Eco-nomics: Energy and Development

As a companion to the post on population here is a little data to think about regarding development and energy usage. We often see the chart of energy usage per capita which shows the high income countries (and especially the US) as outliers using huge amounts of energy per person. But this is not the right way to think about it in my mind. Compared to most of the world we in the US enjoy long lives relatively free of hunger, malnutrition, disease, infant mortality, war, famine, etc. I would hope that we all think that every human being should be able to live similar lives. So a chart of energy per capita seems to suggest that the best thing for the planet is for us all to be poor. But I am uncomfortable with the notion that the rest of the world should not strive to have an equal quality of life.

We know this connection between poverty and environmental sustainability is not true either, just look at the way poverty taxes natural resources - the deforestation of the Brazilian Amazon for example. Rich countries can afford to protect natural resources much more than can low income countries. A picture of energy use per capita also diverts attention to the big threats in the future: densely populated developing countries that are experiencing fast growth.

The fact is that the energy efficiency of the US economy has improved tremendously. Here is a graph of the energy use per dollar of GDP since just 1980.



Here is a similar picture for the US since 1950.



How does this compare to the rest of the world? Here is a graph of a set of countries and their energy use per GDP. Note that the middle income countries, those that are moderately industrialized, tend to be the least efficient (there is also a very strong correlation between inefficiency and resource availability - take Venezuela for example). While the US, and especially Western Europe where energy is very expensive, are relatively efficient. So are lower income economies that are still largely traditional. [As I mentioned above, don't romanticize traditional economies, they tend to have things like infant mortality rates and life expectancy rates that would make you wince] By the way, these are selected from a list of countries from North America, South American, Western Europe, Eastern Europe, Middle East, Africa, and Asia, in that order. Here is the source data for both this graph and the first one.



Finally, here is a scatterplot that plots energy usage per GDP against GDP (in this case using a PPP rather than an exchange rate comparison - better but harder - so you might notice a difference)

Eco-nomics: Population

The Economist has a nice piece on the environmental impact of population growth that mirrors things I have said here. But they are the economist so it is ever so much more persuasive.

In a nutshell, my take is that population is an aggregate problem, not in individual one. By this I mean that population growth rates are correlated with many macroeconomic and socio-economic factors, therefore the way to achieve the decline in population growth that environmental alarmists wish to see is not to appeal to individual's guilt but to focus on economic development. High income country fertility rates are below replacement level in many cases, France for example is trying hard to get it up, not down. And, in general, fertility is falling in the world fairly rapidly thanks in large part to improvements in development.

Anyway here is an excerpt of The Economist's take:

Astonishing falls in the fertility rate are bringing with them big benefits

THOMAS MALTHUS first published his “Essay on the Principle of Population”, in which he forecast that population growth would outstrip the world’s food supply, in 1798. His timing was unfortunate, for something started happening around then which made nonsense of his ideas. As industrialisation swept through what is now the developed world, fertility fell sharply, first in France, then in Britain, then throughout Europe and America. When people got richer, families got smaller; and as families got smaller, people got richer.

Now, something similar is happening in developing countries. Fertility is falling and families are shrinking in places— such as Brazil, Indonesia, and even parts of India—that people think of as teeming with children. As our briefing shows, the fertility rate of half the world is now 2.1 or less—the magic number that is consistent with a stable population and is usually called “the replacement rate of fertility”. Sometime between 2020 and 2050 the world’s fertility rate will fall below the global replacement rate.

At a time when Malthusian worries are resurgent and people fear the consequences for an overcrowded planet, the decline in fertility is surprising and somewhat reassuring. It means that worries about a population explosion are themselves being exploded—and it carries a lesson about how to solve the problems of climate change.

Today’s fall in fertility is both very large and very fast. Poor countries are racing through the same demographic transition as rich ones, starting at an earlier stage of development and moving more quickly. The transition from a rate of five to that of two, which took 130 years to happen in Britain—from 1800 to 1930—took just 20 years—from 1965 to 1985—in South Korea. Mothers in developing countries today can expect to have three children. Their mothers had six. In some countries the speed of decline in the fertility rate has been astonishing. In Iran, it dropped from seven in 1984 to 1.9 in 2006—and to just 1.5 in Tehran. That is about as fast as social change can happen.

Falling fertility in poor and middle-income societies is a boon in and of itself. It means that, for the first time, the majority of mothers are having the number of children they want, which seems to be—as best one can judge—two. (China is an exception: its fall in fertility has been coerced.)

It is also a boon in what it represents, which is greater security for billions of vulnerable people. Subsistence farmers, who live off their harvest and risk falling victim to rapine or drought, can depend only on themselves and their children. For them, a family of eight may be the only insurance against disaster. But for the new middle classes of China, India or Brazil, with factory jobs, cars and bank accounts, the problems of extreme insecurity lie in the past. For them, a child may be a joy, a liability or an accident—but not an insurance policy.

And falling fertility is a boon for what it makes possible, which is economic growth. Demography used to be thought of as neutral for growth. But that was because, until the 1990s, there were few developing countries with records of declining fertility and rising incomes. Now there are dozens and they show that as countries move from large families and poverty into wealth and ageing they pass through a Goldilocks period: a generation or two in which fertility is neither too high nor too low and in which there are few dependent children, few dependent grandparents—and a bulge of adults in the middle who, if conditions are right, make the factories hum. For countries in demographic transition, the fall to replacement fertility is a unique and precious opportunity.

Nonsense, say Malthus’s heirs. All this misses the point: there are too many people for the Earth’s fragile ecosystems. It is time to stop—and ideally reverse—the population increase. To celebrate falling fertility is like congratulating the captain of the Titanic on heading towards the iceberg more slowly.

The Malthusians are right that the world’s population is still increasing and can do a lot more environmental damage before it peaks at just over 9 billion in 2050. That will certainly be the case if poor, fast-growing countries follow the economic trajectories of those in the rich world. The poorest Africans and Asians produce 0.1 tonnes of CO2 each a year, compared with 20 tonnes for each American. Growth is helping hundreds of millions to escape grinding poverty. But if the poor copy the pattern of wealth creation that made Europe and America rich, they will eat up as many resources as the Americans do, with grim consequences for the planet. What’s more, the parts of the world where populations are growing fastest are also those most vulnerable to climate change, and a rising population will exacerbate the consequences of global warming—water shortages, mass migration, declining food yields.

