Economist's Notebook: Pigovian Taxes and Studded Tires

The always entertaining (and bike commuting - isn't that oh so Portland?) commuter columnist for The Oregonian, Joseph Rose, has touched on another of the numerous third rails of Oregon politics: studded tires (self-serve gas is another - but once the economy recovers, I am back on my high horse about it).  He wonders whether, given the extreme wear and tear the tires impose on roads, these tires should be banned in Oregon and he reports on a real effort to have such a ban enacted.  Apparently Minnesota and Wisconsin have bans in place. [I lived for many years in Wisconsin and never though much about studded or even winter tires as most folks just drive more slowly and carefully to account for the weather.  I was always amused to come to Oregon for my winter break and hear the clickety-clack of studs on dry pavement.]

Rose reports that the studs do $40 million dollars of annual damage statewide and you can see the effects on the highways. There was a time when I was an undergrad at Lewis & Clark that I could drive back to campus from downtown on I-5 and not steer.  My little VW Rabbit would just track up the curves in the ruts (I was young and poor and delighted in the cheap amusements).  Besides, rubber snow tires are almost as good without the extra wear and tear so there is little reason to allow them.

In fact he has a poll that asks that question: should studded tires be banned in Oregon? [At last looks like about 3 to 1 in favor of a ban]

But to an economist the optimal solution is obvious and it is not a ban.  There are probably some folks out there for whom studded tires are very, very useful (or at least they think they are) and for those folks a ban would be a real hardship, but for most folks they aren't really doing that much.  But given the added wear and tear the impose on roads it is efficient to include in the price of the tires the cost of the added damage to roadways.  Given the $40 million figure mentioned above, it is clear that there are estimates of the actual monetary damage they do.  Now, if they are reducing accidents you have to factor this in as well, but my guess is that this is probably actual outweighed by the additional accidents on wet roads on which studded tires are much worse.

Regardless, the true net additional cost of studded tires is not that hard to estimate.  A Pigovian tax that adds to the purchase price of tires the external costs they impose will return efficiency to the market.  Only those who really do value the tires will buy them after the tax is imposed, and the taxes they pay will provide revenue to fix rutted roads more quickly.

There you go, problem solved.  You are all welcome.

Beeronomics: External Economies of Scale

As if on cue, the always excellent John Foyston writes today in The Oregonian about Indie Hops and its new pelletizing plant to serve craft brewers specifically:

Indie Hops' shiny new $2 million hop-pelletizing plant in Hubbard is the most tangible evidence of CEO Jim Solberg's belief that it's time for the American craft brewers to move out of the shadow of the giants.

The plant has already proved that it can make hop pellets at 110 degrees and less -- 20 or 30 degrees cooler than current methods. The lower temperatures better preserve the delicate hop oils and aromas that craft brewers prize.

Hops are usually dried and baled after harvest in the fall and then sold as whole leaf, or processed into hop extract or pellets, which are hops that have been chopped and compressed into the size and shape of a pencil eraser. Pellets are easy to store and use, and produce more consistent results.

And now, Indie Hops' pellets will retain more of the volatile aromatics and aromas.

...

But there is a tradeoff: The plant runs slower than the pelletizing plants in Yakima -- about an acre an hour, Solberg said, or eight 200-pound bales of compressed hops. That fits in with the business plan devised a couple of years ago by Solberg and partner Roger Worthington, an Orange County attorney and longtime friend.

"We decided from the start to scale this to craft breweries and not the industrial brewers. Craft brewing has basically grown up on trickle-down from the mega brewers," such as AB InBev (Budweiser) and SABMiller, he said. "But craft brewers have come into their own."

Pelletizing is just part of the Indie Hops business plan, which aims to elevate Oregon's aroma hops to among the best in the world and provide the state with a processing and storage infrastructure that now exists mainly in Yakima. The U.S. grows about a quarter of the world's hops in Yakima, Oregon and Idaho. The 2008 crop was worth nearly $40 million to the state.

This is precisely the trend I was talking about in my recent Beeronomics post on economies of scale. This is an excellent example of external economies of scale: the fact that the craft beer industry as a whole has grown prompts or allows suppliers of ingredients to become more efficient and offer cheaper of better inputs which improves the costs and quality of all brewers.  Pellets are easier to ship, store and use but craft brewer worry about loosing some flavor.  Indie Hops has brought a new version that will allow craft brewers to be more efficient by using pellets but still retain the flavor that typifies their beer.

[Note: the picture is from The Oregonian's web page, but is unattributed]

Economist's Notebook: Agglomeration Externalities and Portland

Ed Glaeser has another in his continuing series of excellent posts on agglomeration externalities in The New York Times' Economix Blog.  Here is an excerpt:

Jed Kolko’s essay in the “Agglomeration Economics” volume reminds us that the delivery of services often involves face-to-face contact, whether in a barber shop or a law office. While the costs of moving goods has declined steadily over time, the cost of moving people has not because time has gotten more valuable and you need time to travel. This explains why business services, which generally rely on face-to-face contact, are disproportionately prone to locate in cities. Mr. Kolko finds that the most skilled service industries are most likely to locate near each other and to locate in dense urban areas.

Mr. Kolko’s paper also shows that customers and suppliers that rely most on information technology are also most likely to locate near one another.

Perhaps unexpectedly, information technology seems to be associated with a greater desire for geographic proximity. After all, Silicon Valley — the home of information technology — is the most famous example of a geographic cluster in the world today. One reason new technologies make face-to-face contact and proximity more valuable is that technological change increases the returns to being smart, and human beings get smart by hanging around other smart people.

Cities, like New York, thrive as places of pleasure as well as work. Urban proximity enables people to connect with one another by creating, among other things, urban marriage markets. Large urban scale can also cover the fixed costs of urban amenities like museums and live music venues and clubs.

The Joel Waldfogel essay in “Agglomeration Economics” emphasizes the benefit that comes from being around people who share your own tastes.

If you live in a county of vegetarians, then your local supermarket is likely to be short on beef. If you live surrounded by voracious (and prosperous) carnivores, then you are much more likely to find U.S.D.A. prime at the butcher counter. The shopping options in Manhattan are tremendous by world standards, because of the vast number of customers on the island, and that is part of New York’s appeal.

Cities are a natural topic for economists because urban density can magnify markets, like the markets for workers and balsamic vinegar and spouses. That urban strength also explains why cities have proved to be so robust, and so fun.

This has direct application to Portland. Portland has gained a reputation for a number of things: progressive politics, urban planning, local food, beer, art and design and outdoor amenities. The fact that prople decide to move here because they are attracted by these things makes these things more prevalent and cheaper. I wrote about a version of this in a beeronomics post on economies of scale: more and more local breweries make it cheaper to brew for all of the breweries in town. [A more specific version of this is the organic beer movement - it used to be very hard to find organic ingredients, especially malts, and choices were limited and often available only from Germany.  But now with Roots, HUB and lots of other breweries brewing at least one organic beer, local suppliers are beginning to provide organic malts in increasing varieties]

Portland also has a tech sector, but it is mostly the lower end production stuff that is cheaper here and doesn't need to be so close to the 'brains.'  This is, in my mind, the key to the continued success of Portland: having enough of the really smart and creative tech types locate here and create new businesses.  So far it hasn't happened in sufficient scale.  It is a hard thing to engineer and trying to specifically target the types, the specific industry, etc. is a mug's game.  Which is why I am generally both optimistic about the future of the city and a little less skeptical than some of otherwise hard-to-defend public investments.  They are hard to defend because the data that establish a causal link between, say, an MLS team or a streetcar and general economic development are simply unobtainable.  But absence of evidence in support is not evidence for the negative and it is hard to believe that these things about Portland that people like so much don't have a long-term economic impact.  It is slow and amorphous, but it is real.  I think Portland is, and will continue to be, a jewel in the American urban landscape and this will, through time, yield real and substantial economic results.

