Picture of the Day: Country and World Inequality

Branko Milanovic, “The Haves and the Have-Nots,” p. 116.

Catherine Rampell in the New York Times' Economix blog has a nice discussion of this graph. Students of development will find it unsurprising but it is a nice way to understand both domestic inequality and world inequality. The horizontal axis is the income 'ventile' Poorest 5%, next poorest 5%, and so on. The vertical axis is the share of world income. So the poorest 5% of Americans are about as rich as the richest 5% in India. While the richest 5% in Brazil are about as rich as the richest 5% in the US.  Note also how unequal Brazil is overall the poorest are among the poorest in the world while the richest are among the richest.  I don't know how world income is normalized but purchasing power parity is the way you should do it.

Anyway, Rampell has a more thorough explanation.

US GDP Growth

Everyone is reporting, but I'll link to the NPR story the latest GDP figures because a student pointed me there and there is a nice graph I can steal.

First off growth is a good thing and it is nice to see. But I am not very optimistic that it means much right now as stimulus dollars are running out and soon states across the nation will have to dramatically slash spending. This is going to put a big brake on economic growth that I don't think increases in consumer spending will fully counteract.

Still, six straight quarters of positive growth is pretty good evidence that the worst is over.

Oregon University Funding and Faculty Salaries

Oregon Business Magazine reports on the Oregon University System's latest self study. The above chart is part of it and shows faculty salaries in Oregon as compared to all other states.  Oregon does poorly.  A few things to note about this - the first being that I clearly need a raise.  But seriously, there is a lot of talk about the generous benefits Oregon offers state employees, and they are pretty generous, but without them we would lag badly in terms of relative pay, these generous benefits vault faculty salaries from 43rd in the nation to 31st.  So talk of cutting into benefits has to take into account the fact that benefits are a component of overall compensation, so if  you cut benefits you will have to increase salaries to stay competitive.  And you will too because the second thing to notice is how states 44 through 50 offer a much lower cost of living.  I suspect that if you remade the left hand table with figures normalized by cost of living, Oregon would come out dead last.

But my experience is that faculty are not as self-interested as you might think and what rankles academics in the state is the funding cuts that affect class size, instructional support, research seminars, travel to conferences to stay current in your field.  Academics became academics for the most part because they are passionate about their fields of study and they want to be able to effectively translate their expertise into knowledge for the next generation.  Most of us went into academics knowing that we could have become wealthier if we chose a different path, so it is not as much about personal gain as you might think.  I think deteriorating working conditions are more responsible for the recent loss of two professors in my department than the fact that they now command much, much higher salaries at other state's universities.

Still academics are not immune to personal compensation.  There is a lot of talk about the fact that part of the compensation for working in Oregon is being able to live in Oregon and this is true.  Economists call this a compensating wage differential.  It is exactly what led me to choose a 25% lower salary but the opportunity to come back to Oregon, and there are many others like me.  But not that many.  There are lots of good places to live in the US and the world and if Oregon is unable to offer at least somewhat competitive salaries they are not going to be able to recruit the better talent and ultimately it will be the students and the state that suffer.  The research that gets done will not be as relevant or cutting edge (you'd better believe that the academic market prices these things), the knowledge that gets passed on will not be as timely or sophisticated and the students produced will not be as dynamic or productive.

If Oregon is unable to adequately support state universities, universities must be allowed to do what is necessary to support themselves.  I support the efforts by the OUS to become a university system and achieve more independence.  But more on that later.

Picture of the Day: Federal Budget

In light of the State of the Union speech last night, I thought it would be instructive to give you a general sense of where the federal budget money goes.  These are 2009 budget numbers and the chart is from Wikipedia, but the figures used are from this source.

Portland Home Values: Case-Shiller November Numbers

Portland hits a new low. And I am now ready to declare my relative optimism (that home values would end the year not much worse then when they started) too optimistic. Portland homes lost, on average, 7% of their value from November of 2009 to November of 2010. And since near in neighborhoods like mine have not done quite so badly, the suburban areas must be especially bad.

