Happy Holidays

I am taking a break from regular blogging for the next two weeks.  I will post occasionally when the mood strikes but otherwise I will be back to regular blogging after the new year.

Have a great holiday.

My Op-Ed

UPDATE: Here is the link to the OP-Ed in The Oregonian.

Well since The Oregonian never got it on the web page, I suppose it is safe for me to do so now.  Here is my original text (its all I have in a digital version) with my addition of the word 'substantial.' As far as I can tell it is the same as was published.

I have written a number of Op-Ed pieces that have been published in the Oregonian over the last few years, but never had nearly the response as I have had on this one, nor even close to the level of passion people have surrounding the movement, both for and against.  What this tells me is that the movement is really striking a chord that resonates with a lot of people.  The point of the editorial is that the movement can't just vent the frustration and anger symptomatic of the deep unrest with the outcomes of our political and economic system over the last few decades and be successful. It has to become a focused agent of change or it will all come to nothing; they now have to pivot from protest to advocacy.

I have been attacked by both those for and against the movement for in my words they managed to paint me as either opposed to the movement or a fellow traveler.  The truth is I am neither, I can't tell you if I support the movement because I am not entirely sure what it is they are advocating for.  And by the way, you can be critical of something and still support it - one would hope self-analysis and criticism is a key part of the occupiers themselves.  If they can't take my mild criticism, I have little hope for the movement.

Anyway, here you go:

The Occupy Portland movement managed to close down terminals as the Port of Portland Monday in an act of protest, putting a number of their fellow 99% out of work for the day. The reasons for targeting the Port were vague: apparently they were trying to hurt companies that do business at the port which are responsible for some rich people getting even richer. I fear the Occupy movement has lost the plot.

There is nothing unique about these businesses. It is hard to find a business that is not in some way connected to the global economy and that supports, however indirectly, a very wealthy person’s income. Imagine a small local business that gets a small business loan from a local bank. This seems safe enough, right? But that small local bank probably does business with a larger bank whose bosses are the very villains the Occupy movement is targeting. And the local business may ship goods to customers in foreign countries, enriching shipping magnates and importers, and so on. In other words, in trying to identify and protest a particular part of the economy they are chasing their tails and muddling their own message.

Thus the problem with the Occupy movement is not the general sense of a growing disenfranchisement of the middle and lower classes – this trend is real and identifiable – but what they suggest to do about it. What policies do they oppose exactly? What do they propose as alternatives?

I understand the general sense that the modern economy, ever more global and huge, is responsible for the growing inequality in the United States and how this inequality translates to a lack of political power. But it is not the global capitalist system itself that is causing these outcomes, but how we as a country restrain the system through our policies and our laws. And therein lies the genesis of a real and well-articulated message.

For example, it is now well known that our financial regulations were inadequate to restrain firms that were involved in a returns arms race – forever trying to best each other by producing impossibly high returns on loose credit without regard to the sustainability of such actions. We have made very little progress in improving such regulations.

It is also well known that the modern and global economy is creating ever more dramatic differences in returns to education. High school graduates have hardly made any advance in earnings for decades, while those with four-year university degrees and higher are continuing to advance. But instead of redressing one of the real root causes of inequality, we are dramatically disinvesting in public education in the United States.

Given the ever increasing inequality, the collapse of the financial sector and the worst economic downturn since the great depression, it is remarkable how little is being done in Washington to improve financial regulation and invest in the education of American children. Which leads to another policy lacuna: the inability to balance the needs and rights of corporate America with that of the vast majority of its citizens that have not seen their standard of living [substantially] improve in two generations.

So here is a suggested start for the Occupy movement. Do not put port workers out of work for a day: port workers are impacted dramatically by such economic disruptions while the fat-cats hardly notice. Use the collective energy of the movement to call for real financial reform, for a reinvestment in public education and to restrain the influence of money on government. It is a just a start, but an articulate one.

Finally, I realize I should get the Oregonian to mention my blog because it provides a forum for those who would like to debate the issue. [Perhaps this is why they never posted my Op-Ed: to save me the inevitable abuse that would have come from the generally caustic comments that appear on the O's web page] Anyway, I will not answer any more e-mails about this. You want to discuss, do it in the comments here, but keep it respectful.

Karma

I got a little blowback from Occupy folks from yesterday's Op-Ed.  Undeserved methinks, I don't think I am alone in not understanding the message behind the port protest and worrying that they are losing the plot, but I'm glad folks are paying attention.

But, since then I have had to have a root canal and my son told me he supports Tottenham Hotspur.  So if you are upset with me, don't worry the fates have punished me sufficiently.

Today I take a break from blogging to convalesce.

Update: A reader admonished me for my statement that "...the vast majority of American citizens, who have not seen their standard of living improve in two generations."

I agree, I had intended to write "substantially improve" but failed. My bad. But the motivation of the Occupy movement and it's supporters was not the point.

I have also been taken to task for both criticizing and supporting the Occupy movement. I was doing neither - I understand from whence the passion comes, but don't know if I agree with the remedies proposed, because I have not heard much about their remedies. Which was the part pf the point of the Op-Ed.

Occupy Portland: In Need of Focus and a Message

Credit: The Oregonian

My Op-Ed in todays Oregonian. [Not yet on-line - I will link when it is] Here is a tease:

The Occupy Portland movement managed to close down terminals as the Port of Portland Monday in an act of protest, putting a number of their fellow 99% out of work for the day. The reasons for targeting the Port were vague: apparently they were trying to hurt companies that do business at the port which are responsible for some rich people getting even richer. I fear the Occupy movement has lost the plot.

Who needs on-line? Go spend a buck and read the rest, I am so worth it!

I will add that it is absolutely okay to protest the outcomes of a system without understanding the fixes. Economics is complex and full of connections that are not always readily apparent. But by the time you have decided to shut down ports, you should have a good idea why you are doing it. There are plenty of knowledgeable folks to call upon to start to formulate a real message and to focus on the real problems. Acting without such preliminary groundwork is what makes me fear for the future of the movement.

