Thursday, January 28, 2010
Wednesday, January 27, 2010
As an example we will think about perhaps the most commonly used example: the education - earnings relationship.
We will also study the empirical evidence on class size and discuss the STAR study and it limitations.
In other words, what do these two graphs tell us and how much should we trust conclusions based on these pieces of evidence?
Tuesday, January 26, 2010
Here is the graph of the raw month to month numbers:
Here is the graph of the year-to-year percentage change in home values:
Monday, January 25, 2010
Saturday, January 23, 2010
Don't get me wrong, any investment in the state is great, especially now, and especially for a community like Prineville. But the amount of attention that the decision by Facebook to build their first data center in Prineville is receiving is a little out of whack. For example, the Oregonian editorial board cheers this as a major statewide success story - but then these are the same folks that urged a no vote on 66 and 67, and I see a clear connection between the two.
You see, this type of investment is indicative of where Oregon has arrived in terms of its investment in human capital and in research and innovation. What comparative advantage the state has at the moment is in cheap power, cheap land and cheap labor. This is not a success story this is a failure story. What the state needs to be is a place where we have a comparative advantage in human capital and technology, and that means investments in education and in research in partnership with research universities. What we are is a poor and poorly educated state that is like a domestic developing country that will do the low value-added work because it is all we can get.
So the real story should not be how wonderful this investment is, but what does it signal in terms of the future of the state's economy? The fact that The Oregonian's editorial board didn't ask this question is a clear signal that they just don't understand the fundamentals of economic growth. Because if you think this is a good path we are on, I got news for you: As much cheap land, power and labor we have, there are many, many more countries that have much cheaper land, labor and even power. I don't know the technology too well, but I suspect that the only reason this data center is here (as well as the Google data center in the Dalles) and not in China is due to some specific costs involved with distance and the provision of bandwidth. More and more manufacturing, even in high-tech, is leaving the state and the forces of globalization are only getting stronger, which means our competitive edge has to be that we are on the technological frontier or we will be competed away. Without hugely increasing our commitment to education in this state, it is hard to see how that could happen.
Friday, January 22, 2010
The blogger and graphic artist whose "nom de plume" is Samurai Artist popped me a note to inform me of his very interesting interview with Brett Joyce of Rogue (the above is a sample of his work). During the interview he asked Brett about a post I had done in the past about Rogue and signalling. At the time Brett appeared quite annoyed by my post, and I was completely perplexed. But then I realized the problem, people were not understanding it as an equilibrium concept. Anyway, here is the exchange:
SA: There was another blog post (on the Oregon Economics Blog) that suggested that you guys use the economic term 'signalling' by pricing yourself higher to signal to consumers that your beer is of a higher quality. I know that you said that wasn't true, but I would like to see if you have more of a response to that.
Brett: Yeah, I'm not smart enough to know what 'signalling' is, but I would just say this, there is a lot that goes into the packaging, there is a lot of hops and malt that goes into our products. We have never told John in 21 years what to put into the beer. He is an artist, and it is our job to get out of the way and let him practice his craft, and it is our job to go sell it, go market it. Our beer is not inexpensive to make. It's because of ingredients and because of packaging, not because of 'signalling'. I don't even know what that means!
This is a good illustration I what I mean. I would not say that Rogue 'uses' signalling. What I was trying to provide an explanation for was the popular beer blogger complaint that Rogue is too expensive. Given that the craft brew industry in Oregon is intensely competitive it is hard to see how Rogue's prices are sustainable in the free market of beer. Signalling provides a potential explanation (not necessarily the right one or the only one, but a possible one): if people think price contains some information about the quality of a product that they cannot themselves determine before they purchase it (as opposed to something like a new shirt that you can touch feel, try on, etc.) then they may act on that information by purchasing it. Of course, all beer companies could try this, but the companies with a lesser product would find out quickly that consumers learn and their sales would plummet. Packing plays a similar role - Rogue's packaging is more expensive and a signal of the quality of what's inside. Other breweries could do the sam but if their beer is of inferior quality than their attempt to signal becomes a costly waste of time.