Anyway, here are the numbers as compiled by the Wall Street Journal:

Home Prices, by Metro Area

Metro Area	November 2010	Change from October	Year-over-year change  ↓
Atlanta	100.67	-2.5%	-7.9%
Chicago	119.57	-2.2%	-7.6%
Detroit	67.26	-2.7%	-7.1%
Portland	139.92	-1.6%	-7.0%
Phoenix	104.85	-1.1%	-6.4%
Seattle	141.57	-1.1%	-4.7%
Cleveland	100.12	-2.0%	-4.4%
Minneapolis	118.8	-2.1%	-4.4%
Charlotte	113.61	-0.4%	-4.3%
Dallas	114.88	-1.1%	-4.2%
Tampa	134.05	-0.8%	-4.0%
Las Vegas	100.59	-0.4%	-3.5%
Miami	143.81	-0.2%	-3.5%
Denver	125.02	-1.2%	-2.5%
New York	169.75	-1.0%	-1.7%
Boston	152.76	-1.0%	-0.8%
San Francisco	137.23	-1.2%	0.4%
Los Angeles	173.28	-0.4%	2.1%
San Diego	160.08	0.1%	2.6%
Washington	185.42	-0.1%	3.5%

Source: Standard & Poor’s and FiservData

Public Policy Gone Bad

UPADTE: Willamette Week is reporting that $335,000 has been collected so far...

Jack Bog (who has blacklisted me for having the temerity to question his economics acumen) posts on some inside info about how goes the leaf removal fee.  There is no way to verify the accuracy of the information, but it is in a blog so it has to be correct.  Anyway, predictably the leaf fee program is costing more than it is bringing in. From Jack's blog:

Through December 31, the reader says, less than $50,000 was collected, whereas the city's revenue bureau was reporting costs of about $49,000 in administering the collections. Over in the transportation bureau, around another $35,000 of expense was reported for printing, copying, postage, even special delivery charges. That's $34,000 in the hole before counting what it cost to send the equipment out to do the work (which the reader estimates was about $600,000).

Hopefully this will be the death knell for the leaf fee, but if there is one rule about bad public policy it is that it tends to be near impossible to expurgate.  Which is why I still waste 10 minutes every time I have to put gas in the car.

Oh and I suppose I should come clean.  I was about to pay the fee - the sweeper came and collected the leaves in front of my house - but then I started contemplating the opt-out language: "I would have managed the street leaves in front of my property myself if I had earlier notification about the fee and the opt-out process." This is a very difficult philosophical question. Had I known well in advance would I have acted differently? Yes, probably: it would have been easy for me to bag it up and have my garbage hauler take it for much less money. But I also want this program to fail so there is a clear strategic reason for me to opt-out. Nonetheless, I convinced myself that I would have come up with an alternate plan, and so I opted out.

A Tale of Two Hemispheres

Dilma Rousseff.  |  Photo credit: BBC

The USA, the world's economic engine struggles to find a way out of the deep, deep recession.  Meanwhile down in the hemisphere, Brazil has an entirely different problem: how to escape the slings and arrows of outrageous fortune. When I was there in December is was like the world had turned topsy-turvy, the US was in the doldrums and Brazil was positively humming - strong growth, full employment and (predictably) struggling to contain inflation.

My Dilma had just been elected and my economist friends were withholding judgment beacuse they just didn't know what to expect. They were troubled by signs that she may threaten central bank independence and block a move to increase interest rates in an effort to put the breaks in inflation fearing that higher interest rates would be unpopular with the working class - her main constituents.  I imagine they are all feeling a little reassured as the central bank has just announced an interest rate hike.

The BBC has the skinny:

Brazil's central bank has raised its key interest rate to 11.25% in a bid to cool inflation in one of the world's fastest growing economies.

The rise, from 10.75%, is the first under President Dilma Rousseff and central bank head Alexandre Tombini, both of whom took office this month.

Inflation was 5.91% last year and is forecast to remain above 5% in 2011.

But the rate rise risks sucking in foreign money, adding to pressure on the already overvalued Brazilian real.

The central bank warned that the rate hike may be just the start of a series of rises to curb inflation.

Capital inflows from outside Brazil have soared as investors flee record-low rates in more developed countries.

The strengthening of the real has hit Brazil's manufacturers hard because their exports have become more expensive.

But Brazil needs to do more to rein in a massive consumer credit boom which has helped fuel the economy's rapid growth.

The economy, Latin America's largest, grew more than 7% in 2010 and is expected to grow between 4.5% and 5% this year.

Other anti-inflation measures have included a big increase in banks' reserve requirements to hold back lending.

Think about how estraordinary this is given where we are as a country. Our central bank has had interest rates at essentially zero for well over a year now and we worry about deflation, while Brazil is booming so much that they are worried about too much inflation.  11.25% prime interest rate?!?  Wow.  And this is not at all the old Latin American story of too loose a monetary policy to appease the masses which lets inflation get out of hand, this is pure old fashioned economic growth.