Agglomeration externalities also provide an economic explanation for the observed sorting of people by ideologies as argued in the book "The Big Sort."  Perhaps it is to find more and cheaper things that we value that really determines our location choices and the fact that these are correlated with ideology is accidental.  So we are not seeking the comfort of the people we agree with, but seeking the material things we like and prefer them to be accessible, plentiful and cheap.  The fact that they are things like local organic food, green energy solutions, mass transit, etc., correlate to our political and policy preferences but these non-material political preferences are not what made us self-sort.  Perhaps.

Portland Home Values: Case-Shiller February Numbers

The latest Case-Shiller numbers are out and are pretty dismal for Portland:

The March and April numbers will probably be better thanks to the expiring federal incentives, the late spring and summer will tell us a lot about whether the fledgeling recovery can help counteract the continuing fallout of the sustained high unemployment rate.

On-shoring

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HT: Marginal Revolution

Hamilton: Follow the Money

Sick and busy today so I'll outsource to James Hamilton at Econbrowser with his post on the housing market melt-down. Here is the conclusion:

To the extent that purchases of mortgages were being ultimately being funded by short-term borrowing through commercial paper or repos, the institution borrowing in this manner was essentially fulfilling the function of a bank-- borrowing short and lending long. If, as happened starting in 2007, those providing the short-run funds choose not to renew the loans, the institution would be forced to liquidate its long positions in a market where the underlying securities could only be sold at a deep loss. In other words, there would be a run on the shadow banking system.

Now, there are two aspects of the situation that began in August 2007 that one might choose to emphasize. The first perspective supposes that self-fulfilling fear itself is the key dynamic that propagates the crisis, as fire-sale prices create ever-spreading losses. When calm and rational valuation return, all will be well. The key problem, according to this perspective, is that would-be short-term lenders were hit in August 2007 with a sudden irrational lack of exuberance that ended up persisting over a year and bringing much of the world economy down with it.

The other perspective of what happened beginning in 2007 is that those Other People-- the ones who ultimately provided the Money that drove all this-- finally started to wise up.

Beeronomics: Hops Poll

Hey thanks for chiming in on my now closed hops poll. I think the Hopopotamus®
 will begin life with a four different hops (because a Hopopotamus®
 should really full of both lots of hops and lots of varieties). So I am going to go with Crystal as a base, and Amarillo, Cascade and a touch of Simcoe hops for flavor and aroma.  Crazy, I know, but the people are going to expect something crazy good when they hear the name Hopopotamus®.  And what the people want, I deliver.

The wisdom of the crowd - well really just a gaggle - suggested Willamette, but Simcoe is just too alluring...

I'll let you know how it turns out.

Beeronomics: Non-Linear Pricing

Here is a picture I took the other day at the Deschutes' Portland pub.  It is a little out of focus, the iPhone not quite up to the job of low light detail work, but notice how the beers are priced: $5 for 500ml and $3 for 300ml.  In other words exactly 1 cent per ml.  This seems straightforward, but to me it was astonishing as you almost never see this kind of 'linear' pricing in beer.  Most places are like the Full Sail Tasting Room and Pub in Hood River which prices their imperial pints at $4.25 and half pints at $3.  This is what economists refer to as 'non-linear pricing:' when the price per unit changes as the total units change.  So a pint at Full Sail is about 21 cents an ounce and a half pint is 30 cents an ounce.  This is the norm and it is everywhere in product markets: beer, soda, chips, socks ($4 a pair or 3 pairs for $10), you name it. The question for all you budding economic naturalists (or Beeronomic naturalists) is, why?

One reason for this type of pricing is simple: costs.  It can be cheaper to sell in larger quantities.  I talked recently about the cube-square rule that generally affects packaging costs: the volume from bigger packages increases at a faster rate than the surface area of the packaging - so the costs per unit of the packaging decrease with volume.  There are reduced transactions costs per unit for bulk purchases as well.  In a pub setting, smaller servings may mean more glassware to bus and wash and more visits per table by servers.  So some of what we might be seeing in non-linear pricing is just a reflection of the added costs of smaller quantities.  

But not always.  Bill at the It's Pub Night blog has had an ongoing fascination with non-linear pricing in beer, focusing particular attention on the inflated price of 22 ounce bottles that have gained so much popularity.  Given the cube-square rule and the lower amount of packaging (no paperboard holders) you would assume that the six-pack would be costlier per ounce of beer and therefore if price was just a function of costs, 22 ounce bottles would be less expensive per ounce than six-packs, but Bill finds that the opposite is true.  So, again, what is going on?

The answer, to economists, is well known and goes by the term 'price discrimination,' or more specifically in this case 'second-degree price discrimination.'  Price discrimination in general is the ability to charge different customers different prices for the same good based on their ability to pay.  You charge more to people who value the good more and less to those that don't.  If you can do this two things happen: you do better as a seller, and you sell more than you would otherwise.  You do better because you get to capture most of the surplus from each transaction and you sell more because if you were forced to sell everything at the same price you would keep it reasonably high (if you had any market power) and thus the folks who didn't value it that highly might not get to buy.  If you can charge different prices, however, you are quite willing to sell at a low price to a customer with a low value of the good because you can still sell to the high valuation customer at a high price.

Portland's saturday market is a good laboratory to see how this works.  Go to a booth where an artisan does not post prices and observe how prices are quoted.  You will probably find that price will fluctuate based on some observable characteristics about the customer that might be reasonably related to willingness to pay for the artisan's wares: fancy clothes, watch, age, extra excitement, and so on.  To illustrate this phenomenon I always tell my students tales from when I was a Lewis & Clark College student studying overseas in India and would go to the market.  After a while I got to know the regular prices, but as soon as they saw an obvious westerner, the shopkeepers would immediately double, triple or quadruple the asking price (it helped to know a little Hindi to hear how the prices changed from a local to me).  The shopkeeper made the correct assumption that a westerner in general had a much higher willingness to pay than a local and thus wanted to extract more surplus from that transaction.  He was practicing price discrimination and thus showed himself (it was almost always men) to be a good economist.

This is close to what we refer to as first-degree price discrimination where you can tell something about individual willingness to pay for a good.  The problem with this type is that most market situations are more anonymous - you can't tell by looking at them anything about their willingness to pay or you don't even see them at all.  So what to do, well you might be able to get different types of customers to differentiate themselves by offering different prices.  This is 'second-degree' price discrimination.