This is why I was perplexed about Brett's annoyance with the story: it is an equilibrium story that is not an explicit strategy by Rogue. In fact it happens simply because Rogue responds to the incentives that are already in the market. And it only works if Rogue's beer really is thought of as that good once buyers purchase it. I think he thought I was saying it is an explicit strategy you can use to fool consumers and get a higher price. Precisely the opposite: it is a market outcome whereby better beers price higher and lesser beers price lower and it works because in equilibrium consumers are then correct about how price and quality are related. [Note that good and bad craft beer aren't necessarily any more or less expensive to produce so there is more to price differentials than the cost of ingredients clearly]
Full disclosure, I love Rogue and Brutal Bitter is among my top five favorite beers, but that has nothing to do with it. The answer to "how do they get away with charging so much?" is simple: the market thinks their beer really is that good. And as good beeronomists we should know not to question market outcomes, our task is to simply try and understand them better.
Finally, this model was originally applied to education: people get college degrees because they want to gain more skills and knowledge but (perhaps unbeknownst to them) it also serves as a signal to firms that they are smart and worthy of hiring. Getting a degree is hard, however, but a lot harder if you are not smart than if you are truly smart. So firms take the degree as a signal of quality and they are right to do so - because, in equilibrium, only the smart ones will find it worthwhile to spend the time and effort getting the degree.
Thursday, January 21, 2010
International Medical Corps is a global, humanitarian, nonprofit organization, founded by volunteer doctors and nurses and dedicated to saving lives and relieving suffering through relief and development programs. Our emergency response team is in Haiti responding in force and I would like to ask for your help to get the word out to the readers of The Oregon Economics Blog. There are still thousands of patients seeking treatment of which approximately 80% are in need of surgery and are running out of time - especially with the tremendous aftershocks still devastating this country. The team is treating crush injuries, trauma, substantial wound care, shock and other critical cases with the few available supplies - And they're in it for the long haul. I would love your help spreading the word by blogging or tweeting about IMC's rescue efforts. We've put up a blogger friendly widget here on our site:
With the widget it's really easy to let your readers know that donating $10 to help the people of Haiti is as simple as sending a text message of the word "haiti" to 85944. If you have any questions just let me know and I will do my best to help you out. If you are able to post the widget or tweet, I would appreciate it if you could send me the link.
Thanks so much,
International Medical Corps
All this by way of excuse, lots of stuff happening and I am going to punt on it to other sources.
Jobs: Finally, some actual job growth in Oregon to report. Though the unemployment rate held steady at 11%, the real news is that 2,900 new jobs. Not enough to celebrate, but 'it sure beats losing' to quote from Bull Durham.
Banks: The Obama administration proposes regulations with some pretty big teeth.
Soccer: finally, truth, justice and righteousness has been restored to the world of professional soccer:
|English Premier League|
|January 20, 2010||P||Pts|
Wednesday, January 20, 2010
I will start with a basic overview of the aggregate demand curve with a mention of the aggregate supply curve and talk about the natural level of output and deviations from it. I will also talk about the Phillips curve relationship, whether it really exists and what a government can try and do to deal with high unemployment episodes.
Finally we will chat a little about agglomeration externalities, urban redevelopment zones and fixed-route transit.
Tuesday, January 19, 2010
Here are some excerpts from Conor Dougherty's article:
MINNEAPOLIS—Christopher Slinde, a lifetime Minnesota Vikings fan who has endured decades of heartbreak and lots of overpriced beer in supporting his team, believes Vikings fandom is priceless. According to economists, it's worth $530.65.
As fans pack stadiums and couches to watch the National Football League's divisional playoffs this weekend, they care about victory. Economists are tackling a more abstract challenge: putting a price on the emotional benefits of having a pro sports team in town.