In principle, there are three ways of limiting human environmental impacts: through population policy, technology and governance. The first of those does not offer much scope. Population growth is already slowing almost as fast as it naturally could. Easier access to family planning, especially in Africa, could probably lower its expected peak from around 9 billion to perhaps 8.5 billion. Only Chinese-style coercion would bring it down much below that; and forcing poor people to have fewer children than they want because the rich consume too many of the world’s resources would be immoral.

If population policy can do little more to alleviate environmental damage, then the human race will have to rely on technology and governance to shift the world’s economy towards cleaner growth. Mankind needs to develop more and cheaper technologies that can enable people to enjoy the fruits of economic growth without destroying the planet’s natural capital. That’s not going to happen unless governments both use carbon pricing and other policies to encourage investment in those technologies and constrain the damage that economic development does to biodiversity.

Falling fertility may be making poor people’s lives better, but it cannot save the Earth. That lies in our own hands.

GDP on the Rise: Great but...

...don't look for unemployment to come down much. Don't misunderstand, 3.5% GDP growth is fantastic news, and you gotta start somewhere, but if you are more interested in unemployment (which is what most households care about rather than GDP), 3.5% doesn't move the unemployment rate much.

Paul Krugman has the sobering details:

Here’s the scatterplot of annual growth versus annual changes in the unemployment rate over the past 60 years:

--REMOVED--

Note, the graph did not display well with my black background, so here is essentially the same information (in this case 8 quarters rather than 4) from a graph made by Brad DeLong:

The average, according to Krugman, is about a half a percentage point, but notice on the graph that there are data points both in the positive and negative range for change in unemployment. How can that be? Well, productivity can go up (it is), the underemployed can work more (but this is not reflected in the base unemployment number) and discouraged workers can re-enter the work-force which counters job creation in the unemployment stats.

Savvy readers will recognize this picture as as graph of Okun's law. A fairly standard rule of thumb is about a .5% decrease in unemployment for every 1% increase in GDP so at the higher end we might expect a bigger impact on unemployment but as there is so much slack in employment (lots of underemployed and discouraged workers) we might not see much movement at all at least for a while.

Economist's Notebook: Just Who is Getting the Home Buyer Credit?

Economists always talk about how a tax never stays where you put it. If you tax producers or consumers makes no difference, in the end prices adjust and the tax is shared the same way in either case.

But the same can be said of a credit. The government is giving new home buyers $8000 for purchasing a home, but its it the buyers who are actually getting it? The recent Case-Shiller numbers suggest that a lot of this money is actually going to sellers. It makes sense, if you are a potential buyer and you suddenly have an additional $8000, you are probably willing to pay close to $8000 extra for a home. To try and ensure you get the home you want, you are likely to bid up the price close to that $8000. So call it a home buyer credit if you will, in the end it is more like a home seller subsidy.

That said, it does not make much difference from a public policy perspective. The point of the policy was to get homes selling again and put a floor underneath home values to staunch the bleeding going on in the real estate market and all evidence suggests it has been very successful.

But with the winter season approaching and unemployment still high, it appears that this credit is probably going to need to be extended until spring.

By the way, for econ students a quiz: what determines how a tax is shared among buyers and sellers, and how do you think it relates to the housing market?

Soccer on Grass...Again.

The New York Times' Goal blog has a nice update on the new Red Bulls Arena and the transition of the team to the new surface. Here is the key passage which concerns the Red Bulls star Juan Pablo Angel and his concerns about artificial turf:

Angel, the team’s career leading scorer, has often complained about the artificial turf at Giants Stadium, which exacerbated his nagging back problems... “Everyone knows I’ve been the biggest critic, I never liked the turf,” he said.

Yes, Giants stadium has the new, modern turf. So it is not a matter of what fake grass it is, it is a matter of fake grass, full stop.

Juan Pablo Angel has been perhaps the most successful foreign star to join the MLS. While not a superstar, he was a successful striker in the English Premier League and could have signed a very lucrative contract with a team in that league when he decided to come to the MLS. He immediately became the most dangerous striker in the MLS (and he is all class to boot). So if he is dissatisfied with the turf, it suggests that other high quality players will balk at signing with a team that plays on turf.

Something else for the Timbers to think about...

Beeronomics: Hops and Asymmetric Prices

Faith Cathcart/The Oregonian

After my rather lengthy disclaimer about how talking about beer is a device through which I discuss economics principles and have some fun in the process, I tenuously dip my toe back into the beeronomics pond...

The always reliable John Foyston has a great article in today's Oregonian on something that I informed my loyal beeronomics devotees of a month and a half ago: the hop shortage is over and in fact we are in a hop glut.

But I am not a reporter. Thankfully, John is and he has uncovered some fascinating aspects of the current situation. One interesting fact is that apparently because the hop shortage convinced breweries that they needed to contract in advance for their hops, there is currently no spot market at all for hops. So excess supplies have no where to go. Amazing.

The big news, which is in Foyston's lede is that this glut of hops should not result in lower beer prices, even though prices rose significantly with hops prices.

This comes as no surprise to an economist. For one reason, the statement above about how all hops were forward contracted means that prices cannot fall due to the glut in supply. Brewers locked in higher prices as an insurance policy to ensure a supply of hops and, well, lost the bet in essence. Foyston himself makes this point.

But the other reason that this economist is not surprised is what I mentioned in that previous post. Across a huge array of industries, price changes tend to be asymmetric. Industries are very quick to raise prices in response to higher costs but very slow to lower them when costs come back down. This does not seem to be true of individual retailers, by the way, so don't blame them, but it is especially true of industries like beer that have complicated wholesale distribution networks.

Here is Sam Peltzman of the University if Chicago writing in the Journal of Political Economy:

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gaso- line, agricultural products, etc.), this one uses large samples of di- verse products: 77 consumer and 165 producer goods.

So it looks like the craft beer industry is no different. So even when forward prices adjust to the increased hop supplies, we shouldn't expect beer prices to follow suit.

