all cars on the road were driven by African-Americans along I-95]  This stopping and searching of cars then is disproportionately focused on black drivers and is evidence of racial profiling, stopping and searching cars precisely because they are being driven by black drivers.  Even if it is the type of car itself, say, that is the reason for the search, if that type of car is disproportionately driven by black drivers it could still be considered racial profiling.  But what if police officers are using their wealth of knowledge and experience to judge which cars to search regardless of the race of the driver, and it just so happens that this leads to half the cars searched being driven by black drivers?  In other words, what if officers are quite good at detecting illegal activity and that this activity has disproportionate racial participation.  How could you tell the difference between discriminatory behavior, searching drivers because of race regardless of likelihood of illegal activity, and good policing, searching only cars with a high likelihood of illegal activity?

Well if it is the former, what we would expect is a higher number of unsuccessful searches among those performed on cars driven by blacks than among those driven by whites because blacks are being stopped due to race and not evidence of illegal activity.  This is precisely the test Knowles and Todd did with the Maryland traffic stop and search data.  It turned out that though the searches were disproportionate, the conviction rates from those searches were not.  There was no lower a conviction rate among black drivers that were searched than among white drivers.  So while racial profiling might be the reason for the search it is not, in this case, evidence of racial prejudice.  Now, as I said before, there is a bigger question about whether, even if this is true, racial profiling is justified and should be allowed.  You are welcome to discuss this in the comments, but I am going to leave it as an open question.  It does seem, however, that Chief Sizer wants to do something exactly equivalent to the Knowles and Todd test for Portland Police searches.  It would be good to know, for instance, if there is evidence of racial discrimination.  But even if similar results to the Maryland study are found, the question of the righteousness of profiling remains.

On a related note: my study of racial discrimination in the NFL has a similar design.  I looked at whether the outcomes of players in the NFL were consistent with their draft position and found that non-white players systematically outperformed their draft position while white players underperformed relative to what their draft position would predict.  This is evidence, then, that NFL teams discriminate against non-white players when they draft players into the league.  [Note that the action here is not in the first and second round stars but the in the outcomes of the many players taken the the later rounds]  Why? That is an open question, but I believe that teams find white stars more marketable (at the time the white Ed McCaffrey was a huge media darling in Denver while the statistically better black Rod Smith was not).  I did find some suggestive evidence that teams pay a real price for this behavior where teams that were more egregious in their racial preference fared worse in terms of the their record.

[Image: Scott Sroka]

All Blogging Shall Temporarily Cease...

...Arsenal are about to kick off v. Villareal in the UEFA Champions League.

UPDATE, 11:55 am: NOOOOOOO!...... VCF 1 - AFC 0

UPDATE, 1:10 PM: YESSSSSS!.... VCF 1 - AFC 1. A brilliant strike from Adebayor. A crucial away goal.

Full Time: 1-1. A good result for Arsenal.

For those that wonder what the heck I am doing watching European soccer during the day (or how I do it), here is a wonderful resource: www.myp2p.eu. I had the Hong Kong Star TV feed in the corner of my computer screen.

Economist's Notebook: Game Theory and Stop Signs

The recent attention to the so-called "Idaho Stop" bill that would allow bicyclists to slow but not stop in residential intersections with stop signs got me thinking about this and about the uncontrolled intersections present in many Portland neighborhoods. How should we think about human behavior in the face of such incentives? In these cases, since the problem is inherently about more than one vehicle (or pedestrian) the interactions are strategic in nature, so game theory is the appropriate modeling framework which to employ.

Before we get to that however, Joseph Rose in The Oregonian claims that having an "Idaho Stop" law is actually safer based on incident data from Idaho pre and post law. [Note to Mr. Rose: correlation is not causation, and even if you think this law is good, please explain how such a law could be responsible for an immediate 14.5 percent reduction in bicycle injuries? I think we are dealing with spurious correlation here] But the rationale for the Idaho stop is the same for cars: if there are no other cars around, why stop fully? Sure a bike is human powered but the physical concept is identical, it takes more energy to stop and start than to maintain momentum, and if we care about climate change why not let cars do it too?