The worth of fandom may seem theoretical, or even silly. But it's serious business for teams like the Vikings, who want Minnesotans to help them pay for an $870 million stadium to replace the Hubert H. Humphrey Metrodome in downtown Minneapolis. The Vikings' Metrodome lease runs out in 2011 and the team says it won't sign an extension without a deal for a new stadium.
The team hasn't explicitly said it will bolt without a deal. But it insists the Metrodome cannot support a modern NFL franchise. So, many fans are convinced that without a new stadium, the Vikings will take their quest for football greatness to a warmer state with no Nordic heritage.
Sports teams sell their facilities as economic-development projects that create jobs and generate tax revenue. But a slew of studies have shown that publicly subsidized stadiums—usually paid for by selling bonds and paying the cost and interest with tax revenue–rarely return the money governments put into them. Teams continue to argue, often successfully, that they are worthy of subsidies because they are a source of civic pride and purpose.
But what is that worth? Economists Aju Fenn and John Crooker tried to answer the question in a study published in July 2009 in the Southern Economic Journal.
The two used "contingent valuation methodology," which is a nerdy way of saying they surveyed people and used statistical models to turn the answers into an average price Minnesotans place on the Vikings.
The result: The Vikings' "welfare value" is $702,351,890— $530.65 for each of the roughly 1.32 million households in Minnesota.
You couldn't touch that money. It's an abstract figure meant to catch everything from the joy of donning blond braids and Vikings horns to the feeling of pride that even nonfans get from living in a "major league" city. In the broadest sense, Mr. Crooker says, "welfare value" represents the worth Minnesotans place on having the Vikings in Minnesota.
It's tough putting a price on feelings, which is why some economists are skeptical of contingent value studies.
"It's not that this is capturing nothing, it's just that it's not legitimate to interpret people's answers as if folks were spending their own money," says Peter Diamond, an MIT economist. He co-authored a 1994 paper titled: "Contingent Valuation: Is Some Number Better Than No Number?"
Survey questions were fine-tuned by the Metrodome experience. In the 2002 off-season (to minimize in-season emotions), Messrs. Fenn and Crooker mailed 1,400 surveys to households across Minnesota, capturing both fans and nonfans.
The study's figures were based on the mail surveys, which had 30 questions ranging from demographic information to how much time the person discussed the Vikings at home and at work. But the so-called welfare value was generated from a single yes or no question: Would you be willing to pay $X out of your own household budget for the next year to make a new stadium possible? There was one price on each survey (it ranged from $5 to $100).
Mr. Fenn cautions that the $702 million welfare value doesn't mean that helping the Vikings with a stadium would be the best use of the state's tax dollars.
"We're not suggesting that the state of Minnesota act a certain way, or that voters support [a new stadium], or not support it," he says. "We're just pointing out that the Vikings mean a lot to the average Minnesotan."
Also, here is a nice Q&A With Jerry Bell of the Minnesota Twins (who are building a new stadium).
Friday, January 15, 2010
Thursday, January 14, 2010
For more information about Mercy Corps’ efforts in Haiti, you can check out http://www.mercycorps.org/haiti?source=13500, http://www.mercycorps.org/?source=13500, andhttp://www.mercycorps.org/rogerburks/blog/17219. Our efforts for Haiti have also been mentioned by The Huffington Post (http://www.huffingtonpost.com/2010/01/13/whos-heading-to-haiti-res_n_421231.html), The New York Times (http://thelede.blogs.nytimes.com/2010/01/13/haiti-disaster-relief-how-to-contribute/), The U.S. State Department (http://blogs.state.gov/index.php/site/entry/disaster_haiti), and The Christian Science Monitor (http://www.csmonitor.com/World/Americas/2010/0112/7.0-earthquake-rocks-Haiti).
Wednesday, January 13, 2010
Even before Tuesday’s devastating earthquake, Haiti had a distressed economy.