Take the pub as an example.  Suppose you know that there are two types of customers: high demand and low demand.  Low demanders are only going to buy one beer and are willing to pay up to $6.  High demanders willingness to pay for one beer is $6, $5 for the second and $4 for a third or a total of $15 for three.  Now let's suppose there are equal numbers of both types and so let's talk about a single table of two people, one of each type.  Lets also assume the marginal cost is constant so that it costs them $2 to provide every beer.  The pub could charge $6 a beer and would sell two, get $12 in revenue, $4 in costs and clear $8 in net revenue.  Or they could charge $5 a beer and sell three, and make $9 net.  Or they could charge $4 a beer sell four (one to the low demander and three to the high), and make $8 net.  But a clever publican would offer a different deal: $6 per beer or three for $15.  The low demander will buy their one beer for $6 and the high demander will go for the three beer deal (if you prefer make it $14.99 so he strictly prefers this deal and gets $0.01 in surplus over one $6 beer).  The pub will make $6 + $15 in revenue, will have $8 in costs and will net $13!  Clearly this is a better plan for the pub and notice it does not require knowing which customers are high and low demanders - they self-select.

This is classic third degree price discrimination and can be applied to Bill's 22 ounce bottles as well.  There are low demanders for these beers who want just a wee bit to taste and high demander who will drink much more.  By pricing the 22 ounce bottle so much higher you charge a premium to the low demanders and you give a discount to the high demanders by offering them a volume discount in six packs (and generally even better deals with 12 packs).

But Bill should not despair (assuming he is a high-demander) because this strategy generally benefits the high demander - they get lower prices than they would in the absence of the price discrimination.  Thus the 22 ounce bottle is a good thing for the six-pack buyer.  Why?  Well, go back to my pub example and notice that the high demander pays only $5 per beer, rather than the $6 they would have paid without price discrimination.

This is a general rule in price discrimination: some groups benefit and some suffer from the practice.  In this case, high demanders see lower prices, but low demanders get the same price.  This is due to the particular simplicity of my example, more often low demanders see higher prices.

Cheers!

A Lesson in Incentives

Incentives matter:

Sharp Rise in New-Home Sales in March

WASHINGTON (AP) — Sales of new homes surged 27 percent last month, topping expectations as better weather and government incentives helped sales.

The Commerce Department said Friday that new-home sales rose in March to a seasonally adjusted annual sales pace of 411,000. It was the strongest month since last July and the biggest monthly increase in 47 years.

...

The median sales price was $214,000, up more than 4 percent from a year earlier but down more than 3 percent from February.

The new-home sales report reflects signed contracts to purchase homes rather than completed sales and thus gives economists a feel for how many buyers were out shopping for new homes in a given month.

It is likely capturing consumers who are trying to qualify for federal tax credits that will expire at the end of this month. The government is offering an $8,000 credit for first-time buyers and $6,500 for current homeowners who buy and move into another property.

To qualify, buyers must have a signed contract complete by the end of next week and must complete the transaction by the end of June. Nearly 1.8 million households have used the credit at a cost of $12.6 billion, according to the Internal Revenue Service.

Eco-nomics: Ecological Economics

Couldn't let Earth Day pass without an Eco-nomics post, now could I?

PSU recently announced that Robert Costanza would become the new Director of the Center for Sustainable Processes and Practices, or CSP2 apparently.  Costanza is a well known scholar in the field of 'ecological economics' and I thought that this moniker might confuse people who only focus on the word 'economics.'  In fact ecological economics is a distinct field from economics and has a host of criticisms about the way that neo-classical (read modern) economics deals with the environment and natural resources.  Dr. Costanza is an ecologist, not an economist, and the field of ecological economics has more to do with ecology than economics (as opposed to environmental and natural resource economics which takes a neo-classical economics approach to these issues).  I am not an expert on ecological economics by any means but I have studied it a little as a grad student and have participated in a sort of debate in Corvallis with a follower of the ideology so I know a little.  The Wikipedia entry on ecological economics appears to be reasonably well written and balanced:

Ecological economics is a transdisciplinary field of academic research that aims to address the interdependence and coevolution of human economies and natural ecosystems over time and space. It is distinguished from environmental economics, which is the mainstream economic analysis of the environment, by its treatment of the economy as a subsystem of the ecosystem and its emphasis upon preserving natural capital.
...
The identity of ecological economics as a field has been described as fragile, with no generally accepted theoretical framework and a knowledge structure which is not clearly defined. According to ecological economist Malte Faber, ecological economics is defined by its focus on nature, justice, and time. Issues of intergenerational equity, irreversibility of environmental change, uncertainty of long-term outcomes, and sustainable development guide ecological economic analysis and valuation. Ecological economists have questioned fundamental mainstream economic approaches such as cost-benefit analysis, and the separability of economic values from scientific research, contending that economics is unavoidably normative rather than positive (empirical).
...
Ecological economics includes the study of the metabolism of society, that is, the study of the flows of energy and materials that enter and exit the economic system. This subfield is also called biophysical economics, sometimes referred to also as bioeconomics. It is based on a conceptual model of the economy connected to, and sustained by, a flow of energy, materials, and ecosystem services.

So one key distinction from the outset is the foundation of ecological economics is moral and philosophical with a host of research attempting to promote the viewpoint.  This is absolutely and fundamentally different from economics which applies scientific principles (and is often criticized for doing so) to economics research.  Economists are interested in uncovering the mechanisms that govern the economy and human interaction, including the interaction with the environment.  We propose theories and attempt to falsify them using data. We are not averse to making normative claims when research shows clearly preferred outcomes, but are otherwise generally interested in the positive.

At the risk of being too reductionist, take the example of the value of biodiversity.  An economist looks at this and wonders if there is a market mechanism to provide this value (there isn't entirely, but if biodiversity matters for market goods like drugs, then it can in some cases).  We then have to think about the societal benefit of diversity and think of mechanisms that one could create to try and equate the cost of destroying biodiversity to its benefits.  If successful than the optimal amount of biodiversity will result.  In this is an appreciation that everything represents a trade off, that preserving biodiversity means that we may have to do without other things.

An ecological economics take on biodiversity would start with a statement of its fundamental value - something different than the value individuals would place on the benefits it can confer.  They also reject the idea that its value is relative - that we can substitute scientific discovery for natural biodiversity for instance - which is a fundamental concept in economics most generally captured by opportunity cost. With these assertions the trade off mentioned above in the standard economic paradigm is rejected and the idea of an 'optimal' level of biodiversity is similarly rejected in favor of a value statement on its necessity.

Why I don't personally subscribe to this line of thought can be seen in a thought experiment.  Suppose there are starving people (never mind why or how they got to this state) living in a forest.  Their only means of survival is to cut down the forest and destroy some biodiversity.  Should they be allowed to do it?  You either answer no to this question or you accept that humans inhabit a world where scarcity forces us to make difficult choices.  The economists' answer to this general question is that we have to make these choices and so let's try and do it so that we make the most people as well off as possible both now and in the future.

