Saturday, October 30, 2010

Things I Don't Understand


A little piece on an odd decision Adidas by Mike Rogoway
:

Adidas America wants to sell its north Portland headquarters to raise money for operations, then lease back the property in a long-term deal.

This confuses me. Long-term interest rates are at historic lows, so how is it that this is a good way to raise capital? Either Adidas should be able to borrow directly or at the very least should be able to use the property to secure a very low interest loan against it.

But I am not a finance guy...still I wish someone would explain this to me.

Friday, October 29, 2010

Moles are not Rational


My experiment with the economics of moles has ended, predictably, badly.  By slightly raising the marginal cost of lining in my yard, I had hoped convince my subterranean friend by use of an annoying emitter of sound waves to seek out more pleasant pastures...like my neighbor's yard.  But alas, not only has my mole remained after three weeks of use, but he is quite happily continuing to dig within a few feet of the 'sonic spike' itself.  The picture above is not the best, but these are two new mole mounds with the solar panel of the 'sonic spike' visible at the edge of the grass.

Clearly my mole has not had an Econ 101 class and doesn't understand decisions at the margin.

But I have made a scientific breakthrough!  Moles are not rational creatures.

Addendum: When you post an entry, Blogger informs you of the having successfully posted on a separate page in which they embed a Google Ad clearly targeted by keywords from your post.  Ironically, the ad associated with this post was headlined" "SONIC MOLE CHASERS WORK" and clicking through takes you here.  You have been warned.

Thursday, October 28, 2010

Election 2010: Measures 73 & 76

It may seem strange to write a single post about Measures 73 and 76 as they are so different, but they do have one common aspect that I dislike: they reduce the flexibility and responsiveness of government to deal with changing economic circumstances.

My wife is passionate about environmental and education issues and she considered a 'yes' vote on Measure 76 a no-brainer.  Who doesn't like funding for parks and beaches and wildlife?  So I posed a question: "at this moment, if there was one thing you had to cut for a couple of years until the economy improves, which of the two things, education and parks, do you think can best weather a temporary cut?"  My answer is clear: parks and wildlife.  There is convincing evidence that temporary disruptions like shorter school years, larger class sizes, etc. create long-term consequences for kids.  Thus if I have to make a difficult choice, I would protect schools above just about anything else.

I also don't like the idea of telling the criminal justice system how to do their jobs, having virtually no knowledge of the actual tradeoffs between spending more money on education, early childhood intervention and other things that will spur economic growth and thus provide non-criminal opportunities, versus spending more money on incarceration.  Measure 73 not only ties up money that might be better spent elsewhere, but it also reduces the ability of the justice system to deal on a case-by-case basis with recidivists.

Which is why I am weary of Measures like 73 and 76 which essentially tie-up state resources.  I believe that the state government needs more flexibility, not less, to deal with serious downturns like the one we are in.  I have faith that the good folks who make up our state legislature take their jobs seriously and try and do their best with the evidence they have (though I am always advocating for better evidence for them to work with).  In short, I believe in representative democracy.  Normally the trade-offs would not be so stark, but this recession is, and will continue to be, very severe and the cuts are going to have to be deep.
 
That said, there are arguments for both that essentially come from the same principle: there has been a failure of government (or the criminal justice system) to properly deal with to things that have substantial externalities.  Parks, beaches and wildlife have substantial positive externalities and as such are chronically underfunded.  Sex offenders and drunk drivers cause substantial negative externalities to society and as such there we have a system that allows too much of them.  I don't necessarily disagree with either statement.  But public education may have the biggest external benefit of all and to address the aforementioned two at the expense of education is the real trade-off.

In the end, things that look good in isolation start to become less clear when the trade-offs are explicit - which is a big point of economics in general.  Will schools benefit if these two do not pass?  I don't know, but given that K-12 is THE massive chunk of the state's general fund and a major part of the lottery fund account, it is hard to see how they won't.

Hard choices.

Picture of the Day: Venezuela

From N Greg Mankiw's blog:


This here is a market in Caracas selling oil.  They post the 'just price' and the (much higher) 'capitalist price' and let you know just how much you would have been screwed by the system were it not for the Chavez regime.

Wednesday, October 27, 2010

Giants


As someone who had a peripatetic childhood there are very few constants that I clung to and that remained with me until adulthood.  But perhaps the one true constant was, and is, the San Francisco Giants.  Born, and raised until I was 11, on the peninsula just south of San Francisco, I spent many a frozen evening at Candlestick Park watching the fog pour into the stadium through the breezeways in the upper deck while the likes of Willie McCovey, Jack Clark, Bill Madlock, Vida Blue and my personal favorite (for no real reason - I was a kid after all) Mike Ivey plied their trade below.

Later, I would develop a fondness for Milwaukee's County Stadium and the Brewers and Civic Stadium and the Beavers (I tried the Mariners but the Kingdome, even with a young Griffey, Jr., was just depressing), as my family split and went different directions. But I would continue to return to the nest thanks to return trips to visit relatives in SF and always carried the Giants as my birthright.  Recently, visits to my in-laws who live in Marin County are highlighted by ferryboat rides to McCovey cove to see the Giants play in the spectacular PacBell SBC AT&T Park, which (by any name) is by far the best in baseball.