Which brings me the the topic of today: non-controlled intersections. These are intersections without any traffic restrictions - anything goes. Well not really, the right of way goes to the vehicle that gets there first, which is precisely the problem. [By the way, do you know who goes if it is a tie? Yep, the vehicle on the right, just like a 4 way stop] Anyway, most of the intersections around my son's elementary school are uncontrolled even though there are many kids walking to school crossing at these intersections. And if you ever want to see good examples of dangerously aggressive driving, all you need to do is show up at an elementary school at drop off times. These are parents who should be most attentive to child safety, but hey their kid isn't walking so they have nothing personal at stake except for getting to work on time. Anyway, I am constantly amazed at the reckless driving exhibited by these parents and what I have found most striking is that on the rare days that I drive my child to school and slow almost to a complete stop at these intersections to be sure there are no cars or kids around, a car from half a block away will almost always bomb right through at 30 mph. If I had asserted my right of way, we would crash and so this reckless driving is kind of like a credible threat in game theory and the logical thing for me to do is to wait until the car has passed.

I imagine that traffic engineers think that these intersections are actually traffic calming. They force all cars to slow down and proceed cautiously through the intersection. But when you think about the game cars are involved in, it is not at all clear that this is the equilibrium. Here is a depiction of a normal form game (single shot, simultaneous, non-cooperative) that I think describes the incentives. Car 1's payoffs are the first number of the pair and Car 2's payoffs are the second number.

Each car has two strategies available to them: be cautious or aggressive when entering the intersection. If both cars are aggressive, a fender-bender occurs and they both loose 10. If they are both cautious, they have to slow down, but no accident occurs so they both get 0. If one is aggressive and the other cautious, the aggressive one gets to go fast and first through the intersection and gets 10 while the cautious gets 0 again. Economics students will immediately recognize the Nash equilibria - where each car is playing a best response strategy to the other. They are the two aggressive/cautious pairs. The problem is of course when both think its the other that is going to be cautious and both end up aggressive... But anyway, this actually describes pretty well what I observe around my son's school: some drivers being aggressive and bombing through the intersections and others being cautious.

This is not what I believe the traffic engineers think and what's worse it means there are aggressive drivers bombing through intersections when lots of little kiddies are running about. Makes me wonder why, of all places, are the intersections around schools not controlled? And, by the way, if you really want to calm traffic, a four-way stop seems to do a good job.

Beeronomics: Honest Pints

Beervana blogger Jeff Alworth's Honest Pint Project is getting a lot of play in the news these days, and even in Salem. See his Honest Pint Project website for details about all of the news coverage. But this report by KATU's Jeff Jaeger is the best one I have seen to explain very clearly the problem.





I have blogged about the economics of the problem before: it is an asymmetric information problem - punters can't tell how much they are getting but bars know how much they are serving. The incentive then is for businesses to cheat and the market outcome will be inefficient. What is nice about this story is that they find a place, Grand Central Bowl, that intentionally uses cheater pints (14oz glasses) and advertises a 'pint' on the menu. This is exactly the problem. [As is the problem of establishments that are unwittingly using cheater pints]

But this is also why I am not so sure about the bill. It seems fairly innocuous, so I don't think there will be much harm done, but the much easier and permanent remedy has always been, in my mind, marked glassware. It is incredibly cheap (if you allow a phase in period) and solves the problem permanently.

Beeronomics: Craft Brews and the Recession

Jeff Alworth has a wonderful post on the 25th Anniversary of Widmer Brothers Brewing Co. Well worth a read and congrats to the Brothers Widmer!

Unfortunately, this economic downturn is starting to take its toll on the craft brewing industry in Oregon. The Portland Business Journal is reporting the $33 million loss that the Craft Brewing Alliance, the company created by the Widmer - Redhook merger, suffered in 2008. Trends in the local brewing industry are worrisome as consumers abandon the more expensive craft brews for cheaper substitutes. From the article:

December and January shipments for all Oregon craft brewers fell by 5 percent and 7 percent, respectively. But in January and February, shipments for all beer in Oregon actually rose by 10 and 20 percent, spectively. “It would appear trading down from higher-priced, locally-made beer has already begun in earnest,” said Brian Butenschoen, executive director of the Oregon Brewers Guild.