And today is an Emerson two-fer as Rich Read and I chatted about unemployment and I sounded the Grinch note: focus on jobs, not the rate, and job creation sucks right now.

Oregon Unemployment Drops to 9.1% in November

Oregon's November unemployment rate dropped to 9.1% in November, but the number of employed dropped by 1,600 on a seasonally adjusted basis.  Similar to the national data the drop in the rate of unemployment is due to the number of people who exited the labor force by no longer looking for work.  That number declined by almost 7,000 people.  So there is not a lot to cheer.  Especially noteworthy was the 2,300 decline in manufacturing jobs.

The Portland Economy: Incomes are Better than Average After All

Last week the Portland Business Alliance released a report produced by ECONorthwest which was reported on by The Oregonian.  In it the big news was how much worse off were Portland metro workers relative to the US average:

A telling graph in the report, “A Checkup on the Portland Region’s Economic Health,” shows that as personal incomes wobble, tax revenues bounce wildly wreaking havoc in budgets for state services.

“If we want to improve revenue available to support these services, we need to start with good-quality jobs that generate the wages and incomes that can be taxed,” said Sandi McDonough, chief executive of the Portland Business Alliance, greater Portland’s chamber of commerce.

This is the same report that, last year, I criticized quite strongly for being sloppy and misleading and took ECONorthwest to task for the low quality of the work.   So you'd like to think that they paid particular attention to year's report and made sure it was excellent. Nope. Today, The Oregonian reports that the headline data from the report was all wrong, and the conclusion is exactly the opposite:

Portland-area incomes didn't fall faster and farther during the recession than national per capita income, as a study issued last week by local business groups reported.

In fact, per capita incomes in metro Portland declined slightly more slowly than national incomes -- and rebounded somewhat faster.

***

The mistakes occurred in final editing conducted by the Portland Business Alliance and ECONorthwest, a consulting firm that provided the data. Josh Lehner, an economist at the Oregon Office of Economic Analysis, spotted the errors.

Good old Josh Lehner, you all know him as the author of the OEA blog and Twitter feed, but I know him as the go-to guy on state economy data.  As for ECONorthwest, what can you say?  "Mistakes in final editing?!?" Final editing? That is total horsepucky: they mucked up the most basic data comparison, they should at least own their mistake.  These are people who charge a premium because they are supposed to be good at this stuff - you'd hope they would be a bit more careful, especially on such a high profile project.  And if you go to the report, you'll find no mention that it was revised, which is totally inexcusable.

I wondered about this, by the way, when I blogged about the report that said state personal income tax collections were rising much faster than the national average.  Yes the change and the level are not the same thing, but the erroneous graph suggests that the rate of change is lower as well.

So spare a thought for the beleaguered corps of exceptionally talented bureaucrats like Josh who toil in relative anonymity and yet day after day provide excellent service to Oregonians.  They are under-appreciated.    

Bike-o-nomics: If You Build It, They Will Ride, Redux

From Felix Salmon a graph made from data from the NYC Commuting Cycling Indicator showing the rise in bike commuting in NYC.  Felix makes a point that the big rise in bike commuting corresponds with the arrival of Janette Sadik-Khan, the controversial transportation commissioner for NYC who is a big biking advocate.

I blogged about the relation between bike infrastructure and bike riding before, suggesting that the correlation is suggestive of it having a big impact on riding.  Here is more suggestive evidence.  Not that this is terribly surprising: you lower the cost of an activity and people tent to choose more of it.

Now a good research question is whether expenditures on bike infrastructure are a good investment.  I suspect that they are one of the best in terms of cost savings down the road in health care, environment, and so on, but I'd like to see some good research that connects the dots convincingly.  If you know of some, do let me know.

State Tax Revenues on the Rise

Or so says the Rockefeller Institute who tracks state tax revenue from 48 states:

Preliminary tax collection data for the July-September quarter of 2011 show growth in overall state tax collections, as well as for personal income tax and sales tax revenue, for the seventh consecutive quarter. While still strong, revenue growth was more moderate than in the previous three quarters. We will provide a full report on the July-September period after Census Bureau data for the quarter are available.

The Rockefeller Institute's compilation of data from 48 early reporting states shows collections from major tax sources increased by 7.3 percent in nominal terms in the third quarter of 2011 compared to the same quarter of 2010. This is a noticeable slowdown from the 10.8 percent year-over-year growth reported in the second quarter of 2011. Tax collections now have been rising for seven straight quarters, following the five quarters of declines that were brought on by the Great Recession.

Here are the data for Oregon and Washington (PIT=Personal Income Tax; CIT=Corp. Inc. Tax; Sales=Sales Tax):

Percent Change in State Tax Revenue, July-September 2010 to 2011

Fortunately for Oregon personal income taxes in general are recovering faster than are sales taxes as people are probably using new income to pay down debt and build up savings (though the saving rate has begun to dip again, so sales taxes will probably pick up soon).  Overall a 10.4% increase is a nice healthy rebound for Oregon and from what I understand, above both of the two most recent forecasts for Oregon.  This from the OEA blog:

Let's hope the trend continues.  If the Euro mess can get sorted (and today there is good news on that front), this fledgling US recovery might just start to gain some momentum.

Reinhardt and Krugman on the World Economy

Watch live streaming video from nytimesopinion at livestream.com

Gingrich and Child Labor

My friend and colleague, Eric Edmonds of Dartmouth, takes up the bizarre promotion of child labor by Newt Gingrich in Reuters.  Here is an excerpt:

Republican Presidential frontrunner Newt Gingrich continues to insist that child labor laws in the U.S. are “truly stupid,” that the poor lack good work habits, and that the former would solve the latter. He hasn’t mentioned any specific policy changes, yet it’s clear that he doesn’t like the way things are done now, and that that he thinks America would be better off if kids worked more. If only the economics agreed.

***

The biggest hole in Gingrich’s plan is a simple one: adding more workers does not create new jobs. With 1,373,000 youths 16 to 19 currently looking for work, according to the Bureau of Labor Statistics, adding even younger children to this pile would likely serve to increase unemployment or reduce unskilled wages further.