I was in my apartment in Portland when I was in college for the 1989 World Series. My roommate was from the East Bay, but a Giants fan nonetheless, and when the earthquake hit we both ended up trying to contact our families to make sure all were okay and accounted for. Alas, the Giants did not put up much of a fight in that series, but frankly it didn't really matter.

I was alone in a hotel room in Williamstown, Massachusetts during game 6 of the 2002 world series - hiding out and blowing off a dinner banquet for the conference I was attending.  I was beside myself with excitement and anxiety until the bottom of the seventh inning of game 6 when Dusty Baker took out Russ Ortiz with a 5-0 lead.  I had a bad feeling and when it all unraveled I knew it was all over.  I couldn't hardly watch game 7.  

But it was hard to feel sorry for myself as my father, a Boston native, was still suffering each and every season with his beloved Red Sox.  He was an early adopter of satellite radio when he discovered that it meant he could listen to each and every Red Sox game in Portland.  He grew up across from a park in a nice neighborhood a short walk from the Fenway and used to tell me of Red Sox players who, while walking home from games and practices, would stop and play catch with the boys playing in the park - including the great Ted Williams.  The intimacy I have with the Giants can't compare to those more innocent times, but still, the Giants were an anchor to a kid without a geographic center.

But now the Red Sox have won twice since the 2002 World Series and I can start to feel like maybe it is my time - even though I am about 20 years ahead of my father when his dream was finally realized.  Still, I have a feeling of dread, the Texas Rangers seem like an offensive juggernaut and I think it could all end quickly and badly.  At least the National League finally won the All-Star Game.  So I protect myself with a healthy dose of pessimism (this too learned from my dad over my lifetime).

Anyway, tonight starts what might end up being a fortnight of tortuous suffering. But nevertheless I say: Go Giants!

Addendum. Despite my love for the Giants, this is a stupid statement:

"People on the East Coast think of the West Coast as this new place, but San Francisco is a really old American city," said Brian Murphy, the dulcet morning drive-time sports voice on KNBR radio. "This city has a thriving history that goes all the way back to 1860. … So whereas L.A., and Seattle, and Portland, and Phoenix are all sort of post-World War II towns, this town's history runs way deeper than most of America realizes."

Portland, a post-WWII city? Say what? Oregon City is the oldest city in the West. Portland was incorporated in 1851. Revel in the glory of the Giants, but don't be condescending or vainglorious.

And actually the modern history of the city goes all the way back to the Presidio and the San Francisco Mission in 1776 (see, I attended grade school in California!) so the 1860 date is pretty arbitrary.

Port of Portland Showing Healthy Gains in 2010

One thing I like to check on from time to time to get a sense of the direction of the Oregon economy is the Port of Portland marine statistics.  What a recent glance reveals is that 2010 is showing a very healthy improvement over 2009.  In fact in terms of total tonnage through the first nine months of 2010, the Port is 36% higher than last year and in just about every other metric the Port is experiencing strong gains.  Thanks, China.

Tuesday, October 26, 2010

A Note on Public Sector Worker Pay


I have no beef with Ted Sickinger's nice piece on compensation for public and private workers.  He does as good a job as one could ask for in trying to make sense of the issue, and I especially like how the article emphasizes the entire compensation package, not just salary.  For me, the generous benefits helped to make up for the fact that the pay I accepted was far below competing offers from places in California, Ohio and North Carolina.  [But they suck and Oregon is sweet!] I also really like the fact that he brought up education and job skills as they are very important considerations in any discussion of pay.

But if one were to really want to get to the bottom of the question of whether Oregon's public workers are overcompensated you would have to do more than compare averages across states and across private and public sectors.  You would need to be able to say something about productivity - are we getting as much bang for our buck as other states and the private sector.  As productivity is generally positively related to education, experience and job tenure, that would be a good place to start.  If you have data on individual workers you could control for these individual characteristics and then get a much clearer idea of where relative pay stands.  Even better, of course, would be an actual measure of productivity, but as we are talking about a vast array of jobs, doing so would be too difficult.

In the end, Sickinger's piece gives a nice bit of background information, but still leaves us essentially clueless about the question of whether public sector workers are overpaid or underpaid.  Though it may not matter that much given the amount of cutting the state is going to be forced to do.  Still, lawmakers should be aware of efficiency wages: you may cut so much that productivity per dollar actually drops.

My guess as an economist is based in the belief that the public sector has to compete for the same workers as the private sector and so, in equilibrium, productivity weighted compensation should end up roughly equal.  Pay too little and you will see that workers keep leaving for better paying jobs.  Pay too much and you will have a hard time showing how well you have managed your money as a boss.  In the end, I doubt there is much difference.