Finally, I think that the general view of ecological economists' toward economics is one of the belief that following standard economic principles will lead us to our own destruction.  I believe this is misguided.  Humans may be myopic and it may be hard to tell the future, but as fossil fuels become scarce for example, and the costs of environmental degradation become more severe, the price system will start to encourage the development of the very technologies that we need so badly.  I don't think a philosophy, no matter how persuasive, will ever have that kind of transformative power. Which doesn't mean it is a worthless endeavor or shouldn't be tried - quite the opposite, anything that can be done to promote a reduction in our myopia helps.  But it is not an answer.

So, I think this is a great hire for PSU: Dr. Costanza appears to be a leader in the field, has a lot of outside contacts, will be embraced by the environmental community and will immediately create a distinct identity for the center and will probably be great at external relations which, one imagines, will be his primary task.

On the other hand, I am more skeptical that this hire will be great for the community at large - especially Portland - given the momentum Portland has already established in trying to build a green energy economy.  There are some very hard and pressing questions surrounding the future of green energy technologies and their role in the future development of the world economy - what will the price of fossil fuel based energy materials do in the future, how will the economy evolve with the onset of green technology, what are the potential rewards from investing in green technology, what will global climate change do the the economy, prices and the well being of future generations?  These are all questions that economics tackles head on and that matter crucially to anyone serious about building a sustainable economy.  But this is my bias about what I would like to see the center focus on and it comes from my economists belief that fundamental change comes from incentives not philosophy.

To have a competing voice is very welcome, however, and one hopes that Dr. Costanza will welcome perspectives from economics as well as other fields and that this center will focus on real, implementable strategies and solutions to the challenges that lie ahead.

Happy Earth Day.

Media Alert!

I just taped a little segment for KEX on the value added tax for tomorrow morning's show.  It should be on sometime in the 7 to 8 am period.  If I can find a link after it airs I will link to it.

Ah, the dulcet tones of my voice in the morning talking about taxes, what could be better?

The Oregonian and Oregon Education Leadership

I was gratified to see The Oregonian editorial board publicly question the state leadership of K-12 education.  I have been dismayed by what appears to be a lack of strong leadership and, particularly, well-qualified leadership.

Now, I know little of Susan Castillo and therefore don't feel in a position to judge her.  She certainly seems almost anonymous and has no formal qualifications for the job - but neither one means she does not do the job well. Many effective leaders are quiet consensus builders and, quite frankly, the research I have seen from the education research establishment is generally pretty dismal so an advanced degree in education is not necessarily a bonus.  But given the startlingly poor showing of the state in the Race for the Top grant competition, it suggests that much more forceful and effective leadership is necessary.  Yes, there are a lot of legitimate concerns about Race for the Top, but money is money and the state's poorly funded K-12 education system could use all the help it can get.  Besides, if there is one new welcome trend in education it is the move toward evidence based policy, so we should not be afraid of bad ideas sticking.

The Oregonian identifies a major problem: if we are only paying this position 65% or so of a competitive wage, it is going to be hard to attract a talented leader.  I think they are right to call for a substantial increase in the wage of the Superintendent position.

Hops Poll

Time is running out on your ability to influence my decision about the hops to go into the Hopopotamus®.

It looks like Amarillo and Cascade are clear winners and Crystal is goign strong, the three I mentioned were all ready in my mind.  But I am intrigued by Simcoe - it may be hard to get but I found out that Double Mountain uses it (and Brewer's Gold) for their sublime IRA which was, in my mind, the belle of the ball at the Firkin Fest last weekend.

Anyway, register your vote soon - I plan to hit Steinbart's on Saturday.

Eyjafjallajökull

A cool Reuters photo of the ash from the eruption of Eyjafjallajökull.

An even cooler picture from NASA [HT: Chuck Sheketoff]

Renting v. Buying

David Leonhardt has a nice piece in The New York Times today about buying versus renting and when it is better to do the former. Increasingly the answer is now, given the plummeting values of homes.  In the past the benefit to owning a home was the expected increase in the asset value of the home itself and so most people paid a premium for living in a home they bought versus a home they rented. But that calculus has been turned on its head with home prices plummeting, low mortgage rates, as well as the fact that mortgages are harder to qualify for and thus there is a resulting increase in demand for rentals. There are also generous tax credits still available (but not for long) if you are a first time homebuyer.

Here is Leonhardt:

In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.

So, sorry Portlanders, renting will still be cheaper in the sort-run according to this analysis.

Obviously, owning a home brings benefits that are not strictly financial. It offers stability and, for many people, comfort. ... Even in Manhattan, San Francisco or Seattle, a family confident that it will stay put for a decade or more may well be wise to buy today.

But it’s worth remembering that the advantages of homeownership are frequently exaggerated. The mortgage-interest tax deduction doesn’t eliminate the cost of borrowing money; it merely reduces it. The freedom to paint your house any color you wish comes with the responsibility of paying for a new roof when the time comes. The $15,000 or $30,000 or $50,000 that real estate agents’ fees add to the price of a house can wipe out a lot of other savings.

The most striking part of the current situation may be that despite everything that has happened in the last few years, there are still places where renting does not get enough respect.

When I lived in Ithaca, New York - during graduate school - the local property market was in a severe depression.  I quickly calculated that I could save a lot if I bought a house rather than rented.  So, after my first year, I bought a small house on a double lot a very short walk to the Cornell campus and just a couple of blocks from the Collegetown commercial district.  I lived in about twice as much space as in my former apartment, had a huge yard to enjoy, and saved money.  Of course I had to have some money for a down payment which my parents helped me out with, but the purchase price of $85,000 was tiny even for 1996.  I sold it four years later and made a small profit to boot - but that was not the point, it was to have a nice place to live for the four remaining years I was to be in Ithaca.  [I now deeply regret doing so, I would have loved to have held onto it for sentimental reasons and subsequently the Ithaca market recovered strongly and remains pretty strong] The obsessive focus on homes as assets only obscured the fact that houses are also places in which we live, and have immense value for this purpose as well.

There is a psychological benefit owners get that I think is non-negligible: ownership itself provides utility, in the economics parlance, regardless of the increase in the value of the asset.

Eco-nomics and Development

A photograph of the world at night. I am surprised by how bright is the entire sub-continent of India. But it also portends the challenge of the future: as the highly populated emerging economies of East, Southeast and South Asia continue to grow, the pressure on carbon emissions will become severe unless some real solutions are developed soon.

Beeronomics: Happy Hours

I have been provoked...

The OLCC has had an interesting prohibition on the advertisement of happy hour: you could do it within the premises, but you could not advertise externally.  Now, in response to increasing pressure, the have relaxed the rule but in an entirely byzantine way: you can advertise the time of special priced drinks, or you can advertise the special prices, but not both.  The rationale, according to the Oregonian article on the announcement (not on line and already recycled so I am going by memory here) is to make sure price wars don't ensue and thus promote binge drinking.

Let's take things one at a time.

First, would external advertising of drink price specials lead to lower overall prices?  Economic theory suggests that it would.  By lowering search costs for customers they find it cheaper and thus easier to be choosy and this means more price sensitive.  Most bars are serving essentially the same things - though the quality of the pour might differ and brewpubs often serve exclusive beers - so a lower price would likely be a key factor in where they drink.  How big this price effect would actually be is unclear but I suspect it would be very small given the amount of information already available about happy hours and word-of-mouth.

