Friday, January 30, 2009
The question is this: why do we typically see beers of the same brand all priced the same even though it typically costs a more to produce some beers than others, like an IPA versus a Pale Ale?
Part of this can be explained by supply and demand, but I don't think demand systematically falls the more ingredients a beer uses (then again, maybe it does - as you make more and more flavorful beers, perhaps the demand curve falls as fewer and fewer people like them). So there must be something about brand and consumer psychology. My guess is that stores have found that if one Deschutes beer (Inversion IPA) is priced above others (Mirror Pond), few people buy the higher priced one.
Thursday, January 29, 2009
Is this a sensible idea? Sure, these tax breaks only come if you spend the money, so it can be expected to stimulate consumption to a greater degree than income tax cuts, only a fraction of which will translate into new consumption. Promoting green home improvements is also beneficial to society. So this can be expected to lead to an increase in consumption spending and to have a stimulus effect which will help reduce unemployment.
But is it better than the democrats plan to spend on construction projects? Direct spending on construction will also have the same positive effect on consumption. So is it a wash? Well, the key difference is in the fact that the democrats plan focuses on public goods while the republican plan is on private goods.
Public goods are those for which there are at least partially non-excludable and non-rival: anyone can use them and using them does not leave less for others to consume. Roads are a prime example. The key to public goods is that they confer benefits on many people beyond the person responsible for their existence. This means the public benefits are much higher than the private benefits and when left to individual economic agents, the private cost-benefit calculation will often lead to the under-provision of public goods. This is why government provides these goods.
Construction on roads and schools are improvements in public goods, a large swath of society benefits from these investments while private remodeling only benefits the owners of the property (save for the small socially beneficial effect of more efficient homes). In other words, the initial stimulus can be expected to be similar for a similar outlay (assuming, of course, people take advantage of these tax incentives), but the long term benefits of providing more and better public goods will provide much greater benefit to society than better kitchens in private houses.
Portland is number 8 (out of 30), but what I find fascinating is that it is ranked higher among republicans than among democrats. Strange that, for a city that has such a liberal reputation. However, when the question is asked of self-reported conservatives and liberals, liberals rank Portland higher.
The fact that Denver is ranked number one suggests that people rate climate and outdoor recreation very high - which is true when the questions about what is important are asked. So Portland suffers from the former and is good for the latter. A good place to raise children is most important and we aren't so good about education, so that hurts.
A final interesting aspect is that cost of living is a very small factor. It seems like people want to live in nice places, and will figure out how to make it work.
Wednesday, January 28, 2009
"I would like to see the movement in home values going positive by June, but this is optimistic."
How do you account for home pricing in PDX remaining overpriced? This is true based on affordability or the secular trend in Case-Shiller, before the pricing bubble began in 2004. I think we won't see prices achieve the secular trend until end of 2009 after further declines of 10-12%.
I understand why you want prices to stabilize, in order to end the bleeding of the banks balance sheets. However, restoring conditions for the next housing bubble is not a good idea. I would really like prices flatten, and stay flat for the next 10-15 years. Real estate is not an investment.
This is an interesting comment and I agree that there is good reason to expect home prices to fall another 10%, but I believe that will happen pretty quickly - perhaps not by June, but the acceleration of home value erosion is marked. I also agree that we should not spark another housing bubble, but I am not worried about that at all at this time. I think banks are, if anything, over cautious in the residential housing market and I can't see them returning to the kind of massive sub-prime lending as the market for securities derived from residential mortgages has simply disappeared. In the future, new regulations and more caution on the part of banks and the Fed should forestall any hosing bubble.
But real estate IS an investment. I take Gregory's comment to mean the speculators that were in real estate for a quick buck and in that I agree, they were a main driver of the bubble one the house price inflation heated up. But real estate is an important store of wealth for most homeowners and one that is essential for healthy families, healthy communities and a healthy economy. So a return to the steady, but modest, appreciation of home values is important and desirable. Ten to fifteen years of no appreciation would be very damaging to local economies.
Anyway, kudos to Leonhardt for writing such an exceptional piece.
Oregon has now the 6th highest unemployment rate among the states (down from 5th in November), but is much higher at 9% than the national average of 7.2%. California, Nevada, South Carolina, Rhode Island and Michigan all have higher unemployment rates than Oregon. Wyoming and the Dakotas lead the way with unemployment rates below 4%.
Tuesday, January 27, 2009
My infrequent pub going experience has been to pretty packed pubs in Portland these days, so I would imagine that the former effect is at least as large as the latter in Portland.
