Follow Up on World Bank President Speach

Too often research economists seem not to start with the key knowledge gaps facing development practitioners, but rather search for questions they can answer with the industry's currently favorite tools.
                 -World Bank President Robert Zoellick at Georgetown University on Sept. 29.

I think this is exactly right and it is due to the incentives in academic research. Technique, cute identification strategies and novel experiments are emphasized and important questions are not.

I would think this because I had lots of trouble publishing a paper that sought to give some insight on a very important question in development: how does working as a child affect participants. I, along with a Brazilian colleague, looked at adult incomes of Brazilians based on when in life they started working to try and find out how young was too young to work based on this metric. We used sophisticated statistical techniques to try and identify a causal link and though such approaces are never perfect, we had a very defensible strategy and plausible and interesting results.  

I am happy to say it is being published by a very good journal, but it took a long time and it was rejected by some top journals while many little 'cute' papers that don't really help policy makers at all were.  What got me though was there was never a discussion of how important the research question was, or how useful our research was for advancing the knowledge of development, it was all focused on technique.

The Simpsons and the Nobel Prize in Economics

Development Economics and the World Bank President

I am very bust this week what with the start of the Fall term and all, so my blogging has been sparse and that theme will continue the rest of the week I am afraid.  Today I am going to pass on something that Dani Rodrik wrote over at his blog:

World Bank president Bob Zoellick gave an interesting speech today at Georgetown. I wasn't there, but have seen his prepared remarks, which I find both forthright and courageous.

From my perspective, the speech hits all the right notes: the need for economists to demonstrate humility, eschew blueprints, search for differentiated solutions suited to context, learn from the actual policies of successful emerging economies, focus on evaluation but not at the expense of the big questions.

Zoellick, admittedly not an economist himself, goes further and takes on the economics profession. He has many valid points. He wades in on some of the key debates in the profession and doesn’t mince his words. Particularly telling are his surprisingly frank criticism of the current fad with randomized evaluations, which he decries as being too narrow and too unconcerned with scalability, and his open-mindedness towards policies that promote industry through various forms of incentives.

The main theme of his speech is “democratizing development economics.” I like this as a slogan, but fear that it may end up another gimmick. Zoellick offers no new ideas on the governance and internal organization of the Bank. And without changes in these, the bulk of the Bank’s research will continue to be done in Washington, DC by economists from advanced nations.

The criticism of the randomized trial fad is welcome, in my view, not because they are not worthwhile, but the proponents of randomized trials are far too ardent in their dismissal of all other approaches and far to optimistic about the value of randomized trials to solve the world's problems. The external validity (or scalability) problem is very serious one - easily as serious as the problems with isolating causal links in real world data.

OSU Economics: We Rock!

The National Research Council (the research arm of the National Academies of Science) has released its assessment of research-doctorate programs in the United States.  OSU, being one of the smallest in the country is not among the top programs by a long shot.  Its ranking range is 70-104.  But when you control for size, funding and the like and just look at the metric that matters, research productivity, OSU's economics department ranks in the 21-31 range.  In other words, in terms of the quantity and quality of our research we rank similarly to some heavy hitters like Cornell, Minnesota and Michigan.

Unfortunately, in the judgement of the OSU administration we weren't worth supporting and our graduate programs have been shut down.  This, in spite of the fact that our graduate programs were essentially self-funding and thus revenue neutral to the university.  [How? Simple: Graduate Teaching Assistants are a good deal for the university - they do a lot of teaching for a bargain price.  And this is not exploitative, by the way, because they get more than just a wage but also a very valuable degree in the end.] In fact, spite is just about the right word to use.  Sadly, one of the professors who contributed a lot to departmental research left when the grad programs were shut down, but most of us are still here.  

The good news is that OSU undergrads (and e-campus students!) have access to a world class collection of research economists.  Come and check us out.

Oh and by the way, where does U of O economics rank in this metric?  In the 39-66 range.  ;-)

Portland Home Values Continue to Suffer From Unemployment Drag

The latest Case-Shiller numbers (for July) are out and Portland's home values lost a little ground from June and overall are down more than a percentage point from this time last year.  Not dramatic (and about what I had expected - I had anticipated a 2010 where we ended up essentially the same place we started) and also not surprising given our continuing difficulties with unemployment.

Anyway, once again I punt the ball to the Wall Street Journal (who actually get paid for reporting this stuff):

Home Prices, by Metro Area

Metro Area	July 2010	Change from June	Year-over-year change
Atlanta	109.92	0.2%	-0.2%
Boston	158.83	0.6%	2.8%
Charlotte	117.03	-0.2%	-3.5%
Chicago	126.17	1.0%	-1.7%
Cleveland	107.31	0.0%	-0.6%
Dallas	120.75	-0.3%	-0.4%
Denver	128.72	-0.4%	-0.1%
Detroit	71.17	1.6%	1.3%
Las Vegas	100.91	-0.8%	-4.9%
Los Angeles	176.27	0.3%	7.5%
Miami	147.88	0.7%	0.4%
Minneapolis	127.01	0.8%	6.4%
New York	174.9	1.3%	0.6%
Phoenix	110.3	-0.6%	3.4%
Portland	148.33	-0.3%	-1.2%
San Diego	165.02	0.7%	9.3%
San Francisco	143.23	0.5%	11.2%
Seattle	147.04	0.1%	-1.6%
Tampa	138.24	-0.2%	-3.2%
Washington	187.98	1.1%	6.5%

Source: Standard & Poor’s and FiservData

The New Face of Poverty in Oregon

It won't surprise anyone that the demand for state services associated with poverty has increased dramatically in the current economic downturn.  But the dramatic increase in households needing assistance is unprecedented, for example there was a 58 percent increase in participating households from 2005 to 2009.

