This is My 500th Post!

Or so says Blogger. It seems like not so long ago that I started this whole endeavor. It has changed from what I thought I would be doing at the outset, but not by much. I am not sure I am accomplishing part of what I had hoped to do: get students engaged with economics outside of the classroom, but I am enjoying writing it and making connections with folks I would never have otherwise.

So, thanks for reading my blog.

Beeronomics: Friday Notes

Oregonians, your wait is over! Boundary Bay's extraordinary IPA is pouring at the Concordia Ale House, as is their oatmeal stout. Get thee some!

UPDATE! Ack, the IPA has now be dropped from their tap list - and I haven't even had a chance to get myself there (I was planning a trip tonight). Someone else needs to start pouring BB in Portland. Come to think of it, we are pretty short on Washington beers in general...

The Honest Pint Project's Jeff Alworth testified to the Senate Business and Transportation committee yesterday about the honest pint bill in consideration. Shortly thereafter, it was killed in committee. I am/have been ambivalent about the bill so I am not too sad but feel bad for the supporters of it. Time for the "Beaver Pint!" ^(TM)

Beer prices are soaring at my local grocery. I grabbed a sixer of Full Sail because it was the cheapest at $7.99, Deschutes' offerings were $8.99 and Rogue $10.99. Wow. Is this everyone's experience?

What Was the Failure of Economics?

Macroeconomists have been taking a lot of heat for the failure of the sub-discipline to forecast and/or forestall the crisis. This has often been enlarged to suggest that there is something wrong with the economics discipline as a whole.

This suggests an attitude that I am increasingly running into when I identify myself as a professor of economics: that somehow 'economists' run the economy. Ummm, no. The most important thing to understand is that the economy exists as a natural artifact of human interaction. We don't create it, pull the levers, etc. What we strive to do is understand it, and through this understanding, help governments manage it better.

And here there was a failure. However, I don't think it was with macroeconomics in general, but in the failure of the IO principal-agent and contracting folks to interact enough with the finance and macro types. In other words, there was a trust of the internal incentives of the firm (in this case banks) on the part of finance/macro types that was misplaced. It shouldn't have been: there is a lot of research on incentive problems in CEO compensation, in principal-agent contracts and the like. But macro-types that set policy ignored the lessons of this literature in pushing too far on bank deregulation, trusing the internal incentives to do the trick.

Alan Blinder says something similar in an op-ed in the Wall Street Journal but he blames the corporate boards. But again, we know the incentives were/are skewed there too. Still, his answer is along the same lines, get the incentives right through increased regulation.

Chile's Rainy-Day Fund

Reader Jacob Grier sent along this article from the Wall Street Journal which describes Chile's rainy-day fund and how useful it is at the moment. Here is an excerpt:

By MATT MOFFETT
SANTIAGO, Chile -- During the emerging economies' commodities boom a few years back, Chilean Finance Minister Andrés Velasco was a wet blanket at the fiesta. Chile, the world's largest copper producer, was reaping a bonanza from the quadrupling in the metal's price. Mr. Velasco insisted on squirreling away a large chunk in a rainy-day fund.

As the savings swelled above $20 billion -- more than 15% of Chile's economic output -- Mr. Velasco faced growing pressure to break open the piggy bank. In September, protesters barged into a presentation by Mr. Velasco, carrying an effigy of him and shouting, "The copper money is for the poor people."

The 48-year-old Mr. Velasco, wary that a flood of copper income could generate lending and consumption bubbles, stood his ground, even as the popularity of the center-left government withered. Latin American history, he cautioned, was full of "booms that had been mismanaged and ended badly."

Finance Minister Andrés Velasco built Chile's rainy-day fund. Today Mr. Velasco looks like a prophet. Since the onset of the global economic crisis, copper prices have fallen by 50%, in line with the sharp decline in other commodities. Emerging economies that got too giddy in the good years are now coping with nasty hangovers. Soybean-dependent Argentina is facing a possible debt default while oil-rich Russia has been stuck bailing out banks and companies that got in over their heads in debt.

Thanks to Mr. Velasco's caution, Chile is now in a position to try to bootstrap its own recovery from the global recession. Mr. Velasco's preemptive moves have kept Chile's government from having to spend a single peso on bank bailouts. Having paid down foreign debt during the fat years, Chile is now a net creditor nation, with a debt rating that was upgraded by Moody's Investors Service in March.

And now Chile is pouring some of its copper savings into a massive stimulus plan, consisting of job-creating public-works projects, tax breaks for business, investments to keep mines operating and other goodies. Chile's plan is one of the largest stimulus packages in the world relative to the size of its economy. The Chilean program is the equivalent of 2.8% of gross domestic product, versus 2% in the U.S.

As a result, economists expect the nation's annual economic output to decline a very slight 0.5% this year, compared with much steeper declines elsewhere.

.............

The moral of this story is, of course, you should always defer to the economists! (Velasco has a PhD in economics from Columbia). Such a fund would be pretty nice to have in Oregon right now, huh?

Eco-nomics: More Roads or Fewer?

Busy day again today, so I'll pose this as an open question rather then a soliloquy: are more roads better or worse for the environment and climate?

Those who oppose the bigger Columbia Crossing project and the Oregon transportation bill saying that more roads will lower the cost of driving and thus encourage more of it are certainly correct in general (though I am sure there is a diversity of opinion about how much this matters) . But it is also true that congestion is terrible for the environment: all those cars idling in stop and go traffic are belching emissions at a hugely greater rate per mile than free flowing traffic.

So where is the balance? How much do we want to encourage congestion as a way to reduce driving?

My view has always been that the problem is carbon emissions so we need to address carbon emissions through a gas tax. Full stop. So let's reduce gas consumption, but work to alleviate congestion (congestion pricing is a good idea for this as well). What are your thoughts?

Oh and the fact that the transport bill includes a gas tax is good, but don't confuse this bill with stimulus as I think backers are trying to do (though they don't say it directly). Stimulus comes from borrowing from the future to stimulate the economy today. Tax and transfer schemes are different. It is possible that this is a good investment in the growth of the Oregon economy, but the emphasis on jobs created is misguided and confuses these types of investments with stimulus.