The exchange rate problem is a serious worry however, and one with no easy answer.  When I was in Brazil in 2008, the a Dollar bought 3.5 Reals, last December I got 1.5 Reals form my Dollar and boy did it hurt.  Everything was expensive in Sao Paulo (already a very expensive city) and I had to think hard before I spend my money.  This is the same for the stuff Brazil exports - foreign buyers will find it more and more expensive and will cut back or cease to buy at all.  Brazil is worried and for good reason - they don't have the Chinese ability to keep the exchange rate artificially low.  So a natural brake on Brazil's growth is going to happen, but Brazil will still be doing a lot better than the US.  Parabens!

How is Corporate America Thriving in the Recession?

A question I get asked a lot is how can it be that so many American companies are turning healthy profits, and the Dow soaring, during such a damaging recession.  The answer I typically give is that US firms are very malleable and are able to quickly deal with lower demand.  What I mean by this is the relatively laissez faire labor market in the US makes it easy to shed workers and the threat of doing so makes it easier to get workers to put up with increased work loads, longer hours, etc.  So many firms are able to quickly adjust to the new demand they face and do just fine, thank you very much...

Now David Leonhardt has a more nuanced take of the seeming disconnect in the unemployment rate and the stock market in the New York Times.  Here is an excerpt:

Alone among the world’s economic powers, the United States is suffering through a deep jobs slump that can’t be explained by the rest of the economy’s performance.

The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. Yet a greatly shrunken group of American workers, working harder and more efficiently, is producing these goods and services.

The unemployment rate is higher in this country than in Britain or Russia and much higher than in Germany or Japan, according to a study of worldwide job markets that Gallup will release on Wednesday. The American jobless rate is also higher than China’s, Gallup found. The European countries with worse unemployment than the United States tend to be those still mired in crisis, like Greece, Ireland and Spain.

Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture “genuinely puzzling.”

That the financial crisis originated here, and was so severe here, surely plays some role. The United States had a bigger housing bubble than most other countries, leaving a large group of idle construction workers who can’t easily switch industries. Many businesses, meanwhile, are reluctant to commit to hiring workers out of a fear that heavily indebted households won’t spend much in coming years.

But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth.

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

For corporate America, the Great Recession is over. For the American work force, it’s not.

I encourage you to read the rest at the NYTimes.

Anyway, the chicken and egg problem is strong right now, corporations are sitting on a lot of cash and not investing because they are waiting for a sign that demand is going to surge, but of course with so many unemployed demand is not likely to surge.

One last little excerpt from the piece:

Improving high schools and colleges — reclaiming the global lead in education — would help even more. Remember, the jobless rate for college graduates is only 4.8 percent, and some highly skilled jobs continue to go unfilled.

In an economy where skilled labor is our comparative advantage, it pays to be skilled.

Oregon December Unemployment: Still Stuck at 10.6%

The December Oregon unemployment figures were announced today and, as usual these days, they contain both good and bad news.  The bad news is that the unemployment rate is stuck at 10.6%, the good news is that for four months running now the state added private sector jobs.  Oregon added, on a seasonally adjusted basis, 400 private sector jobs in December, however government shed 2,200 jobs leaving the state with a net loss of 1,800 jobs.

The take away is the same as last month - the situation is improving but at a glacial pace.  The wave of budget crises in the states will continue to put the brakes on growth as spending cuts are made and jobs shed - which is severely hampering our ability to climb out of the hole we've created.

Migration

From United Van Lines comes their annual report on whom they moved and where.  It turn out that Oregon is still a top state in terms of net in-migraton.  Given that United Van Lines customers probably skew wealthier and more educated (and perhaps disproportionately are having their move paid for by an employer), this is probably a very good thing for the state.

On the other hand, given local unemployment remains very high, it may suggest that employers looking for high skilled and well trained people are having to go outside the state in which case it is still a good thing that they are coming, but a terrible condemnation of our public education system.

Green Energy is not a Job Creation Engine

Ed Glaeser, in The New York Times' Economix blog has a very interesting discussion on a topic that is local to both Boston and Portland: government support of green energy companies.

Evergreen Solar announced last week that it was closing its plant in Devens, Mass., laying off 800 workers, and moving production to China.

Evergreen’s factory had received more than $40 million in subsidies, which led many to see the plant closing as lesson in the futility of green energy and industrial policy. But what does Evergreen’s story really teach us about solar energy, public subsidies and the future of American manufacturing?