This comes from a new study of SNAP, the state food stamp program, reveals how dramatically the population needing assistance has changed.  Suzanne Porter a student in the OSU Master of Public Policy program, and Mark Edwards, a sociology professor at OSU, in a new report show that many of the new recipients of SNAP have no recent history of SNAP receipt, that many of the new SNAP recipients come from manufacturing and construction and are therefore disproportionately male, and that many households have a full-time worker.

Here is the report:

Newly Poor in the Great Recession

Musing on Health Care

One of the provisions in the new health care bill that kicks in today is an end to the lifetime cap on benefits.  As a state employee I have a plan that has such a limit but I also have an annual open enrollment period in which I am allowed to switch to another plan offered by the state benefits board.

So I have always wondered - if I get close to my lifetime benefit on one plan, can I then switch to another and start over again at zero?

This question will soon be moot, but does anyone know the answer?

In a related development Regence has decided to stop offering children's stand-alone health plans.  From the linked Oregonian article:

Insurers that have discontinued child-only coverage say the new health reform law has set the stage for large and unpredictable medical costs. Now that coverage is guaranteed regardless of health, insurers say too many families may wait until their children are sick to buy health insurance. Insurers need enough healthy enrollees to pay premiums to cover the costs of enrollees who are sick.

Which was always the point about mandating coverage - if you prohibit insurance companies from screening based on pre-existing conditions then people can just wait until they are sick to enroll which raises costs, and thus premiums for everyone.  Democrats are using the threat of excluding companies that don't cooperate from participating in exchanges, so far this threat is not working.  One suspects that insurance companies are trying to use actions such as this for more negotiating leverage, but is going to be an interesting ride for a while.

Beeronomics: Information Economics and Organic Beer

In economics information plays a pivotal role in the efficiency of markets.  One of the assumptions that underlies the result that free markets are Pareto efficient (i.e. maximize total welfare surplus) is that there is full and complete information.  What this means in a product market (among other things) is that consumers know everything there is about a product and can therefore value it appropriately before you buy.  I have blogged about this in terms of beer - highlighting the fact that with a new beer you don't really know until you try how much you value a particular brew.   But this general principle applies in many areas, you might value locally sourced ingredients and be willing to pay more for them at a farmers market for instance, or you might prefer to buy milk from cows that are not given growth hormones.  But you don't know unless you are told whether produce is local or milk is BGH free.  [And by the way this has nothing to do with whether milk from BGH free cows is better or healthier, only if consumers value it differently - but presumably consumers value it differently because they believe there is a difference or some positive probability that there is a difference]

So suppose you value products that are Organic and therefore decide to buy a Deschutes Green Lakes Organic Ale.  This is a beer that is considered organic per the USDAs guidelines.  Ah but wait, it turns out that it is only the malted barley that is grown organically, the hops, according to current USDA rules are allowed to be used in non-organic form in an organic beer (apparently one of only three whole crops thus allowed).   Jeff at Beervana has a nice follow-up blog post explaining the organic rules and the exception.  The justification for this exception for hops is that there are currently too few organic hops being grown (apparently they are very difficult to grow 100% organically).  The irony is that a main reason there are so few hops grown organically probably has a lot to do with the exception itself.  If you can call a beer organic that uses non-organic hops, there is little reason to try and get organic hops and little reason to try and grow them.

Business wise, this is frustrating to organic hop growers - a USDA ruling ending the hops exception would be huge, it would instantaneously create a massive demand.  Economically speaking, the exception creates a market failure for the reasons I mention above.  I am a pretty enthusiastic craft beer enthusiast and until I read Jeff's post I had no idea of the hops exception so I am willing to bet that most consumers don't know either.  This means they cannot accurately value the beer they buy and a sub-optional market outcome results.

Brewer Matt Swihart of Double Mountain commented on Jeff's post and added that:

In terms of ethicality, I've always felt it disingenuous to label a beer 100% organic when made with conventional hops. It is misleading the consumer as hops are grown under substantial pest pressure while barley is a reasonable "soft" crop to grow in that conventional farming of barley requires very little pesticide and nitrogen use. Organic barley and conventional barley have very similar environmental footprints...

So it is possible that it is really hops that matter when consumers are looking for and choosing to buy 'organic beer.' [As an aside, consumers might like organic because they like the idea of limiting chemical applications in the environment, in which case Matt's analysis is correct, or they might like it because they think it is a healthier alternative, in which case I am not so sure as hop vines might be treated before they flower and thus the flower itself might not have any chemical residue whereas barley might retain the residue.  Anyone know?]

Now there is a way forward without the USDA.  If brewers started using organic hops and labeling their beer as 'made with all-organic barley and hops' this might start to alert consumers to the difference and might spur demand for organic hops. As an economist there are few things as universal as the fact that more information is better for the efficiency of markets, so I support any effort to provide more accurate information about all goods.