***

The issue is that workers that start unskilled stay unskilled. Especially if their education is suffering as a result. Working children do not learn skills that are going to help them to succeed in today’s technologically advanced global economy. How is learning to be an unskilled laborer at an early age going to help families in the long-run?

It is not. Implicit in Mr. Gingrich’s argument is that the act of working itself teaches some transferable skill that then makes the child laborer a better worker overall. We’ve seen what happens when successive generations of families need their children to work. They are unable to escape poverty.  Some of the best evidence on this comes from Brazil, where, according to two economists’ research, former child laborers are three times more likely to need their own children to work.

The research from Brazil he is referring to is my own conducted with André Portela Souza. We also have research that shows that participants in child labor end up with lower earnings as adults, all else equal. Research that we are working on now is focused on understanding the effect of working while continuing to go to school. Results are preliminary but suggest a significant decline in the how much and how well child laborers learn relative to their peers who do not, even when controlling for other socio-economic disparity.

Economist's Notebook: On Economics

I had never encountered this quote before I read it in Greg Mankiw's New York Times Op-Ed this past sunday.  It is from Keynes:

“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

I think this is about as perfect a statement on economics as there can be.  I often describe economics as simply a system of logic - a precise way to think about how the world is organized.  In another article in the same Times, Nobelist Tom Sargent referred to a former TA who called economics 'organized common sense,' which is also a good description as long as the emphasis is on the 'organized.'

I like economics because it allows me to see connections clearly, understand society better and be able to be precise and clear when I think about economic challenges and potential solutions.  In fact it was the frustration of living and studying in India as a junior in college that really cemented this in my mind: all around were examples of exceptional poverty and economic malaise and all of the discussions about the cause of the problems were notional and poorly focused.  I wanted answers, or lacking that, a precise way to think about the problems.  Economics gave me just that, and I now spend my life trying to find answers.

But the discipline of economics does not promote capitalism, nor any particular political philosophy.  You can be as liberal as Krugman or as conservative as Friedman and still understand that economics allows us to understand markets clearly - both the benefits and the drawbacks - and reasonable people can draw very different conclusions about the way society should be organized around them.  This is a strength, not a weakness of the discipline: we are looking for facts, not considered opinion.  

What you shouldn't be is an advocate for any economic structure without understanding neo-classical economics.  Which is why, frankly, I think the bulk of the heterodox folks, who have established a separate and parallel discipline, have it wrong.  You have to base your advocacy for non-market based economic systems on a reasonable critique of market outcomes based on neo-classical economics. By dismissing the core of economic thought and attacking straw men caricatures of the same you are not even competing in the marketplace of ideas, but relegating yourself to the fringe.

I say this because if the Occupy movement wants to argue that the current system is flawed and needs fundamental reform, they should study hard in principles of economics rather than walk out and dismiss it out of hand.  There is plenty there to serve as the foundation of a progressive critique of the current system. And there is plenty there to serve as a conservative rebuke as well.  Such is the beauty and utility of economics.

Uh-oh

I can see I am not going to be very popular in the state for a while.  Go Badgers.

Eco-nomics: Biofuels Might Not be the Answer

Photo Credit: Tiffany Woods

A new study by Bill Jaeger and others at OSU questions whether biofuels would do much to displace fossil fuels and would likely lead to increased, not decreased, greenhouse gas emissions.

Here is an excerpt from the press release:

"Our results suggest that existing biofuel policies have been very costly, produce negligible reductions in fossil fuel use and increase, rather than decrease, greenhouse gas emissions," said Jaeger, a professor in the agricultural and resource economics department at OSU.

Biofuels were initially seen as a solution to energy and environmental problems, Jaeger said, because the carbon dioxide that's emitted when they're burned is equivalent to what they had absorbed from the atmosphere when the crops were growing. Thus, biofuels were assumed to add little or no carbon dioxide to the atmosphere.

But the bigger picture is more complex, Jaeger said, in part because biofuels are produced and transported using fossil fuels. For example, nitrogen fertilizer, which is made using natural gas, is used to grow corn for ethanol. Additionally, growing biofuel feedstocks can push food production onto previously unfarmed land, according to well-documented research, Jaeger said. When this new acreage is cleared and tilled, it can release carbon that accumulated over long periods in soil and vegetation, thus increasing greenhouse gas emissions, he said.

The costs of these side effects tend to be overlooked by policies that focus only on gallon-for-gallon substitutions, he added.

You can see the original paper here.

And Now For Something Completely Different

If You Build It, They Will Drive

A reader and transportation advocate in Salem alerted me to a paper that had escaped my attention by Duranton and Turner, two economists from the University of Toronto. It was published in the October 2011 American Economic Review - one of, if not the, pre-eminent journals in economics - and is entitled "The Fundamental Law of Road Congestion: Evidence from US Cities.  In it, the authors try and estimate the capacity elasticity of vehicle kilometers travelled (VKT).  In other words, by how much will vehicle travel increase in response to increases road capacity.  This paper seeks to answer the question: will new road construction ease overall congestion?

[As an aside, how is a paper about driving in the US and published in a US journal allowed to get away with using kilometers instead of miles?? It is an abomination!]

This question is a lot harder to answer than it may appear initially.  You can't just look at road construction and subsequent changes in miles driven (yes, I said miles) because you don't know if the road was built in response to the increase in miles driven, if the increase in miles driven was in response to the new road capacity, or if miles driven would have increased just the same regardless of road construction.  Empirically, this presents a very tricky problem. I won't get into the minutiae of how they addressed this save to say they used historical data on transportation planning to instrument for the road capacity in order to identify the true effect of capacity on VKT.  [Econ students should now be thinking hard about local average treatment effects: the identification comes from things like the original planning document for the interstate highway network in 1947 - how does the variation in planned highways in 1947 affect VKT today?]  The methods are pretty convincing and the results, to my mind, are pretty startling.  Here is the abstract:

We investigate the effect of lane kilometers of roads on vehicle-kilometers traveled (VKT) in US cities. VKT increases proportionately to roadway lane kilometers for interstate highways and probably slightly less rapidly for other types of roads. The sources for this extra VKT are increases in driving by current residents, increases in commercial traffic, and migration. Increasing lane kilometers for one type of road diverts little traffic from other types of road. We find no evidence that the provision of public transportation affects VKT. We conclude that increased provision of roads or public transit is unlikely to relieve congestion.