Glaeser argues (as have I) that the idea that there will be a long-term manufacturing base tied to green energy is not reasonable.  He goes on to say that what Boston should be is a hub (get it?) for new ideas and new technological innovation.

Evergreen Solar’s story begins in 1994, when three alumni of Mobil’s solar division broke away to form their own company. They started in a 2,500-square-foot lab in Waltham, Mass., which has long housed innovative industry, including America’s first integrated textile mill and the Waltham Watch Company, which pioneered high-quality watches with interchangeable parts. Today, Waltham is a venture-capital hub that succeeds by providing abundant commercial real estate and easy access to the scientific community of greater Boston.

Proximity to cutting-edge ideas was surely an advantage for Evergreen Solar in the early days because its principals worked with Emanuel Sachs, a distinguished mechanical engineer at the Massachusetts Institute of Technology, who invented the “string ribbon” process for making solar cells.

“String ribbon” technology was Evergreen’s big idea; it offers the possibility of far more affordable photovoltaic cells. Evergreen began selling “string ribbon” solar panels in 1997 and moved to a much larger space in Marlboro, Mass., in 2000.

***

Evergreen Solar’s move to China was supported by a $33 million loan from the Chinese government, and it has suggested that the Chinese production was cheaper because “solar manufacturers in China have received considerable government and financial support.”

But surely China’s skilled, low-wage labor force is a far more important source of its low costs. Japan’s success in the 1980s was also attributed to its activist industrial policy, but subsequent research found that government subsidies backed losers more often than winners.

***

America has had many high-tech breakthroughs over the last half-century, but those innovations rarely provided abundant employment for the less educated workers who need jobs most. The Devens closing reminds us that even when ideas are “made in America,” production is almost always cheaper in China.

Failed public investments, like the money spent in Devens, reflect the fact that public officials are rarely skilled venture capitalists and that governments pursue many objectives that lead them away from solid investments. It’s easy to see why any governor would be excited about a green-energy manufacturing plant in a less prosperous area of his or her state. But the same forces that made Devens political catnip meant that it was unlikely to be a long-term success.

Manufacturing solar panels in Devens never played to Massachusetts’s core strength: the creativity that emerges naturally when smart people are clustered together. Forty years ago, greater Boston was suffering from the same deindustrialization that afflicted all older American cities. The region came back, buoyed not by renewed manufacturing plants, but by technological innovation, much of which was connected to the region’s rich research community.

Evergreen Solar’s early years were an example of the synergy between schools and start-ups, and greater Boston’s universities will surely continue to spin off new companies. Professor Sachs, for example, has moved on to 1366 Technologies, a solar company in North Lexington, Mass., financed by a Waltham-based venture-capital fund.

Massachusetts’s edge lies in ideas, not products. Those ideas are best produced in creative clusters, built around cities, where knowledge moves easily from inventor to entrepreneur. The only production that really needs to occur in greater Boston is the early-stage manufacturing that can be an important part of the research process. Mature companies, like Evergreen Solar, naturally move their factories to lower-cost areas.

This is what I have said about Portland using Intel as an example: as basic manufacturing has moved overseas, the cutting edge, high tech and innovative stuff has remained.  I suspect that if there is a future in green energy in Oregon it is in exactly these types of activities that are closely tied to R&D.  The problem with Portland is, unlike Boston, there is no great engine of R&D and human capital like Harvard, MIT, Boston U, Boston College, etc.

This also speaks to what I describe as government's role in providing the foundation for growth but not trying to hard to pick the winners - because doing so is a mugs game. As Glaeser points out, even Japan, the poster child for effective government intervention in the economy, wasn't good at predicting winners.

Education, research and infrastructure. We are doing okay on the last, but failing terribly on the first.

Video of My Citizenship Ceremony

In case you were wondering what it is like. I thought the crown was a bit much but being given Wales was awfully nice I thought...

Jolly Good Show, What?

Today I become British.  Well, I become sort of an ersatz Brit, but a Brit nonetheless.  I have only to swear the oath and make the pledge and I am in. I do so today in San Francisco.  I shant give up my US citizenship of course, but become a dual citizen.

Why I mention this here is because now, of course, I must use anglo-isms and phrases like 'rummy,' 'jolly good show, what?' and 'old boy.'  I realize that this might be distracting for my US readers but it can't be helped. I shall also begin referring to the 'boot' of my car and looking under the 'bonnet.'  I shall randomly drop definite articles and refer to 'going to hospital.' I shall pointlessly pluralize and refer to studying 'maths.'  But most importantly I shall adopt an effete persona and master the art of damning with faint praise.  Rather...  Perhaps a bowler and bow tie as well.  The possibilities are endless.