Second, would these lower prices result in more binge drinking and problem drinking?  There is evidence of an overall price effect on alcohol consumption, particularly among young adults and teens.  But this is not quite the same thing - we are speaking here of drinking in a bar or pub.  So the teen factor is eliminated and the drinking here is during a special time in a controlled environment.  The US Dept. of Transportation is worried about happy hours and drunken driving and suspects that it matters a lot, thought there is only indirect evidence.  But their report is about happy hours in general, not the advertising of price.  They mention one study that did not find an effect of happy hours overall:

Only one study has attempted to directly evaluate the efficacy of happy hour laws in lowering alcohol consumption. The banning of happy hour practices in Ontario, Canada, was studied by observation of drinking habits before and after the ban, supplemented with analyses of total per capita consumption in the city (Smart and Adlaf, 1986; Smart, 1996). No significant decline in alcohol consumption was observed following the ban. Given that there was little time (two days) allotted to observing pre-ban drinking habits, and given that aggregate consumption figures may not be that sensitive to changes in happy hour practices, the results were inconclusive as far as the overall effect on alcohol consumption of the presence or absence of happy hour practices.

I left the DOTs disclaimer in, but it is not clear to me that this is a problem.  Anyway, though overall drinking may not change the concentration of drinking during a time period might cause externality problems in terms of excessive drunkenness and driving whilst impaired.

But the OLCC allows happy hours already so the new law is quizzical.  If it is the price war that is of concern, then why allow price advertising at all?  And if it is the price specials during certain hours, why allow happy hours and advertising of the times?

Given the rules already in place it is hard to understand these new ones.

In the end I don't really have a opinion other than it is unnecessarily complicated and a general economist's take that it is not clear that regulation is necessary at all.  There are externalities associated with alcohol consumption, for sure, and this is one reason alcohol is taxed fairly heavily, but once the Pigovian taxes are there, let the market do its thing.  However, happy hours might contribute excessively to drunk driving in which case there might be a case for prohibiting them altogether, but the evidence is not at all clear on this connection as far as I can tell.  So the advertising part seems a bit misguided - if you are going to have a policy on happy hours themselves, fine, but if you are going to allow drinks specials then it is odd to not let you talk about them.

Comparative Advantage and Increasing Returns

Busy, busy, busy Friday - jumping from one meeting to the next.  So a late post about this article in the Portland Business Journal:

TriMet has been awarded $2.4 million from the Federal Transit Administration to research a U.S.-produced streetcar propulsion system.

The work will be led by Clackamas-based Oregon Iron Works Inc., whose subsidiary, United Streetcar LLC, is the only U.S.-based manufacturer of streetcars.

In a news release Friday, the Federal Transit Administration said the funds represent its 80 percent share of a $3 million project in which $600,000 will come from a local match.
The goal of the project is to fill a major hole in the U.S. streetcar supply chain. Propulsion systems account for about 20 percent of a streetcar’s cost, but the only manufacturers are based outside the U.S.

United Streetcar, which last year unveiled the first U.S.-built streetcar in 58 years, uses a propulsion system made by Czechoslovakia-based Skoda Electric S.A.

Chandra Brown, United Streetcar’s president, said the federal funds will be used to test a propulsion system developed by Milwaukee, Wisc.-based Rockwell Automation.

Once installed, 90 percent of the streetcar’s components will be made domestically, up from 70 percent today, Brown said.

So I am going to sound like a typical economist here - but guess what I am a fairly typical economist (atypical in my wit, wisdom and good looks but that is another matter). Why do we care so much about having our streetcars totally made in the US? What if we are not terribly good at it? Perhaps the Czechs are real experts and can produce a more reliable propulsion system for less money. Wouldn't it be better to focus on what we are good at - like designing iPhones, making good beer (Pilsner - pah!), making Hollywood blockbusters - and then trading them to the Czechs for streetcar propulsion systems?

Almost 200 years of economic theory suggests that we should and that if we do we will be better off.

Is there a counter-argument? Actually yes, and it is essentially what Paul Krugman won the Nobel Prize for. If the source of the Czechs comparative advantage in streetcar engines is from economies of scale, or if the source of their comparative advantage is from having gotten really good at it through experience (i.e. that there is a strong learning curve effect) than this type of government intervention can actually help, over time, the US become better comparatively than the Czechs. In other words, no private firm would do it themselves because they could not compete at first, but over time would grow big enough or learn enough to be competitive if only they had the support to make it there.

Does this argument hold water in this case? Hard to say for sure, perhaps we have more skilled electrical engineers and manufacturers so that if we set our minds to it we would be better and more efficient at it - but we would also have to overcome our relatively expensive labor.

I am skeptical, but of streetcars become the rage in the US, perhaps...

Economist's Notebook: Telecommuting

The real Wall Street Journal piece Mike Rogoway tweeted about today (below) on Bay Area telecommuters who have chosen to live in Portland raises the question: has the world of information technology made proximity obsolete?  You might be tempted to think so, but it turns out that there is a huge amount of economic evidence that, even in the 21st century proximity matters.  I have blogged about this numerous times often using the term of art: agglomeration externalities.

An anecdotal example that is mentioned a lot in Portland business circles is the relative paucity of venture capital in Portland relative to Seattle and the San Francisco area.  Why should this be?  Why, in this era of IT, with wealthy investors who made a ton of money in IT, are they reluctant to fund projects far away?  One reason is that they understand that the probability of success of a start-up depends on the environment into which they are born.  Silicon Valley may be expensive and very competitive but it also has a pool of talent and knowledge that is easy to tap into.  Another reason may be that human beings still find direct contact a more efficient form of communication, are more comfortable with face to face communication and are more likely to trust people they meet face to face.

Whatever the reasons, it is unlikely that, even in the service industry, we will ever really experience entropy in terms of physical location and this is even more reason to invest in local human capital.

Portland

Portland, the media darling, appears in two international publications today [HT: Mike Rogoway]

Correction: so this is embarrassing, The Wall Street Journal piece I linked to and commented on today below is from long ago, May 2009 to be exact.  I didn't even notice (such is the haste of my post the the life of the part-time blogger), I just did a quick Google search and up it popped and I didn't think to check that it was the one.  Er, the piece below is the piece Rogoway was referring to.  Many thanks to an astute reader who figured it out - and my apologies.  [The older article is still below and is also interesting and, such is the state of the economy, it reads just as current today as last May]


The Wall Street Journal on Portland

This is about Bay Area commuters who have chosen to live in Portland and Seattle:

Now it is getting more practical for people to live in the Pacific Northwest and continue working for Bay Area-based companies, as more employers loosen their telecommuting policies. Technology also is making it easier to stay connected all the time, and travel between San Francisco and cities to the north has become more convenient, though hard data on Bay Area transplants to the Northwest who retain their local jobs are hard to come by.

Alex Payne plans to move to Portland with his wife next month, while keeping his job at San Francisco-based Twitter Inc. Last October, Mr. Payne caused a stir when he blogged about his frustrations with San Francisco's quality of life, including criticisms of its public transit and high cost of living.