One quick note on the ephemeral nature of fresh hop beers, since we are on the subject of hops. I finally got my hands on a bottle of Deschutes Hop Trip which was, by most accounts, one of the real gems of the fresh hop beers this year, so I was excited. Unfortunately it was a total dud. It was brewed a while ago now and the hop essence had completely disappeared from the bottle. The beer was thus an under-hopped disaster. And for $5.50 this is a problem, I expect a superior beer at that price. This, I think, illustrates the difficulty of bringing a fresh hop beer to a mass market in bottles, though in the past few years I have not had the same experience.

Although, strangely enough this is why I like fresh hop beers so much: they are as far away from industrial macro lagers as you can get. They exist only in a moment in time and are connected to the land like wine. So I don't mind suffering the occasional dud. But I do think breweries are going to have to keep track and establish "sell by" dates to limit the number of dud beers sold.

Portland Home Values: Case-Shiller August Numbers

The August Case-Shiller numbers are out and the news is good...for now. The housing market appears to be stabilizing in Portland and across metro areas in the US. This first picture is the raw C-S numbers for Portland, Seattle and the 20 city composite.



The next picture is the year over year change in home values for the same three indices.



The combination of low interest rates for mortgages and the new home buyer tax credit seems to be having a substantial impact, however with the tax credit potentially expiring (if it is not extended), high unemployment and a shadow inventory of foreclosed properties that will take a while to work through the market, I would not get too optimistic about the next year or so. I would expect these to take a dip in the winter and perhaps, finally, by the middle of 2010 we'll see sustained improvement.

Econ 101: Perfect Competition, Part 3

Oops...took longer than I had planned to get back to this, sorry.

In my previous two posts on perfect competition I covered the basics of the assumptions (market structure), the supply and demand side (market conduct) and the notion of equilibrium.

Today I am going to talk about why markets are so great.



If we look at the above illustration of market equilibrium for some good there is one aspect that immediately stands out: all the consumers that had a reservation price for the good that was above or equal to the market equilibrium price were able to purchase the good. Similarly, all of the suppliers who were able to supply the good for a cost below or at the market equilibrium price were able to sell their goods. The is one aspect of the efficiency of markets - all of the buyers and sellers who should transact, do. So there is no benefit to either party that is left 'on the table' by the market - all of the possible benefits are enjoyed by the participants in the market.

And notice the next aspect: every single one of these transactions was entered into willingly because they left both buyers and sellers better off. Let's return to the example of the yard sale. Many people have around their houses stuff that they no longer want and can supply it to a market (in this case the market that they created in their front yard) at very low cost. The potential customers are the ones who have some value for the stuff. That people are able to sell stuff from their front yard is a good thing because these buyers and sellers can come together for mutually beneficial exchanges. Society benefits then from having free markets so that such exchanges can happen and everyone can benefit.

There is another aspect of the efficiency of free markets that I will just mention in passing. Since free markets are, by definition, ones that anyone can enter, this causes competitive pressure on the part of firms. Notice that if someone invents a technology or process that can save just a tiny bit of cost, they could reap huge benefits by being able to undercut other firms' prices. This then creates relentless pressure to be efficient on the part of firms and ensures that no firm is wasteful in the sense that they are needlessly costly in their production of any good.

So there you have it - the wonder of free markets. Contrasting this with markets in which there is not free entry shows that less than optimal amounts of the good will be sold and that the firms may not be efficient - both of which lead to lower benefit to society.

MARKET FAILURES

To complete the analysis, let's go back to the implicit assumptions that we started with (the implications of the explicit assumptions I think are more or less self-evident).

In order for these results to hold we have to have full and complete information: most importantly, all consumers must know all about the product (so they can value it properly) and all of the prices that it is being offered at (so they can always go for the lowest). [NB: we can alter the model easily to deal with real world realities like transportation costs, to wit, you would usually go to the store down the block than across town just to save a penny]

There also can be no external costs and benefits. The easy way to see this is with external costs. The supply curve is based on private costs and we get efficiency from the fact that all suppliers with costs below the price supply. But what if, in the production of the good, the supplier gives off toxic smoke that is damaging to local residents' health? Well then the true social cost of the good is higher than the private good and there will be exchange of good that should NOT be exchanged: people who value them for more than the private costs but less than the total costs will buy and consume them when they should not (from a social welfare perspective). These exchanges start diminishing the total surplus from the market and efficiency is lost.

This is precisely the rationale for a carbon tax, by the way. By making the cost of carbon emissions part of the private cost of production, market efficiency is restored.

One last note, these have to be private goods, only those that purchase the good can consume it, so these markets do not work well for things like city parks, streets etc.

So that is the essence of perfect competition and free markets and why economists often extoll the virtues of them. Any good economist will, in the same breath, acknowledge the assumptions and the potential for market failure as well, however. That said, most of us start with the idea that a market solution is the best in most cases and only if it is clear that market failures are significant and that a regulatory solution is available that can correct the failure at a reasonable cost (not more than the cost of the failure itself) should markets be constrained. We do this not out of some fetish for profits, competition and greed, but because we understand that everyone benefits from free markets.

Think of our yard sale example. What if the government outlawed them entirely or put onerous restrictions on them? Lots of people would loose out on the opportunity to engage in mutually beneficial exchange. The poor college student who needs a cheap couch no matter how tattered and the family who have finally replaced their old couch with a new one both benefit from finding each other and transferring the couch. This is what markets are all about.

And, by the way, this is why markets and market-based economies arise naturally and this is also why acting in your own self interest is good for all. The poor college student does not care about the family who bought a new couch and the new family is not acting out of a sense of concern for the college student, but they are helping each other nonetheless.

Economist's Notebook: Opportunity Cost, General Equilibrium and The Sellwood Bridge

Brent Wojahn/The Oregonian/2008

I have been meaning to write a post on this for a while. The latest news about the Sellwood bridge replacement project appeared in The Oregonian on October 8. Here is a excerpt of Dylan Rivera's story:

Multnomah County on Thursday came one step closer to imposing the state's first county vehicle registration fee, aimed at replacing the cracked Sellwood Bridge for $330 million.

County Chairman Ted Wheeler and commissioners gave a mostly favorable review to a plan that calls for the county to pay for about a third of the project with the new fee.

In the next two weeks, the county board expects to approve a vehicle registration fee that would cost $19 a year per car in Multnomah County. Next year, Clackamas County will consider a fee of $5 a year for its motorists.

The plan puts Multnomah County drivers in the position of paying more than triple the rate of Clackamas County residents for a bridge that is mostly used by Clackamas County drivers. The situation shows the political difficulty of paying for a regional asset that is owned locally.

So what is the problem with the last statement? Nothing factually, but it echoes a common theme that will, without a doubt, become a rallying cry for opponents: "why should Multnomah County drivers pay for a bridge that is used more by Clackamas County drivers?" And this logic is wrong.

Why? The answer lies in the equilibrium effect of cross river traffic. Eventually the bridge will become unusable. Fine say MultCo drivers, it is ClackCo drivers' problem. Not at all, without a Sellwood bridge traffic will push up to the Ross Island. When the Ross Island bridge gets too crowded, traffic that used to use the Ross Island will use the Hawthorne. And then Hawthorne traffic will go to the Morrison, and on and on and on. So you see, the fact that Clackamas county drivers are a majority on the Sellwood is not really the point. Perhaps a better way to think about it is how big a percentage of all Portland bridge traffic is made up of Clackamas county drivers.

So the true opportunity cost calculation of the Sellwood bridge is not what it would be like to have to use another bridge under current traffic conditions (as most are implicitly assuming when they say things like, 'I live in Irvington, why should I have to pay much for the Sellwood bridge?'), but what will it be like to have to use the other Portland bridges and feeder roads without a Sellwood bridge? I submit it would be quite a lot.

Are There Editors at The Oregonian? A Dave Lister Howler

I nearly fell off my chair...really.

The apparently irony-proof Dave Lister decided to use Sea-Port Airlines as his shining example of the glories of free enterprise in an Op-Ed in today's Oregonian. Come again?

[Note: perhaps wisely, the inept folks that run the OregonLive site have not posted the Lister Op-Ed]

Sea-Port Airlines, you may recall, exists for no other reason that it is the beneficiary of an enormous amount of government subsidy!

This from the September 14th Oregonian: "...the flights remain heavily subsidized. In the first six months, [Newport and Astoria] have spent more than $1 million of the grant money to support the airline, while the flights have generated just $213,000 in revenue."

Sea-Port got over $3 million over two years to provide service to Pendleton. They found some more federal money to fly some routes in Arkansas. And the list goes on.

The point is of course that Sea-Port is precisely the opposite of an exemplar of the wonders of free enterprise. It would not exist without heavy government subsidy, not even close: its Pendleton routes, for example, cost about $3 million a year and were projected to earn about $1.5 million in revenue. So it is with an amazing amount of gall that (equally irony-proof) Kent Craford, one of Sea-Port's partners, says that the misguided decision to expand the federal government by creating the TSA created this wonderful free-enterprise opportunity that he and his partners exploited. What they exploited is taxpayer largesse and to not acknowledge that is outrageous.

So let's follow the logic: the government is bad because it does not make use of the free market for airport security, but we don't mind if the government subsidizes our operations and allows us to take home fat paychecks. Priceless.

The biggest question is why doesn't The Oregonian exercise a little editorial judgement and not publish this inane drivel, it is not at all hard to figure out that this is utter nonsense?

There are a couple of very interesting public policy questions that arise from this little misfire:

Is it appropriate that the vast majority of American taxpayers, those that live in urban areas, should subsidize rural living so heavily? Is air service that important. Their Astoria and Newport routes apparently average about 2 people per flight. So is not particularly environmentally friendly - I suspect a car would be much greener.

Was the creation of the TSA a sensible way to overcome the clear principal-agent problem involved in having private for-profit companies handle airport security? If not, what other ways would be better.

Good questions for my public policy analysis class next term, but interesting questions like this are not apparently what The Oregonian is interested in.

MLS in Portland: Grass

An alert commenter has pointed me to this story that I had completely missed:

Toronto FC to get grass pitch

Toronto's BMO field, home to Toronto FC, will replace its artificial turf with a grass playing surface by the time the club begins its 2010 season.

Toronto council approved the switch last week, but the project needed the approval of both the federal and Ontario governments, which have paid for part of the construction of the $74-million stadium in 2007.

Mayor David Miller announced Friday that both governments have now given the project the green light.

Maple Leaf Sports and Entertainment, which owns Toronto FC and manages the city-owned field, is investing $3.5 million to replace the turf.

After only three seasons in the league they are abandoning their misguided turf experiment. That this means that now all soccer-specific stadiums in the MLS will have natural grass fields. So only Seattle (boo!) and New England, who play in NFL stadiums on turf have no plans (as far as I know) to construct a soccer-specific stadium.

C'mon Merritt, commit to grass!

Beeronomics: Fresh Hop Ales in the NY Times

A wonderful article by local writer Lucy Burningham.

Matt of Double Mountain gets the hops.

Matt and Charlie brew.

All photos: Lisa Bauso for The New York Times

The nascent Killer Green.

Class Size Redux

A day after complaining about 'Think Out Loud' not getting a neutral academic to talk about the evidence, I make my opinion known in a more public forum. After reading a lot of the literature on both sides, I am convinced that the best available evidence is from Tennessee and comes down solidly on positive and significant impacts of small classes. I think I do a good job noting the diversity of findings and some criticisms of the study. But I'll let you be the judge.

Excerpts from my op-ed in the The Oregonian:

... This raises the question, should Oregonians be concerned about large sized classes? The answer is yes.

The effect of class size on student achievement is the subject of intense debate among economists and education researchers. The reason has much to do with the difficulty of isolating the effect of class size when examining average achievement differences across classes, schools, districts and states.

...

Studies of the data from the Tennessee experiment have found significant and persistent differences in the achievement of children in the small classrooms (13-17 students) versus the large classrooms (22-26 students). The achievement gap was even wider for disadvantaged students in inner-city schools.

Princeton economist Alan Krueger has estimated that being in a smaller class significantly improved math and reading test scores ... and this from little more than two years spent in smaller classes.

Although the experiment was conducted on kindergarten through third grade classrooms, the effects of having been in a small class remained after the children returned to larger classes in higher grades. Furthermore, the more time a student spent in a small class setting, the larger and more persistent are the gains in achievement.