Oregon Tax Climate Ranking Unchanged

According to a report released today by the Tax Foundation, Oregon's tax climate ranking among all 50 states remained unchanged from 2010 to 2011 at 14th. Oregon's ranking did fall from 2009 to 2010, from 8th to 14th, after the passage of Measures 66 & 67, but it remains in the top third of all states.


State Business Tax Climate Index
Fiscal Year 2011
2011
Rank
2010
Rank
Change from 2010 to 2011
2009
Rank
2008
Rank
2007
Rank
2006
Rank
Alabama
28
19
– 9
20
23
22
16
Alaska
2
3
+ 1
4
3
4
3
Arizona
34
28
– 6
24
25
29
29
Arkansas
39
40
+ 1
35
37
36
35
California
49
48
– 1
49
49
48
42
Colorado
15
13
– 2
13
10
11
13
Connecticut
47
38
– 9
37
38
39
41
Delaware
8
8
0
10
9
8
9
Florida
5
5
0
5
5
5
5
Georgia
25
29
+ 4
27
28
21
20
Hawaii
22
24
+ 2
22
18
16
24
Idaho
18
18
0
29
21
26
30
Illinois
23
30
+ 7
23
24
31
26
Indiana
10
12
+ 2
14
13
12
12
Iowa
45
46
+ 1
44
46
45
44
Kansas
35
32
– 3
31
31
35
33
Kentucky
19
20
+ 1
34
27
28
38
Louisiana
36
35
– 1
33
34
33
32
Maine
31
34
+ 3
40
35
37
43
Maryland
44
45
+ 1
45
47
24
25
Massachusetts
32
36
+ 4
32
33
34
36
Michigan
17
17
0
21
17
23
28
Minnesota
43
43
0
41
42
43
39
Mississippi
21
21
0
19
22
19
19
Missouri
16
16
0
16
16
15
14
Montana
6
6
0
6
6
6
8
Nebraska
29
33
+ 4
42
40
41
45
Nevada
4
4
0
3
4
3
4
New Hampshire
7
7
0
7
7
7
6
New Jersey
48
50
+ 2
50
50
50
48
New Mexico
33
23
– 10
26
29
25
23
New York
50
49
– 1
47
45
46
49
North Carolina
41
39
– 2
39
41
42
40
North Dakota
20
25
+ 5
30
32
32
31
Ohio
46
47
+ 1
48
48
47
47
Oklahoma
30
31
+ 1
18
19
20
21
Oregon
14
14
0
8
8
9
10
Pennsylvania
26
27
+ 1
28
30
30
22
Rhode Island
42
44
+ 2
46
44
49
50
South Carolina
24
26
+ 2
25
26
27
27
South Dakota
1
1
0
2
2
2
2
Tennessee
27
22
– 5
17
20
17
18
Texas
13
11
– 2
9
11
10
7
Utah
9
10
+ 1
11
12
18
15
Vermont
38
41
+ 3
43
43
44
46
Virginia
12
15
+ 3
15
15
14
17
Washington
11
9
– 2
12
14
13
11
West Virginia
37
37
0
36
36
38
34
Wisconsin
40
42
+ 2
38
39
40
37
Wyoming
3
2
– 1
1
1
1
1

Where are the Wage Gains? Cities at the Heart of the Information Economy

Another gem by Ed Glaeser in the New York Times' Economix Blog:

Santa Clara County, which contains Silicon Valley, experienced 8.7 percent wage growth from 2009 to 2010. San Francisco County had 5.4 percent wage growth. These two counties were third and fifth on the list ranking areas by wage growth.

The success of these areas is particularly remarkable because they started off with higher wages. Typically area incomes revert to the mean, but in the recent recession, at least some places that started with higher earnings have gotten richer over time. This matches a post-1990 pattern in which the incomes of initially richer areas have risen more quickly.

***

The bad news is that more money has been earned by fewer people. The rise in the incomes of these coastal cities has not been accompanied by increases in the number of employed people. Employment in Manhattan dropped by 1.7 percent over the year and employment in San Francisco fell by 3.1 percent.

***

These wage gains are only the latest bit of evidence confirming that America’s economic future depends on its information-intensive cities. Our country is never going to be able to compete with Asia as a producer of ordinary manufactured goods. If the products are old, then they will be produced where costs are lowest. Our economic eminence depends on continually coming up with new ideas in software, biotechnology and finance.

One implication of this is that our future will never seem as certain as it did when America had enormous dominance across vast markets for manufactured goods. In those days, we could be pretty sure that incomes would continue to rise if we just kept doing what we were doing. Now we need to hope that the uncertain process of American innovation will continue forward on its jerky path.

A second implication is that America’s future depends on its schools. This recession has also emphasized the enormous handicaps facing less-skilled Americans. Only 39.5 percent of adult Americans without a high school degree currently have a job, according to the bureau, while 73.1 percent of adults with college degrees are employed. If we want the United States to be strong, we must make sure that we have more college graduates and fewer high-school dropouts.

The final implication is that cities remain vitally important to our economy. That importance reflects the fact that places like Wall Street and Silicon Valley create skills that are even more valuable than those taught in our schools. Globalization and new technologies have made knowledge ever more valuable, and we are a social species that acquires skills by hanging around other smart people.