As a parting note, Matt also points out that:    

"...brewing is carbon positive. Growing the hops and barley for beer produce more carbon than consumed in the production of the crops and the beverage. What a beautiful thing. Save the planet! drink a beer!"

I don't know if Matt is including transportation and refrigeration in this, but who cares? It id another good reason to have a beer.  And by the way, if you haven't had Double Mountain beer - what the heck is wrong with you?  Matt's beers are sublimely crafted and his commitment to the highest quality ingredients is evident in the beer.  Go find some.

Seven More Years of Weak Economy?

Busy today so let me point you to Robert Shiller's discussion of the rather depressing conclusions of some economists who have studied past crises:

But now the Reinharts and Rogoff have systematically studied many more examples in modern financial history. There is also the world financial crisis that attended the oil shocks of 1973 and 1979, and there are the country-specific financial crises in Spain in 1977, Chile in 1981, Norway in 1987, Finland and Sweden in 1991, Mexico in 1994, Indonesia, Korea, Malaysia, the Philippines, and Thailand in 1997, Colombia in 1998, and Argentina and Turkey in 2001.

So, there are many more than just two modern cases (though they are not all entirely independent, because they are somewhat bunched in time). From them, the Reinharts and Rogoff found, for example, that median annual growth rates of real per capita GDP for advanced countries were one percentage point lower in the decade following a crisis, while median unemployment rates were five percentage points higher.

How did this happen? They note that, in general, debt levels and leverage rose during the decade preceding these crises, propelling increases in asset prices for a long time. Reinhart and Rogoff describe a “this time is different syndrome” during the pre-crisis boom, whereby these bubbles are allowed to continue for far too long, because people think that past episodes are irrelevant.

There seems to be the germ of a new economic theory in the work of the Reinharts and Rogoff, but it remains ill defined. It seems to have a behavioral-economics component, since the “this time is different syndrome” seems psychological rather than rational. But it is still not so sharp a theory that we can really rely on it for making confident forecasts.

Moreover, there are reasons to suggest that this time really might be different. I hate to say so, not wanting to commit the sin defined by their “syndrome,” but this time might be different because all of the modern examples of past crises came during a time when many economists worldwide were extolling the virtues of the “rational expectations” model of the economy. This model suggested that a market economy shou

ld be left alone as much as possible, so that is what governments tended to do.

The Recession in Perspective

From the Wall Street Journal:

The Recession Ended Over a Year Ago

This is no surprise: the NBER has just declared that the recession ended in June 2009.  What is also not going to be a surprise are the inevitable and endless comments from the lay population about how if the recession is over how come I don't feel better?  It is a good question and highlights the problem with economic terms and the ability of the profession to communicate effectively.  Many people realize that a recession is just that, when the economy is in recess or not growing.  In fact the key characteristic of a recession is prolonged negative growth.  Yes they take more into account than that, but it is the basic metric.

This appears in contrast to how people tend to think of recession not being over until we have returned to where we where prior to the onset of the downturn.  A medical analogy is apt: killing of harmful bacteria that have made you ill, versus recovering to your pre-illness strength.  Economists using the term recession are speaking only of the first part.

Which, of course, suggests that economists might want to think about coming up with a pair of terms that describe the contraction and the recovery.  In fact they could use those two terms and officially date the contraction (instead of recession) and come up with a definition of recovery based on unemployment numbers, GDP per capita, etc.  The problem is in defining these.  Often recessions follow periods of overheating in the economy, so waiting for unemployment levels that immediately preceded this downturn could take decades.  But getting back to 6%, rather than 4% is probably enough to declare the recovery.  The problem is economists like precision and it would be very difficult to come up with a set of benchmarks to define the recovery (perhaps within 25% of the levels of peak unemployment and GDP per capita in the year prior to the official start of the contraction).

At any rate the NBERs declaration of the end of the recession in June 2009 is unlikely to make anyone feel any better and will inevitable lead to the derision of economists.  But we are used to it.

 

Another Reason Economists are Not Like Normal People

The New York Times' Economix reports on the Rew Research Center's poll on the acceptability of walking away from a mortgage.  Amazingly, 59% of respondents say it is unacceptable behavior.

I am willing to bet that if you asked economists this question, a vast majority would say it is perfectly acceptable.  Why?  Well, a mortgage is simply a contract entered into by two willing parties, the terms of which are simple: the bank loans the money to the borrower and the house itself secures the loan.  This of course means that if the borrower fails to pay the loan the bank has the right to seize the house.  So there is not really any reason to consider borrowers who choose to opt out, based on the mutually agreed upon terms, engaging in unacceptable behavior.

The only argument I can see that economists might make is the externality walking away imposes on future borrowers: by contributing in some small way to the probability of default, you raise mortgage rates.  But with mortgage rates at historic lows, it is hard to worry about that too much.

How would you have answered this poll?

Soccernomics: The United States Refusal to Embrace the World's Game is Responsible for Our Trade Deficit

The United States is the greatest sporting nation in the history of the world.  We dominate the Olympics, we produce top talent in just about every sport imaginable (okay, not cricket).  But, even more than Obama, it is our sports provincialism is destroying America!  When have we ever exported american football players, or baseball (save for a few to Japan)?  Basketball is pretty good - it is pretty popular around the world - but ice hockey? I don't think so.  And Washington sits on its hands as out trade deficit gets ever worse-er!