It is one of the poorest countries in the Western hemisphere, with around 80 percent of the population living under the poverty line and 54 percent living in abject poverty, according to the CIA World Factbook. More than two-thirds of the labor force are believed to not have formal jobs, and just 62.1 percent of adults over age 15 are literate, according to the United Nations Human Development Report.
Haiti also has among the world’s lowest levels of gross domestic product per capita.
Despite the destruction wreaked by multiple tropical storms in 2008, in many ways Haiti’s economy and infrastructure-building seemed to be turning a corner in recent years, aided by international support and debt relief programs.
In fact, Haiti was one of only two Caribbean countries expected to grow in 2009. There were hopes of a tourism revival, reinforced by the announcement that a new Comfort Inn would open there this May. In a sign of its growing structural sophistication, Haiti even recently announced that it would begin collecting better national statistics, with the help of theInternational Monetary Fund, so that it could better assess and calibrate its economic policies.
Update: Here are some theories from Tyler Cowen about why Haiti has remained so poor.
I was going to post on today's Public Policy Analysis class, but little else seems to matter relative to the disaster in Haiti. To be sure a 7.0 magnitude earthquake would be a disaster in any built environment and yet it is so much worse in a poor developing country like Haiti due to poor construction, poor infrastructure, and poor services including emergency response.
The reality of the world is that while even developing countries have come a long way, the inequality among nations continues to grow. Here is a chart of some selected countries which illustrates this point.
Haiti's GDP per capita is about $1700, compared to the US's which is about $43,000. Over time this difference has grown and continues to do so. Here is a graph that illustrates the growth in inequality in the world.
Most policy that has any real affect (outside of trade policy) is national in nature, so transfers to developing countries are essentially voluntary charitable donations. And while much effort has been spent to try and improve developing country economies so that they too can enjoy rapid sustained growth, the reality has been dismal - especially in Africa.
Tuesday, January 12, 2010
Professional standards in our field include a peer review process for quality control, and the backing of a well-established research institute, university or respected consulting firm. Research results always are made transparent, and data and methods are made available freely to other researchers who might want to examine them in detail.
Claims that 70,000 jobs will be lost due to the “job killing taxes” represented by Measures 66 and 67 are not based on estimates that conform to these standards of the economics profession. These estimates were not subjected to peer review — at least not voluntarily. When examined by nationally recognized experts on state and local public finance at the Brookings Institution, the result was a scathing report concluding that the analyses were “without merit.”
The economists behind these job-killing estimates have failed to fully explain their methods. Indeed, months after presenting to voters their estimate of 70,000 lost jobs, they are now backtracking on these “guesstimates.” They recently substituted a new paper that purports to come to the same conclusions but using completely new data and different statistical methods. However, they have refused to make their new data and new methods available to other economists or the public.
In addition, these economists have misrepresented the conclusions of scholarly publications and institutions (including statements in the Oregon Voters’ Pamphlet). Perhaps most tellingly, none of these economists is affiliated for purposes of this analysis with an institution with a reputation for unbiased research.
Voters should understand that there is no exact way to estimate the long-term effects of changes in taxes and public services on jobs and economic growth. The evidence from 30 years of economic research, however, reinforces common sense: When your taxes and public services are among the lowest in the country, the benefits from improving poor public services — especially education — are likely to outweigh the costs of modest increases in taxes.
I support measures 66 and 67 because, based on economic evidence, I believe that the risk to the economy from declining education funding far outweighs the potential harm of the taxes themselves.
Economists understand that taxes have consequences, but the effect of these taxes on most businesses and individuals in Oregon will be minimal and the state will remain one of the lowest business tax states in the country. How low? According to the conservative Tax Foundation, even with the new taxes, Oregon will rank 14th in lowest tax states. Thus Oregon businesses are neither excessively burdened by taxes, nor likely to find greener pastures elsewhere. The effect of the new taxes on employment is therefore likely to be very small, and may be more than offset in the short-run by jobs preserved in social services, public safety and education.
