Graph of the Day: Housing Booms and Busts (or Not)

Feel better? Didn't think so...

Economist's Notebook: Selection Claims Another Victim

The normally very reliable James Surowiecki of The New Yorker blunders badly this week in his column about thriving businesses that focus on the tops and bottoms of markets.  Here is his thesis:

Apple’s launch of the iPad next week is a gamble in more ways than one. To start with, it’s obviously a bet that there are millions of people looking for a new way to surf the Web, watch movies, and read magazines. But it’s also a more fundamental gamble; namely, that people will pay for quality. Starting at five hundred dollars, the iPad is significantly more expensive than its competitors. But Apple’s assumption is that, if the iPad is also significantly better, people will happily shell out for it (as they already do for iPods, iPhones, and Macs). That’s why when Steve Jobs first introduced the iPad he said that, if a product wasn’t “far better” than what was already out there, it had “no reason for being.

For Apple, which has enjoyed enormous success in recent years, “build it and they will pay” is business as usual. But it’s not a universal business truth. On the contrary, companies like Ikea, H. & M., and the makers of the Flip video camera are flourishing not by selling products or services that are “far better” than anyone else’s but by selling things that aren’t bad and cost a lot less. These products are much better than the cheap stuff you used to buy at Woolworth, and they tend to be appealingly styled, but, unlike Apple, the companies aren’t trying to build the best mousetrap out there. Instead, they’re engaged in what Wired recently christened the “good-enough revolution.” For them, the key to success isn’t excellence. It’s well-priced adequacy.

These two strategies may look completely different, but they have one crucial thing in common: they don’t target the amorphous blob of consumers who make up the middle of the market. Paradoxically, ignoring these people has turned out to be a great way of getting lots of customers, because, in many businesses, high- and low-end producers are taking more and more of the market. In fashion, both H. & M. and Hermès have prospered during the recession. In the auto industry, luxury-car sales, though initially hurt by the downturn, are reemerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms. And, in the computer business, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops—the reverse of Apple’s premium-price approach

There is an obvious logical fallacy here: that because Apple and Acer are so successful, this must be a good segment to do business in. The problem with this reasoning is what economists call selection bias: you only see the success of the businesses that are the most successful.  Making inferences about the world based on survivors leads to misleading conclusions.  It is as if you arrive shortly after the great plague and saw only the survivors and thus concluded that the plague was not fatal.

And this is the whole problem. Sure there are outsized reward to being the very best - either the most advanced or the best at cost cutting - but the problem is there is only room for one at the top and bottom. Take Apple for example, it regained its mojo only when it started producing 'insanely great' stuff again. You think it is obvious to try and be the producer of the best smartphone? Just ask Palm how well that strategy is working.

The truth is that most firms are in the middle of the market and so competition there is fierce. Thus these firms do not have the outsized success of the outliers. But the winner-take-all nature of trying to capture either end of the price/quality spectrum suggests that the expected returns for that strategy are probably just about equal to the expected returns from competing in the middle. To understand if this strategy is so good you have to look at both the winners and the losers in the battle to be the best and cheapest.  Only then can you make reliable inference about the world.

In making this claim, Surowiecki falls into the common business literature pitfall: studying the winners and making general statements about their success. It is no surprise that he quotes consultants and not economists in this piece, economists obsess about selection issues.  Perhaps if he had asked one or two they could have prevented this embarrassing blunder...  ;-)

Portland Home Values: Case-Shiller January Numbers

Completely farmed out to the Wall Street Journal.  Portland and Seattle are down again and fairly significantly, they are two of the top four cities in terms of seasonally adjusted month to month changes, reflecting the unemployment situation on the two states.

Meanwhile, help is on the way: Oregon is one of five states to get special federal help for the housing market.  Oregon will get $88 million to help prevent foreclosures.

I still think we will see some bumping along, but no significant appreciation or depreciation this year.

The Trouble with Economics?

Little time on this first day of the Spring term, so I'll point to an interesting, but quite misguided critique of economics by David Brooks in The New York Times (which The Oregonian picked up last week) and a rebuttal from Greg Mankiw.  I think Greg's rebuttal is a little off the mark as well, sure we are not terribly good forecasters, but the point of Brooks' column was more about the construction of homo-economicus than the ability to forecast in my reading.  And this is where Brooks goes astray, for the economics view of humans responding to incentives is not nearly as mistaken as he would have you believe.  So, in general, we can say with some conviction that if the price of Coke goes up, Pepsi sales will improve to give but one example.  Where things get sticky is trying to predict an individual's precise behavior - for there are some who would not switch to Pepsi at any price.  What the discipline is working on, and making great progress by the way, is understanding common or mass exceptions to the rational behavior that we expect, and this is where the behaviorists have a lot to tell us.  But these are prominent economists working within the discipline, not critics from outside.  To me that is the hallmark of a healthy academic discipline.

Oregon Business, Taxes and The Oregonian

Earlier this week I was disturbed by the front page article in The Oregonian which insinuated that many Oregon businesses were soon to leave for he greener pastures of other states.  In fact, if you read the article, there was no story at all, some 'unnamed' business owner claiming to be on the verge of leaving but otherwise it was simply an article about businesses complaining about new taxes.  In fact, there was really no story at all, not one single company that is actually leaving.  And yet The Oregonian, perhaps to defend its own editorial position, deemed it worth of not only publication, but front page status.

Let's be clear, this was not a news story: this was an op-ed dressed up as a news story and The Oregonian need to keep its editorializing on the opinion page.

Still, I am on Spring Break and decided not to bother commenting.  Thankfully, Ben Jacklet, Managing Editor of Oregon Business magazine has done the work for me:

The Oregonian took the unusual step this morning of running a front-page business story about an unnamed executive, CEO of “a successful technology company southwest of Portland employing hundreds and boasting a bright future.”

Was he unnamed because he is participating in the witness protection program?

Hardly. He’s thinking of skipping town.

The gist of the story is that this phantom executive is considering gathering up his highly successful company and leaving Oregon, leading a devastating mass exodus of talent and capital, all because of the tax increases passed by the voters with Measures 66 and 67.

Well, here’s my own personal message to Mr. Phantom CEO: Don’t let the door hit you on the butt on the way out.

It’s not that I don’t care. I care deeply about the state of Oregon’s economy and would hate to see our job market deteriorate further. But the votes are in and the law is the law. And guess what? Oregon’s tax burden on businesses is far from the worst. It’s right there in the middle of the pack. Personal income tax is high, but that’s because Oregon has no sales tax. The end result is an imperfect but admirably progressive tax structure.

But it’s not the objective numbers that matter, apparently. “The far greater damage,” investor David Chen told the Oregonian, “is in how it disenfranchised business.”

Disenfranchised? Really? Did someone lose the right to vote?

Hardly. They just lost the vote. That doesn’t make you disenfranchised.

Now the states of Idaho, Utah, Montana and Ohio are joining our scavenger-like neighbors in Clark County and the grandstanding mayor of Chicago in welcoming Oregon businesses to move to greener pastures. The only problem is, their pastures aren’t greener, and their cities aren’t better for business. Anyone considering a move to any of those locations should consider the old adage that you get what you pay for. The winery tours aren't quite the same in Utah, and the Ohio Coast doesn't really compete with Oregon's.

My qualm with all of this after-the-vote crying of wolf is this: It does not help. As anyone who tracks real estate or the stock market understands, perception matters. Sending out apocalyptic messages that Oregon businesses are so fed up that they might even move to Idaho is not helpful. Vowing to take your hundreds of jobs and abandon the community that helped you build your company is not helpful either.

Especially if you don’t have the guts to sign your name to it.

My thoughts exactly.

Eco-nomics: Energy Efficient Buildings

Portland ranks 12th as a city for the energy efficiency of its commercial buildings.

Soccernomics: Crests

WARNING: SPRING BREAK USELESS POST AHEAD

What is an American Soccer team supposed to do, try to be distinctly American or nod to the traditions of Europe when it chooses a team crest? Soon the Timbers will have to decide: from the Meritt Paulson Q&A:

Q – Josh Thompson:
when are you going to release the new crest?

A – Merritt Paulson:
June

I favor the classic European look.

The history of the MLS is that most teams started with pretty horrendous American-style logos:

Then they slowly moved toward Europe and things got better. So, since nobody asked here is my guidance for the good folks at the Timbers when looking at current MLS crests:

GOOD:

(Though the name is atrocious)

OKAY:

OH GOD PLEASE NO:

As for the Timbers, the current/throwback crest needs to retire back to the 70s even though it is pretty cool:

The new version actually was headed in a good direction but then some slanting and waving sent it off course and it seems a bit unfinished:

Lets hope for something classic, but a little better than the Sounders managed to do. 

By the way, the timbers army has done a nice job with their new crest:

This is not a small decision, so I imagine a lot of market testing will go on.  I think the key is to test it among soccer fans, not random 8 year olds  - which is how I imagine the Clash and Burn logos above were decided upon (fire breathing horse! scorpion!! AWESOME!!!).  Given that Portland is perhaps the most traditional and tradition-rich club in the US, I am optimistic.

It is Finally Over...

The future of the Made in Oregon sign has been determined.

Thanks Randy...

UPDATE: My favorite libertarian, Jacob Grier, is unhappy the way the city grabbed control of the sign and how we now all get to pay for it.  I meant the "Thanks Randy" a bit ironically, as it is not clear we all really wanted to own the thing, but I do think restricting its commercial use, on public goods grounds, was appropriate, no different than how we regulate highway billboards (though in this case it is much more prominent).  Have a look at Jacob's take.  One thing is for sure, my kids will be happy that the red nose will reappear next winter. 

Econ 101: Recessions and Luxury Goods

Photo Credit: Doug Beghtel/The Oregonian

Saks Fifth Avenue is closing its two Pioneer Place locations.  Recessions are tough on purveyors of luxury goods - which economists define as goods on which you spend proportionally more on as incomes rise.  But this works both ways, you spend much less on them as incomes fall - they are often the first things to go out of the budget when belt-tightening is done.  And so Walmart thrives and Saks suffers as Oregonians average incomes plunge.  In fact, Saks is apparently close to inking a deal to open a "Saks off Fifth" discount store in Bridgeport Village.

But don't feel too badly for Saks, when the economy finally returns to robust growth, guess which sector of the retail trade will thrive?  

Health Care Bill

Here is Greg Mankiw on the health care bill:

Well, it appears certain that the healthcare reform bill will become law. One thing I have been struck by in watching this debate is how strident it has been, among both proponents and opponents of the legislation. As a weak-willed eclectic, I can see arguments on both sides. Life is full of tradeoffs, and so most issues strike me as involving shades of grey rather than being black and white. As a result, I find it hard to envision the people I disagree with as demons.

Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

I like to think of the big tradeoff as being between community and liberty. From this perspective, the health reform bill offers more community (all Americans get health insurance, regulated by a centralized authority) and less liberty (insurance mandates, higher taxes). Once again, regardless of whether you are more communitarian or libertarian, a reasonable person should be able to understand the opposite vantagepoint.

In the end, while I understood the arguments in favor of the bill, I could not support it. In part, that is because I am generally more of a libertarian than a communitarian. In addition, I could not help but fear that the legislation will add to the fiscal burden we are leaving to future generations. Some economists (such as my Harvard colleague David Cutler) think there are great cost savings in the bill. I hope he is right, but I am skeptical. Some people say the Congressional Budget Office gave the legislation a clean bill of health regarding its fiscal impact. I believe that is completely wrong, for several reasons. My judgment is that this health bill adds significantly to our long-term fiscal problems.

The Obama administration's political philosophy is more egalitarian and more communitarian than mine. Their spending programs require much higher taxes than we have now and, indeed, much higher taxes than they have had the temerity to propose. Here is the question I have been wondering about: How long can the President wait before he comes clean with the American people and explains how high taxes needs to rise to pay for his vision of government?

This is as nice an explanation of the limits of economics as I have read on this issue. I am more confident that significant cost savings can be achieved by the way. I believe this because many countries achieve as good or better health outcomes as ours without spending nearly as much money as we do, so the savings are there, we just have to a better job getting the incentives right. But regardless, providing health care for is partly a moral issue and not just an economic one.

Media

Oops, should have posted this prior to my appearance, but alas it is spring break...

Here I am, trying desperately not to embarrass myself on "Live @ 7" last night.

Keeping Up With the Economy

The Wall Street Journal has this exceptional site, EconTracker, that is a compendium of economics statistics and indicators, along with charts and other wiz-bang gadgets.  It is a one-stop shop for those interested in the state of the economy.  Highly recommended.

Spring Break...

...blogging will be sporadic this week.  For now I shall revel in the success of Cornell.  It'll probably never again happen in my lifetime so I gotta live it up!

Clash of the Titans

Cornell Wins!

Cornell stomped on the Temple Owls to win their first ever NCAA Tournament game.  This was a pretty comprehensive 78-65 victory.  They led almost the whole game and won easily in the end.  Not bad for a school that does not offer athletic scholarships.

Beeronomics: The Novelty Curve, Economies of Scale and the State of Craft Brewing

Whew, how's that for a title?

Over at Beervana, Jeff Alworth has blogged a couple of times recently about some new data purporting to show the health and growth of the craft brewing industry.  He discusses how the data reveal an interesting fact about the industry: there are a few big players (Boston Brewing, New Belgium, Sierra Nevada, Full Sail, Deschutes) and a TON of very, very small breweries.  He and I have also had conversations about the overall trend.  Craft beer cheerleaders look at the remarkable growth in market share over the last decade and the still small share in general to suggest that the future is bright and that there is no reason we should not expect craft beer to continue to grow both in overall volume and in the number of breweries. I am skeptical.

The model I have in my head of the craft beer industry in the US is one that is mainly characterized by a tension between two forces: novelty and scale.

The first comes from the natural desire of consumers to consume variety. Most of us don't eat the same meal for dinner every night and we tend to get tired of any one meal we eat too often.  But the variety desire at the market level can be also arise because of static and different tastes. Finally, tastes can evolve - consumers get used to hoppy beers, for example.  So dynamic tastes, where consumers of beer find their tastes evolving and are always looking for new and interesting experiences, can also drive the market demand for variety.  All this leads to the advantage new breweries have in brewing new styles reach customers that were previously badly served because no beer was available that matched their preferences well, or to consumers looking for new things, or to consumers looking for more adventurous drinking experiences.   Jeff has coined this the 'novelty curve,' and suggests that new breweries have an advantage over established ones because of new, fresh products. [Ninkasi comes to mind]  Established breweries, like Bridgeport for example, have a more difficult time trying to keep a standard line-up selling while at the same time satisfying the desire for new tastes.

The second is a natural aspect of many industries - the larger the volume of the firm, the lower the average cost of producing the product. In brewing the size of the brew house, the ability to have your own bottling line, efficiency in distribution, number of taps, brand recognition, and many other aspects make brewing an industry that is subject to significant economies of scale.  What this means is that larger breweries can undercut smaller ones, all else equal.  [My colleague, Vic Tremblay, has estimated economy of scale effects for the large industrial breweries up to about 23 million barrels, if memory serves]

Because of these two forces and how they interact with the craft brewing industry, I expect that the industry will always be characterized by a lot of volatility.  I think that there will be some stable mainstays (the Deschutes and Full Sails of the world) that have the scale advantages and try hard to keep up a line of unique, one-off, specialty beers to feed the novelty curve.  And a lot of churn (in economics-speak) among the smaller breweries.  I think the brew-pub model is the way to go here as a stable revenue stream from food and an in-house captive audience for the beer can help tame the vagaries of a fickle consumer base.  

All that is to say is that I don't think the number of breweries continuing to increase is a sustainable path and I expect another round of shake outs in the market, unless small brewers can establish a successful restaurant operation.  And in general, I think we can always expect breweries to come and go regularly.  But this is not necessarily a bad thing - the better breweries, those that brew good beer, are well run businesses, market well, etc. will stick around and new start-ups will keep offering new, interesting beer.

This doesn't mean that the overall market share of craft breweries won't continue to increase, but as this increases it may reinforce the economies of scale advantages of bigger craft breweries.  That said, mainstays like Boston Brewing have seen sales stagnate, while lots of little breweries have opened, so we may be in a period where the variety motive in the market is ascendant.  The good news in all of this is that the market should always be interesting from here on out for this observer - I think craft beer is here to stay.

Note: the picture is of Hangar 24 craft brewery in Redlands, CA, where my brother is a brewer.  Check it out if you are in the LA area.

Cornell in the Final Four!

Each year PayScale comes out with a final four prediction based on median alumni salary. As was the case last year, my alma mater, Cornell, makes it to the final four. Last year they made it to the final - losing to Duke. This year they lose to Duke again, but in the final four. I'd take that. But then, I'd just like to see two of my three former schools meet by having both Cornell and Wisconsin win their first games.  The good news is President Obama predicts just such an outcome.  As for my other school?  Well, Lewis & Clark has had better years.

One note, these salary stats are self-reported, so they probably inflate the higher schools, as students who attended those schools don't want to report if they think they are below the median and may inflate their own salaries, cognizant of the high salaries on average.

Why Healthcare Reform Matters

This graph, from the Center on Budget and Policy Priorities, shows about as clearly as possible why it is healthcare that is the biggest challenge to future fiscal stability. Whether the current bill has enough cost saving measures to make a serious dent is an open question, but it is a start.  [HT: David Leonhardt]

But it is also important to note that the current healthcare reform debate has two main pillars that are often conflated and confused.  The first is what the graph above references: healthcare costs are soaring and becoming a serious fiscal issue for the United States and we have to do something about it.  To this part of the debate economists have a lot to say and contribute.  The second pillar is different.  This part of the debate is more of a moral and social argument: should a society be responsible for the health and welfare of its own citizens?  To this, economists have little to contribute other than mentioning the cost of providing critical care to the uninsured versus more comprehensive coverage.  This is the limit of economics - economics can help in determining the best way to achieve a social policy objective, but it is mostly silent on what those objectives should be.

Oregon February Unemployment: 10.5%

The latest unemployment numbers are out today and the story is essentially the same - holding steady.  The February unemployment rate is at 10.5%, and those 1,200 jobs gained in January?  Gone.  February saw a loss of 1,200 jobs on a seasonally adjusted basis.  Leading indicators are up, but the jobs just aren't coming yet - it is going to be a long, slow recovery...

Soccernomics: Grass - or Not

I have blogged a few times about my desire to see soccer played on natural grass.  I have lamented the decision by Merritt Paulson to install artifical grass at PGE Park.  And I have argued that the new modern natural grass field technology works pretty well in controlling moisture.

But I have to say that this is about as clear and direct an explanation as you could wish for, and I find it convincing.  This is from a Timbers Q&A with Merritt Paulson:

This is very simple. If we could have a quality grass field, we would. We cannot. PGE Park is below grade and only a small fraction of the field, especially after our new configuration, receives direct sunlight. That fact in and of itself makes PGE Park a unique challenge for grass even without the weather in the Pacific Northwest. In addition, add training needs (although we will provide a grass training complex for the team) to our fall high school and PSU football games that we will host, to our weather and you have an equation that simply does not work. Imagine an October soccer game, when the grass no longer grows in Portland, the day after a football game on grass. No way to get rid of football lines and an awful surface. Our organization has looked at this long and hard and will continue to look at it as technology advances. Turf is much better quality today than it was 5 years ago, and we will look at a product that favors soccer. Additionally, we will likely have our own custom grass cut-outs for exhibitions when necessary.

Let's hope that field turf comes up with a modified, soccer-specific, product soon. I think that the main adjustment would be to have slightly longer blades of fake grass to prevent the ball from bouncing too much and to slow the momentum of a rolling ball.  But still, soccer played mostly without tackles is just not the same.

Study Economics to Be Happy!

As if higher employment rates, higher salaries and the admiration of your peers isn't enough (okay, perhaps not admiration of your peers) researchers in Germany have found that studying economics (at least in Germany) makes you happy (HT: Economix).

And stay tuned for our new improved OSU undergraduate econ major and options!

Economist's Notebook: Sin Taxes and Pigovian Taxes

From NPR, a blunder (HT: Greg Mankiw):

But economists frown on what they call "Pigovian taxes," which are designed not only to raise revenue but put to governments in the position of trying to influence how people shop or behave.

If there is one thing almost all economists believe in, it is Pigovian taxes.  The story was on "sin taxes" which are taxes directed at behaviors generally frowned upon by society and so they are easier to enact in a democracy, and the writer obviously confuses sin taxes with Pigovian taxes.  Some behaviors frequently the target of such taxes, like smoking, also have negative externalities associated with them: the damage smoking does to the person's health which often costs society in medical care, and the the damage one persons smoke does to others nearby.  Taxes that are equivalent to the dollar amount of those external costs are Pigovian and efficient.  But huge taxes on cigarettes that are designed to get people to stop smoking are more what we would call 'sin' taxes and these are not as popular among economists.

Soccernomics: What We Talk About When We Talk About Soccer...er Football

A spirited debate arises in the soccer subculture over the use of terminology when describing the game as played in the United States.  We use American expressions rather than the English counterpart for many things: cleats instead of boots, uniforms instead of kits, field instead of pitch.  We also don't tend to 'rate' players, say that they have gotten a 'knock,' talk of the ball going out to 'touch,' or that players are being directed by a 'manager.'  However, some things have seeped naturally into our lexicon: we talk of strikers instead of forwards,  matches instead of games, etc.

The debate arises about how we should speak when we speak of soccer in the US.  To many, using English terms is a pathetic affectation.  We would not talk of bonnets and boots when we talk about our cars so why should we act differently when we talk of our sports.  I am on the other side.  To me this is exactly the point, this is not our sport, it was invented by the English and the english language terms that go with it are naturally a product of that.  The relevant example is if the English came up with unique terms for basketball, an 'expanse' instead of court, and 'the round' instead of hoops, say.  They don't, of course, and so we shouldn't be so parochial about our own terms.  I don't really care which terms are used, but I get impatient with folks who say we shouldn't use English terms.

All this arises because of ESPNs decision to go with all-British announcing teams for the World Cup.  All I can say is: "oh, thank god." There are a few exceptional American announcers, JP Dellacamera being the main one, and so some games will be well called, but as the world cup needs multiple teams we often get atrocious announcers on others.  [I still remember from the '98 world cup an american announcer totally unfamiliar with the sport who would not stop gushing about a defender who shielded a ball, last touched by the offensive player, as it rolled out over the end line - a totally routine play]  The New York Times' Goal Blog wonders whether these British announcers will use the English terms or adopt the American equivalent.  I don't care either way, but just as I would expect to hear an american football field called a gridiron in Britain (and I had a little bit of a surreal globalization experience sitting in an Edinburgh sports bar with an NFL game all over the TVs once) I expect that eventually the lexicon for soccer in the US and Britain will converge (except for the soccer part).

I do think there is one area where this convergence has become a little silly, the use of acronyms like FC and names like Real and United.  Teams like Seattle Sounders FC use the FC as FC, not standing for anything officially but meaning the same thing as in England: "Football Club."  This term harkens back to the time when these professional teams were just that, clubs. Many still are in a way, kind of like the evolution of the Green Bay Packers.  I don't mind the FC, just make the name Seattle Sounders Football Club and be done with it.  Surely the world is big enough for Association Football and American Football.

The Goal Blog also wonders what Brits would think if Americans called the World Cup soccer matches on British TV, but this is the wrong question.  The right question is what would the Brits think if Americans called NFL matches on British TV?  From my experience in Edinburgh - they would think it natural.

So all this is soccer - where is the economics?  Well, in the world of 'language goods' like movies, TV, books, etc. the United States rules the english speaking world.  Our lexicon is exported much more than others' are imported. So, I think this makes us insular and parochial.  The size of our market is so much bigger than anywhere else (most notably the UK, Ireland and Australia) that we rule the English language in pop culture.  [One exception is, of course, in pop music where the UK gives about as good as it gets]  We therefore tend to think it strange to hear terms that we have not coined.

Finally, my favorite little bit of Soccer trivia: why is football called football?  Hint: it is not because you kick a ball with your foot.  When the games that would become Rugby and Football were being played and differentiated in Rugby, England - they were all referred to as 'football' because they were played on foot (as opposed to on horseback).  This is also why American football, the stateside variant of the games first played in Rugby also took on the moniker of football.  They were all football until different rules regarding mostly the handling of the ball caused the split into two different variants of the game in England and into American football, Aussie rules football and Gaelic football abroad.

UPDATE: It is happening already!  This from an official MLS press release about the Timbers victory over the Sounders:

Despite dominating play, the Seattle Sounders FC fell to the Portland Timbers, 1-0, in the Community Shield preseason friendly match on Thursday night before a crowd of 18,606 on the Xbox Pitch at Qwest Field [emphasis mine]

Customs House

Long ago when I spent most of my junior year in college abroad in India, I actually had to visit the US Customs house to 'register' my camera so that I could prove I took it out of the country when I returned to the country.  (I was naive and thought it was important to do so - but it wasn't) It was my first real experience there and I was amazed that such a cool building existed that had entirely escaped my attention up to that point.

Now comes news that the deal to move the International School there has fallen through and the building will now go to auction.  It always seemed curious to me that the international school should move there - the building seemed too big, too out of the way, too limited in terms of campus for a school of that nature.  Nevertheless, it is such a marvelous building in such a marvelous area, I hope something good becomes of it.

If anyone wants to stake me, I envision a "Portland School of Economics, Business and Policy" like a Portland version of the London School of Economics - an exceptional non-profit private school. How great would that be for the city and for the business, economic and bureaucratic state of the state?  Send me your $100 million checks today.

Eco-nomics: Carbon and Trade

This graphic is making the rounds of the blogosphere from a report by Steven J. Davis and Ken Caldeira. The point most are making is how much of the carbon footprint we consume comes from imports. To me, it means something different. The graphic shows clearly the difference in the energy efficiency of production between the US and China. The two are pretty similar in terms of the value of their exports. China is at $1428 billion and the US is at $1287, but the carbon implications of this production for sale abroad is hugely different - just compare the extremely wide arrows from China relative to the narrow arrows from the US.  So, while the US is way ahead of the world in term of carbon per capita, the other big problem for the near future is the relatively inefficient production that is coming from the rapidly growing economies of East and South Asia.  

By the way, it appears to me that the authors of the report have decided to use the Peters Projection map.

A Lesson in Opportunity Cost

Without making a judgement on the benefits of the wars in Iraq and Afganistan, here is an interesting take on the opportunity cost of the wars.  I chose Portland as a reference point, you can go and choose your own.

Economist's Notebook: Schools, Big and Small

I am an interested party in the Portland high school redesign effort.  I will have children that I expect will attend Portland high schools.  In the case of my kids, they will most likely attend Cleveland, one of the high schools that seems to do reasonably well in various metrics.  The schools the district is worried about are schools like Jefferson, Franklin and Marshall that draw from lower socio-economic status areas and have worse performance metrics.  I understand the concern: you cannot sit idly by and let schools fail the students that depend on them most.

But I am very frustrated about what appears to be the following of the latest fads in educations causing new disruptions every few years.  Just a few years ago the miracle cure was small sized high schools that could provide needy students the personal attention they needed.  Of course, it sounds so obvious.  And yet, despite a mountain of educational research that suggested this was an established empirical fact, when the Gates Foundation spent lots of money promoting small schools and (to their great credit) carefully studying the result, they found that small schools were a complete failure.  Unfortunately, Portland was one of the great bandwagon districts that jumped on board wholeheartedly (and Vicki Phillips parlayed this experience into a job with the Gates Foundation).  Now, even PPS admits it was a failure - well, almost.  Here is their take:

Researchers have found that, other things being equal, the large size of many high schools is correlated with lower levels of student achievement, engagement and graduation rates, particularly among poor and minority students.

However, the small school reform movement that followed this research in such cities as Portland, Boston, New York, San Diego and Chicago, has shown mixed results. The Gates Foundation’s 2009 Annual Letter — after the foundation invested millions in converting large, comprehensive high schools into small schools — said those small schools did not improve students’ achievement in any significant way. Those that did were almost all charter schools that had significantly longer school days. The foundation noted that it had less success trying to change an existing school than helping to create a new school.

Jefferson, Madison, Marshall and Roosevelt, the Portland high schools that moved toward a small school model, whether into fully autonomous small schools (at Marshall and Roosevelt next year) or trying to create smaller “academies” within a school — were all attempts to convert a large, existing school with poor performance into more successful small schools. However, those campuses are still posting some of the higher dropout and absentee rates in the district, and many still are showing some of the lowest scores on Oregon assessment tests. In addition, community members say students do not have access to essential courses and electives.

However, the growth data tells a different story: Most of the schools are making significant progress is getting more students to benchmark, and individual students with low scores in eighth grade are making great gains by the 10th-grade assessments, even if they still might not meet benchmark. Our small schools have demonstrated the highest academic growth rates in both reading and math for four straight years. The Spanish-English International School on the Roosevelt Campus doubled its graduation rate between 2004 and 2008, and last year bested the district average. This school also has claimed the highest academic growth rate on state assessments in reading for three straight years.

So amusing as this is: 'research says small size is best, but experience says it is not, including Portland, except they seem to be getting better,' it is neither particularly helpful nor a particularly useful roadmap for where to go next. Yet this does not seem to deter PPS.

But what I have discovered is just how bad the education research is.  Some of the most basic themes in social science empirical research - correlation vs. causation, selection, endogeneity - appear to have escaped the attention of most researchers.  The common type of school size study I have found is the type that looks at small and large schools and compares them.  I would hope that most of my students could immediately spot about ten things wrong with drawing inference from such a study.  So it is no wonder that when the Gates Foundation studied the effects of downsizing schools it was dissappionted. 

There may be many things to complain about with Arne Duncan's new (or old depending on your perspective) education policies but the one I am extremely pleased about is the focus on the collection and careful study of real world data so that we can finally have some good answers to some basic education questions.  We should have evidence-based policy but to do so we need good evidence that is well understood.

Learn about Money and Banking Online

My OSU E-Campus course, ECON 330 - Money & Banking, is being offered again this Spring term.

If you have been following financial crisis and the actions of the Fed but still aren't sure how it all works, this is the class for you.  In it you will learn all about money and the monetary system, banking and the banking system, interest rates and foreign exchange.

Priority registration is on now and open registration is coming soon.

Economist's Notebook: Bank Regulation

Paul Krugman's latest is very good and echos what I consider the fundamental point about the banking crisis: the incentives to bankers was clear - get risky or die.  Okay, maybe it wasn't that extreme, but when banks are rewarding clients with high returns from practices that are questionable, and the demand for these assets are sky high, only the brave bankers settled for lower performance and lower risk.  And perhaps these conservative bankers were foolish in the end, even if they did make the right choice, in that the US government had their back anyway so they should have gone for the big rewards.  In the words of Robert Frank, when payoffs are linked more to relative performance than absolute performance the incentives are to take on more risk.  So it isn't enough to run a successful, well-managed bank, you have to bring it better returns than the other banks no matter what.

Mounting evidence shows that it was not the Community Reinvestment Act, not Fannie Mae and Freeddie Mac, not really all that much about exotic finance; but more about the pushing of mortgages on anybody and anything to get them out there so that exotic finance could take place.

Here is Krugman on the Irish case:

Ireland had none of the American right’s favorite villains: there was no Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising, perhaps, was the unimportance of exotic finance: Ireland’s bust wasn’t a tale of collateralized debt obligations and credit default swaps; it was an old-fashioned, plain-vanilla case of excess, in which banks made big loans to questionable borrowers, and taxpayers ended up holding the bag.

The point is where there are clear strategic incentives to behave in an ever more risky fashion (you can't be the bank that doesn't do the risky assets because your performance will suffer and your share price will plummet) there has to be regulation to take the super-risky options off the table.  This is game theory 101.  Sadly, efforts to reform the financial sector appear to be dead in the water.  So be prepared to replay this record all over again.

Econ 539 - Public Policy Analysis: Minimum Wages, Part 2

Quite a while ago now, a 'friend-of-the-blog' in the restaurant industry e-mailed to ask about what I thought of the relatively high minimum wage in Oregon and the additional aspect of Oregon's minimum wage that it cannot be reduced for those that earn tips.  California and Washington also have high minimum wages and do not allow for a 'tip credit,' of this sort so we are not alone, but these are three of eight total states (that I was able to determine) that do not allow credit for tips.

The question was essentially, what did I think of the effect on unemployment in Oregon and what did I think of the specific impact on the restaurant industry?  I punted on the question at the time as it required too much time to read up on the literature just for the purposes of the blog which is, after all, not my real job.  But happily my real job has converged with the blog and doing a week on minimum wages in Public Policy Analysis required my familiarity with the literature and I have learned a few things.  Not enough to synthesize into a strong opinion, but enough to list some empirical evidence of the impact of minimum wages:

1.  Minimum wages, if they are designed to combat poverty are a pretty poor way to do so.

This table, from a Congressional Budget Office report on the effectiveness of the minimum wage relative to an expansion of the Earned Income Tax Credit (EITC), shows that just $1.6 billion of almost $11 billion would go to households classified as below the poverty line.

To get virtually the same amount of money going to impoverished households, you could do a $2.4 billion expansion of the EITC.

Why is it so bad as an anti-poverty measure?  Well, it didn't used to be, but it turns out that a very small fraction of impoverished households (or those within double the poverty line) actually work for the minimum wage.

Here is a table from a report done by Burkhauser and others in 2005:

From this table you can see how the persons making the minimum wage have evolved through time and now (or by 2003 at least) few of the households in or near poverty rely on a minimum wage job.  More and more, minimum wage earners are teenagers and part-timers. Which brings me to my next observation:

2. Minimum wages may distort the incentives for kids to invest in education.  By raising the opportunity cost of schooling, kids may be induced to leave school and not continue their education.  In fact Neumark and Wascher (AER 1995) have found such effects.  They find that minimum wages "...increase the probability that teenagers leave school to become employed or work more hours, and they increase the probability that teenagers leave school to become non-employed or non-enrolled."

3. But what about the big question of minimum wages and unemployment?  The evidence is decidedly mixed and the effects appear to be small, with a preponderance of the evidence suggesting an elasticity of teen workers at about -0.2 (though some notable studies even find positive employment effects, like the famous Card and Krueger 1994 AER paper).  However, many have pointed out that studies that fail to find any effect are unlikely to be published leading to a type of bias.  Given this, most studies of the effectiveness of the minimum wage (like the CBO one above) go with the zero employment affect assumption.

4. As for restaurants and the minimum wage: Oregon is already the second highest minimum wage state in the nation and added to that we have a no tip allowance so it is likely that we pay more for our restaurant food and that we have fewer restaurants than we would have in absence of a minimum wage.  Empirical evidence has found the minimum wage-price link to be strong.  This, of course (from the law of demand), means that we probably have fewer restaurant jobs than we would have in the absence of a minimum wage, but it does not mean we have lower employment overall, as well-paid restaurant employees spend their income as well and the net effect is, as mentioned above, a matter of some debate.

5. The last observation I have is that the big question to which their seems to be no good evidence is if states with relatively high minimum wages suffer higher unemployment and lower growth because of their minimum wages.  This is a very tricky empirical puzzle to solve so it does not surprise me that there is a lack of convincing evidence, but it would be extremely useful to know.  In other words, the graph I made for my last minimum wage post is really totally meaningless as far as a causal link goes.

My conclusion is that for me the main rationale for a minimum wage is to provide a 'living wage' - meaning to fight poverty - and that I think it is not a particularly effective way to do so, the EITC is much better, for example.  The minimum wage does, however, have the advantage of being practically costless to administer, while the EITC does not.  Still, from my perspective, if I were to think about further expansion, I would go for the EITC before the minimum wage.

Friday Humor

Funny or Die's Presidential Reunion from Will Ferrell

Beeronomics and Eco-nomics: Craft Beer in Cans

John Foyston has an article in today's Oregonian business section about the growing trend of craft brewers putting their beer in cans.  His article focuses on Fearless Brewing of Estacada, but Caldera in Ashland cans as well, as has MacTarnahan's and Mac's owner, Pyramid, will soon.  From Foyston's article:

"I expect this whole market just to explode," said Johnson, who owns Fearless Brewing in Estacada with his wife, Barrett. "And I'll be the first one in the local market with cans. Cans are perfect for the way we live out here because you can't take bottles to the golf course, you can't take them out on the river and you don't want to pack them into your campsite. Cans are lighter, they chill faster and they don't break."

Johnson is the latest convert to the craft canning revolution. Although the beer can celebrated its 75th anniversary in late January, it has long been associated with insipid, mass-market lagers. But brewers began to realize that it absolutely protects beers from its two greatest enemies, oxygen and light, and that modern linings eliminated any metallic taste. And about a decade ago, craft brewers tumbled to the fact that if you pour good, flavorful beer into a can, that's what you'll pour out.

Cans have many advantages, and they can be recycled (but not reused).  The fact that this is a cheap method of bringing craft beer to retail outlets may be a boon for craft brewers and for enthusiasts who are always looking to try different beers.  I haven't had any Fearless beer, for example, but will certainly try it if it reaches my local stores.

But it is not all good news and for this reason I think brewers should be cautious.  Currently, as far as I can figure out, most or all aluminum beverage cans are lined using BPA.  Nicholas Kristof did a good job explaining the current concern over BPA in food, and here is a report on the now famous Canadian study of soft drinks in aluminum cans:

The first comprehensive testing of bisphenol A (BPA) levels in canned soft drinks in Canada has found that most contain the controversial chemical.

While the levels are low, some environmentalists say the levels may very well be enough to cause harm to children, especially those who drink a lot of pop or energy drinks.

The study, the largest test of its kind, was conducted for Health Canada as it investigates Canadians' exposure to BPA, which has been linked to cancer and reproductive problems.

The study tested bisphenol A levels in 72 samples of canned drinks, including carbonated, non-carbonated, diet, non-diet, fruit-flavoured and energy drinks. The survey represented at least an 84 per cent market share of canned soft drinks sold in Canada.

The chemical was found in almost all of them, and was particularly high in the energy drinks sampled.

The only exceptions were two samples of tonic water. The researchers suggest the quinine in tonic may have interfered with BPA extraction.

BPA was detected at levels between 0.032 and 4.5ìg/l (micrograms per litre). The highest levels of BPA -- 4.2 and 4.5ìg/l -- were detected in two energy drinks - drinks that are popular with teens and university students who often used them to stay alert as they cram for exams.

The authors calculated that an adult weighing 60 kg consuming one canned soft drink per day would, at the average BPA level found, consume only 0.0034ìg/kg body weight per day and 0.027ìg/kg body weight per day at the highest BPA level.

Now, the final piece in the puzzle - the definitive study that either links BPA consumption with adverse health outcomes (or finds no such adverse outcomes) - has not yet been found, it is likely that cautious consumers will avoid exposure to BPA.  So, until there is a source of BPA free cans for craft brewers, I think it would pay for them to be cautious about moving wholeheartedly into cans.

Update: Over on the Beervana blog, commentator Stan Hieronymus points out a New Belgium blog post on this very issue.  They think the science is pretty clear: no problem with BPA in the lining of cans (they also confim that you can't get non BPA lined cans).  Though they can also say, "get yours in a bottle if you are worried" as they do both.

US Unemployment: Another 36,000 Jobs Lost

NY Times graph. Source: Bureau of Labor Statistics Horizontal axis shows months. Vertical axis shows the ratio of that month’s nonfarm payrolls to the nonfarm payrolls at the start of recession. Note: Because employment is a lagging indicator, the dates for these employment trends are not exactly synchronized with National Bureau of Economic Research’s official business cycle dates.

The US unemployment rate held steady at 9.7%, but again the economy shed jobs: this time 36,000. This was better than expected after the snowstorms caused substantial disruption in the east, but it still means we have yet to turn the corner to strong job gains.

Unemployment and Mortgage Delinquency

From the Calculated Risk blog this graph to which I added the label for Oregon's datapoint. Oregon is among the highest unemployment rate states, but is well below other states with similarly high unemployment rates in mortgage delinquencies and foreclosure.

This begs the question as to why this is? Are unemployed Oregonians over-represented in the renter population relative to the national average (and if so why? - two theories: the preponderance of young migrants and the limitations on building new houses), were Oregonians less likely to have gone for sub-prime loans (answer: yes, somewhat)? Ideas?

No Support for a Rainy-Day Fund?

OPB is reporting on a poll they commissioned showing a decided lack of support for kicker reform leading to a permanent rainy-day fund. Frustratingly, they do not appear to be releasing the poll itself so one cannot know the exact wording of the questions. It is surprising as other recent polls mentioned by Peter Courtney and others have shown 58% support (which they say is still too low for it too succeed). Polls are extremely sensitive to the wording and order of the questions and it frustrates me that a news organization is not transparent about theirs (and any poll they report on).

So what gives? Why won't they release the poll?

This is a complicated issue and the academic in me thinks that all it takes is a little educatin' to get folks on board - but not if it is really at 38% support.

Economic Gardening?

An Op-Ed in today's Oregonian (not yet on-line so I have to go by memory here) by Brent Barton, Bob Jenson and Jefferson Smith promotes the idea of "economic gardening." This is a wonderfully evocative term, but the piece offers few specifics. Personally, this kind of public-policy mumbo-jumbo drives me nuts because it sounds so right yet means so little. In fact this is precisely what caused be to choose economics as a career: other disciplines frustrated me with the lack of specifics while economics excited me with its precision.

As much as I can figure out, the idea is that we make it as easy as possible for businesses to start up in our communities, and this is anything but a new idea. But if it were that easy we would not need to keep coming up with more and more wonderful terms to extoll its virtues. The problem in Oregon is not the bureaucratic environment - in most measures of business friendliness Oregon scores near the top - the problem is in the fundamentals, like education, where Oregon scores near the bottom.

Littleton, Colorado is an interesting example that was chosen to illustrate the 'economic gardening' idea.  Littleton exists in a sea of highly educated people, other high tech companies and institutions of higher education.  The Denver-Boulder metro area has a pretty good human capital infrastructure, in other words, which makes it easier for a new company to succeed.  I talked about this in my recent posts on agglomeration externalities.

The problem with agglomeration externalities is that they are not easy for policy makers to create by 'choosing' industries or businesses to promote.  So what I would like to see are policy makers, like the Op-Ed's authors, focus on the fundamental things that matter and stop trying to engineer economic prosperity.

As an aside, my attraction to economics is echoed by Paul Krugman in an interesting biographic piece in The New Yorker:

...Krugman went to Yale, in 1970, intending to study history, but he felt that history was too much about what and not enough about why, so he ended up in economics. Economics, he found, examined the same infinitely complicated social reality that history did but, instead of elucidating its complexity, looked for patterns and rules that made the complexity seem simple. Why did some societies have serfs or slaves and others not? You could talk about culture and national character and climate and changing mores and heroes and revolts and the history of agriculture and the Romans and the Christians and the Middle Ages and all the rest of it; or, like Krugman’s economics teacher Evsey Domar, you could argue that if peasants are barely surviving there’s no point in enslaving them, because they have nothing to give you, but if good new land becomes available it makes sense to enslave them, because you can skim off the difference between their output and what it takes to keep them alive. Suddenly, a simple story made sense of a huge and baffling swath of reality, and Krugman found that enormously satisfying.

The article also touched on his contribution to economic geography:

Later on, Krugman became interested in economic geography, in the related question of why there were regional specialties—why, in the United States, for instance, were cars produced in Detroit, carpets in Dalton, Georgia, jewelry in Providence, and chips in Silicon Valley? Again, the answer turned out to be history and accident. Once an industry started up in one place, for whatever reason (the carpet industry in Dalton appears to have its origin in a local teen-ager who in 1895 made a tufted bedspread as a wedding present), local workers became trained in its methods, skilled workers from elsewhere moved there, and related businesses sprang up close by. Then, as more skilled labor became available, the industry could grow and benefit from economies of scale. Soon, as long as it didn’t cost too much to transport the industry’s products, the advantages of the place would be such that it would be impractical for someone to open up a similar business anywhere else. Many economists found the idea that economic geography could be so arbitrary “deeply disturbing and troubling,” Krugman wrote, but he found it exciting.

This is essentially my point - it is impossible to predict which industries will thrive, so let's not try and create a local economic focal point, let's get the fundamentals right so one will spring up.

Oregon January Unemployment: 10.7%

The Oregon unemployment rate has been stalled for a while and remains at a high level in January, which saw an unemployment rate of 10.7%.  The good news is that on a seasonally adjusted basis, the economy finally gained some jobs, 1,100 to be exact, the first monthly job gain since February 2008.  Still, there is no sign of a return to robust job growth any time soon.

Economist's Notebook: Poverty and Risk

The recent earthquakes in Haiti and Chile present an interesting contrast between the deleterious effects of a major earthquake in one of the richest countries in the western hemisphere and in the poorest.  It may surprise you that Chile is (by relative standards) quite an advanced and relatively wealthy country as many Americans, I think, have a tendency to view all of Latin America as a poor region.  According to the CIA, the per-capita GDP in Chile in 2009 was $14,700 while Haiti was $1,300 - so while Chile is far from US or Western European standards of living, it is a much wealthier country and Haiti.  In both cases the earthquake (and subsequent tsunami in Chile) were devastating disasters, but the scope of the tragedy in Haiti was, it appears, much, much worse.

Part of this difference was the proximity of Port Au Prince to the epicenter of the Haiti quake but part of it was the ability of the relatively much wealthier Chile to prepare for their quake through the creation and enforcement of strict building codes, and their ability to mount a significant response in the aftermath. And this illustrates a major difference in how people in low-income nations live as compared to those in the high-income world: the susceptibility to, and management of, risk.  [This also just so happens to be the subject of my lecture last week in ECON 455/555: Development Economics]

Poorer countries are particularly vulnerable to risk largely due to a lack of infrastructure or quality of infrastructure to cope with variability and shocks.  Agricultural households that do not have modern irrigation, for example, are quite vulnerable to adverse weather shocks.  The poor quality of the built environment, like we saw in Haiti (and Pakistan before it) makes it more vulnerable to weather and natural disaster. And the poor quality and size of emergency services leave low-income countries even more vulnerable still.  

On top of the lack of ex ante investment that could help residents cope with adverse shocks, the poor also tend to have inadequate savings to deal with adverse shocks to income or wealth and they are often unable to afford risk insurance and do not have access to credit - the two main institutions of risk management.  In fact, in poor countries these markets, for insurance and credit, often simply don't exist for a large part of the population even if they could afford it.  Add to this the lack of social safety nets (unemployment insurance, basic medical care, etc.) and you get an idea of just how vulnerable the poor in low-income countries are to risk and how desperately they need our help when disaster strikes.

As a development economist I constantly have to defend economic growth as a goal.  Growth itself is not the goal, of course, but it is the means to just about all the ends most people identify as important: education, health and welfare, risk management, etc.  The traditional life is not a bucolic as some would make it out to be: infant mortality rates that are an order of magnitude larger than in high-income countries, life expectancy rates 30 or more years younger, high morbidity rates, low levels of education are all facts of life in low-income countries.  I am not denying that there are adverse affects of modernization by any means, but the reality of abject poverty is extraordinarily grim.

Econ 539-Public Policy Analysis: Minimum Wage

For the last week of classes before our series of rapid-fire in-class presentations (my there are a lot of you) we will study the minimum wage using the methods and ideas presented in class.  We will study the standard neo-classical theory of labor markets and how minimum wages affect labor markets, and then think about how realistic the neo-classical model is and what kinds of other complexity we might add and how this might alter how we view minimum wages.

We will then proceed to think about how one might test for the effects of minimum wages using real-world data.  We will think about the causality and identification problems and how these might be overcome.  We will than proceed to examine a series of studies to attempt to get a sense of where the literature stands on the issue.

After this, on Wednesday, we will think about minimum wages in policy terms: what is the market failure we are trying to correct and is it the best was to do so.  We will compare alternatives to minimum wages, most notably the Earned Income Tax Credit.  Finally we will think about the appropriate pieces of a cost-benefit analysis of the Oregon minimum wage and the lack of an exemption for tips.  We will finish with a specific examination of the Oregon restaurant industry: how is it probably affected by the state minimum wage law.

To begin, here is a provocative graph I threw together last night using BLS data on state unemployment rates and US Department of Labor data on state minimum wages:

Is this graph meaningful?