For those curious I am the son of a Brit and thus have the right to citizenship and for various reasons, mostly related to travel, a UK passport is quite handy.  For sentimental reasons, it is kinda cool too, and heck, one world cup is better than none...

Besides, as my British step-father says, his fail-safe health insurance should he become old and infirm without adequate coverage is a one way ticket to London with his passport and a note saying 'please look after this man' taped to his chest...

Do Trees Really Reduce the Incidence of Poor Birth Outcomes?

On the front page of today's Oregonian there is a headline that reads: "More trees in a city bring surprising benefit, Portland study finds."  You probably figured I would to post on this and get all worked up about the correlation vs. causation problem.  You are right.

The article refers to this study by Donovan, et. al. published in the journal Health & Place.  [NB: They also did one on trees and crime that I blogged about before] In it, the authors find that increased tree canopy around a house significantly reduces the incidence that babies are being born that are 'small for gestational age'(SGA) - undersized - but has no impact on pre-term births (PTB).  The marginal effect is very small, slightly more than a 0.1% decrease in the incidence of pre-term births from a 1% increase in tree canopy coverage within 50 meters of the house.

The first thing that even the most inexperienced empiricist thinks of is that tree cover is probably highly correlated with wealth and status and these are probably highly correlated with birth outcomes. To address these and other problems, the authors include measures of mothers education, age, race and, to proxy for income, the real market value of the home. The problem here is of course that the real market value of the home is not a very good proxy for income. Another good proxy for income might be - you guessed it - trees on the property. They are expensive and expensive to maintain so what trees might be capturing is the unexplained variation in income not controlled for by home value. So the correlation might be entirely spurious it is working entirely through the correlation with income.

But it actually gets worse. The authors, after making hay about the inclusion of these variables actively data mine them away. This is inexcusable. Look at the final regression that was estimated which I display below.  Only the total births, no college education and a single race variable were included as controls and the proxy for income, market value of the house.  In the iterative deletion process of other controls, one expects that the proxy for income was dropped because it was insignificant.  But of course this can happen if it is correlated with another regressor...like trees!  So now trees and college education are the remaining proxies for income and trees is probably the better one.

So this result is probably totally spurious, by which I mean that if we could adequately control for income and nutrition the effect would most likely vanish entirely (which is probably why they throw out covariates).  Why I get so worked up about these things is that pretty soon in public policy debates in neighborhoods and cities you are going to hear references to this article (and the one on crime) and people are going to take it seriously and it may affect policy.  This is dangerous because the real problem of income and information is not going to be solved by planting trees and money for trees would more effectively be spend in other ways if the objective is to improve prenatal health.  It is possible that trees matter, but there is no way to know from this study.

In defending the results the authors say this:

Although no observational study can prove a causal relation- ship, consider the following strengths of the study. First, it builds on past experimental work demonstrating that trees can improve health outcomes (Ulrich, 1984). Second, if trees were merely proxies for positive neighborhood characteristics, one would expect that trees further than 50 m from a house would also be correlated with better birth outcomes, but they were not. Third, a wide range of individual and neighborhood characteristics, includ- ing many markers for socioeconomic status, were controlled for. Fourth, validation testing showed that results were not due to spurious correlation.

A coupe of things to say about this.  One, I am not worried about trees being proxies for neighborhood characteristics, I am worries that trees are proxies for household characteristics, a worry further enhanced by the lacy of a 50 plus meter affect.  Two, the validation testing is crap.  It tells you that there is a correlation, but not the source of the correlation.

Another big problem of the study is the lack of any real model - just what exactly do trees do?  The authors meekly try and suggest 'reduce stress', but little else.  A model might help you, a priori, expect that trees close help and trees father away don't, etc.  but as no such model exists, it is hard to interpret the results in a meaningful way.  I would also like to know what causes SGA but does not affect PTB. My guess is nutrition, because intuitively physical health and mental health of the mother would seem to affect both. But I do not know and this is a vital question given the results. I mention this because proper nutrition (both from being able to afford it and from understanding what is proper nutrition) are probably highly correlated with income and education.

Unfortunately this paper is an example of too much of the stuff that passes for real 'research' in policy debates.  It is not just useless, it is actively harmful and what we need are more policy types who are data savvy.  I am going to try and do my part this term with my OSU MPP students.