No, like Nero, we fiddle as our trade deficit burns a hole in our economy.  And at last we have to suffer in the ignominy of the knowledge that it is Argentina, not the USA (nor Brazil for that matter) that is the worlds number one exporter of footballers:

Argentina sold more than 1,700 players last year, almost 300 more than Brazil.

Argentina's trade has grown by almost 800% in five years after European clubs eased restrictions on foreign players.

Last year the football player export business was worth $117m (£74.5m) to Argentina.

A total of 1,716 Argentine players were sold, compared with 1,443 sold by the next biggest provider, Brazil.

Trade growing 800%! $117 million! C'mon Washington, we need a soccer trade policy and we need it now!

Beeronomics: Growing Your Own - the FInal Hop Update

Well fresh hop season is upon us, time for the wonderfully fecund crop of volatile beers - good and bad - made from fresh (as opposed to dried) hops. I have only had Oakshire's so far, so I gotta get moving. But my dream of making my own from my home-grown hops has been shattered by my failings as a horticulturalist. My problem stems from my assumption that any growing vine must be
as hearty as a weed and thus not in need of any special attention. Ur...no.

My real problem was poor soil and so after growing quickly to about a foot, it just stopped. I was patient, but eventually realized it was a failure to thrive and needing of nutrients. Massive doses of compost restarted it and obsessive watering and tending got it moving but too late. It has now stalled out at about 8 feet and no flowers.

The picture above is my best attempt at pretending it is a towering plant. I was told not to expect much of a harvest the first year, but I had hoped for some flowers. Alas.

Speaking of growing your own, I finally had a Chatoe Rogue Single Malt Ale made entirely of Rogue's own home-grown barley and hops.  As it only uses one type of malt and one type of hops I didn't expect much - brewers love to blend lots of ingredients generally.  But I was surprised to find that it was a delightful beer: simple, straightforward and very quaffable.  I highly recommend it both as a pean to the local food movement, but also as a great beer in its own right.  And Rogue apparently knows a lot more about growing hops than do I.

As far as fresh hop ales go, I am looking forward to trying Rogues, as well as the standard setting Full Sail Lupulin and Double Mountains Killer Green.

If you want to know where to find fresh hop beers in Portland, use Bill's Fresh Hop Map and contribute when you find an undiscovered one.  

Taxes and Revenue, the Chris Dudley Proposal

Chris Dudley, Republican candidate for Governor, presented his 20-point plan for promoting employment and the Oregon economy. [Funny how these things always miraculously come out to nice round numbers - why not a 19 or 23 point plan?]  Anyway, the key points appear to be decreasing taxes and in particular capital gains taxes, (many of the other points are bromides rather then specific proposals).  This makes sense politically, after the passage of Measures 66 & 67 taxes are an obvious focal point for Republicans.  But do they make sense economically?  Perhaps.

When I first heard the news reports on the plan the sound bite they chose to play was of Dudley trying to make the point that the tax cuts would likely pay for themselves in terms of extra revenue.  To me this sounded like the tired Laffer curve argument that has been discredited for marginal income tax rates as low as we have in the US.

As an aside, if you are wondering about income tax rates and the disincentive to work, most economic studies put the tax rate at the peak of the revenue curve (i.e. after which revenues actually decline when you increase the rate) at over 70%.  Here is perhaps the foremost expert on the matter, Emmanuel Saez of UC Berkeley, quoted in the Washington Post:

The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed

And here is a passage from Greg Mankiw's textbook:

Laffer's argument may be more compelling when considering countries with much higher tax rates than the United States. In Sweden in the early 1980s, for instance, the typical worker faced a marginal tax rate of about 80 percent. Such a high tax rate provides a substantial disincentive to work.

But you should note that Saez's analysis is a static one, not considering the long-term growth effects of tax cuts.  Perhaps by promoting growth in the long-run, over time cutting taxes will promote growth.

Capital gains taxes are more nuanced than the tax rate on labor income since capital gains taxes are on often associated with the very investments that we think are good for economic growth, especially in productive capacity.   We want to encourage investments in new businesses and in revenue enhancing productive capacity, and one way to do so is to increase the reward on such investments - by lowering the tax rates.  There are also many other types of investments that fall into this category that are not so obviously growth enhancing like buying and selling stock.  If the share price goes up, the investor makes a capital gain, but this gain does not necessarily represent an investment in productive capacity.

So what is the answer, will this pay for itself?  The first part is pretty clear: in the short-run we should expect tax revenues to decrease.  The second part, the question of whether the cuts will this enhance growth in the state enough over time so as to raise tax revenues to a level higher than they would have been without them, is not clear.  And no good answer exists to this question.

Here is the conclusion form a CBO report on capital gains taxes and growth:

Revenue estimators are often faulted for the way they project tax receipts and prepare legislative cost estimates related to capital gains taxes. But the relationship of realizations and receipts to gains tax rates is neither predictable nor obvious. And while reductions in the overall taxation of capital income can measurably increase economic growth, a cut in capital gains taxes alone is likely to produce much smaller macroeconomic effects. Inaccuracies in projecting revenue and disagreements about the effects of tax changes stem not from a failure to incorporate the behavioral responses of asset holders but from the complexities inherent in the nature of gains and gains realizations.

So in the end, we don't really know, especially in the case of a state as opposed to a country. I think one could target specific investments in new business, new capital, etc. and exclude things like earnings from stock sales and have a smaller short-term revenue impact while getting the growth boost you are hoping for.