What this says is that the capacity of elasticity of VKT is one: that for every new lane kilometer of road you build you will get a corresponding increase in traffic - yielding no net benefit to congestion.  Wow.  So opponents of the CRC, for example, might be pleased to note that claims of quicker travel times are probably completely bogus.

But there is more.  They find exactly the same effect for public transportation (and by extrapolation we can pretty safely say the same is true for bike travel) that every car taken off the road by, say, a new MAX route, will be replaced by a new car yielding no net benefit to congestion.

There are a number of pretty serious caveats here though.  They find that was fills in these new roads is a pretty robust increase in commercial truck transport and in the change in individual driving behavior.  This makes sense to this economist - if road congestion is an equilibrium result of the market for driving, if you lower the marginal cost curve, you expect more driving to get back to the point of marginal cost equals marginal benefit (since the benefit hasn't changed).  So if you are a CRC advocate, you can point to the potential increase in commercial truck activity that will result as evidence of increased economic activity in the region in response to the better transportation network.

Interestingly, the increase in highway usage does not appear to come from those switching from city roads to highways - so such new highway construction should not be expected to ease congestion on surface roads.

There is also the fact that this elasticity works both ways.  So it may be that by getting a person to take a bus or ride a bike only convinces someone else to start driving, removing road capacity in order to provide more bike or transportation infrastructure should result in a proportional decrease in overall VKT.

Finally, these results are for highways, but they do have some, arguably less robust results for major roads in urban areas where the elasticity estimates range from 0.67 to 0.89, so high but not 1.  Which means that building out major roads in urban areas should be expected to decrease congestion, but by relatively small amounts.  For example if we use 0.75 as a intermediate number than increasing urban road capacity by 10% should yield only a 7.5% increase in VKT.

So there is lots here for advocates on both sides to wrangle over.  I, being the Scholar, have a duty only to report and interpret.  Go forth and wrangle away...

Why Would the Death of the Euro be Such a Bad Thing?

This was a question, posed to me by a well-known beer writer when I met up with him recently in the UK (which is feeling pretty darn smug right now for not joining the Euro).  It is a good question (surprisingly, given its provenance), and I have been thinking a lot about the answer to this.

To be clear, we all understand that leaving the Euro by a small and heavily indebted country like Greece would be a disaster for them: they would adopt their own currency again, and heavily devalue.  Capital would flee astonishingly fast as folks got their Euro deposits and investments out as quickly as they could.  This would both incapacitate the government by essentially cutting off all credit and would lead to a complete collapse of the banking sector.  Bad times.

But why doesn't Germany, which is not at all happy about having to rescue the hopelessly mismanaged Greek economy, just cut and run?  They have a robust economy, could re-launch the Deutche Mark credibly and off they would sail into the sunset...

The first and obvious answer is that cutting and running might lead to Greece, Portugal, Spain and even Italy falling into crisis and Germany would not be immune to the sickness that would spread - they would be seriously hurt by this and the resulting recession would likely be pan-European.

But the less obvious answer is that if Germany exited, the Euro would immediately lose a lot of its value and German banks have a lot of Euro denominated assets that would suddenly be worth a whole lot less.  This would necessitate a bailout of German banks and a subsequent very tight credit environment as banks had to shore up their balance sheets.

In fact, UBS released a study which claims that that it would be much cheaper for Germany to bail out Greece than to exit the Euro. From the report:

Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over EUR1,000 per person, in a single hit.

The moral is that it is pretty easy to create a monetary union, but a whole lot harder to break it up.

Economist's Notebook: Lake O Streetcar and Accounting v. Opportunity Costs

An article in The Oregonian discusses the new and improved cost figures for the proposed Lake Oswego Streetcar extension. In it, there is a discussion about whether the cost of the land that was purchased years ago should be included. This is a classic lesson in accounting versus opportunity costs in economics:

The new figure also does not include land owned by the government that originally had been included with capital costs. That alone reduced the price tag now being promoted by $80.3 million.

"I don't think it's disingenuous at all," said Obletz, who argued that the land is "not a cost to the project."

It may be correct to say the land is not an accounting cost for the project going forward, but it is entirely incorrect to say it is not a cost of the project. The reason economics makes the distinction is that the opportunity cost includes the next best alternative usage for the land and thus deciding to use the land for this project makes it unavailable for other uses.

In other words, if the land can be sold say for $100 million than utilizing it for this project denies that $100 million for any other use.  So, if you are doing a cost-benefit analysis of a project you have to include this cost as well, it is just as important as any real accounting cost going forward.

I kinda hope the streetcar guts built, it'd be pretty cool, but let's be real about the cost.

Oh No Canada!

The Economist wonders whether Canada is headed for a US-style housing collapse noting that the degree to which houses are overvalued there is above what US house prices were at the peak of the bubble:

Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble. Despite their collapse, Irish home prices are still slightly above “fair” value—partly because they were incredibly overvalued at their peak, and partly because incomes and rents have fallen sharply. In contrast, homes in America, Japan and Germany are all significantly undervalued. In the late 1990s the average house price in Germany was twice that in France; now it is 20% cheaper.

What is it about the German economy that makes it so robust? Well, puzzle not, here comes the Wall Street Journal to tell us that Germany and France are not immune to debt problems either:

Soccernomics: Soccer on Television

Photo Credit: Reuters

An interesting little tidbit from last weekend: a tape-delayed broadcast of the Liverpool-Chelsea English Premier League match on the Fox network drew almost double the viewership of the MLS Cup final.

This illustrates both the good and the bad of American soccer. The proliferation of European sooccer available on American TV over the last decade has completely changed the landscape. Americans are increasingly tuning in to see top flight soccer from the world's best leagues. At least in my neighborhood in Portland I see more grade school aged kids sporting European club and country jerseys than MLB, NBA, and NFL combined.