Finally, I enjoyed immensely the quote in the Oregonian from "Dr. Stephen Fortmann, a senior investigator at the Kaiser Permanente Center for Health Research in Portland." Dr. Fortmann is not an economist and is therefore very, very polite. But he clearly understands the weaknesses of the study when he says: "The issue with any observational epidemiological study is confounding. Is there a causal relationship here, or is something else going on?" An economist like me would just say it is crap. See, I just did.

Alfred Kahn and the Airline Business

Recently the news of Alfred Kahn's death.  Fred Kahn was a Cornell University economist, the head of the Civil Aeronautics Board and the father of airline deregulation.  My good friend (whom I saw over the weekend in Denver at the AEA meetings) worked with him at NERA and said he was busy right up until his death.  He had a large personality and was famous for his belief that bureaucrats needed to do better using plain spoken language in their official communications (here is a nice essay on this in the New York Times from Bob Frank). My favorite anecdote is from when he retired as the Dean of the College of Arts and Sciences at Cornell, he said: 'dean is to faculty as fire hydrant is to dog.'

His death, given his role in airline deregulation, as well as my recent travel have prompted me to think about the airline industry and the very swift adoption of a la carte pricing.  Which, of course is all part and parcel of deregulation. It seems strange, given the amount of grumbling, how widely adopted such pricing schemes are. When I book a ticket I am immediately assaulted with offers of more leg room, faster check in, faster security lines, when I check in there are fees for bags, on the plane you can buy a snack or a meal, and so on.

To an economist this is both a rational strategy and an efficient one.  Rational because the more price discrimination there is generally the better the revenue for the firm.  The goal of price discrimination is to get people to play different prices for essentially the same service based on willingness to pay.  It is efficient because it allows very price sensitive travelers to buy a seat on the plane for as little as possible and those less price sensitive can get more leg room, get to take more luggage, get faster check in and so on.

[As an aside, how is it that TSA participating in this? I think they must have a fee structure that charges higher fees for the express lane but I wonder how they keep track of the airlines they have to charge or if they rely on airlines themselves to self-report.]

Despite how much I and other economists understand, we still grumble when we have to pay $25 to check a bag (no one said rational individuals cannot be emotional).  As far as I can tell, however it is a successful strategy because there is only one airline that bucks the trend and makes it a point of pride: Southwest.  To me this is a product differentiation strategy - they are looking to pick off precisely those customers for whom the price discrimination strategy particularly irritates.  By distinguishing themselves thusly, they can actually charge a higher base price and subsidize the baggage handling operation.

I guess the point of all this is that remember when you complain about such prices that they are making the base ticket price as low as can be and so for someone like me who has to do another quick overnight trip on Thursday and Friday to San Francisco.  Since it is a quick flight, I barely need any luggage and I don't need extra leg room.  So I can go without any extra charge and I appreciate that I do not have to subsidize those with three big suitcases.  I complain at other times when I do have a suitcase to check in, but I remind myself of the economics and try to be more rational than emotional.  Overall, I both understand and appreciate the airlines' pricing strategies as irritating as they are.

Tax Rates and the Movement of Soccer Stars

Ronaldinho wants to go...where the taxes are low.

January is one of the two international transfer windows that allow the movement of players from club to club in FIFA sanctioned leagues.  There will be a lot of shifting around of players including a number of big stars from clubs in one European league to another.  Thus there will be some multimillionaires moving from on tax regime to another.  Henrik Kleven, Camille Landais and Emmanuel Saez examine the effect of differential marginal tax rates on player movement in a new paper (synopsis here).

They conclude:

Combining the evidence from tax reforms in all 14 countries in our sample, we find that the location decisions of players are very responsive to tax rates. But because labour demand by football clubs is relatively rigid—there can only be so many players in a club and only so many clubs in each National league –- we also find strong evidence of sorting effects. Top-quality players are much more responsive than lower-quality players. In fact, we find that tax cuts to foreigners in a given country attracts top-quality foreign players, but ends up crowding out lower-quality foreign players as well as displacing some domestic players.

How and why do these results matter for public policy? First, they matter for the football labour market. Here, our results clearly call for a reappraisal of the effectiveness of preferential tax schemes to highly paid foreigners. Implementing a favourable tax treatment of foreigners is able to attract top-quality players, which brings in new tax revenue and increases the quality of the League. However, because of sorting effects, part of this new revenue is lost as domestic players are displaced. This implies that preferential tax schemes to foreign players ultimately have limited power to raise revenue in a rigid labour market setting such as the football market. Moreover, these schemes create negative externalities on other countries as they lose their top players, highlighting the need for tax coordination among European countries. In the absence of coordination, as many more countries enact preferential tax treatments, the positive effects of having low tax rates tend to disappear in a pure race to the bottom, detrimental to all.