As always, a reminder that these averages hide a huge amount of variation from neighborhood to neighborhood and even within neighborhoods. As an anecdote, my house, according to Zillow, has gained in value in the last few months (for what that's worth). I imagine that places like Happy Valley are seeing a much larger erosion on average.
Here is some more market data from Altos Research. The first graph is average days on market for houses in Portland proper. This continues to get worse, but the 7 day average is plateauing so perhaps we are turning a corner.
The second is the housing inventory for Portland proper. If there is good news it is that the supply is starting to contract - though there are likely banks with foreclosed properties that they have not put on the market yet and future foreclosures. Fortunately, Portland has a relatively low foreclosure rate.
Nationally, home sales are up, but many of these are bank foreclosure short-sales and it is hard to know what to make of it all. A key to starting the recovery is to get this housing market back in the black, and the silver lining of the collapse of the residential construction market is that there is virtually no new supply coming on the market. But I have seen estimates of 1.6 million excess homes, so perhaps it will still be a while before the market reaches equilibrium.
Anyway, once home values start appreciating again, the 'toxic assets' may start to become less toxic and the credit markets may start to ease. I would like to see the movement in home values going positive by June, but this is optimistic.
Monday, January 26, 2009
Our state, Oregon, has a highly volatile revenue structure, both because of its composition and because of the jurisdiction’s size.
This causes all sorts of difficulties as it moves through the business cycle. State spending doesn’t fluctuate as much as revenue, but it fluctuates more than it should. The problem, however, is not revenue volatility per se but the nastiness that results from trying to adjust spending up and down to match current revenue flows and from trying to find the money needed to stabilize spending during downturns. During booms the state tends to grow spending at an unsustainable rate and then cuts spending way back during busts. As a consequence of these behaviors, the Pew Center on the States at Harvard’s Kennedy School of Government ranked Oregon’s money management practices 43rd out of 50 states.
Recognizing these issues, the legislature authorized the creation of a Task Force on Comprehensive Revenue Restructuring (OR House Bill 2530, June 30, 2007) to examine "Oregon’s tax structure from top to bottom." The task force was appointed by the Governor, Chaired by Lane Shetterly, and charged with assessing several options for change: replacing personal income and/or property taxes with a sales tax or a gross receipts tax and imposing a tax on business assets and/or a value-added tax in place of the corporate income tax. It very quickly became apparent to the task force members that, even if these options were politically feasible, they would not work to correct the problem, but would leave the state with a tax system that was less fair, less efficient, and less adequate than the existing tax structure and not significantly more stable. Moreover, it was obvious that Oregon’s long-term revenue trend was one of the highest in the nation and that its revenues would be sufficient to meet most future needs, if it could find a way to use savings and or borrowing to smooth out spending over time. What was initially hard for the task force to accept is that putting such a system into place requires only fairly modest institutional fixes. But, that is, indeed, the case.
Oregon’s constitution requires the legislature to enact a balanced budget in which planned spending is equal to or less than the revenue forecast. If the forecast is up, the state can plan to spend more; if the forecast is down, the state must scramble to cut the budget. Then, if actual revenue exceeds the forecast in the period in which the budget is executed, the state must return the difference to the taxpayers. If revenue falls short of the forecast, the state can make up the difference from savings or, if necessary, by borrowing. This is looser than the balanced budget requirement found in some jurisdictions, where, if actual revenue is less than forecasted, spending in the period of budget execution must be reduced to bring it into line with actual tax receipts (Hou & Smith 2006). Consequently, smoothing spending in Oregon requires only two changes to its budget process. The first would be to base the state revenue forecast on the state’s long-term rate of revenue growth rather than short-term revenue growth. The second would be to give savings or the retirement of general-obligation debt first priority for the use of revenues in excess of the forecast. And, that is essentially what the task force recommended: amend the method of estimating the end-of-session forecast of state revenue on which the budget is based and apply actual revenues in excess of the forecast to the state's general reserve fund (The Statesman-Journal, January 23: B-1).
However, a more satisfactory recommendation would have specified the method for estimating the end of session forecast. In my opinion, the state revenue forecast should reflect the state’s long-term, sustainable rate of expenditure growth. Otherwise, as one very insightful colleague observed: "If we believe that the problem is caused by the fact that many of our politicians have a distorted time preference … because they care mostly about the current generation and discount the future generation’s concerns too heavily, a debt‐financing regime is optimal. So we are back to square one – the original problem of inadequate reserves and too much spending." Unfortunately, the task force was unwilling to take this step, perhaps, because they weren’t fully persuaded that forecasting a sustainable rate of expenditure growth was workable, perhaps, because they persisted in viewing the problem as one of reduced tax receipts during economic downturns, or, perhaps a little of both.