And this is getting too long, but my first impression is that the tax credit for businesses who hire unemployed workers is a very good proposal as a temporary measure.

Opinions?

NB: I was trying to decide what kind of picture to use of Dudley and it made me wonder if the Dudley campaign likes the use of Dudley-as-Blazer pics as they create the positive association with the Blazers (in most Oregonians minds, I would think this is positive), or do they want to get away from the basketball player identity and try and make him seem wonkish by showing him in button up shirts and a serious expression. To me, the picture I showed rocks, baby: get that rebound big man!

Beeronomics: Beer Stimulus

"While Japan and the U.S. think up new ways to combat risks of deflation, Germany is banking on its own 200-year-old solution: Beer. Lots of beer."

So begins Brian Blackstone's Wall Street Journal article on the economic impact of Octoberfest in Germany.

Saturday marks the start of the 17-day celebration of Munich’s Bicentennial Oktoberfest (though it has been canceled 24 times in the last two centuries for disease and wars). It’s a boon for the city: by UniCredit economist Alexander Koch’s count it adds about one billion euros to Munich’s economy, or roughly 2% of its GDP via money spent on beer, food, shopping, hotels and transportation.

Last year, over 6.6 million liters of beer were sold (and presumably consumed) at Munich’s Oktoberfest. That was in the early days of Germany’s recovery from a severe recession, and consumption was up smartly from 2008, though still considerably below 2007’s record of nearly seven million liters.

The research on which this article is based is from UniCredit and is a good read.

And they are pretty excited about the pro-inflationary effects of beer as well:

But wait, inflation is bad right?  Well, actually a little inflation (2 to 3 percent) is a sign of a healthy economy and Germany's current one percent rate is a little too low.

Ah the wonders of beer, and it tastes good too!

Economist's Notebook: Self-Selection and Oregon's SAT Scores

Oregon kids' performance on the SAT exam is better than the national average crows the State Board of Education.

SALEM, Ore. (AP) -- Oregon high school students taking the SAT college entrance exam did better in reading and writing this year and held steady in mathematics.

The state Department of Education said Monday the average scores of 521 in reading and 496 in writing were two points higher than last year. The average in mathematics was 523.

The department said all three scores outpace national averages.

More than 14,000 public school students took the SAT test this year.
The ACT test taken by 11,000 students this year reported scores up slightly from last year.

If the SAT were a standard test administered to all high school students in the US then we could talk about comparing across states.  But the SAT is a voluntary test taken by those kids that would like to continue on to college, so you can't compare across states unless you can control for selection.

Take a simple example - two states with identical distributions of student talent (both inherent and taught).  Suppose however that in one state (for whatever reason) almost all students sit for the exam regardless of preparation or intent to go on to college, while in  the other state only the kids who definitely plan to go on to college sit for the exam.  Now if all students in both states were forced to take the exam we would expect the distribution of scores, including the mean and median, to be the same based on the assumption of equal talent across the two states.  But would the mean and median be the same based on the self-selection story I described above?  No.  In fact we would expect the mean and median to be much higher in the state where only college-bound kids take the test.  And in practice, there is a high correlation between participation rates and average SAT scores across states.

So how does Oregon stack up?  Not bad actually.  In 2008 it was 20th in participation rates, so its better than average performance is not just a self-selection story, but many other factors including demographics are important as well.

This is not to say that Oregon is not doing well, they could be doing fantastically well, it is just to say that you can't tell either way from the data.

By the way, the process of comparing SAT scores across states is actively discouraged by the College board so it is disappointing that the Dept. of Ed. would even mention it. This is the disclaimer that is all over their web site:

A Word About Comparing States and Schools
The SAT is a strong indicator of trends in the college-bound population, but it should never be used alone for such comparisons because demographics and other nonschool factors can have a strong effect on scores.

Oregon August Unemployment: Stuck at 10.6%

Oregon's unemployment situation was little changed in August - the official unemployment rate remains at 10.6 percent for another month - leaving it essentially the same for almost a year.  But the depressing news was in the payroll report where the state lost another 1,500 jobs (700 of which were government jobs from the shedding of Census workers).

Given that the federal report showed 67,000 new private sector job, there was hope that we would see a positive number in Oregon, but alas, it was not to be.

This, along with slumping leading indicators, suggests it is still a long way out the woods for the state.  

The Economics and Politics of Stimulus

James Surowiecki of the New Yorker has a very nice piece on the stimulus in the latest issue.

Here are some excerpts:

When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ” and as simply a “second stimulus”—as if the word itself were a damning indictment. The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical. But in Washington stimulus has become the policy that dare not speak its name.

This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. What’s more, it did so without any of the negative effects that deficit spending can entail: interest rates remain at remarkably low levels, and government borrowing didn’t crowd out private investment.

Politically, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they’re opposed to a new stimulus plan.

I'd argue that this part is not surprising - it was clear to me that this would always be a political loser, without the counterfactual you could always claim it was wasteful spending no mater what the economy looked like at the 2010 elections. I think it was a brave and necessary decision to push forward with the stimulus bill despite its political risks and I agree it has been successful.

But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. The tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping the states avoid layoffs and spending cuts, but politically it didn’t get much notice, because it was the dog that didn’t bark—saving jobs just isn’t as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. But unless you were unemployed this wasn’t something you’d pay attention to.