In contrast, the 26-year-old believes Portland is a "model of urban design." Mr. Payne is especially impressed with the revitalization of Portland's Pearl District, a once-grimy industrial neighborhood that now teems with art galleries and restaurants. Portland's lower property costs also are appealing, though he initially plans to rent.

I once found myself in the commuter plane terminal at San Francisco International Airport on a Friday evening (around 6pm or so) and there was a flight to the Redmond airport leaving around the same time as mine (I was headed to give a talk at Cal Poly in San Luis Obispo).  All of the passengers were assembled for that flight and clearly knew each other (and the airline staff) very well and were all talking about their weekend plans in Bend.  They were clearly weekly commuters to silicon valley who lived at least part time in Bend and commuted back on weekends.  I was impressed.


The Economist magazine on Portland

This is mostly about the general urban, dense and progressive nature of the city. Here is a taste:

Mr Adams says Portland’s success is “totally replicable”. But much of it seems to be an unintended consequence of land-use policies dating back to 1973. Back then, Oregon adopted “urban-growth boundaries” (UGBs) to preserve the farmlands that were then the mainstay of Oregon’s economy. Over time the rationale for UGBs changed to “don’t Californicate Oregon”—ie, don’t become Los Angeles, a freeway sprawl with no centre. The result has been unusually compact living, which is in turn easily served by public transport.

But cities with sprawling, California-style layouts will find it harder to make people use public transport. Phoenix, for example, has an excellent light-rail system, but it is often empty. And it may be even harder for such cities to get their residents to live more closely together.

Joel Kotkin, a Los Angeles-based demographer and author, thinks that places like Portland, San Francisco and Boston have become “elite cities”, attractive to the young and single, especially those with trust funds, but beyond the reach of middle-class families who want a house with a lawn. Indeed Portland, for all its history of Western grit, is remarkably white, young and childless. Most Americans will therefore continue to migrate to the more affordable “cities of aspiration” such as Houston, Atlanta or Phoenix, thinks Mr Kotkin. As they do so, they may turn decentralised sprawl into quilts of energetic suburbs with a community feeling.

A couple of comments.  Are these really unintended consequences of the UGB?  It seems to me that the intent is to preserve rural land and promote density - and with density comes all the things that the Economist calls success: urban living, bike friendliness, etc.

And I am not so sure about the 'childless' part, perhaps the statistics back this up but in my experience (and in the recent experience of the Portland Public School system) the child population is growing quickly - the little rugrats are everywhere.

As mentioned above, this is an article from last year on Portland from the WSJ

The Wall Street Journal on Portland

This article is about the city attracting educated youngsters even in a time if high local unemployment. Here is a taste:

This drizzly city along the Willamette River has for years been among the most popular urban magnets for college graduates looking to start their careers in a small city of like-minded folks. Now the jobs are drying up, but the people are still coming. The influx of new residents is part of the reason the unemployment rate in the Portland metropolitan area has more than doubled to 11.8% over the past year, and is now above the national average of 8.9%.

...

The inflow of young college grads helped change Portland's economy over the past two decades. Most notably, it contributed to an increase in the fraction of Oregon workers with college degrees to 28.3% in 2007 (above the national average of 27.5%) from 19.5% in 1990 (below the national average of 21.3%), according to Moody's Economy.com. Of course, some of that increase came from older educated migrants, as well as homegrown college graduates.

When I moved to Portland full time (my father had been here for many years by then) to attend Lewis & Clark in the mid eighties, Portland was a very different place - blue collar and a bit ragged - and this was part of its charm to me. Since then it has changed completely largely because of two things in my narrative: it was low cost and close to the Bay Area, and its blue collar charm and natural beauty helped engender a youth culture that attracted lots of young educated types to the area. And luckily so. [As an aside, a few years after graduating, I found myself in Grad school at Wisconsin and one day I was in the library and overheard a gaggle of Wisconsin undergrads planning their next move after college: most were aiming to relocate to Portland. This was 1994]

So my experience matches the statistics given above. The great news is that in attracting educated folks, the city's economy was made much stronger and more diverse. The bad news is that in doing such a bad job making our own educated youngsters, this economic growth may not be sustainable.

Beeronomics & Econ 101: Economies of Scale - Redux

After my post this morning, Beervana blogger Jeff Alworth sends along this new picture and writes: "Each one of those tanks at Widmer is 1500 barrels (46,500 gallons)--the annual production of a big brewpub.  There are six in that room and one of the brewers joked, "the biggest six-pack in Portland.""


Here is another aspect of economies of scale: the cube-square law.  According to Galileo (via Wikipedia) this law states: "When an object undergoes a proportional increase in size, its new volume is proportional to the cube of the multiplier and its new surface area is proportional to the square of the multiplier."  So if you double the size of a tank in a brewery, the cost of the materials to make it (stainless steel) increases fourfold but the volume increases eightfold.  So if you have the production to support it, you get double the bang for your buck in tankage - thus the average cost per ounce of beer decreases (all else equal - like just as easy to clean and maintain as smaller tanks).  Now you know.


And for my students - after these two posts, I have now made attending my class today almost entirely redundant, but as it already happened you cannot act on this knowledge - so my ego is safe for another day.  

Beeronomics & Econ 101: Economies of Scale

Over at the Beervana Blog, Jeff Alworth notes (and photos) a new set of tanks being delivered to Coalition Brewery near his house.  To the economist in me this picture says one thing: economies of scale.

Economies of scale simply refer to any productive activity whose average costs decrease with output.  In many cases this is due to large fixed costs - those costs that do not depend on the quantity of the output.  Take this brewhouse for example: the cost of these tanks will be the same if they brew no beer or if they brew to capacity.  Alex at Upright, for example, has a beautiful brewhouse but is only brewing at about 60% capacity - if memory serves.  So if Upright brews more, the average cost of the beer they brew will go down - the fixed cost will be spread across more beer.  Since breweries require a lot of large scale equipment, it is an industry prone to economies of scale. There are other sources of economies of scale that are relevant to the beer industry as well: bottling, distributing and marketing to name three.

The implications of economies of scale have been discussed here at length, but the main one is a tendency for such an industry to be prone to concentration.  It is no accident that the big macrobrewers have become bigger and bigger through acquisitions and mergers.  [I have noted in a previous post how the fact that craft brew is an artisanal product and an experience good creates a countervailing force for small scale brewers to exploit]

The good news for Portland and Oregon craft brewers is that, like these internal economies of scale (that depend on the firm's activity alone), external economies of scale exist.  For example, with a lot of local craft brewers there is more demand for ingredients.  This high demand allows farmers and other input providers to achieve their own economies of scale, promotes competition and allows for efficiency in distribution of inputs.  So it is likely that inputs costs are low in Portland and Oregon not just because of proximity to the growers but because of all the brewing that goes on in Oregon.  [There is also a demand side effect, but that is a topic for another day]

So this external economies of scale is a pretty groovy story: the more local craft brewers brew, the lower are the costs for their fellow brewers.  Once again we see that competitors can also help each other out - even unintentionally.  For an industry that is remarkable for its sense of community and fellowship, this shows that they are not just deluded hippies - they are also savvy businesspeople.

Oregon March Unemployment: Still Steady at 10.6%

The March job figures are out and are predictable but depressing nonetheless.  The unemployment rate is stubbornly fixed at 10.6% (up insignificantly from February's 10.5%).  But the jobs number is still in the red with another 400 lost on a seasonally adjusted basis even with the Census hiring spree. Yes this is still trending to zero, but it is about time to see some real and sustained job growth.  This is what we economists mean be a jobless recovery: many economic indicators are on the rise - GDP, consumer confidence and spending, manufacturing and service activity, productivity, capacity utilization - but the employment situation is stubbornly stuck.  This is to be expected to an extent, employment is always one of the last things to recover after a recession, but there is no great source of growth out there to predict a strong jobs recovery and this is what we are seeing.  So settle in for a tough 2010.

A Beeronomics Poll: Hops in THE HOPOPOTAMUS®

Okay, spring leaves beer on the mind.  I am preparing for the worldwide premier of THE HOPOPOTAMUS® and yet I have not finalized the recipe, especially the hops.  I am pretty sure that Crystal, Cascade and Amarillo will make the cut, but I figure why not let my dear readers chime in?  Besides I am an economist and should not be trusted to brew a beer as anticipated as THE HOPOPOTAMUS®.  So I have created a poll to tap into the wisdom of crowds.


So, lend me your expertise and take the poll!  I probably won't make it to Steinbart's until the weekend after next, so you have a little time to ponder. 

Beeronomics: Doing it Yourself and Growing Your Own

Over a year ago I mused about whether brewing your own beer was a cost saving strategy and concluded that at the scale of a part-time homebrewer the answer was no.  A big part of the cost of ingredients (inputs in econospeak) was the cost of hops (which were particularly high at the time).  But hops are practically a weed man, thought I, what if I grow my own?   So I did, or am about to, to be precise.  For $4.50 I bought a rhizome, a scrounged about for some unused pieces of wood to build a makeshift support for the vine and voila - hops!!  I hope.  

What to grow caused me to ponder - but not for too long.  I really wanted to grow two varieties (and in fact bought two rhizomes) but the wife convinced me that given our wee garden and my inexperience with gigantic hop vines, I had better just start with one.   I chose Cascade - I mean was there really a choice: high yielding, wonderfully versatile with a lovely citrusy-floral bouquet?  No.  Willamette was the other rhizome I bought (anyone want it?), I thought it would be a good complement but alas, next summer.

Finding space was a challenge and of course a good economist thinks about opportunity cost, so... out went the sage!  Opportunity cost of just about zero, right?  Apparently my wife was not so sure, but what's done is done and I am sure she will stop being mad at me once she tastes the beer that will result - and between now and then is only 6 or 7 months...

Nevertheless, your intrepid beeronomist jury-rigged a hop support and prayed that he would still have a fence come winter. Besides, I kept them out of the veggie beds which my wife controls (and hasn't gotten around to weeding yet) so I am on pretty firm ground here.  If only she were a beer lover...

So at about $2 an ounce, Cascade hops at Steinbarts are not cheap.  I think I can get at least a pound (though I have been told not to expect too much the first season).   But for a beer with a 8oz hop bill we are talking $16 saved...wow!  Okay, best we not think in terms of pure monetary reward.  The real reward comes in being a yeoman farmer (that is a way inside economics joke, by the way, for you macro-types - here's to you Bruce!) close to the earth and self-sufficient.

Unfortunately (or happily) it is now time to brew again and to gear up for the spring unveiling of my ultra special Hopopotamus® will require no less than three varieties of hop (and maybe even four) - so off to Steinbarts I shall go.  But I shall dream of Emerson's Special Wet Hop Ale come the early fall.

Dow 11,000

Oregon Business Taxes - A Comparison

The talk of the effects of the tax measure on business location goes on and speculation about businesses fleeing continues to crop up - something I blogged about not too long ago.  So it is interesting to see a new Ernst & Young report, commissioned by the Council on State Taxation.  In it, they do an interesting thing, try and see how much businesses play in a state relative to what they receive in state services.  Here is their description:

An Alternative Measure of Business Taxation

This study provides estimates of the taxes paid by businesses in each state, an important first step in any evaluation of short-run business tax changes or longer-run tax reform. To enable comparisons across states, the study also expresses business taxes as an effective tax rate on private sector economic activity (taxes as a share of gross state product).

...

The basic rationale for business taxes, recognizing that the economic burden of business taxes are ultimately borne by consumers or owners of factors of production (including workers), is to pay for government services that directly benefit businesses. This section provides a comparison of business taxes to these benefits in each state.

If state and local business taxes were equal to the value of the benefits business received from state and local public services, they could be considered a payment for services and taxes would not influence business location decisions or impact competitiveness. However, if state and local business taxes exceed the value of the benefits received from government services, the difference represents an excess cost to business that will reduce profitability in the absence of shifting the tax through higher prices or lower payments to labor. When such excess costs exist, they can affect a company’s choice of locations.

To estimate these excess costs, the estimates begin with state-by- state estimates of state and local spending that directly benefits business, which were developed by economists at the Federal Reserve Bank of Chicago with an adjustment to the education spending component to reflect the uncertainty about who benefi ts from education expenditures, business or households. Due to the large expenditures for education in every state, the ratio of business taxes to government expenditures for services benefiting business is sensitive to assumptions about who benefits from public spending for education. The estimates presented in this study present a range of estimates, assuming that 0%, 25% or 50% of education expenditures directly benefit business.

In nearly every state, the business tax burden exceeds the value of government services that
directly benefit business, regardless of the assumption made about education spending.

Except, of course, for Oregon which offers businesses one of the best values for money of any state in the Union. Only Maryland and Nevada offer a better ratio. Here is the figure (this is tax-benefit ratio, so lower numbers mean more benefits per tax dollar):

The darker bar assumes that businesses receive about 50% of the benefits of education expenditure.  This seems reasonable to me-educated people make up the workforce.  In this metric businesses recieve more in the value of the services provided to them by the state than they pay in taxes.

And what of business taxes overall?  Well Ernst & Young measured total business tax as a percentage of Gross State Product (GSP) - the value of all the goods and services produced in the state - and found that Oregon is in a three way tie for the lowest in the country.  So according to E&Y we have the lowest business tax burden in the country (Delaware and N Carolina are the other two):

Now, these figures are for fiscal year 2009, so Oregon's relative position will slip but, at least according to E&Y, we have one of the most business friendly tax structures in the US.

Beeronomics: Upright Brewing Turns One

What a nice day on which to turn one year old - and an even nicer day to walk, bike, bus, drive over to the LeftBank Project and help the Upright gang celebrate their first anniversary.  They have some special treats for you if you do: the release of Four Play as well as some apricot farmhouse ale.   I had a chance to sample these (as well as a bit of the Congo Pale Ale) in the media preview night they put on and I was very impressed - more below.  Treats from the Sugar Cube will be served as well, whose proprietor, Kir Jensen modeled for the label (shown here).

What can you expect?  I'll leave the real reviews to the experts, but I found the apricot farmhouse ale to have a strong apricot flavor yet none of the cloying sweetness that often dooms fruit infused beers.  In fact the apricot ale was wonderfully dry, perhaps thanks to the amazing yeast they use that eats up just about all of the residual sugars.  It does not quite reach the level of Cascade Brewing's trancendent Apricot Ale, but it is not going for transcendency rather it is a noble farmhouse ale and would be a wonderful summer session beer.  I highly recommend it.