Barça!

I have always liked Barça for their refusal to sell the front of their shirt to corporate sponsors. After two European championships in three years, perhaps the gods like that too.

Congratulations on a well-deserved chapionship.

Housing Markets: Inventories

Busy day, so I'll punt to the Calculated Risk blog. Here is a nice graph of changes in home inventory levels. Now, of course, there are homeowners waiting on the sidelines and new foreclosures driven by unemployment to come, but it good to see movement in the right direction:



This is also why new housing permits/starts are a good sign of economic activity but this activity doesn't really help market for residential housing.

Portland Home Values: The March Case-Shiller Update

From the Case-Shiller Home Price Index for March 2009, some lovely pictures.  First the raw data:

Still shows a serious erosion of home values in the winter of 2009.  Here is the year over year percentage change in home prices:

These are still declining for Portland and Seattle but the 20 city composite may be leveling off and even turing upwards.  These data are too old to assess the current situation with summer approaching and mortgage rates incredibly low.  But again, unemployment is very high, so where is the demand going to come from?

The Wall Street Journal article has a nice interactive graphic and also reports on the jump in consumer confidence - which with the increase in the leading indicator improvement give optimists like me some small hope that the end of the decline may be here by the end of the year.  Then it'll just be the digging out that we'll have to worry about (and probably for years).

Good News, Bad News and the Effects of Cap and Trade

...were all topics touched on briefly last night as I once again risked public embarrassment and ridicule for the benefit of all humankind by appearing on KGW's Live @ 7.

Economist's Notebook: Some Random Friday Observations

Now they may be right, but it seems pretty clear to me that a group that is facing increased competition would have an incentive to stifle that competition, so I would not put too much weight on their analyses:

Lodging Group Pans Mayor’s HQ Hotel Plan

Perhaps some people need a lesson in incentives and behavior...


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Megan McArdle thinks that increased fuel efficiency standards are a bad way to cut down on auto pollution mainly because efficient cars induce people to drive more. This is true (to some extent) and a carbon tax would be better, but she completely ignores the benefits of induced innovation: by making the price of poor fuel efficiency higher for auto makers, you prompt investment in and development of better, cleaner technologies. So it is not nearly as bad as she claims.


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There is a whole political economy literature about how a small, focused interest group can subvert the common interest. I think about this a lot as a group of architects without any viable plan for the building, have managed to prevent the demolition of the Memorial Coliseum. Now we have a much more questionable proposal to put a stadium in Lents Park wallowing in the mud.


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Some more small glimmers of good news: credit markets continue to improve.

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Have a great holiday weekend, I am headed off to visit me mum so please wait until I arrive to hit the interstate! It's all about the externalities...

Beeronomics: An Economist's Preferred Honest Pint at Belmont Station

This escaped my attention until now. Via John Foyston, a message from Belmont Station:

A FULL 16 ounce PINT EVERY TIME. You asked for it, we're delivering. We are now using oversize glasses with a 16 ounce line. Be patient. Let it settle a moment. If it's not 16 ounces we'll top it up. More beer for you. Less waste!

Yeay! Kudos to them for going to marked glassware. I have not seen them, but I can only hope that the mark looks a little something like this:

The Economics of Senioritis

Ah, late May, when the students look at you with rapt attention glazed and vacuous eyes, wondering "when, oh lord, when will it all end?" And "can I take any more economics lectures before I slip into catatonia?"

But perhaps it is entirely reasonable:  Benjamin Chimenti, a student in my international economics course, has attempted to make sense of 'senioritis' from an economics perspective.  I think it is fantastic and asked him to let me share the result.  [I especially like it because I can convince myself that it is not my stultifying lectures that are causing the vacuous stares] Enjoy...

Publish at Scribd or explore others: Essays & Theses School Work

Searching for Some Light at the End of the Tunnel

Let's forget about the other dismal stuff and take some solace in the fact that the Conference Board's index of leading economic indicators is up for the first time in many months (graph from the New York Times):

Credit Cards, Asymmetric Information and the Role of Government in Preventing Bad Choices

The new credit card (and guns) bill is about to be signed into law and it begs the question: what is the market failure that this government intervention is suppose to correct?  After all, credit card contracts are full information - all the facts are there for credit card applicants to review - and if a private citizen in the United States wants to enter in a legal contract with another entity, why should the government prevent this?

The answer lies in whether you believe that by making extraordinarily dense and complicated contracts an asymmetric information problem exists despite this 'full disclosure.'  Most consumers cannot make sense of the contracts, supporters of the bill say, and companies deliberately make contracts dense and confusing so that they can slip all kinds of nasty little provisions designed to take advantage of customers once they are in debt to the company.  

If this is true than a bill that regulated the type of contract language that can be used, how explicit the terms must be, how accessible the language is to an average person not trained in the law is justified.  But if this regulation was successful in making consumers informed about what type of contract they sign, does the government have any role in regulating the type of contract they sign?  As an example, what if the contract very clearly stated: interest rate may be changed at any time by the issuer without prior notice.  If I was quite happy to agree to this provision, why should the government prevent me from entering into a contract such as this.  The bill just about to become law does precisely this.

The answer from some circles is that you have to protect people from their own tendencies to make bad choices.  But is this really the role of government?  Some bad choices impose serious costs to society like not wearing a seat-belt - in a crash your are more likely to be seriously hurt and many people will rely on public assistance to pay their medical bills and even those insured will have to pay higher premiums on average. Do bad choices in the credit card market impose such social costs?  I doubt it.  I know we are in an economic crisis partly fueled by just such credit shenanigans, but again the lack of full information is a main culprit and I am supposing that this part of the problem is solved through regulation.

I like, therefore, the parts of the credit card bill that stipulate more transparency, but I dislike the restrictions on the type of contracts that will be allowed.

I think that we need to be careful that government does not start to try and explicitly guide behaviors that have no or little social cost.  I am fine with mandating that nutrition information be available to customers of restaurants upon request but if we required restaurants to include such information on menus as some have suggested, I think we cross the line in this regard.  The private costs of poor choices are enough to ensure efficient market outcomes.