All of this seems like an incredibly positive thing for the sport in the US. Kids no longer think of it as a kids only sport that is a good pastime until you can play the real sports. And they get to see the world's best players, learning the moves and strategies that will help them progress the game in the states. It also raises the legitimacy of the sport in the eyes of the adults - it is not just a great game to play but a great spectator sport as well.

But there is a significant negative as well: such broadcasts expose the significant gulf between the level of play in the top European leagues and the state of play in the MLS. The MLS has made huge progress in terms of the experience in the stadiums - starting next season all but three teams will be playing in soccer specific stadiums (if we count the special shrinking magic of BC Place in Vancouver). Average attendance this year has grown significantly: up seven percent from the year before - helped by Portland and Vancouver.

For all of the in-stadium progress, the fact remains that MLS still struggles to attract TV audiences: the MLS Cup final drew a underwhelming 0.8 share. And now that top flight European soccer is easily available on US TV there is serious competition for eyeballs. Who would choose to watch a Dallas v. Philadelphia match when Barcelona is playing, or Kansas City v. Chivas USA when the Arsenal is playing Manchester United. The fact is that the product on the screen coming from Europe is far superior. So while the energy, excitement and fun at a Timbers game is second to none, the TV product is pretty lame (and don't get me started again about turf - it is even worse on TV than live).

And this is the economic conundrum: the real money in professional sports is from television. To the extent that European league broadcasts cannibalize the MLS TV market, the development of the MLS will be stunted by the lack of revenues to spend on quality players.

The hope is in those little kids with the Man United jerseys. As they progress and get better so will the US. There is no reason there can't be 20 or even 200 Landon Donovans in the US, and as we develop more players the play in the MLS will improve with them.

Trade and Oregon

From the Office of the US Trade Representative:

Oregon

Exports Support Jobs for Oregon Workers

Export-supported jobs linked to manufacturing account for an estimated 5.2 percent of Oregon's total private-sector employment. Nearly one-quarter (23.5 percent) of all manufacturing workers in Oregon depend on exports for their jobs (2009 data latest available).

Exports Sustain Thousands of Oregon Businesses

A total of 4,918 companies exported goods from Oregon locations in 2008. Of those, 4,384 companies, or 89 percent, were small and medium-sized enterprises (SMEs), with fewer than 500 employees.

SMEs generated close to one-third (32 percent) of Oregon's total exports of merchandise in 2008.

Foreign Investment Creates Jobs in Oregon

In 2008, foreign-controlled companies employed 46,900 Oregon workers. Major sources of foreign investment in Oregon in 2008 included Germany, the United Kingdom, Japan, and Canada.

Foreign investment in Oregon was responsible for 3.2 percent of the state's total private-industry employment in 2008.

Oregon Depends on World Markets

Oregon's export shipments of merchandise in 2010 totaled $17.7 billion.

The state's largest market was China. Oregon posted merchandise exports of $4.0 billion to China in 2010, 23 percent of the state’s total merchandise exports. China was followed by Malaysia ($2.7 billion), Canada ($2.4 billion), Japan ($1.4 billion), and Korea ($937 million).

The state's largest merchandise export category is computers and electronic products, which accounted for $7.8 billion of Oregon's total merchandise exports in 2010. Other top merchandise exports are agricultural products ($2.3 billion), machinery manufactures ($1.5 billion), chemicals manufactures ($1.4 billion), and transportation equipment ($827 million).

Oregon's Metropolitan Exports

In 2009, the metropolitan area of Salem exported $325 million in merchandise. Other major metropolitan areas in Oregon that exported in 2009 included Eugene-Springfield ($314 million) and Corvallis ($241 million). A major metropolitan area exporter that included some counties of Oregon was Portland-Vancouver-Beaverton (including some counties in Washington as well) which exported $15.5 billion in merchandise in 2009.

*Data updated June 2011, by the Office of Trade and Industry Information, International Trade Administration, U.S. Department of Commerce.

Now, keep in mind this is from a source that is charged with promoting trade, but most of the facts are straightforward. Now you know.

Picture of the Day: Budget Deals

Via The New York Times' Economix blog:

Growth Doesn't Buy Happiness

Changes in life satisfaction, education and growth performance in the 2000s
Annual changes, in percent

Source: Perspectives on Global Development 2012

Statlink: http://dx.doi.org/10.1787/888932517610

This was sent to me by the OECD and illustrates the struggles emerging economies are having translating economic growth to advances in human capital and life satisfaction.

Food Stamps: Oregon Leads the Nation in Food Assistance

From The New York Times' Economix blog:

In Oregon, 17.8 percent of families received food stamps, officially known as Supplemental Nutrition Assistance Program (SNAP) benefits, the highest rate in the nation. Oregon was followed by Tennessee (17 percent) and Michigan (16.9 percent).

Yet Another Picture of the Day: Comparative Oregon Unemployment

Still trying to catch up after conference travel, so I'll guide you to the Oregon Office of Economic Analysis with this tease:

Picture of the Day: Manufacturing Up

Via the WSJ.

Picture of the Day: Which States are Most Exposed to Europe

Don't make too much of this, the US is so integrated that all states will suffer if Europe goes into recession, but there would likely be some differential effects based on how much trade states do with Europe.  So how much do states trade with Europe?

Data from the Commerce Department and Wells Fargo, and the graph is from the Wall Street Journal.

A Mileage Tax or a Gas Tax?

Our fair Governor has proposed a mileage tax on top of a gas tax hike to address the lacuna in transportation funding.  This raises the question of which is better and what do they accomplish.

If you are proposing Pigovian taxes, then both make sense but address very different things.  Driving a car imposes external costs through the impact on the environment, through the wear and tear on the roads and through the time cost of congestion.