This is the hope for Portland, that investments like those by Intel, Solar World and Vestas will lead to a regional economy based on technological innovation and high-tech manufacturing. By creating a critical mass of focused human capital, it is hoped that we will be able to crate and sustain a comparative advantage in such activity. It is a gamble for sure what with huge investments being made by China in specific human capital, but seems to me about as good a bet as one could make. What can government really do to engineer this? Not a lot, except make sure the fundamentals are right: education, R&D and infrastructure.

Read the entirety of Glaeser's article here.

Portland Home Values: The August Case-Shiller Update

Here are the numbers, nicely displayed thanks to the Wall Street Journal:


Home Prices, by Metro Area

Metro Area  ↓August 2010   Change from July   Year-over-year change   
Atlanta109.09-0.8%-2.0%
Boston158.35-0.3%1.5%
Charlotte116.6-0.4%-3.4%
Chicago126.70.4%-2.9%
Cleveland107-0.3%-0.4%
Dallas119.41-1.1%-1.7%
Denver128.57-0.1%-1.2%
Detroit71.540.5%-0.1%
Las Vegas101.030.1%-4.5%
Los Angeles175.55-0.4%5.4%
Miami147.47-0.3%-1.0%
Minneapolis126.53-0.3%2.9%
New York175.270.2%0.1%
Phoenix108.84-1.3%0.4%
Portland147.02-0.9%-2.3%
San Diego163.99-0.6%6.9%
San Francisco142.83-0.3%7.8%
Seattle145.93-0.8%-2.4%
Tampa137.53-0.5%-4.1%
Washington188.260.3%4.8%
Source: Standard & Poor’s and FiservData

The news is bad: Portland is losing ground and in the top group for lost value. Not at all surprising given the unemployment situation.

Monday, October 25, 2010

Zooey: 1996 - 2010


We had to make the excruciatingly difficult decision to put our dog of almost 15 years down this weekend. If she had been stricken by an aggressive disease and was suffering visibly it would have been easier.  But she was mostly just old and was no longer able to get up on her own, was losing control of her bowels and had great difficulty walking.  How do you know when the time is right?  I have no answer.

What I know is that she was a great dog.  A Labrador through and through: she loved swimming and fetching (and the combination especially). A chance to swim would excite her more than anything else in the world.  The picture above is her about two or three years old in the Wildflower Preserve in Ithaca, New York at a popular dog swimming hole with rocks she could launch herself from.  I love this picture because I can't think of another one in which she looks as completely happy - dripping wet, big stick in mouth, tail wagging vigorously, ready to do it again...and again and again and again...

We got her as a puppy and had the choice of the litter.  How to make such a choice was answered (in typically social scientist fashion) by the puppy personality test from the wonderful book "The Art of Raising Your Puppy" by the Monks of New Skete. We wanted a moderate dog, not too dominant but self-confident, so we gave her and her sister the test (she had eight brothers, be we wanted a female) and she got mostly 3s.  Perfect.  And thus she was: wonderfully confident, a little willful but not too much - and, typical of Labs, the friendliest dog you could ever meet.

We got her the first summer we spent in Ithaca, between my first and second year in the economics PhD program at Cornell.  I had to study for the make-or-break exam in macroeconomics that summer and so little Zooey would sleep in her crate next to my desk and I would study and every hour or two we would take a break and go outside.  I passed the exam and the rest is history.  She was my constant companion ever since, was a gentle and proud caretaker of my sons and a constant reminder to get outside and enjoy nature.

I will miss her and I don't much feel like blogging...

Friday, October 22, 2010

QPR

Don't look now, but Queens Park Rangers are dominating the League Championship in England and are on course to be promoted to the Premiership next season.  Many matches ahead, but things are definitely looking good.  This would have made my Granddad, who was born and raised in Hammersmith and a QPR man, very happy.  If they end up promoted, games between his QPR and my Arsenal will leave me conflicted.

Friday Reads

It is Friday and a significant portion of the work I had planned to complete this week remains sitting on my desk, so I'll punt to something I rarely do: link to other posts.  This is THE sure way to drive traffic on your site, so they tell me, but I really don't care about how many people read my blog in general, I just care about who reads my blog.  And I am very, very happy with the interesting, thoughtful people who visit this space.  So, interesting, thoughtful people, here are some interesting reads - go and think:

Mark Thoma has a nice post on an article from the SF Fed.  Here is a nice (and scary) little graph on deflation risk - are we really different than Japan?  [Lost decade anyone?]


Justin Wolfers on Freakonomics has a ver nice lesson on detecting momentum in data and comments on Nate Silver's error of deduction when he suggests that there is no such thing in polling data.

The Oregon Office of Economic Analysis has a nice post on the output gap.

Ben Jacklet in Oregon Business Mag has a nice comment on the Intel News.  [Which by the way is a subject I have spoken about to three or four reporters and thus I decided not to post on it here.]