The Four Play is the star however: a truly delightful infusion of cherries into the already wonderful Four produces a dry yet complex belgian ale with a subtle cherry flavor that is ever-present but not too assertive.  Again the house yeast is, I imagine, largely responsible for counteracting the sweetness in the fruit.  This is a special beer worth a special trip.  It was dark in the brewery when I tried it but it appeared to have a rose tinted glow to it and I look forward to a glass bathed in sun.

The festivities start at 4:30 and continue on until 9.   The LeftBank Project is at 240 N Broadway at the east end of the Broadway Bridge.

Cheers.

Eco-nomics: Krugman on Building a Green Economy

Hei Yubai/European Pressphoto Agency

A two-fer! - unintentionally. Here is Paul Krugman's new piece in The New York Times Magazine in which he both explains the basic economics of market efficiency, externalities, Pigovian taxes and carbon emissions, and then discusses the economics of trying to do something about global climate change as a result of carbon emissions.  Not surprisingly, he is in favor of carbon taxes.  And lest you think that this is a polar liberal opinion piece, economists from the other end of the political spectrum are also in favor of carbon taxes - Greg Mankiw for example.

It is long (and good) read, here are a couple of excerpts that capture the gist of the second part:

What you hear from conservative opponents of a climate-change policy, however, is that any attempt to limit emissions would be economically devastating. The Heritage Foundation, for one, responded to Budget Office estimates on Waxman-Markey with a broadside titled, “C.B.O. Grossly Underestimates Costs of Cap and Trade.” The real effects, the foundation said, would be ruinous for families and job creation.

This reaction — this extreme pessimism about the economy’s ability to live with cap and trade — is very much at odds with typical conservative rhetoric. After all, modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives — Ronald Reagan liked to talk about the “magic of the marketplace.” They believe that the capitalist system can deal with all kinds of limitations, that technology, say, can easily overcome any constraints on growth posed by limited reserves of oil or other natural resources. And yet now they submit that this same private sector is utterly incapable of coping with a limit on overall emissions, even though such a cap would, from the private sector’s point of view, operate very much like a limited supply of a resource, like land. Why don’t they believe that the dynamism of capitalism will spur it to find ways to make do in a world of reduced carbon emissions? Why do they think the marketplace loses its magic as soon as market incentives are invoked in favor of conservation?

Here he addresses something I have talked about repeatedly to explain why new technology innovation, induced by Pigovian taxes, would be vital if we want to address the big problem emerging economies like China, India and Brazil pose in their profligate use of carbon.

For those who think that taking action is essential, the right question is how to persuade China and other emerging nations to participate in emissions limits. Carrots, or positive inducements, are one answer. Imagine setting up cap-and-trade systems in China and the United States — but allow international trading in permits, so Chinese and American companies can trade emission rights. By setting overall caps at levels designed to ensure that China sells us a substantial number of permits, we would in effect be paying China to cut its emissions. Since the evidence suggests that the cost of cutting emissions would be lower in China than in the United States, this could be a good deal for everyone.

But what if the Chinese (or the Indians or the Brazilians, etc.) do not want to participate in such a system? Then you need sticks as well as carrots. In particular, you need carbon tariffs.

A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods. Suppose that China refuses to reduce emissions, while the United States adopts policies that set a price of $100 per ton of carbon emissions. If the United States were to impose such a carbon tariff, any shipment to America of Chinese goods whose production involved emitting a ton of carbon would result in a $100 tax over and above any other duties. Such tariffs, if levied by major players — probably the United States and the European Union — would give noncooperating countries a strong incentive to reconsider their positions.

He then goes on to address the issue of uncertainty, echoing the Frank piece from yesterday, but addresses the gradualist versus 'big bang' approaches.

Eco-nomics: Carbon Mitigation Costs and Benefits

A while back Robert Frank of Cornell wrote about mitigation in the face of uncertainty of carbon emissions in his occasional column in The New York Times.  Here are some excerpts:

A Small Price for a Large Benefit

Forecasts involving climate change are highly uncertain, denialists assert — a point that climate researchers themselves readily concede. The denialists view the uncertainty as strengthening their case for inaction, yet a careful weighing of the relevant costs and benefits supports taking exactly the opposite course.

Organizers of the recent climate conference in Copenhagen sought, unsuccessfully, to forge agreements to limit global warming to 3.6 degrees Fahrenheit by the end of the century. But even an increase that small would cause deadly harm. And far greater damage is likely if we do nothing.

The numbers — and there are many to choose from — paint a grim picture. According to recent estimates from the Integrated Global Systems Model at the Massachusetts Institute of Technology, the median forecast is for a climb of 9 degrees Fahrenheit by century’s end, in the absence of effective countermeasures.

That forecast, however, may underestimate the increase. According to the same M.I.T. model, there is a 10 percent chance that the average global temperature will rise more than 12.4 degrees by 2100, and a 3 percent chance it will climb more than 14.4 degrees. Warming on that scale would be truly catastrophic.

Scientists say that even the 3.6-degree increase would spell widespread loss of life, so it’s hardly alarmist to view the risk of inaction as frightening.

In contrast, the risk of taking action should frighten no one. Essentially, the risk is that if current estimates turn out to be wildly pessimistic, the money spent to curb greenhouse gases wouldn’t have been needed to save the planet. And yet that money would still have prevented substantial damage. (The M.I.T. model estimates a zero probability of the temperature rising by less than 3.6 degrees by 2100.)

Moreover, taking action won’t cost much. According to estimates by the Intergovernmental Panel on Climate Change, a tax of $80 a metric ton on carbon dioxide — or a cap-and-trade system with similar charges — would stabilize temperatures by midcentury.

This figure was determined, however, before the arrival of more pessimistic estimates on the pace of global warming. So let’s assume a tax of $300 a ton, just to be safe.

Under such a tax, the prices of goods would rise in proportion to their carbon footprints — in the case of gasoline, for example, by roughly $2.60 a gallon.

A sudden price increase of that magnitude could indeed be painful. But if phased in, it would cause much less harm. Facing steadily increasing fuel prices, for example, manufacturers would scramble to develop more efficient vehicles.

Even from the existing menu of vehicles, a family could trade in its Ford Explorer, getting 15 miles per gallon, for a 32-m.p.g. Ford Focus wagon, thereby escaping the effect of higher gasoline prices. Europeans, many of whom already pay $4 a gallon more than Americans do for gasoline, have adapted to their higher prices with little difficulty.

In short, the cost of preventing catastrophic climate change is astonishingly small, and it involves just a few simple changes in behavior.

The real problem with the estimates is that the outcome may be worse than expected. And that’s the strongest possible argument for taking action. In a rational world, that should be an easy choice, but in this case we appear to be headed in the wrong direction.

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WE don’t know how much hotter the planet will become by 2100. But the fact that we face “only” a 10 percent chance of a catastrophic 12-degree climb surely does not argue for inaction. It calls for immediate, decisive steps.