A mileage tax addresses the wear and tear issue.  People who drive will be assessed a tax that is equivalent to the cost of the road wear they are responsible for.  This has the benefit of being fair and providing a direct source of funds to maintain the roads and is a disincentive to drive once the external cost is made internal through the tax (and also taking into account the cars weight, etc. - of course how will they deal with studded tires and chains?).  The implementation is costly however, having a GPS in each car has got to be expensive as well as the cost of reading them and imposing a tax.  Perhaps we could just do a mileage charge - not as accurate but simple.

The mileage tax does not address the congestion issue, but with the GPS it could, one assumes.  If you drive on certain congested roads at certain rush-hour times, you could be charged more. This would provide the same Pigovian incentives to avoid driving during rush-hour or in congested areas.   The GPS could also determine how much tax should go to municipalities, counties, and the state depending on which roads you drove on.  But doing these things would seem to be an enormous computing challenge and one that would be enormously expensive.  It is an interesting idea, however.

The gas tax is Pigovian in addressing the environmental impact of the amount of carbon emitted which is exactly related to the gas used.  If the primary goal is to address this than this is the appropriate tax.  

It is clear that each tax is also a poor way to address the other issue, to wit: a gas tax is not a good way to address wear and tear because a Prius could do a lot of wear and tear with little gas and a Mustang could do little wear and tear with a lot of gas; and a mileage tax doesn't work, for the very same reason, as a way to address environmental impact.

Both taxes could be implemented, but since the gas tax is good for the environmental impact side and, though imperfectly, does address the wear and tear side as well, and is basically zero extra administrative cost, it seems like the clear winner.  However, if the GPS system could be done very cheaply and has the added congestion and differential tax components, it might be worth pursuing.  Perhaps it is politics but I don't see what's wrong with a healthy increase in the gas tax - besides the GPS monitors will just serve as a constant reminder of the government's taxation which will fuel the anti-tax sentiment latent in almost everyone.

Note: One thing I failed to mention is that the milage tax is imperfect in that non-Oregon registered cars that drive in Oregon (for example, Vancouver commuters) would get off scott-free.  At least a simple gas tax would catch some of them and would work both ways (Oregon drivers in Washington would pay for Washington's roads only when they buy gas in Washington).

Econ 101: Dynamic Comparative Advantage

This past weekend, the Oregonian reported on something that has been fueling the rumor mill in Corvallis for a few months: HP is most likely scaling down its Corvallis operations.  A few weeks ago they also reported on the shuttering of the Hynix plant in Eugene.  What gives in the Willamette valley?

Well, as a friend who works for HP in Corvallis explained to me, HPs printer business is not growing and in modern business you have to grow revenues.  So without growth in sales, you need to cut costs and a big cost savings is to employ engineers in Asia rather than in the US.

When I teach comparative advantage, the relative productivity advantage that leads to gains from trade, I try to stress that though in the classical Ricardian example there exist static differences in productivity, such productivity differences evolve through time.  Countries like India and China for a long time had a major comparative advantage relative to the US in light manufacturing and other labor intensive activities that came from an abundance of unskilled labor and a relative paucity of skilled labor.  But over the last ten to twenty years, this has begun to change quite dramatically.  India and China have begun to produce more and more skilled engineers, to use but one example.  Thus the relative productivity advantage that the US used to enjoy in engineering is disappearing fast.

Why has the US lost this advantage?  One need only look at the sorry state of the US higher education system to figure this out.  Federal funding for basic research is almost non-existant, states support for public higher education is drying up and the K-12 system is sending (and not sending) kids to college without proper preparation.  From my vantage point it is not hard to feel pretty pessimistic about the future.  Our best hope is to try and hold on to all of the incredibly talented foreigners that come to get advanced degrees (for the time being at least) in the US.  But with stricter immigration policies and ever improving opportunities at home, many foreign students are choosing to return, leaving the US talent-poor and loosing more and more industry.  

So back to Oregon.  What can a state do to combat these job losses?  Produce skilled individuals who have the ability to be high productivity participants in the 21st century.  This takes time and resources for the entire educational system.  Failure to do so will leave us in the unfortunate position of having a comparative advantage in low value-added activities.   

Econ 101: Myth-Busting Self-Service Gas

MYTH 1: Eliminating Gas Station Attendants Will Just Lead to More Profits for the Owners and No Lower Prices for Consumers.

In the comments section of the previous post on the self-service gas poll, Kari Chisholm, an enormously intelligent guy for whom I have lots of respect, gets one terribly wrong. He argues that if gas station attendants were to disappear, gas station owners would just pocket the excess profits. I am sorry Kari but this is just bad economics - and wrong.

Excess profits, or 'rents' in the economics parlance, come from market conditions. Usually rents come from some sort of market concentration (monopoly or oligopoly) that can either be 'natural' (high fixed costs prohibit potential competitors from entering), or 'created' (regulation, patents, strategic entry deterrence, etc.). Now it may be true that gas stations do capture some rents because of special regulations covering the storage of potentially toxic fuel, among other things, but I doubt it is much. You see, it doesn't take very may gas stations to make a competitive market. The reason for this is that gas is, for the most part, a completely generic product and price information is posted very visibly, so consumers are extremely price sensitive and thus to attract them you have to compete fiercely on price. [For you economics students, this is a pretty good example of Bertrand price competition, in which only a few firms will drive the price to marginal cost] Most studies have found the market for retail gas to highly competitive.

Regardless of how competitive they are, however, the real key to why Kari's suggestion is in the fact that the market conditions do not change if you eliminate attendants, so any rents that exist after the elimination of attendants would be there before as well. The only thing that will change is the marginal cost of providing gas to consumers, and this cost savings will be passed on to consumers by force of competition. [And, by the way, when John Corzine proposed the change for New Jersey, the only other state that forbids self-service, it was the gas station industry group itself that was most instrumental in killing it - which should tell you that they did not expect to make higher profits with the switch]

MYTH 2: National Average Gas Prices are a Good Counter-Factual.

No. Local gas prices are determined by, among other things, state taxes, state regulations and especially, distance to pipelines and refineries. Just saying that Oregon's gas prices are consistent with other states prices where self-service gas is allowed tells us nothing. (But, by the way, Oregon is 4th highest in the continental US for regular gas prices according to the latest data from AAA) The true counter-factual is what would happen to prices at your local gas station if the labor costs were reduced - it doesn't take an economist to figure it out. But seeing as I am an economist, here is the basic econ 101 graph of supply and demand in retail gas with two supply curves, one that includes the extra cost of attendants and the other that does not. Note that when you include attendant cost, price goes up.