This is all true, but it ignores all of the high-profile infrastructure projects, adorned with large billboards, that were a major part of the stimulus. So it wasn't all absent of political considerations. In fact, I would suggest that they were trying hard to find the balance between what was most effective economically and what was most effective economically.

He addresses this a bit below:

The stimulus was also backloaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and insured that money would keep flowing into 2010, lessening the risk of a double-dip recession. But it also made the stimulus less potent in 2009, when the economy was in dire straits, leaving voters with the impression that the plan wasn’t working. More subtly, while the plan may end up having a transformative impact on things like the clean-energy industry, broadband access, and the national power grid, it’s hard for voters to find concrete visual evidence of what the stimulus has done (those occasional road signs telling us our tax dollars are at work notwithstanding). That’s a sharp contrast with the New Deal legacy of new highways, massive dams, and rural electrification. Dramatic, high-profile deeds have a profound effect on people’s opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it’s not surprising that the voter’s view is: “We spent $800 billion and all I got was this lousy T-shirt.”

And this, I think, is the best evidence yet of the efficacy if the stimulus - the swooning economy coincides suspiciously with the dwindling stimulus spending. But Surowiecki seems to be trying to have it both ways here - the stimulus was backloaded EXACTLY BECAUSE they were pushing so many big infrastructure projects and it is hard to get them all done immediately. I think it is a little disingenuous to say that the stimulus is unpopular because they focused on what was economically sound and not what was politically popular. If they wanted an effective stimulus that was also immediate, block grants to the states were (and still are) both immediate and have real stimulus effects.

Anyway the underlying message here is that the stimulus was a good idea and probably saved us from a depression. As we have seen in many developing countries once downward momentum starts it can be extremely difficult to stop. The stimulus arrested the fall, now it is time for the private sector to lead the way up and out of the hole we are in.

Beeronomics and Economist's Notebook: Does Drinking in College Hurt Performance?

I figured I'd put this in the Beeronomics sphere as well as the Economist's Notebook as beer is one of the beverages of choice among collegge students: A new NBER paper [HT: Freakonomics] reports that drinking in college impairs performance.  From the abstract:

This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes.

Uh oh. This should come as no surprise to anyone who has ever been, or been exposed to, college students: students drinking alcohol is common and the effects of alcohol (as most college students will tell you) impedes their academic performance.

But look more closely at the abstract to understand just what it is the authors are doing in this paper, and the actual story becomes less less clear.  The authors took data from the US Air Force Academy where underage drinking is not tolerated and can lead to immediate expulsion and compared the performance of students just before their 21st birthdays and the performance of students just after their 21st birthdays.

So it is not the alcohol itself the authors are isolating, but the entire change in lifestyle and time management that happens when students turn 21. The authors claim that the USAFA data are a source of strength, but I actually see it as a major weakness.  With such a tightly controlled campus, 21st birthdays may traditionally be a moment of liberation, not just to drink alcohol but to become more social off campus and perhaps less serious on campus.  Now, I imagine that they have a control group for comparison of students who didn't drink prior to age 21 and who don't drink after turning 21, but this is not really a counterfactual because not drinking may also signal a rejection of the entire post-21 lifestyle of which I speak.  [I don't have access to NBER working papers through OSU]

This is just another problem of identifying causality that always happens with social data: is it the alcohol that impedes performance or the behaviors correlated with alcohol?  I suspect both.

Another point is that students are maximizing utility functions that include academic performance, social performance and just plain fun.  Many students recognize the tradeoffs inherent in drinking, and in socializing in general, with academic performance and make their own decisions about where their optimum point lies.  The question then is do they accurately estimate the effect of alcohol consumption on academic performance or do they not understand the deleterious effects?  If the former, than there is nothing to say unless there are significant social costs. If the latter, than we need to understand these effects and transmit the knowledge to students. Unfortunately, I don't think this paper does this.

Finally, the other important question is if there really are significant social costs.  Underage drinking has many by the way, which is why we prohibit it, but I am talking here only of the effect on academic performance.  Well, there are social returns to education so if alcohol impairs individual performance, it should also have a social impact as well, as a less well educated population is less productive.  But how significant are these costs is an important question and one we don't have the answer to.

So it is an important research agenda, but a tough causal link to uncover.  

Best Places to Live and Go To College

The American Institute for Economic Research has produced a list of the best destination cities for college. In Oregon, Portland is number 5 in 'mid-sized metros' and Corvallis is number 7 in 'college towns.'  Sadly, Eugene fails to make the list.  Lets see, I started in Portland for my BA, went to Madison, WI for my MA, Ithaca, NY for my PhD, and then worked in Denver and and Corvallis.  In this case correlation is definitely causality - places I have graced with my presence are now among the best destinations because of it.

Meanwhile in Seattle

Nice.  This is in the proximity of Qwest Field, but a bit far south on 4th Ave.  Not the most expensive billboard in Seattle, but it does the trick.  Too funny.

Back to School, Part 2: Advice for Freshmen

A couple of days ago I tweeted about Greg Mankiw's latest New York Times column in which he gives advice to incoming college freshmen about what to study and learn.  I agree with what he says in general (I am likely to as a fellow economist), but I think he misses perhaps the most important one of all.

Here is a heavily edited excerpt:

Here is my advice for students of all ages:

LEARN SOME ECONOMICS

The great economist Alfred Marshall called economics “the study of mankind in the ordinary business of life.” When students leave school, “the ordinary business of life” will be their most pressing concern. If the current moribund economy turns into a lost decade, as some economists fear it might, it will be crucial to be prepared for it.

There may be no better place than a course in introductory economics. It helps students understand the whirlwind of forces swirling around them. It develops rigorous analytic skills that are useful in a wide range of jobs. And it makes students better citizens, ready to evaluate the claims of competing politicians.

Not convinced? Even if you are a skeptic of my field, as many are, there is another, more cynical reason to study it. As the economist Joan Robinson once noted, one purpose of studying economics is to avoid being fooled by economists.

LEARN SOME STATISTICS

High school mathematics curriculums spend too much time on traditional topics like Euclidean geometry and trigonometry. For a typical person, these are useful intellectual exercises but have little applicability to daily life. Students would be better served by learning more about probability and statistics.

One thing the modern computer age has given everyone is data. Lots and lots of data. There is a large leap, however, between having data and learning from it. Students need to know the potential of number-crunching, as well as its limitations. All college students are well advised to take one or more courses in statistics, at least until high schools update what they teach.

LEARN SOME FINANCE

Few high school students graduate with the tools needed to make smart choices. Indeed, many enter college without knowing, for instance, what stocks and bonds are, what risks and returns these assets offer, and how best to manage those risks.

LEARN SOME PSYCHOLOGY

Economists like me often pretend that people are rational. That is, with mathematical precision, people are assumed to do the best they can to achieve their goals.

For many purposes, this approach is useful. But it is only one way to view human behavior. A bit of psychology is a useful antidote to an excess of classical economics. It reveals flaws in human rationality, including your own.

Let's start with the obvious: I believe strongly that some basic economics training is an invaluable tool to take with you in life. The understanding of how behavior is influenced by incentives and how behavior shapes markets and the world is extraordinarily useful. In fact, once you understand these basic forces, you start to see patterns everywhere and start to anticipate how tweaking incentives might lead to intended and unintended consequences. Robert Frank at Cornell calls this becoming an economic naturalist.

I also think the statistics advice is spot on - and let me emphasize the part where Mankiw says that students need know both how to do statistical analysis AND understand its limitations. In fact, I think basic statistical skills are some of the most marketable for exiting students.  But statistics are easily and often abused to make wrongheaded conclusions and policy, we need more folks out there who can understand what can and cannot be concluded from statistical analyses.

Finance and psychology are also good to understand at a basic level and all of this is why an economics major is so marketable. It is a basic set of knowledge and specific skills that are very valuable and versatile. Many students are drawn to business for this reason, but I would argue that an economics degree is a much better way to go for students that care as much about the "why" as they are in the "how."  And it is not just me saying so, studies have shown that an econ degree is one of the most valuable degrees in terms of incomes.

But the most important skill that college students need to have upon exiting college, by a very large margin in my opinion, is the ability to write effectively. I am not a fantastic writer, but I am a competent one, and though I am a professional economist my success as a researcher has as much to do with my ability to communicate my work through words as my mastery of economic theory and statistical analysis. It is also a skill that is getting short-shrift in the ever more consumer-driven model of higher education. My abilities as a writer come from being made to write endlessly at my undergraduate college. It was an emphasis from the moment I walked in the door until the moment I left. It has been by far the most valuable skill I developed as an undergrad.

So by all means become an economics major, or at least take some economics and statistics, but make sure you learn to write and communicate effectively. [And as an aside, I have found Oregon's high school graduates much better trained in writing and composition than their counterparts in Colorado - so way to go Oregon high school teachers, and thanks]

I will see all you new students on September 27th.

Back to School and the Economics of Education

While Oregon's public universities are still a couple of weeks away from the start of Fall term, most K-12 districts open this week, so it is a good time to remind ourselves of one reason we invest heavily in education: it is a smart thing to do.

From the Bureau of Labor Statistics [HT: Wall Street Journal]:

All of the increase in employment over the past two decades has been among workers who have taken at least some college classes or who have associate or bachelor's degrees—and mostly among workers with bachelor's degrees. The number of these college-educated workers has increased almost every year. Over the 1992–2009 period, the number of college-educated workers increased from 27 million to 44 million. In contrast, the number of employed people with only a high school diploma or without a high school diploma has remained steady or decreased.

There is also lower rates of unemployment among the more educated:

And higher pay:

If you think what people say about higher education leading to higher earnings is a cliché, you might want to consider that sometimes clichés are true. In 2009, the median weekly earnings of workers with bachelor's degrees were $1,137. This amount is 1.8 times the average amount earned by those with only a high school diploma, and 2.5 times the earnings of high school dropouts.

And, don't forget, you can now get an Oregon State economics BA or BS entirely on-line. It is never too late!

Economist's Notebook: Economics of Sports

Photo Credit: Beth Nakamura, The Oregonian

The family decided to spend Labor Day at PGE Park attending the latest of the Beavers farewell season closers.  Absolutely picture perfect weather and an entertaining game: it was great.  For the first time in recent memory, the crowd was actually paying attention to the game and it was a very entertaining one as well: lots of lead changes and home runs an even a nail-biting finish.  It was a great day.

The Oregonian has been a bit overwrought about the Beavers leaving - too much so I feel.  Editorials about how it is a failure of leadership by the city government, a column by John Canzano (who hardly ever even bothers to mention the Beavers in his column), ever the opportunist, calling out Sam Adams, and a long series of farewell pieces all graces the pages recently.

But why all the hand wringing and fuss?  This is not the same baseball team that was here until 1993, and no one remembers the Portland Rockies (Rockies, really, couldn't that have at least called themselves the Cascades?  Salt Lake City Bees (né Buzz) anyone?  Yep, those are the old Beavers.  It is also not the last team that will play baseball in Portland.  Portland is the biggest non-baseball market in the country, there will be something.

But the fact is that baseball at Civic Stadium is no longer viable (as PGEs naming rights deal is expiring, I am choosing to call it by its old moniker).  This is something people don't seem to get. 2,000 people showing up for a game in a 16,000 seat stadium is not a winning proposition.  When people grumble about soccer displacing baseball, they should be happy that an economically viable use for Civic Stadium has been found and that the wonderful old stadium shall have a new life.

I think the economics of pro sports are clear in this case.  Minor league baseball is now a niche sport - a small but loyal fan base will support it but it does not have broad appeal.  It is not MLB: the media saturation of top level pro sports has given people everywhere front row seats to MLB games, made the stars household names, and I believe has lowered the demand for minor league baseball, at least in cities like Portland, where the team no longer has that community embrace that comes from a sense of ownership.  Now with free agency and mass player movement, the team doesn't even feel like part of some larger family, just a way station for players on the way up or down.

My demand for the Beavers is typical I think, I go a few times a year to spend some time on nice summer evenings chatting with friends, casually following the action and generally enjoying Portland summers.  I don't really go because I am a fan of the team.

[As an aside, even if the demand for the Beavers was like yesterday, the poor old Stadium could not handle it: concession lines were unbelievable]

Anyway, there will be a day soon, when someone - possibly even Meritt Paulson - figures out how to build a small stadium in town and baseball returns.  I don't really think it matters if it is triple-A or something lower.  And it will again be a place to spend warm Portland evenings. Until then I think we should stop the histrionics.

Beeronomics: Nanobrewing

Nanobrewing is a hot topic around Stumptown these days.  For lack of an official definition I shall define it as brewing commercially on a very small brewing system (less than 3bbl, say).  Here are two examples of recent write ups on nanobrewing from Angelo at Brewpublic and Jeff at Beervana (and yes, I am going with the one word rather than nano brewing which should at least have a hyphen everyone!).  And it makes sense that it is: there are a large number of homebrewers and beer enthusiasts in the city (and the world for that matter) most of whom, at some point, have had dreams of starting their own business in brewing.

But commercial brewing is a capital intensive business and it is hard to get started without a pretty big wad of cash, even a relatively small 10bbl brewhouse can cost around $150,000 and that's before all the costs associated with installation.  So it makes sense that nanobrewing is appealing.

The economics of brewing are unchanged however and the per-unit costs of brewing on a nano system are very high.  To be a bit pedantic, the average cost per unit of a product is total cost (TC) divided by output (Q).  In brewing, total cost is made up of both variable and fixed costs.  The variable costs (VC) are costs that depend on output - the more beer you make the more labor, ingredients and energy you use.  Fixed costs (FC) are the costs that don't change as output changes - the cost of the brewing equipment and the building (unless you reach your present capacity and need to expand).

So TC = FC + VC.  ATC, which is basically your per ounce cost of beer.  Note that ATC=TC/Q which means that ATC= FC/Q + VC/Q.  In the second term on the left, both the numerator and the denominator are increasing in output so this can either rise or fall with Q (for argument's sake lets call it constant), but the first term ALWAYS falls with Q.  Voilá, this then is an increasing returns to scale industry.  Increasing output will ALWAYS  end up lowering your cost of beer.

Now the reality is that AVC can rise as well, especially when you get really really big.  It gets harder and harder to manage large enterprises, supply chains, etc.  My colleague Vic Tremblay has estimated though that the economies of scale are only exhausted at 2.5 million barrels a year, which is massive.  So the basic economics are undeniable - bigger is cheaper in brewing.

So where does that leave nanobrewing? Basically as a foot in the door.  If there is intense enough local demand for craft beer and enough beer nuts out there who will go off in search of nanobrews, some local bottle shops and pubs that will serve nanobrews, and a robust enough demand to be able to charge premium prices, then I suppose it can be a way to try and build up some funds to pay for future expansion.  If any place does, Portland certainly meets the above criterion.  I mean a city that can support Alan Sprints' passion for 17 years could certainly support a nanobrewery or three. But I agree with Jeff, nanobreweries are just a stepping stone - even those who think they will remain small, will soon find the tide of economic forces carrying them along.

But the good news is that very little has to be ventured so that even if it is lost, not much damage will be done.  And the local market for craft beer, already an embarrassment of riches, may get even more interesting.

The US August Unemployment Report

The US August unemployment report came out today and it shows that nation's unemployment rate essentially holding steady at 9.6% (up from 9.5% in July).  More importantly perhaps it shows that the economy lost another 54,000 jobs.  But there is a silver lining, albeit thin: the private sector actually added 67,000 jobs.  Unfortunately this level of growth is anemic and will not do anything to dent the unemployment rate. So we wallow in the swamp at the bottom of this recession, still looking for something to lift us out.  I suppose the takeaway is that it still looks to me that we are stuck in a U shaped recession rather than a double dip recession.