This substituting cheaper alternatives has always been my concern for the local brewing industry. Just as department stores like Macy's are suffering while Walmart is thriving, during a downturn the purveyors of cheap substitutes tend to do well relative to their more expensive counterparts. This works both ways, however, which is part of the reason why craft brewing did so well during the last boom period. As this recession is going to be long and deep, I wonder how the breweries will fare. This is also a time in which big brewing conglomerates might try and snap up ailing independent brewers so that they have products with which to compete when the recession turns around.

US Unemployment: 8.5%

663,000 jobs lost. This was actually good news for me as I was worried that the more pessimistic estimates of 750,000 jobs were likely to be correct. See, it pays to be a pessimist! This is gruesome, but remember what I posted on yesterday, unemployment is going to be on of the last things to get better. Which, of course, is bad news for Oregon which has a high unemployment rate already and, more importantly, has revenues that are heavily dependent on income taxes.

So, based on this, national number I am predicting an 11.5% rate for Oregon when that data is released on April 13th. Remember, I am a pessimist.

Beeronomics: Scottish Ale

I don't generally like Scottish Ales. The Scots may have mastered the Malt, but to my taste their ales are far too, well, malty (and by 'their' I am really referring to the style called 'Scottish Ale' as practiced in the US - I have no idea what a Scottish Ale tastes like in Scotland, I am always too consumed with trying the aforementioned malt when I am there, and the beer I have tasted there was no different than the stuff in Eng-er-land). I tend toward the more hoppy ales of the Pacific Northwest. But I adore just about everything Full Sail's John Harris brews. So the news that John has made his first Scottish-style ale, 'Keelhauler,' raises the distinct possibility that I may have found one that I am really going to like. I don't think John could stand for a beer that is too malty/sweet. I expect one that is nicely balanced and that opens my mind to the possibilities of Scottish Ale. Yum.

Pilsner Room anyone?

Economist's Notebook: Leading and Lagging Indicators

Jessica, a reader, e-mailed me suggesting I post about the contrasting economic news coming from the stock market and the labor market in the context of leading and lagging indicators. Good idea and thanks for the suggestion Jessica.

Let's start with the stock market. The Dow has made some pretty significant gains in recent weeks. It reached a low if 6547 on March 9 and is about to close the day today at around 8000. But the stock market is notoriously fickle and most economists downplay its worth as a good economic indicator. Still, almost a year ago in May 2008 it closed above 13,000 the subsequent erosion in equity value has hurt a lot of Americans, many of whom now have retirement funds invested in these markets. The loss of wealth that was the result of this erosion in stock price has led to people cutting consumption spending and staying in or re-entering the labor market. These two things lead to reduction in aggregate demand and increased unemployment respectively. So, while the Dow (or the better S&P 500) may be a fickle economic indicator, there is no doubt that it is a key component of our economy and as such is one leading indicator - something that generally precedes an economic recovery or gets better before the general economy does. So why do economists shrug when they observe the recent upturn in the Dow?, well here is a look at the DJIA from 1931 to 1934:



Notice how in the summer of 1932 the Dow surged? What that the end of the great depression? No. Spring of 1933, same thing. We have seen this time and again in recessions, so we tend to be pretty weary of placing too much weight on the Dow as an economic indicator. Perhaps it is best described as a necessary but not a sufficient condition for economic recovery - that fact that it is rising is necessary for economic recovery, but it could rise even though we are not in recovery yet. [On a related note, what Wall Street likes in the Geithner plan is not necessarily what is best for the economy]

Now let's contrast this with employment. First off, the BLS will announce the March US unemployment figures tomorrow morning and from all indications it is going to be gruesome. Unemployment insurance claims are up, the ADP report is bad, and no one seems to be adding jobs right now. But unemployment is a lagging indicator, it is about the last thing that will start to turn positive even though it is about the most important indication of how people are suffering from the economic downturn. Why will it lag? Well businesses are reluctant to make the big commitment to new employees unless they are very confident that they need them. As they currently have a lot of employees who are working less than full time and can ramp up hours and even overtime, thus new hiring will be dealyed until they can't squeeze more productivity out of their current workforce. Also as the economy turns better, more discouraged people - people who stopped looking for work - will re-enter the market. This will counteract the effect of job creratin in the unemployment numbers, and thus unemployment will be slow to get better. Here is a look at the rapid deterioration in labor market in the US. It is going to keep getting worse until the end of the year, in my opinion.
Tomorrow morning I'll be looking at the BLS unemployment numbers. Job losses of around 650,000 are the expectation. Which is just terrible. But I would not be surprised to see a number closer to 700,000.