Rejecting these new taxes will, however, likely lead to very severe and long-run consequences on the Oregon economy through the decline in investment in education. The positive economic effects of education are empirically well founded. Economic research by Eric Hanushek of Stanford University has found ‘significant growth effects’ from the improved cognitive abilities that result from investments in education. Claudia Goldin and Larry Katz of Harvard have found that a large part of what explains the phenomenal economic success of the United States in the 20th century is the investment the country made in education. The same is true for states: more educated states tend to be more economically successful than less educated states. It is no accident, for example, that the state of California built the world’s best system of public higher education and saw its economy grow to the 10th largest in the world and become a key engine of growth for the US economy in the second half of the 20th century.
So how is Oregon currently doing in terms of public investment in education? Miserably. In K-12, Oregon currently ranks 49th in the nation in terms of class size and has a school year that is three weeks shorter than the national average. In higher education, Oregon ranks 41st in terms of per-student funding. The percentage of Oregonians earning a college degree is actually decreasing through time. Clearly we are not currently on track to create an economy characterized by healthy growth and job creation and we cannot afford to fall any farther behind.
It is also important to note that private business benefit directly from public investment in education: research by Enrico Moretti of the University of California at Berkeley has found that businesses enjoy increased productivity from locating in cities with a large share of college graduates. In other words, a highly educated population makes businesses more productive.
The Oregonian and others have argued that we should hold out for something better and reject 66 and 67. But the country and the state are in the midst of the worst economic crisis since the Great Depression, we do not have the luxury to wait for something better. Research has shown that even temporary disruptions in education can have lifetime consequences for students. Inarguably the state needs to fix its broken revenue system and we should all demand that it do so soon. But we need the temporary fix that 66 and 67 provide right now. Without investment in the education of Oregon’s children, the future economic prosperity of the state is at risk.
Last week Fred Thompson shared his take on the measures on this blog. I largely agree with him but I am less sanguine about the disruptive effect of the failure to pass the measures and about the legislature's ability to come up with a quick compromise solution (including borrowing). Though I am much less of a student of the state government than Fred is, so keep that in mind.
Monday, January 11, 2010
Friday, January 8, 2010
Most of the public debate about Measures 66 and 67 is not very edifying.
Will passing Measures 66 and 67 cost a lot of jobs? Probably not.
They may retard the expansion to full employment and, once there, reduce average job quality, but people who want to work at the compensation levels offered will; others will drop out of the job market or go elsewhere, but 70k? I don’t see it. Moreover, proponents of these measures are almost certainly correct when they argue that cutting state spending would cause more fiscal drag than the tax increases would.
I am especially skeptical of Bill and Randy’s estimates. Even if their analytical assumptions were valid (and I am not persuaded that they are), their estimates would still be off by a factor of two, maybe more. Here, I am talking about their willingness to take the state’s revenue estimates at face value. That is naïve. Measure 67 has two main components: a substantial increase in the minimum corporate income tax and an increase in statutory rates on corporate income. The primary effect of the increase in the minimum tax would be to reduce the ability of corporations to defer tax liabilities.
Accelerating tax payments will increase state tax receipts considerably in the near run, but the discounted present value of all future increases is likely to be small. The increase in the statutory rate will motivate businesses to find new ways to recognize revenue in jurisdictions with lower rates and, if yes on 67 wins, Oregon will be surrounded by them. My hunch is that the estimate of the revenue gain from increasing statutory rates is at least 20 percent too high.
The problem with 66 opponents’ analysis of the effects of the increase in personal income tax rates is double counting. They assume both that the tax will be collected and that a lot of folks with high incomes will find ways to report their incomes in jurisdictions with lower rates, some by moving away (or just not moving here). Both assumptions cannot be true.
Will the fiscal policy effects of Measure 66 be worse than those of Measure 66. Probably. What I don’t like about 66’s personal income tax increases, both in the statutory rate and through the reduction in the federal tax exclusion, is that they are permanent. Most economists accept some version of the permanent income hypothesis.
Consequently, we believe that most of a temporary tax cut will be saved, while most of a permanent tax cut will be spent, which is why a dollar of government spending provides more fiscal stimulus than a dollar tax cut. The opposite is true of tax increases. Temporary tax increases mostly reduce savings; permanent ones mostly reduce consumption, therefore more fiscal drag. Not good. At least not at this time.
Is Federal tax deductibility regressive? Not very.
In Oregon It applies only to the first $10K of federal taxes paid for a married couple filing jointly and the first $5k on an individual filer. The effect of raising this cap from $3K and $1.5K a few years back had little effect on the progressivity of the state's income tax, although it may have slightly reduced the progressivity of the state and local tax structure as a whole. The adjustment to the Federal tax exclusion in Measure 66 is distinctly progressive, tacked on to a marginal rate increase, even more progressive. And all of this piled on top of a state tax structure that is already arguably the nation’s most progressive.
If these measures fail, will Oregon have to cut vital services? Probably not.
Oregon’s Constitution requires the enactment of a balanced budget, not a balanced budget. Were the choice between raising taxes or cutting spending, raising taxes is probably the better option, but that is not the only alternative. Oregon's Constitution requires the Governor to submit and the Legislature to enact a balanced budget. They did. If Measures 66 and 67 are rejected by the voters, the state may legally borrow to make up the shortfall, just as it did in 2003 and 2004, when broader tax increases were rejected by the voters.
Wouldn’t that cause the interest rates the state pays on the bonds to jump? It could. But we could fix that by dedicating future kicker funds to repayment of state debt.
I’ll probably hold my nose and vote for 67 and cross my fingers and vote against 66.
Sputtering along, the question is for how long?
Thursday, January 7, 2010
From The New York Times:
The SeaGen is akin to a submerged windmill that is driven by flowing water, and the Bristol-based company already has a small-scale operation established in Strangford Lough, Northern Ireland, where it has been generating 1.2 megawatts of electricity since April 2008.
Considering SeaGen’s development costs, its makers reckon the device generates electricity at about $5.5 million per megawatt installed — or roughly double the cost of offshore wind energy.
They consider that a victory.
“How many millions of kilowatts of wind are installed already, and here I’ve got one machine and I’m one small firm and I’m only twice the price?” said Martin Wright, the company’s managing director. “We haven’t even started going down the cost-reduction curve yet.”
Energy derived from ocean tides and waves has been eagerly pursued for years by dozens of companies, mostly in Europe and the United States, but it has been stymied by technological setbacks and limited funding. No large scale commercial operation yet exists.
Benj Sykes, who helps develop renewable energy technology at the Carbon Trust, a group funded by the British government, said he sees “significant potential” for wave and tidal energy. But he added that the technology is expensive to develop because testing must be done in the ocean rather than on land, unlike with wind turbines.
This is interesting as it has the potential, it seems to me, of being a more reliable form of energy generation than wind or wave.
Wednesday, January 6, 2010
I also wrote on the curious tip guide on the bottom of my receipt at Kenny & Zukes. Well at Legal Seafood in Atlanta they go one better. They bring the card reader to your table, European Style (though we still are in the dark ages of magnetic strips), and then this screen appears. You have the option of entering your own percentage or amount, or you can choose one of the three convenient options: 15, 18 or 20%. (Note to K&Zs: even at a fancy Atlanta restaurant, they are not bold enough to go to 25% and they can pay the wait staff less than minimum wage) I got out of the waitress that she doesn't have to use the machine and for her regulars who give her good tips, she goes the old manual way because that induces more generous tips, but for irregulars, so to speak, the machine yields better results.
Tuesday, January 5, 2010
The good view of the play in slow-mo starts at about 2:40.