...

Subsequent study of the original participants in the program have found improved achievement in high school and a greater propensity to enroll in college preparatory classes.The experiment wasn't perfect and it has not been replicated, but it is the best evidence available and it points clearly to class size effects. Economist Krueger has estimated that the value of the productivity gains far outweigh the additional costs to the state from class size reductions. It is curious that Oregon seeks to create a renewable energy economy through tax breaks and grants while at the same time disinvesting in the human capital of the very people who are necessary to make it possible. ...

I was pleased to see they left my little lesson on selection issues in. But one thought, can you imagine the outcry if they tried such an experiment in Oregon today? If your kid was in a 25 student 1st grade class and your neighbor's kid was in a 15 student class next door in the same school, wouldn't you be outraged - even if you were told it is for the benefit of science?

MLS in Portland: A Comparison

As the Trail Blazers get ready for their new season, and as Bill Walton came-a-visitin' recently searching for forgiveness, I got to wondering how different was the NBA expansion to Portland in 1970 than the current MLS expansion to Portland.

As I am lazy and cheap and most archival new stories on-line are not free (can it be true, hasn't Google figured this out yet?), I am left to offer only some little tidbits of information.

Such as:

Average attendance of the NBA in the three years leading up to the Portland expansion year (1970): 5,967, 6,484 and 7,563.

So was the NBA such a (wait for it...) 'slam dunk' for the city? Perhaps not. The city owned Memorial Coliseum was already in existence and lacked a major tenant so it has parallels there. But the NBA was still pretty much a fledgling league (with the ABA as a competitor) and future prospects were uncertain. Since then the NBA, thanks in part to Larry Bird, Magic Johnson and the proliferation of color TV, has soared in popularity and became an international brand.

I suspect, however, that in the late 60's there were many who questioned if the NBA would go anywhere. What is interesting to me in retrospect is how much the Blazers are a part of the fabric and identity of the city.

So why so much skepticism about MLS? It is as established a league as the NBA was then. Unlike the NBA at that time it is already part of a global market, and one that is staggeringly enormous. And the league's franchise values have skyrocketed in recent years.

One big difference is that the city does now have an established major league franchise. Though it is also worth noting that their schedules complement each other's nicely - unlike the NHL which so many were so excited about a few years back.

But I am but a youngster, barely out of diapers. Anyone remember the talk surrounding the NBA coming to Portland in the late 60s?

On another MLS note, this is another troubling sign that, in the grass seed capital of the world, the Timbers may end up playing on plastic...

Nemo's original idea was to set the slogan against a carpet of lush grass, Nemo account manager Jessie Grav said. But team owner Merritt Paulson suggested the image be replaced because nobody knows yet whether the 2011 Timbers will be playing on grass or artificial turf, she said.

This is about the photo above. I suspect he would not be that worried if he didn't already suspect that plastic was almost certain.

He Said, She Said Journamalism and OPB

Update, I messed up on the links, the second was supposed to be to my class size posts - fixed now, sorry!

Grrr... On my way to Corvallis this morning I was listening to OPB when "Think Out Loud" came on with a show about class size. Fantastic, I thought. I was excited to hear what a dispassionate academic expert had to say about the evidence on class size as I have been doing a lot of reading on the topic these last few days and have had to read very carefully a vast array of very mixed results to discern what the evidence does and does not say about class size. It would have been very interesting to hear how someone who is unbiased and had been studying the issue for years distilled all of the research and explained it to the lay public. After all, this is what public radio is all about, right?

Um, no. Instead they did the lazy and entirely unhelpful thing of contacting advocacy groups on either side of the issue to give a quick sound bite: "class size is hugely important!"; "no it isn't!" This is standard practice on commercial TV and radio (turn on CNN, FOX, MSNBC at any time of the day or night and this is what you get) - although much more polite.

What makes me so incensed about this is that any listener who did not know much about the issue would not be helped at all by this program - which is just about everyone. The only thing this type of program does is reinforce preconceived notions whether they are right or wrong. If you think class size matters, I am sure you do even more after having listened because a person on the radio confirmed your belief. If you think it does not matter, ditto. So a huge chance was missed to contribute to the level of the discussion around this issue.

I think that, in general, OPB and NPR do a much better job than commercial broadcasters actually getting to the heart of issues, which is why I am an avid listener (and a contributor, defying all economic logic*). What makes for good irony is that the show ended early so OPB could appeal for donations and the main theme of the appeal is that OPB is unique and therefore different than other radio. Not this morning.

*Not really, but that is a whole other can of worms...

Beeronomics: A Clarification

I am not a 'beer economist.' I am not sure what that would be, but I know a whole lot less about the beer industry than other members of the economics department at OSU, for example.

What I am is an economist and the point of the beeronomics posts is not that I am an expert on the economics of beer (whatever that would be), but that economics can be understood through all sorts of real world industries, markets and phenomenon. The point of beeronomics then is to have fun learning about and thinking about economics in less-conventional ways.

I happen to like brewing, consuming and learning about craft beer. And I happen to really like, without exception, everyone involved in craft beer that I have ever had the good fortune to meet. Oregon also happens to be the epicenter of the craft beer renaissance in America. So it seemed to me to be a natural and fun industry to use to explain and discuss economic theories. I can also go off and write purely self-indulgent posts about beer that have little or nothing to do with economics (as long as my editor doesn't notice).

The main motivation behind the creation of this blog was to try to create a place, outside of the classroom, where I could connect with students and others interested in economics. I think economics is interesting and enlightening and that it can also be a lot of fun. The beeronomics posts started as an attempt to demonstrate both aspects.

I say all this because I have been told a few times recently that I have garnered a reputation for being the 'beer economist' and that what I know about is mostly beer. Both assertions are false: I know very little about the beer industry (except the little I have learned through this blog)and I know a lot about many other things. I do, on occasion, refer to my academic research (which has nothing to do with beer) in this blog, but talking about it incessantly would get boring fast.

First and foremost I am a well-trained economist that is curious about many things, interested in the intersection of economics and policy, and someone who enjoys teaching and is excited about his discipline and what it has to offer the neophyte. Oh, and I also enjoy the occasional beer.

With that said, here are some recommendations from recent ventures to the beer store/pub:

Full Sail Vesuvius - beware this is a deceptively big beer, find someone to share the 22oz-er with. An economist would describe a big beer as one that has fairly large diminishing marginal returns.

Bridgeport Stumptown Tart - also surprisingly big and the cherry can become cloying if you drink too much so, again, find a partner for the big bottle.

By the way, I bought a bottle of Sam Adams Cherry Wheat on a lark - big mistake. Yuck. You are so much better off springing for and savoring the Stumptown Tart

Dry-Hopped Mirror Pond on cask at the Deschutes Portland Pub - probably long gone, but man oh man, this uber-classic is stunningly radiant on cask. No diminishing marginal returns here, it was hard to stop drinking.

Crisis Watch: Good News Friday

I have been trying to find some areas of optimism and this is a big one, from MarketWatch:

U.S. Sept. industrial production up 0.7%

WASHINGTON (MarketWatch) -- Led by a rebound in autos, metals, and high-tech, U.S. industrial production increased at an annual rate of 5.2% in the third quarter, the fastest growth in four years and the first quarterly increase since the recession began in late 2007, the Federal Reserve reported Friday. Output of the nation's factories, mines and utilities rose 0.7% in September after an upwardly revised 1.2% gain in August and a 0.9% increase in July, the Fed said. The 0.7% increase in output in September was stronger than the 0.4% gain expected by economists surveyed by MarketWatch. Manufacturing output rose 0.9% in September. Capacity utilization rose to 70.5% in September from a revised 69.9% in August.

Here is a nice picture from Calculated Risk showing the increase in capacity utilization in perspective:



This is also a nice illustration of a little economics riddle: how can there be so much underutilized capacity just sitting around? One answer is the liquidity trap which may well describe where we are - no one wants to lend at any interest rate so we are all just sitting on our hands. But it is this picture essentially that leads the few optimists among us to think that we may be in for a robust recovery. So much capacity tha could ramp up in a very short time period...

Real Soccer Stadiums Have Grass Surfaces

The New York Times' Goal blog has the this story on the installation of the natural grass field at the Red Bull Arena in Harrison, NJ, future home of the MLS New York Red Bulls.

How can they possibly make it work in such a climate?!? They are installing a SubAir system that helps control the moisture in the turf and can keep it warm as well in freezing temperatures. It is what the Broncos use in Denver and has been installed in the beautiful grass fields at the new MLS stadiums in Salt Lake, Denver and Chicago (as well as in Bolton in England). The system actually uses vacuum pressure to help keep moisture down in periods of heavy rain.

From the blog post:

On Wednesday, only hours before the Red Bulls lost their 27th straight road game in Major League Soccer, the first pieces of the grass playing surface, Kentucky bluegrass, were rolled out at the team’s new $200 million stadium — Red Bull Arena — in Harrison, N.J.

The balance of the turf will be placed over the next week in preparation for the stadium’s debut when the Red Bulls play Chicago on March 27, 2010, to open the new season. The grass is only one component of what the club is calling a “cutting-edge underground field drainage and turf-heating system” that uses the SubAir System.

According to the club’s news release: “The SubAir System applies vacuum pressure to accelerate the speed at which moisture moves from the playing surface through the soil system. At the same time, the system can apply pressure through the subsoil pipes to stimulate moisture movement through the soil during particularly dry periods, as well as regulate the core temperature of the soil throughout the year to help stimulate grass growth.”

The stadium, across the Passaic River from the Ironbound section of Newark, is inching toward completion. Only 13 panels remain to be installed on the signature, silver-toned translucent panels that will allow natural light to pass through into the bowl. When finished, the roof will cover the stadium’s entire seating area.

Now if teams in places like Utah and Colorado and Illinois which can get cold and have tremendous rain and hail storms, can get natural grass to work out just fine, surely the relatively mild Portland climate poses no real obstacle.

There seems to be a sense that the only technological innovation in athletic fields has been in artificial turf, making them the only real choice for most applications, but this is false. Modern natural grass fields are high tech and durable. There is also a sense that modern turf fields perform just as well as grass for all sports. This may be true of football, but definitely not of soccer. Everything form the speed of the ball, the bounce of the ball and the players ability to tackle changes on turf - for the worse. Its pretty fun to play on, but pretty dismal to watch.

Oh, and one final note, Merlo field at the University of Portland is natural grass, so if the Timbers blow it and install turf, there will still be one place to watch high-level real soccer in town.

And, by the way, the stadium in New Jersey is awesome, but there will be none better than Portland's if it is done right.

Happy Times for Happy Hours

The OLCC is taking the first steps to remove the ban on advertising happy hours. In economics, information is as close to a universal good as there is and is essential for efficient market outcomes. Thus regulating information is bad and leads to inefficient outcomes and we are all better off. In this case the externality of the public safety and health risk of binge drinking was considered to be worth the efficiency hit, but it strikes me as wrong to think that the ads would make much of a marginal difference while the happy hour prices themselves were unregulated. I don't know the causal link between happy hours binge drinking and the size of the related social cost, but if that is a real problem, regulating ads seems to be the wrong approach.

This is a good move.

On Boys and Balloons

Memorial Coliseum in Full Glory

This picture from the Portland Architecture Blog is priceless. The Blazers played a exhibition game in the old Coliseum on Wednesday (which I was dying to go to but the wife had a 'retreat') and made the exceptional decision to leave the curtains open. I have never had the pleasure of being in the bowl with windows showing, and what a shame - it makes for a wonderful and unique arena experience. I imagine that players and television producers hate the natural light but it sure looks good to me.

I hope the Blazers do it again next year, I'll be there.

Oregon Trade: Is China's Economy Helping Oregon Recover?

This map shows all of Oregon's export markets and their relative size. It is a nifty way to get an idea of with whom we trade and how much we trade with each.

This week, I have had exchanges with two reporters about Oregon's economy in relation to Intel's strong performance (Oregonian) and the Dow at 10,000 (OPB). To both, I expressed the opinion that if there is a bright spot for the Oregon economy in the near future it is the robust return to growth in Asia, particularly in China.