What they have done is eminently sensible; what they have left undone is potentially very dangerous.
The reason for my discomfort is the shutting off of the steam for the radiators on Friday afternoons and not restarting the boiler until Monday morning. I understand this decision though I don't like it: academics and, especially, the many graduate students in the building work on weekends very often. The temperature in this building prevents this and decreases productivity. But so it is in our fiscal climate and I won't complain.
I do get grumpy whenever I hear people complain of bloated universities that don't deserve support until they learn to cut costs, however. In these times I think of my office - 60 degrees in January and 100 degrees in July and wonder what they are thinking about. When you add in other aspects of cost cutting - like the two to three months wait for the processing of reimbursement requests - and I think that most knowledgeable observers agree that Oregon's public universities have been underfunded for so long: there is no more fat to trim, just flesh.
Now that I am done ranting, you will have to excuse me, I have to go and warm up my fingers under some hot water (assuming the tap water is now hot).
Friday, January 23, 2009
But I do want to say that as an economist who thinks a lot about public policy, including urban and regional policy, I have been exceedingly impressed with Sam the policy wonk.
His ideas are not always right in my opinion, but almost always. And I have found him to be an exceedingly creative and intelligent thinker and policy maker and I believe he can do great things for Portland and the state of Oregon.
I don't know how this will all shake out but I do know that in this time of great economic turmoil I hate to think of Portland being rudderless. I hope that in the very least, he will let voters decide in a recall if his personal actions warrant his removal. Until then, I hope he keeps working on the good policy ideas he has and his vision for the city. But that's just me...you?
[Photo credit: The Oregonian]
Thursday, January 22, 2009
In honor of this occasion, I have created a newly updated unemployment poll. I have left lots of room for the gloomiest among us, I hope. What do you think now?
Above is a key table that speaks to the relationship between education and growth (is this acceptable fair use - can someone tell me?). This is a growth accounting that looks at increases in educational attainment and their effect on employment and productivity.
How to interpret this table? Well, column one is the measure of productivity growth (output per hour) and column two is the change in educational productivity. For column three, I'll let the authors say the punch line: "Thus, education directly contributed an average of 0.34 percentage points a year to to economic growth...[emphasis theirs]" They go on the say that between 1960 and 1980 the contribution of educational advancement to labor productivity growth was 0.59 percent per year but then sharply declined to 0.37 per year. This matches the general observation that there was great advancement in the educational attainment of Americans post WWII, but a steep fall off in the eighties and nineties (as can be seen in column 4).
So, are these numbers big or small? Well, when average growth rates of high income countries are a little above 2%, a bump of 0.34 percentage points is a 17% increase in growth. So these numbers are pretty huge.
What I really want to discuss here at length is their treatment of the future of education and technology and how a state like Oregon should view education as a part of its economic (as opposed to social) strategy. Soon - the taxpayers of Oregon are paying part of my salary not to blog but to teach research and assist in the operation of OSU, and the tuition paying students of OSU are always my top priority. So blogging has to take a back seat.
Wednesday, January 21, 2009
In Goldin and Katz, they examine the nature of the US higher education system and its emphasis on general knowledge as opposed to, and quite distinct from, Europe in the twentieth century which was largely focused on specific vocational training. They argue convincingly that this emphasis on general knowledge was beneficial to the US because of its high degree of occupational and and locational mobility (again quite different from Europe). Citizens with skills and knowledge are more flexible and able to deal with changing technologies, a changing economy and workplace disruption.
So what does the twenty first century look like to you? A era where you want to see kids invest in very specific skills ready to remain in one profession for the entirety of their lives, or an era where you want to see kids instilled with the knowledge and aptitudes that make them adaptable and able to change with a changing economy?
Tuesday, January 20, 2009
Back home in Oregon, the landscape is turning bleaker by the minute and we are staring down the real possibility of sacrificing our future to meet immediate budgetary challenges.
Needless to say there is a lot of very hard work ahead both for Obama and Kulongoski and national and state legislators, but this too shall pass and with a clear focus on the future and a commitment to protect the most vulnerable in society we shall weather this moment and emerge stronger. But it will take time.
Good luck and godspeed President Obama.
[Note: Tomorrow or Thursday, I shall post the last of my three part education series of posts with an overview of what we know about education and the future of prosperity in America]
[I had in mind something modeled on Ninkasi's Total Domination, which without a doubt is the best beer brewed in Oregon and possibly the country. On this I am sure there will be no debate. And by the way has Ninkasi, in a short time, become the best Oregon brewery? I think it might. Kudos to Jamie Floyd.]