Second, our results matter for policies much more broadly in the sense that they demonstrate for the first time a clear effect of taxation on international migration and sorting of high-skilled labour. Since football players are likely to be a particularly mobile segment of the labour market, it is of obvious interest to broaden the analysis to other high-income workers. This will be an important topic for future research.

Here is the abstract for the more technical language that will be more pleasing to economists:

This paper analyzes the effects of top earnings tax rates on the international migration of top football players in Europe. We construct a panel data set of top earnings tax rates, football player careers, and club performances in the first leagues of 14 European countries since 1980. We identify the effects of top earnings tax rates on migration using a number of tax and institutional changes: (a) the 1995 Bosman ruling which liberalized the European football market, (b) top tax rate reforms within countries, and (c) special tax schemes offering preferential tax rates to immigrant football players. We start by presenting reduced-form graphical evidence showing large and compelling migration responses to country-specific tax reforms and labor market regulation. We then set out a theoretical model of taxation and migration, which is structurally estimated using all sources of tax variation simultaneously. Our results show that (i) the overall location elasticity with respect to the net-of-tax rate is positive and large, (ii) location elasticities are extremely large at the top of the ability distribution but negative at the bottom due to ability sorting effects, and (iii) cross-tax effects of foreign players on domestic players (and vice versa) are negative and quite strong due to displacement effects. Finally, we estimate tax revenue maximizing rates and draw policy conclusions.

In essence the responsiveness of top players to tax regimes is large. Which makes sense, we are talking about a lot of money. But it works both ways, lower paid players are actually less responsive than average due to sorting - can do better in higher tax regimes because the top talent is more scarce.

Economist Ethics

The New York Times reports on the effort by some economists to get the American Economic Association to adopt a 'code of ethics' whereby members would be required to disclose any potential conflict of interest.

Here is an excerpt of the Times story:

When the Stanford business professor Darrell Duffie co-wrote a book on how to overhaul Wall Street regulations, he did not mention that he sits on the board of Moody’s, the credit rating agency.

As a commentator on the economy, Laura D’Andrea Tyson, a former adviser to President Bill Clinton who teaches in the business school at the University of California, Berkeley, does not usually say that she is a director of Morgan Stanley.

And the faculty Web page of Richard H. Clarida, a Columbia professor who was a Treasury official under President George W. Bush, omits that he is an executive vice president at Pimco, the giant bond fund manager.

Academic economists, particularly those active in policy debates in Washington and Wall Street, are facing greater scrutiny of their outside activities these days. Faced with a run of criticism, including a popular movie, leaders of the American Economic Association, the world’s largest professional society for economists, founded in 1885, are considering a step that most other professions took a long time ago — adopting a code of ethical standards.

The proposal, which has not been announced to the public or to the association’s 17,000 members, is partly a response to “Inside Job,” a documentary film released in October that excoriates leading academic economists for their ties to Wall Street as consultants, advisers or corporate directors.

Universities and medical schools have tightened disclosure requirements and conflicts of interest policies for scientists, engineers and doctors in recent years, and the main professional associations for political scientists, sociologists and psychologists have all adopted ethical codes.

During the American Economic Association’s annual meeting, in Denver next week, its executive committee will take up a proposal to “consider the association’s role regarding ethical standards for economists,” according to an internal committee agenda obtained by The New York Times.

Note that, by and large, such conflicts of interest only affect economists at the most prestigious, high-profile institutions whose brand name is appealing to the firms that employ them.  Thus, you can be pretty sure that your humble economists who slave away at Oregon's public universities are pretty conflict free (even if we wish we weren't).

But this is a very good idea.  The idea that you can replicate work seems to me an ivory tower cover.  Our pedigree and position is supposed to serve as a signal of authority on the subjects we study.  Thus our opinions are given more weight than lay persons' opinions.  We have a deep responsibility to behave in an unbiased and ethical way, especially when serving in public roles.  However, I find that in general most economists are like most scientists in being hesitant to give personal opinion, preferring instead to talk about evidence and research.  As with any subject, when a so-called academic economist starts making broad and overly simplified pronouncements you should be skeptical and ask questions.