This table (below) illustrates what I am talking about (at least as far as China is concerned). It shows how, overall, Oregon's exports have crashed recently (compare the first six months of 2008 with those of 2009) save for one glaring exception: China. Exports to China have increased alomst 24% It also shows how important to the Oregon economy are exports to Asia. Five of the top six export markets are in Asia. So the speedy recovery of the Asian economy is very good news for Oregon. [Note that this table shows only the top twelve export markets for Oregon, there are many more]

Exports of NAICS Total All Merchandise from Oregon in thousands ($ USD)

Econ 101: Perfect Competition, Part 2

Picking up from where I left off last time in Part 1 of this Econ 101 post, let's turn to the supply side.

Firms in perfectly competitive markets are, by assumption, price takers. Since they produce identical products, trying to get consumers to pay more for a particular company's output will not work. And since each individual company is so small relative to the overall size of the market, their own supply decision will not affect prices at all. In addition, the market will easily gobble up all the product they can produce and sell at the market price.

So what do firms do? They produce output as long as the marginal cost is not greater then the market price. Marginal cost is the cost of producing one more unit of output. If this is lower than price, they will earn a positive return on the sale of that unit. So they keep producing until marginal cost (which eventually must rise) reaches the price. So, given a price in the market, we need only trace it to the firm's marginal cost curve to see how much each firm will produce, which means that the firm's marginal cost curve is also its supply curve. [Astute students of econ will also note that there is a shut down condition to meet - if price is so low that you can only make economic losses - but let's assume that away for the time being]

Note that this is the same as saying that firms produce until marginal revenue (benefit) = marginal cost, which is the profit maximizing rule for all firms. In this case as price is fixed, it is exactly the extra revenue a firm earns from the sale of each additional unit of output, so in perfect competition, price = marginal revenue. In fact just about all economic activity is governed by the marginal benefit = marginal cost calculation, so no matter how you dress it up with math it almost always comes down to an expression of this rule.

Anyway, here is what the firm's supply curve looks like and its optimal output decision depending on the price:

If we add up all such firm's supply curves in the market we will get a market supply curve that looks similar: upward sloping.

So now we have the basics of both sides of the market. Buyers who derive satisfaction from the consumption of the good, and sellers who can potentially make it at a cost that is lower than the monetary value of that satisfaction.

This is a good point to stop and think about this aspect of the story for a moment because it will help later when we talk about the great things markets do. A useful example is a yard sale. You may have a bunch of stuff in your basement or garage that is no longer of much use or value to you. You can provide them for sale at a very low cost - you just set them out and put up a few signs to advertise. There are others out there who may value your items a great deal. Perhaps you have children that are growing and you have baby clothes, furniture and equipment to offload, and there are new parents who really need what you have. Because these new parents value the stuff more than you do, a mutually beneficial exchange is possible. So what do you do, you create a market, allow the high valuers to come and purchase the goods at a price somewhere between their value and your own. [Of course they would like to get a low price and you a high, but any price in between your valuations leaves you both better off than before the transaction] Everyone is better off.

EQUILIBRIUM

Once we put the market supply and the market demand curves together on the price-quantity graph, equilibrium is easy to describe. People will continue to purchase more of the good as long as there are sellers who can provide it for less than their reservation prices (and vice-versa, sellers will continue to make more and sell as long as they can find people who value it for more than the marginal cost of production). Putting this on a graph looks like this:

Where the P* and the Q* are the market equilibrium price and quantity. Why? Well if price were any higher there would be too little quantity demanded for what the firms were willing to supply, leading to excess supply. Firms would start cutting price to find willing buyers and price would go down. If price were any lower there would be too much demand and too little supply, or excess demand, and buyers who couldn't find any of the good would start to offer more.

Next time, in Part 3, I'll go over the performance of the market, describing why markets are so great, as well as discuss a few of the possible market failures (assumptions that fail to hold) and what the implications are for the 'great' outcomes of the market.

Maskin and the Crisis

Via Greg Mankiw I learn about a fascinating web site, "The Browser," and a very interesting and in-depth interview with Eric Maskin (Nobel winning economist) about economic theory and the crisis. Well worth the read and for those with some economics training, reading the referenced articles is worth the effort.

Dow 10,000

Class Size and Achievement, the Tennessee STAR Study

Because any analysis of students achievement that looks at existing differences in class size is going to have severe problems stemming from the fact that students and teachers are not randomly appearing in large and small classes, the gold standard of all class size studies is the Tennessee STAR study. This was a randomized intervention into Tennessee's schools that made for both small and large classes and randomly assigned students and teachers to both types of classes. The only non-random part was that school districts decided for themselves whether to participate.

Here is a summary of the program and the findings:

Star

Among those that question the results of this study, Eric Hanushek is the most notable. He remains unimpressed suggesting a number of deficiencies of the study but his major quibble is that all of his research suggests that teacher ability is hugely important and he thinks the 'random' assignment of teachers was probably anything but.

Have You Seen the Awesome New Dollar Design?

Richard Smith, DollarReDesign.com

Public Education Funding in Oregon

Sigh... From The Oregonian: In class size, Oregon ranks No. 49

Should We Care? This is one of the biggest debates in labor/education economics:

Kreuger says yes.

Hoxby says no.

Heinesen says yes.

Hanushek says no.

Yes, but it is a difficult question say Finn and Achilles.

Here is a good paper that debates the question.

Here is an excellent essay by Ehrenberg, et. al., that is a comprehensive treatment of the theory, the evidence and the policy implications.

My reading of the literature is that for traditionally disadvantaged individuals (e.g., low income US and developing countries) it matters more than for non-disadvantaged students - for whom it might not matter much at all. Overall, however, the mass of evidence seems to pretty clearly support the idea that large classes are detrimental to student achievement. But, as always, much more work needs to be done.

A thought: if Novel H1N1 is bad this year with significant absences, might this provide a natural experiment to study the class size effect in Oregon schools?

Econ 101: Perfect Competition, Part 1

A while back (okay, a long while back) I got a request for a basic description of the concept of 'perfect competition' in economics. I am finally following through. This concept is especially important because it is from this that comes the fundamental welfare theorems in economics - meaning that this is where all the "free markets are good" stuff comes from. In the near future I'll do a post or two on monopoly markets and go over the standard "why monopolies are bad" stuff.