Anyway Steinbarts on Saturday was absolutely crammed with people buying supplies. Unfortunately I was after Centennial, Cascade and Chinook hops to make a classic 'Three C' IPA but the Chinooks were gone. Thoughts of substituting Willamette, Newport and Zeus were also dashed, so I decided to pitch a curveball: up the hops (to compensate for the lost alpha acids) and use Mt. Ranier instead. I'll let you know how it turns out. But the point is that this economic naturalist started to wonder whether, as incomes get strained, people start to make their won rather than buy it in the bottle. Does it make sense to do this in tight economic times?
Wednesday, January 14, 2009
Estimates of the Okun's law coefficient, or the relationship between real GDP growth and declines in the unemployment rate are generally between 2 and 3 for the national economy. Let's take the best-case scenario, 2, which stipulates that a 2% increase in GDP will lead to a 1 percentage point decrease in unemployment. I think this is reasonable, though I am not sure how to think about leakages: presumably leakages are greater the more localized is the stimulus spending so perhaps 2 is too high, but I'll stick with it for the time being.
Tuesday, January 13, 2009
“Only by creating the best-trained, best-skilled, best-educated workforce in America will we be able to create the employment opportunities that are this state’s future. … The way to turn despair into hope, and uncertainty into prosperity, is to build a protective wall around funding for education.”
Monday, January 12, 2009
Here is the picture that says it all:
What is scary about this picture is that with or without stimulus, unemployment is not predicted to return to under 6% until 2012.
I think the question is not is it too much, but is it enough? As an economist I would like to see a bit more, but as a realist, I realize that getting it done politically is a challenge and there is no time to waste.
This is a particularly good time to write about this as there have been a number of high profile pieces in the media about public higher ed in Oregon. Dave Sarasohn’s opinion piece in the Oregonian today is one, the OPB “Think Out Loud” two-part show with the presidents of EOU, OSU, PSU and UO is another (they don't seem to have a link to the second hour), and Tom Potiowsky’s address to the Portland City Club on Friday is a third.
So how should we think about higher ed and the growth of the state’s economy. Virtually no economist has thought about this more than Philipe Aghion of Harvard University. He started with theoretical work and has now moved into examining the theory with empirical evidence.
Like I did last time I am going to use one paper as a focal point. Aghion, et. al., "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth." (The link is to the shorter version of the paper). The title refers to the fact that since we expect growth and investment in higher education to be correlated, so it is hard to isolate causal the link between investment in higher education and subsequent growth caused by that investment.
The essential message from his work is this – you can be a innovator or an imitator. Innovators drive economic growth and imitators play catch up. Silicon Valley is full of innovators, the Silicon Forest, I would argue is full of imitators. What Aghion argues is that if you want to be innovators - which we very much want to be in terms of green technology - then you must invest heavily in higher education, but not just higher education, graduate research universities.
There is another side of course, if you are not going to be at the frontier (and you can do pretty well being an imitator), then it is potentially wasteful to spend too much on this type of higher ed and you would do better investing in undergraduate only universities and community colleges. Please keep in mind that the latter are not unimportant even if you are an innovator, it is really about the question: should a state prioritize investments in graduate research universities? If you are an imitator state, the most bang for the buck in terms of growth effects of education spending is two and four year undergraduate education, but if a state is on the technological frontier then the biggest bang for the buck is in graduate research institutions.
There is also a positive feedback effect in that if a state establishes itself on the technological frontier it will get the benefit of in-migration of highly skilled individuals (and thus reap the benefit of out of state investments in human capital). It also exacerbates the difference between leader and follower states. So if you can become an innovation state, you get into a self-reinforcing cycle. This helps explain the long dominance of Silicon Valley (and California in general) in high tech.
Arguably Oregon has made large strides to establish itself on a few frontiers: there is no doubt that the Portland areas has become a place of in-migration of highly artistic and creative types and the city has established itself as a center for design and advertising. The state has tried to establish itself on the frontier of computer technology (the Silicon Forest) but success here has been minimal and it seems pretty easy to argue that in high tech the state is still in the imitator category (and the link with this and the underinvestment in higher ed is pretty clear – you can’t depend entirely on in-migration, you have to create talented people at home as well).
Through innovative statistical analysis the authors of the current paper find that a thousand dollars per person in additional spending on research universities raises a frontier state’s per-employee annual growth rate by 0.269 percentage points but only 0.093 if that state is an imitator state. Conversely a thousand dollars per person in additional spending on undergraduate education in four year colleges raises imitator states annual growth rates by 0.198 percentage points but innovator states growth by only 0.053. They also find that migration accounts for about half the difference between the frontier and far from the frontier states. [And, by the way, lest these seem small, remember with national annual growth rates of about 2.5% over the last 50 years, something that increases growth by a quarter or half a percent is a ten to twenty percent increase in growth rates – pretty huge and it is hard to imagine another investment as effective at doing this] And though the argument may be made that in tight budget times it is necessary to focus on K-12, it is worthwhile to remember that with good economic growth come the resources for future investments in K-12.
The message for Oregon seems clear: if we are serious about being an innovator state in green technology or anything else, we need to invest in its research universities. Tax breaks and inspiring speeches are not enough.
Conerly’s description of how an economy self-corrects is also lacking: the current systematic collapse of credit markets has rendered standard Fed policy ineffective, even the multitude of non-standard programs have yet to get any real traction. Eventually Fed policy will gain some traction, yes, but how long are we willing to wait as our economy melts down? And the claim that consumers are not spending but eventually will is naïve: with unemployment rates skyrocketing to levels not seen in 30 years and still going up quickly, there is no reason to believe that consumer spending will rebound any time soon. Finally, leakages exist in all state spending, this is not new nor is it a reason to not spend – the multiplier estimates take these leakages into account. Money spent could be directed to programs that have the shortest time lags and the greatest local impact. Leakages overseas are minimal and leakages from Oregon to other states would be matched by leakages from other states to Oregon.
Conerly’s advice to essentially wait out the economic crisis is not particularly helpful to those 8.1% of Oregonians who cannot find a job. Add in the number of people who have given up searching and people involuntarily working at less than full-time and the number is likely to be well over 14%. These Oregonians cannot wait for two or three years for the economy to self-correct. There is always the risk that stimulus will not be as effective as we hope, but the risk of doing nothing is much worse.
Friday, January 9, 2009
Wednesday, January 7, 2009
Matthew Engle in the Financial Times, writes that beer sales in Britain have declined 10% since the smoking ban was imposed there. Why should this be so? It is certainly true that the two, beer and cigarettes, are complements and so increase the cost of one [smoking is more costly because you have to go outside and do it] and the demand for the other falls.
Will this have as big an effect in Oregon as in Britain? I think it unlikely as most of the ever-so-popular pubs and brewpubs are generally non-smoking establishments anyway. But I do imagine that some small bars could find business down. I guess the bigger question is: given that there are many alternatives to patronizing and working in non-smoking establishments, is the ban necessary? The free market side of me suspects not. But the ban is no so much about this, I assume, as about public health and the cost of caring for smokers later in life. If this ban manages to reduce overall cigarette consumption, then it could easily save the state a lot of money down the road.
But I still wonder how you deal with the problem of non-residents. Since the bulk of the congestion problems in Oregon are in Portland, particularly the I-5 and I-205 crossings of the Columbia river, it is not clear how something tied to Oregon registered vehicles will work. A lot of the congestion in these areas is apparently coming from Washington residents that work in Oregon, which means that the GPS in Oregon cars won't be effective in dissuading these drivers.
London has famously instituted congestion pricing, but there the tax works based on photographs of license plates. So if you enter London you pay, regardless of where your vehicle is registered.
Given the cost, complexity and incompleteness of this system, I still cannot see why it trumps the simple and effective gas tax. It strikes me as a wonderful idea of you are an engineer (especially a traffic engineer) because you get to play with new toys and tools, but I remain unconvinced in my mental cost-benefit analysis of the idea.
Monday, January 5, 2009
The fact that the new term starts today probably means slow blogging for this week, but I will try and get to part two of my little education series which will look at the wisdom of investments in higher ed.
However, there is one self-referential news item, which is the official poll results from my little on-line unemployment poll. And the news is that for the self-selected group of readers of this blog that bothered to vote, pessimism rules the day. A whopping 40% of you selected 12% and I suspect that there is some censoring going on - meaning that some of these voters would have gone higher if the choices were available. Wow. I thought 12% was a real extreme, and should we hit that, I will be breathing into a paper bag. I fear that we will indeed reach the 10% range in unemployment in Oregon (which was my vote), and hopefully we won't stay there too long. But then I was wrong about what the depth of the current crisis would be 6 months ago, so perhaps I still don't get it. There are some votes for 7% (which we had not reached when I fired up the poll), so some optimists were there at least in the beginning.
Though self-selected, it seems to reflect the overall pessimism of the populace these days and that is a problem. The Consumer Confidence Index is at a new low and without getting consumers a little more optimistic, it is hard to get businesses optimistic and banks optimistic about businesses, etc.
I hope congress can get its act together soon and get a stimulus bill for Obama to sign immediately, for I fear that without massive federal stimulus, the global economy is headed off a cliff.
Happy New Year!