So what am I looking at as other leading indicators (things that have to start changing first for the economy to stat to right itself)? Well, since this crisis started as a credit crisis and asset/wealth depletion crisis, it has led to a huge decrease in consumption and investment. So one thing I am looking at are a few things that indicate the health of credit markets (which need to get better in order for the rest of the economy to get better). There has been some good improvement in these indicators since the peak of the crisis, but we still see troubles like the indicator for the health of corporate debt (a lot of creditors are still worried about the creditworthness of businesses). I am also looking at indications that consumers a starting to spend again, so recent small upticks in auto sales, pending home sales , while too small and preliminary to signify much, are nonetheless welcome possibilities that things are starting to ease. Other indicators like consumer confidence are important leading indicators as they relate to how much consumers might start spending based on how worried they are about the future.

On the business side we can look for evidence of declining inventories and increased orders and industrial activity. I consider these sort-of real time indicators. Why? Suppose consumers start to spend more in stores, stores will eventually start to need to replace stock this will first draw down inventories, then will spark new industrial activity and then new business investment. Here we are still seeing contraction, but at a slightly slower rate. So that's not great. Market info for residential home sales (values, median prices, volumes) are also more real-time than leading or lagging (though we often get them late) because they are based on ex-post transactions.

I should note that I did not mention construction permits here (which are typically leading indicators) because construction activity is much further down the recovery road in my opinion. First we have to absorb all of the unsold capacity.

You may have noticed that many of my links are to the Calculated Risk blog, which is my one-stop shop for most of these indicators. I highly recommend it.

So what are some things that I did not mention that you look at?

Does the IMF Have all the Answers?

Simon Johnson is everywhere these days, a true media darling: NPR, Wall Street Journal, NY Times, Charlie Rose, Terry Gross, and on and on and on. I am getting a little tired of his voice and, to my mind, his message strikes me as a bit strange. His message is all about the political economy of big, politically powerful banks and his solution is to disempower them politically by kicking all of the higher ups out and breaking up the banks. Fair enough, I suppose, but this type of shock therapy has been pretty hit and miss elsewhere. Then he suggests having some wonderfully neutral and independent organization like (his former employer) the IMF manage the global banking system. Say what? One can make the very same argument about the IMF being too political and beholden to the political interests of the biggest donors and make an even more devastating case that the IMF has in many cases done more harm than good in its interventions. But I am not the right person to say this. Fortunately, Dani Rodrik is. And here I make an exception and cross-post a cross-post. From Mark Thoma:

Dani Rodrik responds to Simon Johnson:

Simon Johnson's morality tale, by Dani Rodrik: Simon Johnson
tells a simple and compelling story:
the U.S. has been afflicted by a version of the crony capitalism that has been the scourge of so many emerging markets, except that Wall Street has bought its
influence and power not by bribery but by shaping the ideology of our times...

The solution, to Simon, is equally clear. Finance needs to be cut down to size. What the U.S. needs is what the IMF would have told any country...

As with any story built around clear villains easy solutions, there is something in this account that is quite unsatisfying. For one thing, I think it puts the blame too narrowly on the bankers. Yes, there can be little doubt that banks badly misjudged the risks they were taking on. But they were aided in all this by the broader economics and policymaking community--not because the latter thought the policies in question were good for bankers, but because they thought these would be good for the economy. Simon himself says as much. So why pick on the bankers? Surely the blame must be spread much more widely.

And I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters--the same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals (as during the Asian financial crisis).

Simon's account is based on a very simple, and I believe misguided, theory of politics and economics. It is an odd marriage of populist and technocratic visions. Countries fail because political elites always end up in bed with economic elites. The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

Among the many lessons from the crisis we should have learned is that economists and policy advisors need greater humility. Too many of us thought we had the right model when it turned out that we didn't. We pushed certain policies with much greater confidence than we should have. Over-confidence bred hubris (and the other way around).

Do we really want to exhibit the same self-confidence and assurance now, as we struggle to devise solutions to the crisis caused by our own hubris?