This is what I dislike most about the modern media: because most academics are thoughtful and nuanced, the media have no time for them.  They don't do well in a 90 second segment on TV or radio.  Even the most respected outlets like OPB and their 'Think Out Loud' show often disappoints by getting advocates on both sides of an issue and no one to talk about the evidence.  It is a shame and a waste.  To give an example, the recent show that highlighted the study on the relatively poor performance of the Portland metro areas job market featured the paid consultant whose firm wrote the study and a spokesperson from a group that sponsored it.   Listeners learned nothing about how meaningful the numbers were, what they really signified and what, if any, policy (or lack thereof) could correct this or should have corrected this.  

As a side note, I am off to Denver (my old home) for the AEA meetings on Thursday.  I'll mostly be involved in an instructor search but I'll try and blog about anything particularly interesting.

The Value of Teacher Quality

It is not news that teacher quality is the most important factor in an effective classroom, but Eric Hanushek has a new paper where he attempts to place a value on quality and the numbers are very big.  This, I suppose, speaks to the debate about pay for performance.  If the actual value of a good over a not-so-good teacher is so large then perhaps we should have sizable rewards for good teaching.

Here is the abstract [HT: Greg Mankiw]:

Most analyses of teacher quality end without any assessment of the economic value of altered teacher quality. This paper combines information about teacher effectiveness with the economic impact of higher achievement. It begins with an overview of what is known about the relationship between teacher quality and student achievement. This provides the basis for consideration of the derived demand for teachers that comes from their impact on economic outcomes. Alternative valuation methods are based on the impact of increased achievement on individual earnings and on the impact of low teacher effectiveness on economic growth through aggregate achievement. A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.

There is a big problem however: how do you measure a good teacher, or even more problematically, how do you measure good performance on an annual basis?  In Brazil I heard about experiments in Chile with so-called value added measures of teacher quality that were terrible disappointments.  There is a complete lack of consistency across different tests and even within sections of the same test.  In other word, when they gave a standardized math test to students at the beginning and at the end of a year, some students improved markedly on one section of the test but did not on the other and vice-versa.  So there was no clear way to rank classrooms in terms of the value added by the teacher.  The same was true across tests (Spanish and Math, say).  So how can you say one teacher is better than others?  You can't.

We are still a long way off from the answers.

China's Economic Future

Back in action after a busy holiday season.  Classes start today and I am back to my regular routine which includes blogging.  I hope everyone enjoyed the season and thank you for your patience.

Over on the Wall Street Journal's economics blog, they highlight a new NBER working paper by Kehoe and Ruhl on Mexico and use it to talk about China's economic future.  The crux of the argument is one that I have been making for a while now when people ask me about my thoughts on the future China (it came up yet again over the week end chatting with friends): it is very hard to move from middle to high income status as Mexico has found.  To me it is yet another aspect of institutions that we often talk about in the case of countries that struggle to grow at all: institutions (well-functioning bureaucracies, private property rights and laws courts and police to protect those rights) are both critical to development and very hard to create. Later in the development stage these same institutions as well as financial and educational systems that keep pace with the ever more sophisticated environment being created can be read stumbling block to continued growth.

As Bob Davis writes on the WSJ site:

While Mexico and China seem very different, the economists point out a number of similarities. On the positive side, the two nations focused on foreign trade as a growth engine and they eased central government control of the economy. On the negative side, their financial systems are inefficient, their non-tradable industries (communications, transportation and the like) lack competition; and their rigid labor rules discourage employers from adding full-time workers.

The economists argue that despite the handicaps, developing nations can make big leaps in growth as they catch up with countries like the U.S. Mexico made its big leap forward in growth from 1953 to 1981; China has been making its move since around 1980. Mexico’s GDP per-capita is now about twice China’s, according to the International Monetary Fund.

Once that catch-up period is over, however, the countries need to continue to reform institutions and policies to produce a well-functioning government an efficient financial system and a steady increase in knowledge so it can continue to grow smartly. Few countries manage that transition, which leaves them well behind the U.S. and Europe.

Which brings me back to China. A whole host of problems, social, environmental and logistical have thus far been avoided by the central government, but they will not be able to ignore for much longer income inequality, an inadequate health care and educational system and destructive and ultimately costly degradation of the environment.  In some senses then, this last two decades of amazing growth has been the easy part. The real challenge lies ahead: how does a country make that leap to a modern, efficient high-income country?  I think the story of the next 20 years will be more about those challenges and a considerable slowing of growth.

Anyway the paper is very interesting (though technical), I recommend it.