MYTH 3: Full-Service is a Good Way to Boost Employment and Reduce Driving, both Noble Goals.

If you buy my argument about gas prices, you may say, but wait, don't we want higher gas prices to discourage people to drive and and thus limit the carbon that is released into the atmosphere? To which I would answer, if that is true then you can increase the tax on gas and achieve the same thing, but the difference is government captures the revenue and can then spend it on things like: lower state college tuition for the types of people that would work as a gas station attendant, investments in public transportation, etc.

Also, full-service gas, as mentioned in previous posts has ambiguous effects on overall employment. There will likely be fewer gas stations with full service and high gas prices affect other industries by raising their costs which will also raise supply curves and lower output and employment. It is quite likely that this will actually lower overall state employment, not raise it, which is why we don't mandate employment in general.

But, by the way, none of this really matters, you can keep everything they way it currently is and still give me the right to pump my own gas (while the attendant watches). Surely you can't argue against that? What I would propose, however, is that each gas station must be able to provide the service upon request, but otherwise people would be allowed to pump their own.

Local Currency

A story in The Oregonian last Sunday discussed the efforts of a group of people to bring local currency to Portland. The idea is pretty straightforward: with local-only currency (i.e. accepted nowhere else) it can never leave the community, so through the use of such currency you ensure that money you spend remains in the community. This, in turn, helps the local community through increased investment, fostering local connections, enhancing local businesses, etc. The system works on an advanced form of barter where a group of individuals and businesses agree to accept the local currency for goods and services provided. However, you can only use the currency within that group - so only if the group has a good or service you need will an exchange be made.

I want to like the idea, I really do, in fact I lived in Ithaca, New York for five years while in graduate school where perhaps the most successful example of local currency exists: Ithaca Hours. But the economist in me just won't let me get excited about the idea. I certainly don't think there is anything wrong with having a local currency, but I think that claims about the benefits are just not very credible - I don't think it really makes a difference.

The first idea, that this keeps money circulating locally seems to me to be countered by the much lower velocity in the circulation of this money. Even though dollars may quickly leave the Portland market, chances are they will have changed hands locally many times first (on average). The problem with local currency is that it does not solve the barter problem very well unless there are a huge number of participants. If the velocity is quite low, then it may even cause a drag on the economy - slowing down the rate of transactions.

I also don't think that local is the way to think about economic vitality. Most Portland artisans, I imagine, are very happy to fill orders from across the US and the world and would be much worse off if they tried to satisfy only local demand. On the other hand if I take a dollar I earn from my job and spend it at the Corvallis farmers market, I hope that that dollar is spent by the farmer in a way that yields the most benefit to him or her. Maybe it is buying seeds from a wholesaler in another county, or perhaps in a new piece of equipment from Japan, or a cool iPod for the kid that cannot be bought with local currency. I am not clear on how a purchase with the local currency (and apparently there is one in Corvallis but I had never heard of it prior to its mention in the article) helps the local economy if it prevents these purchases by the local farmer.

Finally, the hypothetical extreme is a completely closed off economy. What would I expect from such a place? Lower variety, less efficiency (including higher energy usage) and poorer quality. So why should we want such a world, even in part? I like the idea of lots of goods a services both flowing out of Portland and flowing in - I don't see it as a leakage but as a virtuous cycle of exchange.

As a coda: two of my classmates in graduate school actually wrote and published an economics paper which argued that local currencies could serve as a signal of demand for local goods and thus spur investment in local productive activities. With all due respect to my esteemed colleagues, I think in reality local currencies are so minor a part of the economy (even in a hugely successful system in a tiny upstate NY town), that though theoretically correct, the real effect is negligible.

Introduction to the Mind of an Economist

When I think about public policy as an economist, my first instinct is (of course) that a market-based solution is usually the first-best alternative. Unfortunately, this is where many poorly-trained economists (or worse, well-trained economists who should know better) stop. I next think about the potential for market failures: un-realized goals or inefficiencies due to aspects of the market that don't match the textbook version. Market failures always exist - the job of a good economist is to identify them and figure out, one, how important they are, and two if the additional inefficiencies that will arise from government intervention are outweighed by the potential gains from such an intervention.

It is from such a lens that I am often either bemused or delighted by public policy in Oregon (and sometimes both). One of the most visible policies that I find bemusing is the ban on self-service gas in the state. First let us dispense with a number of obvious canards about self-service gas: it is not 'dangerous,' it does not lead to increased environmental damage from sloppy customers pouring gas all over the place, it does not reduce automobile insurance in Oregon, it is not less-efficient. So why do we have this policy? Let me try offer some reasonable arguments for and against. For: the elderly and disabled self-service gas can difficult; it creates jobs for a segment of the population that often has trouble finding employment. Against: it is slow and inefficient; it raises the price of gas; employees (who are often teenagers) are exposed to potentially harmful vapors. Are there any others I have not thought about?

Each of these arguments has an element of truth, so how important are they? Well, I think that they are all fairly unimportant save for the first argument about the elderly and disabled - I'll come back to that in a minute. I have seen a figure of about 7,600 persons who are employed as gas pumpers in Oregon. My guess is that this includes a large-portion who are part-time and for whom the income from their job is not what they live on (i.e. teenagers living at home) , so I think that the real impact on the well-being of Oregonians is minimal - these are simply lousy jobs. Besides if this is good public policy, why don't we mandate employment for many other business (no self-service car washes!, no self-service Laundromats!, etc.)? We don't do this because it dissuades investment in new business. As for the arguments on the other side, I believe it is slower and that gas prices are slightly higher. I don't think either is that important. Perhaps this helps achieve another policy goal of reducing slightly the miles driven, but there are much cleaner ways to do that (to wit, a gas tax). I do not know if there is credible evidence to suggest that teenagers are being harmed by fumes, until there is I shall assume the libertarian stance. So in the end, I think this policy fails the pointless test. I cannot see any good reason for government involvement and, therefore as an economist that believes in limiting government intervention in areas in which it is unnecessary, I think this policy stinks.