You can read my erudite analysis of the Intel investment in Mike Rogoway's article in The Oregonian.

Wednesday, October 20, 2010

Eco-nomics: Brazil, India and Environmental Accounting



From the BBC:

The Brazilian and Indian governments are among those keen to use findings from The Economics of Ecosystems and Biodiversity (Teeb) project.

Nature's services must be counted if they are to be valued, its leader said.

Pavan Sukhdev, a Deutsche Bank capital markets expert who leads Teeb on secondment to the UN Environment Programme (Unep), said that if society did not properly account for services that nature provides, they would be lost.

In an earlier analysis, Teeb calculated that the economic value of services being lost - including water purification, pollination of crops and climate regulation - amounts to $2-5 trillion dollars per year, with the poor hardest hit.

And the first thing for governments to do, he said, was to carry out national equivalents of the global Teeb study - to analyse the real value of ecosystem services to their economies.

"Conventional methods of accounting such as GDP accounting will not capture them - so we need... to rapidly upgrade the system of national accounts," he said.

"You cannot manage what you do not measure."

***

Mr Sukhdev said that so far, 27 governments from Africa and Latin America, and one from Asia, had approached the Unep team for help in "greening" their economies.

Many of these are looking to translate the global Teeb findings findings into their national context, with Brazil and India in the vanguard.

Some governments give "huge subsidies" to oil and gas production, said Mr Sukhdev
India's Minister for Environment and Forests, Jairam Ramesh, said his country was planning a national economic assessment along Teeb lines.

"We are committed to developing a framework for green national accounts that we can implement by 2015, and we are confident that the 'Teeb for India' study will be the key facilitator," he said.

And Braulio Dias, secretary for biodiversity and forests in Brazil's Environment Ministry, said his country was also looking to Teeb for a change of direction - in fact, without the pending election, it might be happening already.

"The tradition of many countries including Brazil has been one of utilising regulation - command and control instruments - and we need to work more on incentive measures and get the different sectors on board," he told BBC News.

"The Teeb approach is very useful to make them understand the implications of loss of biodiversity, and also the return on investment in terms of biodiversity conservation.

"We have several bills before the national congress to establish a national mechanism for payment for ecosystem services - if they're approved, I think we will have a better possibility of implement some of those economic measures."

***

Read the rest of the story at the BBC's website. But if this signals a change in the view of environmental protection and its realtionship to economic growth on the part of two of the fastest growing economies in the developing world, it is very good news. It is these types of countries - fast growing - industrial economies that pose the biggest threat to the earths climate in the 21st century.  That said, I am skeptical that this is much more than window dressing at the moment.

Tuesday, October 19, 2010

Oregon Unemployment Stuck at 10.6%

Once again, Oregon's unemployment rate hasn't budged - for yet another month it was at 10.6% in September.  Worse, the state shed another 1,800 jobs - however the shedding of government jobs was responsible for the negative number.  The private sector added 1,600 jobs in September on a seasonally adjusted basis.  So that is something, but not enough.

Are Microloans Bad for Growth?

Micro-finance, starting with the Grameen Bank in Bangladesh, have very successfully overcome information and collateral problems in very poor areas. This access to credit, and many anecdotal stories of such credit allowing recipients to escape poverty, have made micro-finance institutions the darling of the development NGOs.  Now there is a new breed of for-profit micro-finance institutions as well as peer-to-peer lending organizations like Kiva.  In fact, here is a Kiva promotional picture that is a perfect example: a loan to buy a sewing machine.  Such an investment raises personal productivity a little and may help generate income above the poverty level, but such investment might also be in lieu of going to school.

Whether these microloans are effective poverty alleviation programs is still a hotly debated question, thought the balance of the evidence seems to be that they do increase consumption of recipient households. My new colleague at OSU, Elizabeth Schroeder, has a very important paper that finds significant effects.

My concern is that these loans, which tend to be small, high-interest and where repayment begins immediately, can distort incentives and cause recipient households to concentrate on small-scale entrepreneurial activities rather than investing in education.  In fact, there is some good evidence to suggest that this is exactly what is happening.

What concerns me the most is how this trade off affects the long-term growth trajectory of an economy in which microloans are prevalent.  So I teamed up with my macro colleague Bruce McGough and we built a model of just such an economy and with it we show how microloans can actually lead to lower growth (lower future GDP) and lower welfare.  This is a paradoxical result because we model microloans as in injection of new money from outside the economy (rather than a redistribution) and the GDP and welfare results hold despite this fact.  The mechanism that causes this is the well-established empirical fact that average, not just individual, levels of education are beneficial to growth.  By suppressing educational investment, you can lower the overall productivity of the country and leave it worse off than before.

Now the trade off I illustrate with the Kiva picture might still be the right one to make - after all school is no help if you are starving - but it is important to understand the implications.  Our paper is, therefore, a cautionary tale not a condemnation.

Read all about it here.

Monday, October 18, 2010

Eco-nomics: Oregon #1 in US in Solar Manufacturing

From the Portland Business Journal:

Oregon led the nation in solar module manufacturing for the first 6 months of 2010, according to a new report out this week from the Solar Energy Industries Association.