Now, where is that double cheeseburger with king sized fries I ordered?...  

Green Shoots...

...of the economy economics department. From my office window at OSU. My own little green shoot growing happily in the spring sunshine. Too bad it is a weed...

Eco-nomics: Green Conundrum

From the 'what is the point?' department: organic potatoes found in a Portland Safeway store - individually wrapped in plastic and labeled. The good news? They are 'easy open'!

Taxes, Revenues, Spending and Oregon

Update: I have made a correction to an unfair criticism that I did not really intend. Sloppy writing on my part, sorry.

Mark Thoma on Sunday had an Op-Ed piece in the Oregonian treading over some old territory for this blog: suggesting a sales tax. I only wish Mark had done his due diligence emphasized spending stability rather than revenue stability. A while ago I wrote a series of posts in which I tried to find out what I could about the reality of sales tax and income tax volatility.

The conclusion: sales taxes are not much less volatile than income taxes and the two are highly correlated. They may add a tiny bit to stability but they won't solve the problem. We need only to look at our neighbors to the north to see that sales taxes are not then answer to volatility questions. Sales taxes cratered a bit before income taxes, but they will likely recover faster too.

While in the long term we may want to think about appropriate revenue levels it is important to remember that trying to tax our way out of a recession is only a recipe for prolonging the recession. We need to be very careful during this recession to be sure that any new temporary taxes are used to preserve only the most essential services and avoid the temptation to enact a host of new taxes to fill the budget gap.

The real problem looking to the future is not revenue instability but spending instability. Mark is right about this: a permanent rainy-day fund is an absolute necessity. A rainy day fund that is 5% of state GDP and filled by withholding kicker refunds until the fund is full. 5% of GDP is, admittedly, a lot and I'd settle for less (3%?), but 7-8 billion would come in pretty handy right now, wouldn't it? The fund can be invested conservatively and excess returns can be refunded to taxpayers as well. It is true that strict rules will have to be enacted to assure that the rainy day fund is not used in the sunshine. But such rules are relatively simple to write down and enact.

What is important now is to think about the appropriate level of revenues in the long term. I don't know the answer to this off hand, but I do know that Oregon is a relatively low-revenue state. According to the Tax Policy Center of the Urban Institute and the Brookings Institution we raise about $3,360 per person in Oregon which places us 35th in a ranking of states. Compare that to Washington which collects almost $4,000 per person and California, which collects more than $4,500 per person.

This leaves us with some serious issues, most notably the abysmal funding of K-12 education. From the Tax Policy Center's data on expenditures we can see that in a list of state expenditures on K-12 schools Oregon is 41st in the nation at $1,394 per person. However, overall expenditures on all services in Oregon is $6,866 per person which puts us in 22nd place which begs the question, why are we so low in school funding? By the way, the difference in the revenues and expenditure numbers is, I assume, mostly federal transfers for things like medicaid as well as timber payments and the like.

I am far from ready yet to say that revenues should increase, and we know we have no sales tax, but what about corporate taxes which have received so much attention? Are they really so low? Again, according to the Tax Policy Center a little less than 2% of all state revenues comes from corporate income taxes which places us 3oth among states. Per capita, according to the Tax Foundation, we are in 39th place with $109 raised in corporate income tax per person.


Finally two last points about sales and corporate taxes. We are one of the very highest income tax states, meaning that adding a sales tax would have to involve a lowering of the income tax without overburdening Oregon households. Also as companies have to compensate employees for high taxes to keep them from fleeing to other states, income taxes can be seen as an indirect tax on businesses. Food for thought.

This is intended to start a discussion and exploration into these issues and, as always, I welcome your thoughts, opinions, knowledge, etc.

Passwords and Externalities

This story on NPR about the proliferation of passwords and software products to help you keep track of them, along with a recent threatening e-mail from the computer folks at OSU promising to cut off my access to e-mail if I do not change my password within 7 days got me thinking about the ridiculousness of passwords.

I am deliberately lazy with my passwords, I choose simple, easy to remember and closely related passwords - precisely what the IT folks hate.  Well, come on, just what is the probability that: one, someone will take the time to try and hack my e-mail; two, that if they do they will get anything at all of any use for anything; and three, that they will then try and figure out other accounts I have to do something that is profitable to them and harmful to me?  Practically zero.  What is the cost to me of trying to keep track of all these complicated passwords? Very high.  In fact what you end up doing is writing them down (big no no to the IT types) or using one of these programs that keep them for you under a single password.  So the whole endeavor is wasted anyway.

No, I am convinced that the only reason I have to do this is because it is convenient for the IT folks to make me jump through hoops.  Why?  Well, just one whiny OSU professor (of the hundreds they serve) that has had his e-mail hacked into is a huge headache for them, and the probability of one in hundreds having problems is much higher then my individual probability.  On the other hand, they don't have to pay any of the cost of making all of us change our passwords all the time.  So in their desire to avoid some extra work, they quite gladly impose an external cost on all of us.  

Which of course calls for us to create rules that limit passwords ridiculousness.  Why don't these happen? Probably because the IT folks have us over a barrel.  We have no idea what they do and why, and could not possibly do it ourselves, so we are afraid of annoying them.  Imagine the pain and suffering they could cause.  

So change our dang passwords we do - curse you IT devils!

Note on Blog

Last week I received an e-mail from the Oregon Senate Democrats announcing their new web-site and asking if I would consider including it in the blogroll. I had a look, deemed it a useful resource, and have created a new set of links of Oregon Government Resources to which I will add a few of my regular sites. But this is an open invitation to other groups (e.g. Oregon Republicans) that would like for me to add them to the links. I am too busy/lazy to go searching for myself so I leave it up to you to make a request.

The Governors Make-Work Plan and the Minimum Wage

I have been asked by a couple of readers for my take on the governors plan to temporarily employ 12,000 people who are currently unemployed. The short answer is (Grinch that I am): I am not sure I get it. Presumably many/most of the people employed by this plan will be ones that are currently getting unemployment insurance and who have time to look for work, try and get training for new marketable skills, and can cut child care costs by taking care of their children themselves. When jobs become available the best matches for each opportunity will be hired and the job market will unravel itself efficiently.

What this system creates is a system of 'winners' who will get more than the unemployment insurance benefit, but who will have less time to look for permanent jobs, may have to get additional child care and will not be available for new, better matched opportunities; and 'losers' who will get the standard unemployment insurance (until it runs out).

Why should 12,000 of the 250,000 unemployed in Oregon get lucky? What about the rest? And is this the best way to spend unemployment insurance money? I think the answers are that the system should not be altered to create winners and losers and that it is not an efficient use of unemployment insurance money. In short, this smacks of a policy completely devised for political aims not one for economic progress.

With all that said, I am not insensitive to the plight of distressed Oregon families and I understand that those that would get these jobs would be made better off. But if you are going to spend extra money, why not spend it on education and retraining so that these workers can have better job prospects int he future? Or extend unemployment insurance for folks who find themselves in long-term jobless spells? Or even increase the average payment?

And by the way, we can't escape the elephant in the room: Oregon has a relatively high minimum wage. This also creates winners and losers. We can expect that, relative to having a lower minimum wage, fewer people will be employed in Oregon, but those that are will do better. Economic estimates in the past have shown very small effects on unemployment from minimum wages, but in such a distressed economy, there are probably many people willing to work for, say, $6 and perhaps many places that would employ them at that wage. So I imagine that in times such as these the minimum wage actually bites off many more jobs than in a 'normal' economy. Is is right to deny these struggling people the right to work at this wage? I mention this because too often I think we conveniently forget about the trade-offs, especially when times are good and these trade-offs are small or virtually non-existent. But times are bad, unemployment is rampant, and this plan and the minimum wage creates distortions that make the labor market less efficient and this will likely lead to more suffering

Oregon Unemployment: 12%

Big relief: Oregon's April unemployment is essentially unchanged at 12% (the March figure was revised to 11.9%). I had expected much worse - but this does not mean the end, it will still probably get worse before it gets better.

Notes: the number of people classified as unemployed fell by 10,000. This can, of course, come from people who find a job, stop looking for work or leave the state. Leisure and hospitality added jobs as the summer vacation season starts getting into gear. Overall the non-farm payroll numbers sunk by 9,500 jobs, but compared to recent months, this is a big improvement.

Update: Now that classes are over for the day, I can think a little bit more about these numbers:


The labor force continues to grow, but the unemployed population shrinks - however it is not non-farm payroll employment as that has shrunk. So our agricultural sector and the self-employed that are absorbing a bunch of workers is the essence of these numbers as they ramp up for the summer. This is one note of caution - without the idle capacity in the state becoming active, we ware not going to see any improvement for a while. And if the non-farm sectors continue to shed jobs, we will see increased unemployment in the near future.

Are Hipsters Driving Up Portland Unemployment?

Yes, says the Wall Street Journal. However, it is probably these folks (see graph below) that will drive the recovery and future growth of the region - so thanks young, educated and talented immigrants. If we can't create our own at least we can get them from elsewhere.



Of course, with unemployment in Oregon so high we may see a reversal of this trend soon.

The Verdict: $3.6 Billion

The state economist's official revenue forecast is in: $3.6 billion shortfall over the next two years. This is grim but not as grim as I expected. So I suppose that is some solace.

Beeronomics: Ingredients and Quality

I had a fascinating conversation with a brewer recently about beer ingredients. It started with a talk about a possible impending shortage. This time in malted barley as, he claims, the ethanol market and subsidization is making more and more acreage go to corn. Plus, he said, growing barley for malting is risky because if the quality is not there, it is no good for malting and the price of non-malting barley is very low. There is also continuing concern about hops as well as the acreage of hops apparently continues to shrink. All this suggests that we may be paying even more for beer in the future.

But what really interested me was the claim that we should also expect the average quality of ingredients to suffer. Makes sense: with smaller amounts of barley and hops, even marginal crops will make their way into beers that they might not have before. Apparently there is also a pecking order for ingredients whereby bigger brewers get the best stuff and smaller brewers get ingredients of lesser quality. [That means home brewers are getting the real crappy stuff, I said, and he concurred] I have never noticed quality differences from smaller breweries, so does this means that they are especially good at overcoming poor quality ingredients to produce great beer?? Any brewers out there like to refute this assertion or concur with it?

Switching gears, because it is Friday and because where else would you turn for beer reviews than an economist, Beervana? Ha! I don't know where Full Sail is in the pecking order (probably pretty high) but either way, John Harris continues to produce remarkable beers. His latest, Keelhauler, is a Scottish ale meaning a malt-forward beer. I don't tend to like these very much as I am a bit of an incorrigible hop-head, but John's is, predictably, magnificent. It retains the traditional rich malty body but is nicely rounded with hops giving it a delightful scent and making it a more flavorful beer than most. Kudos. The spring season also brings out my favorite of the seasonals: Full-Sail's Prodigal Sun, new faves Ninkasi's Spring Reign and Deschutes' Red Chair. All three are worth the price of admission a few times over. Get ye some.

Making the pub rounds: Deschutes Bitter (on cask at the PDX pub), Fish Organic IPA (on cask at Belmont Station), Ninkasi Tricerahops (on cask at Bailey's Taproom) and how about an old classic served Real Ale style: Deschutes Mirror Pond (on cask at Horse Brass). Do you see a pattern? Yes, Portland needs more casks...please!

Cashing Out During the Housing Bubble

From the Calculated Risk blog, a picture worth a thousand words, so I'll shut up:

Economist's Notebook: Randomized Experiments

Economics is a social science, meaning most of what we study cannot be replicated in a laboratory. We have to find causal links in data that are contaminated by lots of real-world complication and interconnectedness. We have become exceedingly good at doing so, but our conclusions will never rise to the level of "truth." We can propose hypotheses and fail to falsify them, but generally no more.

Often we have to deal with the fact that we don't have the counter-factual. Case in point: how will we know how effective federal fiscal stimulus was? Answer: we won't. We will never know what would have happened in the absence of federal fiscal stimulus.

Randomized experiments therefore are the holy grail of many economists. They are not laboratory experiments (meaning you still can't control all environmental variables), but at least you can create a counter-factual. Often we try to use real world data to estimate treatment and control groups but they are not random. For example, we know that college graduates make a lot more money that those with only a high school diploma on average but does this tell us the extra income the education itself commands? No, because the population of college graduate is a non-random sample of people in general: they are probably richer, better students, more highly motivated, etc. So using average differences will bias the inference of the value of the college education because part of this is due to self-selection into college.

Randomization then, allows the researcher to assume that the people who are effected by a variable (a college education say) are no different than those that don't. The problem in economics (like medicine) is that we are often talking about policies that affect peoples lives and welfare and randomizing treatment for the purposes of study is of questionable ethics, and more importantly for economics, is politically untenable.

It is happening more and more, however, as economic researchers get more involved in policy design and roll-out. It is often possible to roll-out a new policy in phases and in so doing randomize treatment and control groups, but it is still hard and as the control groups usually end up getting treated eventually, it gives you only a short-term view.

I say all this because yesterday The Oregonian published a fascinating article on a unique randomization event that happened in Oregon by Don Colburn. The essence is that Oregon ran short of money and randomly picked from a population a sub-group who got Medicaid health insurance. This allows for a careful study of how insurance affects behavior. Turns out in predictable ways, but the real value is in estimating the marginal behavior: e.g., by how much do doctor and hospital visits decline when the patient has to pay, how much is spent on medical care and how do health outcomes differ in relation to the first two? The results will have huge utility to those contemplating wholesale changes to our nation's health system.

State Tax Revenue

From the Rockefeller Institute via the Wall Street Journal:



Ouch.

Trade and the Oregon Economy

Short on time this AM. From The Oregonian: Oregon Exports Drop. From the US Government (ITA):

"Export-supported jobs linked to manufacturing account for an estimated 7.6 percent of Oregon's total private-sector employment, the fifth highest figure among the 50 states. Over one-fifth (20.5 percent) of all manufacturing workers in Oregon depend on exports for their jobs (2006 data are the latest available.)"

As I have said before, Oregon is badly battered by the national recession, but gets a doubly whammy from the huge global downturn in trade.

From the WTO:

Quarterly world export developments, 2005-08 (2005Q1=100, in current US dollars)



Note: The Oregonian has some nice graphics but they are not on the OregonLive website.

Paradox of Thrift: Update

This graph from the BEA shows the US personal savings rate since Q1 of 2000. From it you can clearly see both the sharp decline in savings rates in the US in the 2005-2008 period and the sudden and strong retrenchment. This is what we speak of when we speak of the Paradox of Thrift. But what does this look like from an historical perspective? Here is the savings rate since 1947 (but before this recent uptick).



During most of the second half of the 20th century we were saving 8 to 10 percent of our disposable income. We are still pretty far from that, but it is the recent sudden reversal that has helped fuel this recessionary cycle.

Not-For-Profit Newspapers?

Congressman Ben Cardin (D - Maryland) has introduced the Newspaper Revitalization Act to allow newspapers to become 501(c)3 non-profit corporations. He explains his motivations in this op-ed in the Washington Post.

This not-for-profit model is something I have thought a lot about before, and though I really don't know if it will work, I think it is worth a try. This bill confuses me a little bit, however. For starters, I am not sure why an existing newspaper cannot become a 501(c)3 corporation already, one of the categories is education and it seems pretty easy to argue that newspapers are educational. The other thing that confuses me is that political endorsements would be prohibited, but "they would be able to editorialize and take positions on issues affecting their communities." This seems like a hair-splitting argument. For instance, if the Sam Adams lies came out before the election, could The Oregonian editorialize that he should not get elected? Could it say it would be better to vote for the opponent?

I have explained the economics of the newspapers role in our democracy before - it is a public good, and a vital one, and thus the public has an interest in supporting it. Others have pointed out that it might be hard for newspapers to be a watchdog if they are beholden to the pubic purse controlled by politicians. This might be true, when Ken Tomlinson became the head of the Corp for Public Broadcasting, NPR was threatened. Though in the end NPR does not seem to have suffered too badly. This economics argument is distinct from the economics of the newspaper business by the way - that is another story.

So is non-profit status the answer? This legislation is designed to community newspapers not big city dailies, and yet it is the big city dailies that I am worried about. Could an OPB-like model of memberships, foundation and corporate support work for such large newspapers? I don't know, what are your thoughts?

Economist's Notebook: Inferior Goods?

From the Portland Business Journal comes this little tidbit on seven industries that are thriving. What does well in an economic downturn? - inferior goods, things we consume more of as a proportion of our income as incomes decrease. Here is the list:

• Vehicle maintenance. Auto-repair shops increased sales an average of 2.4 percent over the past 12 months. In contrast, car dealers saw their sales drop 9.7 percent in the same period.
• Home remodeling. Sales rose 4.6 percent in the past year for contractors such as electricians, plumbers and heating specialists. On the flip side, home builders saw their sales fall at least 5 percent in the same period.
• Food stores. Grocery stores’ average sales increased 6.7 percent in the past year, while sit-down restaurants saw sales fall 3.9 percent.
• Specialty schools. In 24 months, technical and trade schools had top-line revenue growth of 7.8 percent, up from 5.9 percent in 2007.
• Dentists. The average dentists’ office saw sales increase 7 percent in the past year, up from 5 percent in 2007.
• Certified public accountants. The average revenue at accounting firms grew 10.2 percent in the past year, making the accounting industry among the top 20 sectors in the country by sales growth.
• Personal-care services. Skin-care specialists, nail salons, barber shops and hair salons saw average sales grow 4.5 percent in the past year.

Now some of these make sense, you fix your car rather than replace it, ditto for your house (though the ability to extract equity has diminished), you eat out less, and buy more food in the store, and you look for new skills in a tight job market. But dentists? I guess CPAs are good at making sure you don't pay too much taxes but this is a little bit of a surprise to me. Finally, I was just discussing over the weekend with my neighbor whether to expect salons to be doing well - they are good substitutes for vacations and thus relatively small treats that we indulge in more in tight economic times (her conjecture), but they are also an expensive luxury items, I would have thought. I guess she was right. People like a little pampering in a stressed out world.

Anything surprise you? Can you explain the dentists?

UPDATE: A student in my class said that "This American Life" covered the dentist thing - apparently it has something to do with grinding teeth from stress. I guess I see the allure of a spa treatment.

Do Unions Hurt Business Performance?

One of the recurring themes of the 'problems with Detroit' narrative is that labor became too powerful, won too many costly concessions (e.g. the jobs bank) and these concessions are now crippling and are responsible for a big part of the troubles of America's auto companies.

A rather compelling case can be made that in this specific instance the rigidity that more and more complex union labor contracts begat hurt a company in crisis (in my view, a less compelling case can be made that it was labor that caused the crisis). But it begs the question, is this true in general?

Here is an abstract from a new NBER working paper by David Lee and Alexandre Mas:

We estimate the effect of new unionization on firms' equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm equivalent to a cost of at least $40,500 per unionized worker. At the same time, point estimates from a regression-discontinuity design -- comparing the stock market impact of close union election wins to close losses -- are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings. Using the magnitudes from the analysis, we calibrate a structural "median voter" model of endogenous union determination in order to conduct counterfactual policy simulations of policies that would marginally increase the ease of unionization.

We all know that stock market performance is based on many things, however a unionized work force appears to hurt it on average, but have little effect on the margin. This is probably explained by the fact that when you are using close elections, there is little difference in the performance of firms because there is not a huge discrepancy in what the union wants and what the firm is offering. On average though, these differences might be large - and especially so through time. A very small difference in growth rates of unionized versus non unionized firms can lead to large differences over time.

A caution: this says nothing about whether such differences are welfare improving. It may be that even with slower firm growth, such a trade off is welfare improving if unionization is beneficial to workers.

US Unemployment Hits 8.9%

Is this good news?  From the BLS:

Nonfarm payroll employment continued to decline in April (-539,000), and th unemployment rate rose from 8.5 to 8.9 percent. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across most private-sector industries. Overall, private-sector employment fell by 611,000.

The unemployment rate is rising and over half a million jobs were lost in one month, how can it be?  Well, it appears that there is a clear trend of slowing job losses and it seems that this trend might be more robust than was forecasted - many economists expected to see over 600K this month.  Job losses now have slowed for three months in a row: 741K in Jan, 681K in Feb and 699K in March (okay, so not exactly monotonic, but nevertheless a pretty clear trend).  And since (as I have blogged about before) unemployment is one of the last things that recovers so this early trend could actually signal an economy beginning to recover.

As you may have read elsewhere, in the past when the job losses begin to slow down, the recession is generally over soon after.  [The usual caveat here, positive GDP growth means we are starting to recover, not back to pre recession economic activity - that is going to take years]  Here is a nice graphic from The New York Times illustrating this point:



So keep these little tidbits of information in mind when you vote in the new poll. So far my erudite readers have been pretty good on unemployment, let's see how good you are with recession dating.

New Poll

Okay, new poll. Which quarter will be the first to see positive GDP growth and thus signal the end of the recession? Yes, I know it is not exactly the same thing, but for the purposes of this poll, positive GDP growth means recession over. And I have finally learned my lesson and created a category for all the uber-pessimists out there. You have one month.

Beeronomics: A Story of Honest Pints and Poor Pours

In which the Beervana blogger and Honest Pint Project mastermind is told by his economist friend (guru really) that he should not be upset at this pathetic pour at the Deschutes Portland Pub because it is a full information game - the glass is 20oz. but the pour is about, what, 16?!?  The point is you know it is a lousy pour.  And there is a solution: tip not, says I, though our server is great - but she needs to be on top of the bartender who is lazy.  After a nice beer, however, everyone relaxes, the server is tipped well and the sun breaks through the clouds on a wonderful spring day in Portland.

And the beer is fantastic - XPA on cask.  Wow.  Go now.  Just ask them to give you a full pour.

Beeronomics: Is Craft Beer Recession Proof After All?

I stumbled across this little tidbit when I was looking for some coverage of Boston Brewing's Q1 report (the essence is business is down at Boston Brewing about 5%).  Here is the interesting passage from the Patriot Ledger of Quincy MA:

Craft beer sales appear to be holding up during the recession, boosted by customers strong demographics.

Throughout the U.S. beer industry, overall shipments from brewers have declined 3 percent year-to-date compared with the previous year, said Benj Steinman, president of the trade publication Beer Marketer’s Insights. Import shipments have declined 19.3 percent, with domestic shipments down 1.8 percent.

For the 52 weeks that ended on March 9, craft beer sales rose 12.6 percent from the previous 52-week period, compared with 3 percent for all beer, according to data from market researchers the Nielsen Company.

What is particularly interesting to me is that I had assumed that imports were probably a decent proxy for craft beer sales and I knew sales of imports have been down.  But in reality it seems that consumers are very loyal to craft beers and not shifting to macro from craft.  In economics terms the cross-price elasticity of craft and macro brews appears to be very inelastic, or that beer drinker do not think of macro lagers as a good substitute for micro brews.

This is good news, I wonder if Oregon brewers are experiencing the same thing?  I hear through the grape vine that things have been tough, perhaps this is due to inventory depletion on the part of distributors and retailers (something that would explain the seeming 3 percent down 3 percent up contradiction in the second and third paragraph).  If this is the case, inventory depletions rather than sales, we might see a lot of new orders coming in soon as the inventories run out.

But Boston Brewing's recent struggle also suggests that within craft beer the environment is getting more and more competitive and they need to continue to fight off the challenge of all of the new 'it' beers that come along.  As I mentioned a few days ago, I think this is precisely why Deschutes is pushing its specialty releases hard.

This is also good news for my brother, who is finishing his master brewer certificate program soon and is looking for work.  He has offers in hand, but nothing yet from Oregon.  Anyone hiring out there?

Vampires Need Economists and Governments

Reader Stacy Brock sent me this link about Vampires.  The essence is that Vampires (like virulent viruses) have in them the seeds of their own destruction.  To wit: they tend to kill the thing they need to live.

Apparently some physicists with too much time on their hands have 'proven' this to be true.  Whew - one less thing to have to worry about (but don't worry, there are many more, see Bill Bryson's A Short History of Nearly Everything if you find yourself a wee bit too optimistic about the human race these days).  

An Economist chimes in to say that models of vampire self-destruction fail to take into account the fact that humans will likely resist annihilation by doing things such as picking up wooden stakes and doing nasty things with them.

The mathematicians interject the fact that vampires would not be stupid enough to deplete their entire food supply.  But would they?  I think Jared Diamond has a story to tell them about Easter Island.  Without a central form of government it is unlikely that individual vampires would self-regulate and pretty soon, no humans.

But I think they have all missed the point.  Clearly the vampires face a commons problem: the population of non-vampires is a common property resource and the individual incentive of a single vampire is to 'over-graze,' shall we say.  But don't despair vampires! Economists have long understood the commons problems and have designed regulatory structures to deal with them.  Just like the regulation of fisheries, vampires, through centralized control and authority, can limit the depletion of this renewable resource - heck they can even start to 'farm-raise' humans to keep the population up.

So what vampires really need are a bunch of economists and a good government.  The economist part is easy, just bite a few of us, the government part is a bit trickier - especially since it all has to be done in the dark.  But vampires are intelligent, handsome and cultured (hey, I have seen "Interview With the Vampire," I know of what I speak).  So, thanks to us economists the future of the vampire is secure.  You are welcome vampires.

Unfortunately, I cannot say the same for Zombies who show no proclivity for cooperation and for whom the prospect of a well-functioning bureaucracy is decidedly dim.  [Perhaps I underestimate them, because apparently they have their own banking system]  So worry not for the vampires, they are in good shape, but shed a tear for the poor zombie, who like the Easter Islander, are doomed to extinction.

Economist's Notebook: The Economics of Charitable Giving

My drive to Corvallis has suddenly gotten much longer - it is pledge drive time at OPB. This, however, does get an economist thinking - why do people give charitably?

We generally assume people are altruistic - they like to see the poor being helped, for example - but the first best is always for the poor to be helped, but for me to keep my money. In general for public goods we call this the free-rider problem, since I can get just as much OPB whether I contribute or not there is no reason for me to contribute. Yet I, and many others, do. Well, perhaps it is because we actually get satisfaction from the act itself - economists call this the 'warm-glow' motive - in which case we are actually making ourselves happier by contributing.

But is it all true this way that economists think about these decisions? Well, the emerging field of 'neuro-economics' hopes to better understand such things by watching brain function of people in the process of making such decision through the use of functional MRI. One such person working in this field is Bill Harbaugh of the U of Oregon, who has looked at charitable giving and has found:

Consistent with pure altruism, we find that even mandatory, tax-like transfers to a charity elicit neural activity in areas linked to reward processing. Moreover, neural responses to the charity's financial gains predict voluntary giving. However, consistent with warm glow, neural activity further increases when people make transfers voluntarily. Both pure altruism and warm-glow motives appear to determine the hedonic consequences of financial transfers to the public good.

So, it appears that it is a general part of our preferences: we may be hard wired to get pleasure from charitable acts.

Now there are a few caveats: functional MRI is looking only at one type of brain function and is pretty crude relative to the sophistication of the brain. So, just because we see stimulus in certain areas of the brain it is not yet clear that we can generalize this into preferences the way that economists think of them. However, that said, the results suggest that you are happier if you give.

Given this result we might want to ask: what is altruism? Or, it is really altruism if we get pure pleasure from it?

Either way, OPB is waiting for your call...

Now This is Getting Ridiculous: More Journamalism at The O

Let's see, the victims of Sam Adams careless driving, who have a real interest in his condition at the time, the Portland Police, who are trained to spot signs of intoxication, and a professional reporter, who clearly has higher ethical standards than The Oregonian, all say Adams showed no signs of having been under the influence of alcohol when he had is fender-bender. So what does The Oregonian report? Two bystanders who say he 'smelled of beer.' Is this the lede of an objective journalist and news organization? No. [Note that The O has changed the headline on the web site - the print headline read something like "Second Bystander Claims Adams Showed Signs of Intoxication' - which shows that even they may realize objectivity has been lost]

The Oregonian is allowing its (misguided, but that is another point) editorial opinions to color its journalism, and is at risk of loosing credibility. There is a term for this type of coverage: yellow journalism.

As if this was not enough, Anna Griffin decides this is a good opportunity to essentially reprint an old column suggesting that since Adams is not perfect he risks destroying the city! And she has the temerity to assert that the timing of this column has nothing to do with the accident - yea right. At least she could write something original.

I do think an effective city government is a good thing (as Jacob Grier has made me admit) - and this constant attempt to undermine Adams's effectiveness is destructive to the city. The Oregonian is so desperate to show that they were right that Adams cannot be an effective mayor, that they are actively trying to make it so. It is a disgrace. I am a staunch defender of the fourth estate and have even suggested publicly subsidizing reporting, but my defense comes from the vital role journalism plays in our democracy, and with this privileged position comes responsibility to journalistic ethics. The Oregonian is failing in that regard.

So, hey Oregonian, how about reporting on what the city, under Adams's leadership is actually doing these days - now that would be useful to know...

[By the way, April Baer of OPB had it just right, mentioning the allegations in the body of the piece but leading with the official report which asserts so signs of intoxication - kudos]

Do We Need a Domestic Auto Industry?

A reader asks for my comments on this discussion at the NY Times website, particularly Mark Thoma's contribution. I'll give my general comments first and then specifically comment on Mark's bit.

First, there is some truth to Tyler Cowen's assertion that we should not care where the auto companies are based, after all a job in the US is a job, but he is deliberately narrow minded. To the extent to which the high value added activities of engineering, designing and upper management of the companies happens elsewhere, we are loosing that part of GDP. However, I think the 'these are good jobs and must be protected' attitude of some of the commenters is misguided. The shrinking middle class (or perhaps the declining relative position of the working class) is more about what is happening in the upper parts of the income distribution than what is not in the middle parts. I am not sure protecting and preserving one specific industry is the remedy.