I usually spend about four weeks on this material in class so even though this is an abbreviated description, I will do it in parts.

Remember that the point of any model in economics is to present a simplified version of reality that contains essential elements and strips away a lot of the complicating detail. We do this because it provides useful insight into the real world even though it may not mirror it exactly. The 'art' of economic analysis is to understand which models are relevant to each real world situation and what information is useful to extract from those models. A frequent reference point is to Newtonian physics which helps make sense of the physical world that surrounds us even if not perfectly accurate due to the simplifying assumptions.

Which brings us to the process of building an economic model which always begins with a set of assumptions. So here are the assumptions behind the model of perfect competition.

ASSUMPTIONS (MARKET STRUCTURE)

We start by assuming that there are many firms and that entry by new firms and exit by existing firms is 'free,' or that there exist no barriers to such entry and exit. We assume all firms are 'small' in the sense that any output they put on or take off of the market has no influence over the market equilibrium price. We also assume that they all produce identical products. Finally there are some implicit assumptions: that information is full and symmetric and that there are no externalities - that all of the relevant costs and benefits of this economic activity are born by the participants in the market (a counter example is if the production of the product produces harmful emissions that are born by residents of the area of production but not paid for by the firm).

You might already be wondering if this description fits anything at all in the real world. The short answer is no, it doesn't. Some markets come close and a typical classroom example is one of small family farms all producing the same kind of wheat and taking their harvest to the local grain elevator where the market price is posted and they take it or leave it. But even here there are real, if minimal, supply effects, externalities and potential quality differences. Another example is retail gasoline and gas stations as studies have shown that even a little competition keeps prices low.

So what we have is an abstraction of the real world that doesn't quite describe precisely any real world market. So why study it? Because lots of markets come close and by understanding the extremes (monopoly is the other) we begin to understand both the power and limitations of free markets.

MARKET CONDUCT

Obviously there are two sides to every market: demand and supply. Demand comes from all of the people out there who have some desire for the product in question (and as an aside, when talking about a market we always define it for one product). People have different levels of desire for the product (and for multiple units of the same product), have different incomes, wealth, etc., meaning that they all have different levels of "willingness to pay" or "reservation prices." Willingness to pay is simply the most you would be willing to spend on a given unit of a product which is the same as the dollar amount of satisfaction you would get from consuming the product. By assumption if you can find a product being offered at a price that is lower than your willingness to pay, you should buy it and consume it and you will be better off. This is also why it is called reservation price, you would not be willing to purchase it for anything above that price.

For example if you are hungry and a slice of pizza is worth $3 to you and you find a place with $2 slices then, by purchasing it and consuming it, you are a dollar better off than you would have been if there were no pizza available. You traded $2 for $3 worth of satisfaction.

When you add up all of the people who have some demand for a product and their reservation prices, you get a market demand curve. It is downward sloping on a price - quantity graph because at high prices there may be only a few people willing to purchase but as price gets lower you add more and more people to the mix (and more people willing to buy more than one).

Next time: the supply side, equilibrium and efficiency.

And So It Begins

"The season of rain is coming, hold out your hand"

This quote greets climbers of Corvallis' Bald Hill at the top on a bench dedicated to Greta Wrolstad who authored the poem from which this line was lifted. For a long time I knew only this quote in the context of being out in the elements on top of the hill looking west toward Mary's Peak, but I always loved the quote (or at least my interpretation of it): embrace Oregon's rainy season. And I do.

And here we go...

Oregon Unemployment Fell to 11.5% In September

Oregon's unemployment rate fell from 12% in August to 11.5% in September according to the state Employment Department, however, the month also saw a loss of 10,300 jobs, up from the loss of 7,400 jobs lost in August.

The Economics Nobel

Just two quick things to say about the Nobel Prize to Elinor Ostrom and Oliver Williamson (okay, okay, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel):

One, I had never heard of Ostrom before and her inclusion (she is a political scientist) is further evidence of the economics prize slowly morphing into more of a social science prize. Many have figured it would undergo such a transformation given that it has caught up pretty well with all of the old stuff and either has to become very contemporary or more broad.

Two, any modern economist is very familiar with Williamson's work as it is fully entrenched part of the canonical PhD curriculum - especially if you study industrial organization as I did. His work explored the black box of 'the firm' which prior to his work was simple an entity that too inputs and transformed them into outputs. But what are the internal incentives of the firm? What are the principal-agent problems of firms? Where do firms stop and why? (Or to put this last one in clearer terms - why do firms exist at all, why don't they just contract with private individuals?)

Perhaps the heart of the work is in institutional decision making in the absence of markets (or in the presence of institutionally created markets). This is very timely, as the internal incentives of Wall Street firms were seriously skewed and are largely responsible for the collapse of worldwide credit markets that set of the current crisis. These incentive problems need to be addressed institutionally through a renewed set of modern regulations and the place to start thinking about these issues economically and politically is with Ostrom's and Williamson's work.

The Tax Increases: Letter and Rebuttal

Recently I was asked if I was interested in being a signatory to a letter proposed by the OCPP. I have posted it below, but the essence is that there is a good economic justification for the tax increases passed by the legislature to deal with the current economic crisis. I believe there is so I signed the letter. Though I would prefer that all of the tax increases were temporary and that the state deal with the overall revenue situation in a comprehensive way after the crisis, I do support the increases. Quite simply I believe that the negative consequences of the increases (and there will be negative consequences) are far outweighed by negative consequences of inaction - particularly the long-term consequences of inadequate school funding.

Letter From Economists

Fred Thompson has a very interesting response to the letter in which he argues that now that the legislature has enacted a balanced budget, it is free to engage in deficit spending if the revenues don't materialize - which they won't if voters overturn the tax increases. Fred is much more informed than I of the intricacies of the state budgeting process, but I think most economists would agree that in a crisis, deficit spending is the preferred solution over tax increases. Here is Fred's full response:

Thompson Response

I am skeptical that deficit spending on the scale required to fill the gap would happen if the tax increases fail to materialize so I am not ready to suggest voting against the tax increases, but it is a very interesting argument. What do you think?

Fred also asks about the opinion of other economists in the state, if they or any other economist would like to participate in this discussion, I offer this blog as a forum.