It's the first time the group has ranked states by their solar manufacturing prowess. Oregon tops the list followed by Ohio, Massachusetts, Tennessee and Michigan.

Given that SolarWorld opened North America's largest solar manufacturing facility in Hillsboro two years ago, the No. 1 ranking for Oregon stands to reason, but the new ranking does provide a new bragging right — and it's catching people's attention.

"Most people are shocked," said Tom Kimbra, director of policy and research for SEIA. "It's really a great success story for Oregon."

The Inventory Bounce

Dear oh dear oh dear...

More evidence today that the little spurt of growth we had at the end of '09 and begining of '10 was a classic inventory bounce whereby at the onset of a recession, businesses find their inventory getting too big because of the reduced demand, so they cut back production more than just what they need to satisfy that new demand so that they can draw down their inventory.  Then, when inventories are depleted, the have to ramp up production somewhat but just to meet the new, lower, demand.  It looks like we are back to expansion, but it was really just an illusion.

Now we actually have contraction again in industrial production:

U.S. Output Down For First Time Since Recession
by THE ASSOCIATED PRESS

October 18, 2010

Industrial production fell in September for the first time since the recession ended, as weak consumer demand led factories to pull back.

The Federal Reserve said Monday that output at the nation's factories, mines and utilities dropped 0.2 percent last month.

Industrial production grew 4.8 percent in the July-September quarter, slower than the 7 percent gains in each of the first two quarter of this year.

Factory output, the largest element of industrial production, fell 0.2 percent last month. Manufacturing posted monthly gains for the first year after the recession ended in June 2009. But since then it has fallen twice in the past four months.

Manufacturing has helped drive economic growth as businesses restocked and replaced worn-out equipment. September's decline could slow that trend. Without consumer demand to take up the slack, industry can't maintain its strong growth.

Production of construction and consumer goods dropped last month as high unemployment made Americans reluctant to spend. Lower production of automotive products, appliances, and energy offset a small gain in business equipment production. Production of machinery and electrical equipment also fell.

American factories were operating at 74.7 percent of their capacity in September, down 0.1 percent from August. That was the first drop since June 2009, when the deepest recession since the Great Depression ended.

So what is the answer? Well, to me, I think the evidence that the stimulus was not big enough is convincing (and many economists thought this at the time the policy was being debated). I have always thought that it needed to be bigger but that there is a point at which you can't just spend so much money effectively. So I thought the original stimulus bill was appropriate.

But what I have always thought and still think today, is that we are completely missing the low-hanging fruit: block grants to the states. Immediate and real stimulus to prevent states from having to make so many damaging cuts, especially to education, the very foundation of our future prosperity.

Friday, October 15, 2010

Tip Credits Redux

On Live @7 I was asked about my post on Dudley and tip credits.   Now PolitiFact Oregon weighs in on the kerfuffle.

New Waterfront Amphitheater?

I have often wondered why the Waterfront Blues Festival doesn't float a big barge over to the park as a stage and use the natural contour of the land as a perfect amphitheater.  Apparently I am not alone, but instead of a barge, a group is proposing a complete makeover with a lot of concrete and a permanent stage.  Hmmm...keep the grass and maybe we have something.


But where will the dragon boats land?  This is the only water level shoreline downtown.

Thursday, October 14, 2010

Oregon 6th Best State in Nation for Business

According to a Forbes Magazine study, Oregon is the 6th best state for business and careers, Washington was number 5.

[HT: Portland Business Journal]

Bike-o-nomics: Of Social Norms, Externalities, Tipping Points and Bike City, USA

Hawthorne Bridge bike traffic.
(Photo © J. Maus)


[Yes, back to the o-nomics thing...]

This is a post about social norms, externalities, tipping points and Bike City, USA. It was inspired by the many complaints in the paper, among friends, on Twitter, etc. about bad biking behavior in Portland. As I am on the Springwater Corridor path between Sellwood and Downtown constantly, I see bad bike behavior constantly - almost always on the part of fast and impatient bikers.  But bad biking behavior is everywhere in Bike City, USA and this post will argue that we have reached a point where our approach to regulating biking in the city has to change.

First let's fix ideas with a primer on the economic principles of which I speak.

Social Norms: Social norms are just that - behavioral standards that are set by society but are generally unenforced by an authority.  Consider the lesson you were taught as a child not to stare at strangers.  Your parents probably told you this and maybe even scolded you once or twice for doing so.  Over time this became part of the set of bad behaviors that one doesn't engage in as a member of polite society in good standing.

But why do we continue to behave in this way even when we grow up and our parents no longer have authority over us?  I mean, there are many interesting people in the world and we would get a lot of enjoyment from closely studying their behavior/appearance/manners from afar.  And the real cost is basically nil - perhaps a dirty look, but no real sanction is involved.  So from a optimal decision making standpoint, the best thing to do is to stare away when it pleases you.

We don't because the social norm of good behavior has been ingrained into our psyche and we do feel a psychic cost from violating the norm.  So, in general, people don't stare.  Social norms work fine in cases such as this, when there is no monetary gain to engaging in boorish behavior.  A simple ingrained lesson in etiquette can sustain a no-staring equilibrium.

They also work fine when there is a self reinforcing cost and benefit system like the norm of driving on the right side of the road.  Once we all agree to this norm, the cost of violating it is severe and so we all find it in or individual best interest to continue to drive (or ride) on the right.

The problem comes when there are real payoffs to violating the norm.  For example, we could try and regulate the speed of traffic through residential neighborhoods by norm, but as each driver gets a direct benefit from going too fast, many will violate the norm. So activities with substantial payoffs need enforcement and thus we move beyond norms and into laws, speed-bumps and enforcement.

Externalities: This one is more straightforward - the violating of norms of laws comes with it an expected cost born by the bad actor him or herself, but it also imposes a cost on other people that the actor doesn't have to pay.  For example, the person who speeds through a neighborhood imposes a cost in terms of the reduced safety of residents of the neighborhood, but the driver only factors in the real expected cost of getting caught or causing an accident.  In terms of biking, bad behavior on part of some bikers in the form of going too fast, passing dangerously, ignoring traffic laws, etc., makes every other biker and pedestrian less safe.  And not just form the direct consequences of the bad bikers actions, but indirectly as well, as drivers of cars become frustrated, confused and upset, they begin to behave badly (mostly more aggressively) as well.

Tipping Points: Malcolm Gladwell has popularized the idea, but economists have been talking about this for years.  We often refer to a type of tipping point that includes external costs or benefits a threshold externality: this is when just a tiny bit of extra activity with which an externality is associated causes a huge jump in the externality itself and adds substantial additional costs to everyone else.

In this case, when there are only a few bikers on the roads, and bike lanes and paths are uncrowded, having 5% of bikers behaving badly doesn't matter that much because the external cost is basically nil. But once you reach the point where there is crowding on the roads, lanes and paths, one bad biker can impose substantial risks to others.  In fact I submit that the external costs skyrocket while the internal costs rise only marginally and the benefits rise as well.

Take the Hawthorne Bridge as an example: when there are only a few bikes and pedestrians on it, riding crazy imposes almost no external cost but also doesn't have that much benefit - one doesn't have to be dangerous to go fast.   But when crowded, riding crazy by one rider substantially increases the risk to others and, as congestion means slower traffic, dangerous riding has a real benefit - being dangerous can get you across much faster.

Bike City, USA: Portland, Oregon.

So here is my thesis: Portland has reached a point in its evolution as Bike City, USA where biking has become so popular that we are reaching a threshold in the bad biking externality.  This represents a tipping point because as the city tries to encourage more riding it will find itself constrained by a small percentage of bad riders who impose a large cost to others and this will dissuade new riders from emerging.

Essentially, save for a few times when the Police monitor a specific stop sign and issue citations for rolling stops, biking in Portland is regulated by social norms.  This is fine when the benefits to violating the norms are small, but congestion has now raised the real benefit for violating norms, and it is quite possible that bad biking behavior will only increase in the current system.  We may be at that point where they can no longer rely on social norms to regulate bike traffic.

Thus, it may be the case that regulations and enforcement need to be increased.  Portland may have to come to the realization that in order to make continued progress in getting people to choose a bike instead of a car, more direct intervention into regulating and enforcing these biking regulations is necessary.

I don't know precisely what is appropriate but starting with hand or coaster brakes and a bell as required equipment seems a good idea.  Regulations that mandate the use of said bell, prohibit passing unless safe, maintaing a safe speed and prohibiting earphones are other good ideas.  Some of these are already on the books so having an active enforcement regime is the logical next step.

The good news is that a little regulation and enforcement could go a long way for, if a few bad actors impose large negative externalities, than cracking down on the behavior of those few will have large and immediate benefits.

I wonder if Portland could set up a team of quasi-official bike police who are not real police and have the right only to issue citations for moving violations and improper equipment.  This would be a relatively inexpensive way to get on top of the problem.

In any event, the tipping point may be near and Portland would do well to think seriously about how it deals with bikes.

The United Nations of Oregon

From some Ron Wyden election spam:

In addition to these tri-partisan state chairs, we also announced a Democratic and Republican co-chair for every country in Oregon. This is, to my knowledge, the first Oregon campaign to have ever done so. [Itallics mine]

Hmmm...I wonder if we should think about adopting a common currency?

Wednesday, October 13, 2010

Education Reform News and an Appeal for Evidence-Based Policy

Today brings news of the education reform movements superstar Michelle Rhee's ouster as chief of the DC public schools and of the PPS school board's decision to accept, finally, the high school redesign plan of Super Carole Smith.

In DC, a new mayor is bringing on his own team but promises to continue the reforms Rhee began, though it must be assumed that they will not continue apace.  In Portland, after a process that looked suspiciously like trying out competing redesigns to see which one would have the weakest dissent, it was finally determined that Marshall High would be the one to close despite the promising gains in student achievement made there recently.

I have no specific gripe with the Portland high school redesign - it may well be that this is the best thing for the district to do - what concerns me is that we don't really have any idea what the best thing to do is.  And thus, every few years the powers that be decide that something different has to be done.  First it is small schools: they are the answer to all that is wrong with Portland's low performing high schools.  A few short years later it is large comprehensive schools that are the answer.  The truth is no one knows what the right answer is, and confident statements by the superintendent about doing what is right are naive.  What I am pretty sure of is that constant re-jiggering of the schools is not optimal for anything except continued low performance.

And this is the problem, policy is ahead of the science but this doesn't lead to more subtle policy, rather more hubris-led big policy.  I suppose this is part of the politics of the thing.  Rhee for example, clearly relished the spotlight and was a hard-charger toward reform.  I think the flexibility she won for the district to be more proactive with both good and bad teachers is a good thing. But the truth about teacher incentives is that that are not a panacea - in fact studies have shown only modest improvements with incentives.  This is not really surprising, most teachers are doing their very best and working devilishly hard every day to get their students to succeed.  I think it is more about getting talented teachers to take up the profession and moving those less naturally adept into other professions. To do so, I think it is schools of education that need to start to get more proactive and serious about evaluating their students.  But I digress.

What is needed is a little humility and a desire to learn what works on the part of policy makers.  PPS, for example, is sitting on a mountain of incredibly valuable data, but as far as I am aware no real study of this data is being done.  And yet major policy is being made.  As I have said before, PPS has a wonderful opportunity to use its transfer lottery as a nice natural experiment to begin to understand what happens to students that are put into different educational situations.  But alas, what we get are over-confident statements about how this new approach will bring about the desired results.

I hope so, but we shouldn't be making policy in the dark.

Tuesday, October 12, 2010

Economist's Notebook: The Economics of Moles

[I resisted the temptation to call it Mole-o-nomics, aren't you all proud of me?]







This summer a mole (I shall henceforth call him Morris, though in truth I know not its name nor gender) decided to make himself at home in my back yard.   At first I was okay with this development, feeling I could live in harmony with my subterranean little friend.  And at first, this symbiotic arrangement seemed to be working out just fine - a couple of mole mounds appeared, but only one in the grass and I tended to all of them easily.  But then old Morris started to expand his home at the expense of my yard that I had only just completely rehabilitated.  Not really being a good guest this Morris, thought I. And recently he has really gone into overdrive digging up my yard and making a general mess of my lawn.

So what to do?  Well. I went down to the local hardware store to look for mole traps but I quickly began to have serious misgivings as I looked at the description of the violence promised to Morris.  These traps are also difficult to set (requiring lots of digging and careful placement) in addition to their being quite horrific.  Inflicting such horrors on poor old Morris seemed to be cosmically quesitonable, after all Morris is simply being a mole.

But then the good salesperson introduced me to the 'sonic spike.'  This is a device that sends out sonic waves in the ground and claims that this will drive away moles.  My first instinct is that this type of application of technology never works and a quick check of the intertubes reveals less than satisfied customers.  Nevertheless, the manager of the hardware store was claimed to have personally used them successfully in my neighborhood so I figured it was worth a try.


Besides, this approach has economics on its side.   What I mean by this is that the principle of the sonic spike is to make life in my yard not unbearable but marginally less pleasant than other places.  In economics we know that economic decisions are made at the margin.  In other words, Morris doesn't think 'well the benefits of Emerson's yard outweigh the costs even with this annoying noise (which is probably true), so I'll stay.'  No, Morris, being subject to the same incentives that influence us superterranean beings, thinks 'hmmm...here are two yards seperated only by a fence, but one is just slightly more annoying so I think I'll go to the more peaceful one.'  So, assuming I am right about the response of moles to incentives, it'll work.  But even if it doesn't, it makes for a good economics experiment.

Now, you have by now seen the er...moral ambiguity associated with this plan.  My mole strategy has an external cost that will be born by my neighbors: I am not removing the mole, only hoping to get it to move next door.  This is an example of a classic externality problem: if a the total cost of an activitiy is not born by the actor, too much will be done.  I am a good self-interested rational agent, and since I don't have to pay the cost of my neighbors' mole problem, I do not figure it into my calculation of relevant costs and benefits, so I choose the spike.

However, a bigger problem arises if all the neighbors decide on the same mole strategy.  If we all plant sonic spikes, the old Morris will think that every yard is as good as the next and whatever made him choose mine will cause him to chose it again. 

So I am not convinced it is the solution to my problem (and there is the downside of little high-pitched hums that eminate from the spike about every 30 seconds), but it'll be interesting if it is, at least for now.  And it keeps me karmically safe in the interim.

Failing that I may go with what seems the next best route: stick a hose from the tailpipe of my car into the ground and gas old Morris to death.  My big quesiton here is how do you get the car to not stall out due to clogging the tailpipe - isn't this similar to the old banana in the tailpipe trick?