Now to Thoma's argument: that national security considerations mean that we should preserve the auto industry. I was immediately amused, for as an undergrad it he late eighties, I had precisely this debate (then it was about how Japan would soon make everything and us nothing). Well it made little sense to me then and less to me now. To imagine a industrialized war that lasts years and is on a global scale such that we can't get heavy manufactures for elsewhere is wrongheaded. Even if we could make stuff (and I can't see why we could not tool up for such a task) where would the raw materials come from, or more specifically where would the fuel we need come from? The point is that I am no political scientist, but it is hard to imagine a WWII scenario again which is where this attitude comes from, and if such a situation were to arise where we had to be self-sufficient, we have more problems than a lack of auto plants.

My take is that there is no reason we can't be competitive in cars and that management and the US education and technological infrastructure are causing the auto industry to suffer. I think the incentives of top management in US corporations has become far too heavily weighted in short-term performance than long-term and this has seen disastrous results in cars and banking. But the lack of skilled workers and investment in research and development of new technology does bode badly for the future of the US economy. It is not a zero sum game but we want to be at the forefront of the high value added industries and that requires public investment. Transportation is always going to be a top need of humanity and the challenge of the 21st century is to figure out how to do it more efficiently and less harmfully to the earth. The countries that are at the forefront of this new 'auto' industry are poised to reap large rewards - and help humanity in general.

UPDATE: A nice article on the future of the US auto industry can be found in the April 27th New Yorker. (Subscription is required to read the whole thing)

Poll Results and Portland Politics

The poll is closed and the masses have spoken: MLS in Portland is a Boondoggle.

Given that I have been an ardent supporter of the deal, this result can be interpreted in many ways:

1. My readers are intelligent and independent and are willing to consider my opinions but are not unduly influenced by them.

2. I am not very persuasive.

3. I was fighting against truth and reason all along and I should wake up to that fact.

4. Some dude was stuffing the poll.

I hope the truth is 1. I hope this is true in general and if this poll is an artifact of this fact, then this is wonderful news. 2 is also probably true. I am not ready to accept 3 - I am not convinced that the opportunity cost of turning down this deal has been adequately understood. I suspect 4, however. The poll suddenly took a decided turn in the opposite direction and continued its trajectory suspiciously. Though the economic indicators of the Oregon economy did the same...

But who knows? And who really cares, the point is that if this is any indication of the mood among the general population, Paulson and City Hall have some more work to do to convince people.

And speaking of City Hall, will The Oregonian ever give up on trying to run Adams out of office? Regardless of what their personal opinions are, he is our mayor and needs to be effective for our well-being and their crusade is contrary to our interests. Normally I respect David Sarasohn's opinion pieces, but when he writes the following I wonder what he is thinking:

Friday brought yet another development in the endless tale of the mayor's admitted lies and his desperate effort to survive in office. From Freedom of Information Act requests, Ryan Frank and Brent Walth of The Oregonian reported 33 phone calls from Adams to Beau Breedlove before Breedlove turned 18, a very different view of the relationship from even the mayor's most recent account of it.

There was actually another City Hall story Friday, about Portland's new budget, with higher than expected revenues allowing the city to maintain more of its services.

Guess which was the top City Hall story of the day?

Ummm, it was The Oregonian that made it the story of the day and could have (AND SHOULD HAVE) made the budget the story of the day. When the major daily of the city is not focusing its reportorial energies where it should, don't blame city hall. This is like saying "I hit you for no reason and therefore you must have been at fault."

Beeronomics: Mass or Niche Markets and Incentives

[Note: Stan Hieronymus had to set me straight - aroma and bitterness are as much or more about how you use hops as the hops themselves.  Add them later in the boil and you get more aroma and less bitterness.  All this re-education is making me want to brew again.  Perhaps with Summits...]

I had to stop at a Safeway to get some milk on the way home alst night and on the way to the dairy case I spied a bottle of Deschutes Red Chair IPA. Well, I have a duty to sample it for the loyal readers that tune in for my erudite discussion of economics, right? Sure. Seriously, this is a magnificent beer - hop-forward IPA but with low alpha acid hops (or at least I think this is the case) so you get seriously strong hop aroma and taste but without the heavy bitterness of, say, a Hop Henge. Wow - what a wonderful result. Good thing I only bought one. It is medium bodied, slightly more malty and darker than a typical IPA, but exceptionally balanced and eminently quaffable.  Yummy.

It made me think of the other new beer I have tried recently: after a long wait my local grocery finally started stocking 'Drifter' from the Bros. Widmer. This beer followed a similar philosophy, they used Summit hops to create a medium bodied pale ale that has the nice citrus-y aroma characteristic of Summits but without the bitterness as Summits are low alpha-acid. [Correction: they are actually quite high, thanks for the correction Stan]

What is interesting is the completely different approaches to the business of beer these two offerings represent. Drifter is a fine beer (but a bit far from my personal sweet spot - I like bitter): it is a mild, medium bodies pale ale that is designed to please the masses. My immediate thought was: "this is their Fat Tire fighter." In my mind this is a beer deliberately designed for mass appeal to a defined market that supports a huge volume of Fat Tire sales. "Let's go for that market," I can hear them saying. And, with luck, it will - it is a better beer than Fat Tire.

Deschutes is busy these days (with a stable of exceptional standard beers in place) pushing the fringes with specialty beers, cementing its reputation not only as an outstanding volume beer producer, but a truly top class boutique brewery as well. By doing this, I imagine they think they can keep up their reputation and keep getting noticed and thus the sales of the standard line up will be bolstered.

Widmer does this too, of course, but I wonder how much being a public corporation changes the incentives. Does always worrying about the return to investors cause a more intense focus on producing beers with mass appeal? I don't know, but I suspect so. It doesn't really matter - as long as they keep making good beers, I am happy to have both around. Oh and someone had switched out a couple of Drifers with some Hefewizen, and drinking them took me way back to when it all began and reminded me that, though my tastes have moved on, it is still a really good beer.

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