Now let me return to the one cogent point I put off. I do think that the elderly and disabled argument has merit, because if you have been to our neighbor states recently, I defy you to find anything other than self-service gas. So I can imagine a case for mandating at least the option of having gas pumped for you. However, again, since this does not seem to be an issue in the other 48 states the do not prohibit self-service gas, I would not be in favor of this amended policy solution until I were convinced that it was necessary.

Other policies I hope to comment on soon: bottle bill, payday loans, sales tax.

Note to Self...

...just changing the dates on old posts to dates in the future does not cause them to repost at a later date, just moves the up to the top of the blog.

Ah well, I really don't have time to deal with this so please pretend that you can see the posts until the date listed while I fire the entire editorial staff.

Programming Note: OEB on Hiatus - Bring out the Greatest Hits!

A combination of midterm busy-ness, conference travel and overall 'things-are-starting-to-pile-up-so-high-I-think-my-desk-is-going-to-crumble' will keep blogging light to nonexistent over the next two weeks.  I will get a chance to see UK austerity up close as I travel to a conference in London and then have a little Beeronomics fun making my way up to Edinburgh for a talk.  Actually, I am hoping it is more than just fun but research for a future book as I will be tagging along with a pro beer writer and getting to be in on some conversations about the UK beer industry.  I'll pop in here or on Beeronomics if there is anything particularly interesting to make note of.

But don't despair! I am going to repost some oldies but goodies to entertain and enthrall you in my absence.

Cheerio!

Higher Education: So Suddenly You Don't Believe in Markets?

I came across this piece in Investor's Business Daily by Alex Tabarrok (of Marginal Revolution fame) in which he argues that there are too many arts and humanities graduates and too few science, technology, engineering and math graduates (STEM). [See also this blog post]

Here is a taste:

If students aren't studying science, technology, engineering and math, what are they studying? In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

The story is the same in psychology, which graduates about 95,000 students a year, more than double the number of 25 years ago and far in excess of the number of available jobs.

***

There is nothing wrong with the arts, psychology and journalism, but graduates in these fields have lower wages and are less likely to find work in their fields than graduates in science and math.

As a result, more than half of all humanities graduates end up in jobs that don't require college degrees. Baggage porters and bellhops don't need college degrees, but in 2008 17.4% of them had at least a bachelor's degree and 45% had some college education. Mail carriers don't need a college education, but in 2008 14% had at least a bachelor's degree and 61% had some college education.

Not surprisingly, these graduates don't get much of a financial "bonus" from college. A college graduate in the humanities who finds a job requiring a college degree had median annual earnings in 2009 of $21,000. For those who ended up in jobs not requiring a college degree, the median was just $14,000.

So the obvious question here - especially since the author is a conservative economist pre-disposed to believe in the efficiency of markets - is: what is the market failure here?  The incentives to go into STEM are clear, the disincentives to go into these other fields are also clear and yet student freely choose them.  Clearly, there is more to a college degree than just how it pays off in the labor market in terms of salary.  The fact that many people choose them suggests that there are sizeable non-pecuniary benefits to these degrees.  If you believe in markets, then, you should see these stats as equilibrium and evidence of the efficient distribution of degrees across the population. And if a letter carrier's life is enriched by a college degree, then it is not the economist's place to judge - preferences are personal.

But Tabarrok next makes a different and more compelling argument: if the social returns to education are much higher in STEM than in other fields, why don't we subsidize them more?

Moreover, arts, psychology and journalism graduates are less likely to create the kinds of innovations that drive economic growth.

Economic growth is not a magic totem to which all else must bow, but it is one of the main reasons we subsidize higher education.

The potential wage gains for college graduates go to the graduates — that's reason enough for students to pursue a college education. We add subsidies to the mix, however, because we believe education has positive spillover benefits that flow to society. One of the biggest of these benefits is the increase in innovation that highly educated workers bring to the economy.

As a result, an argument can be made for subsidizing students in fields with potentially large spillovers, such as microbiology, chemical engineering, nuclear physics and computer science. There is little justification for subsidizing majors in the visual arts, psychology and journalism.

I am not sure there is good evidence to support the conclusion that the social returns to education are that much higher in STEM than in other fields.  Obviously the private returns are higher, one needs only to look at the salaries quoted in the article, but the social returns are another matter.  One could make quite a strong argument (and I do) that fields like journalism provide a social return per dollar that is much higher than STEM through the watchdog role they play that limits corruption and other social inefficiencies.  Similar arguments for psychologists, artists, librarians and the like are easy to make: in fact it is quite easy to imagine that society reaps huge benefits from those that are willing to accept relative low wages to take these roles.

Finally, I don't think it is at all correct to say we subsidize these fields equally.  There are huge government investments in STEM through research support that don't exist to remotely the same degree in arts, humanities and social sciences.  This support filters down to fund graduate and even some undergraduate students as well as create capacity for more undergraduates.  It takes a lot more infrastructure to train a STEM student (well, perhaps not math) as well, so the costs are higher but tuitions are the same in general no matter your field - which is the same as an extra subsidy.

Which is all to say that I buy none of it.  Students should know the facts about the job market post-college (and my experience is that they do), and then make the individual choice about major that makes them the most satisfied given that knowledge.

Picture of the Day: GDP Density

This graph, from a paper by Gallup, Sachs and Mellinger, is taken from an Econbrowser blog post by James Hamilton.  Go there and read it.  Interesting stuff.  I will add, however, that it does read a bit like the rediscovery of the wheel: economic geographers and development economists have been studying all this stuff (the role of geography versus institutions, resources and the like) for decades.

Population, Poverty and Inequality

Impossibly busy today with sick kid and meetings, etc.  So for your edification I recommend Felix Salmon's piece on population growth.  Here is a teaser graph:

For more fun here is his cutesy video: