Picture if the Day: State and Local Government Spending

Just as stimulus spending boosts an economy during a recession, state and local governments' sharp budget cutting is a serious drag on the recovery. From the New York Times' Economix blog:

Printing Money and Not Printing Money

Lately there has been a lot of fun made of Ben Bernanke about whether, as a per of QE2, the Fed is printing money.  "No," says Ben, we are simply marking up banks accounts.  Is this the same as printing money, well almost, but not exactly and herein lies a questions of semantics that Jim Hamilton takes on in the pages of Fortune Magazine:

But if the Fed didn't print any money as part of QE2 and earlier asset purchases, how did it pay for the stuff it bought? The answer is that the Fed simply credited the accounts that banks that are members of the Federal Reserve System hold with the Fed. These electronic credits, or reserve balances, are what has exploded since 2008. The blue area in the graph below is the total currency in circulation, whose growth we have just seen has been pretty modest. The maroon area represents reserves.

Are reserves the same thing as money? An individual bank is entitled to convert those accounts into currency whenever it likes. Reserves are also used to effect transfers between banks. For example, if a check written by a customer of Bank A is deposited in the account of a customer in Bank B, the check is often cleared by debiting Bank A's account with the Fed and crediting Bank B's account. During the day, ownership of the reserves is passing back and forth between banks as a result of a number of different kinds of interbank transactions.

To understand how the receipt of new reserves influences a bank's behavior, the place to start is to ask whether the bank is willing to hold the reserves overnight. Prior to 2008, a bank could earn no interest on reserves, and could get some extra revenue by investing any excess reserves, for example, by lending the reserves overnight to another bank on the federal funds market. In that system, most banks would be actively monitoring reserve inflows and outflows in order to maximize profits. The overall level of excess reserves at the end of each day was pretty small (a tiny sliver in the above diagram), since nobody wanted to be stuck with idle reserves at the end of the day. When the Fed created new reserves in that system, the result was a series of new interbank transactions that eventually ended in the reserves being withdrawn as currency.

All that changed dramatically in the fall of 2008, because (1) the Fed started paying interest on excess reserves, and (2) banks earned practically no interest on safe overnight loans. In the current system, new reserves that the Fed creates just sit there on banks' accounts with the Fed. None of these banks have the slightest desire to make cash withdrawals from these accounts, and the Fed has no intention whatever of trying to print the dollar bills associated with these huge balances in deposits with the Fed.

Of course, the situation is not going to stay this way indefinitely. As business conditions pick up, the Fed is going to have to do two things. First, the Fed will have to sell off some of the assets it has acquired with those reserves. The purchaser of the asset will pay the Fed by sending instructions to debit its account with the Fed, causing the reserves to disappear with the same kind of keystroke that brought them into existence in the first place. Second, the Fed will have to raise the interest rate it pays on reserves to give banks an incentive to hold funds on account with the Fed overnight.

Doing this obviously involves some potentially tricky details. The Fed will have to begin this contraction at a time when the unemployment rate is still very high. And the volumes involved and lack of experience with this situation suggest great caution is called for in timing and operational details. Sober observers can and do worry about how well the Fed will be able to pull this off.

But that worry is very different from the popular impression by some that hyperinflation is just around the corner as a necessary consequence of all the money that the Fed has supposedly printed.

[HT: Greg Mankiw]

Peer Effects in Education

Steve Duin has a nice column today in the O about how little the PPS high school redesign does to improve the socio-economic heterogeneity of Portland's public high schools.

He read along -- in "The Big Ideas Behind the Big Ideas" -- as PPS lauded the "groundbreaking" 1966 study that decreed that after the poverty level at a child's home, "the biggest predicator of academic achievement is the socioeconomic status of the school he or she attends (even more so than per pupil spending)."

Then Rupp tripped over page 30 and the district's own projections on how dramatically the redesign will impact the free and reduced-price lunch rates at its comprehensive high schools the next 10 years.

By and large, it won't.

My first thought was "1966, really? You have got to be kidding me." The ability of social science researchers to deal with data in 1966 was almost nil, and the ability to isolate something as tricky as peer effects was precisely nil. That PPS would still use such an outdated study worries me, it worries me a lot. Especially since there have been very very good studies of peer effects conducted since then.

So I'll take this space to mention a few.

First and foremost perhaps is the paper by Hanushek, et. al. This is another in a long line of papers by Hanushek that exploits a wonderfully rich dataset from Texas. Here is a quote from the conclusion.

Perhaps the most important finding is that peer average achievement has a highly significant affect on learning across the test score distribution. A 0.1 standard deviation increase in peer average achievement leads to a roughly 0.02 increase in achievement. Given that a one standard deviation change in peer average achievement is 0.35 of a standard deviation of the student test score distribution and that the use of lagged test score introduces error into the measure of peer achievement, the point estimate suggests that differences in peer characteristics have a substantial effect on the distribution of achievement when cumulated over the entire school career.

Second is a paper that examines data from Chile by Patrick McEwan. Here is the abstract:

This paper reports estimates of peer effects on student achievement, using a 1997 census of eighth-grade achievement in Chile. The data allow detailed measures of peer characteristics to be constructed for each classroom within a school. The paper addresses the endogeneity of peer variables by including school fixed effects that control for unobserved family and student characteristics. The estimates suggest that the classroom mean of mothers’ education is an important determinant of individual achievement, though subject to diminishing marginal returns. Additional specifications using family fixed effects are not suggestive that estimates are biased by within-school sorting. [The emphasis is mine]

So there papers find fairly significant peer effects, however a newer paper using arguably better data from Florida by Burke and Sass finds more modest peer effects:

We find that peer effects are not “one-size-fits-all,” but rather exhibit striking differences across students of different abilities and across different segments of the peer ability distribution. For example, the weakest students appear to experience the biggest positive impact from having higher quality peers. At the same time, however, such benefit appears to derive specifically from having peers in the highest quintile of the ability distribution. High ability students appear to experience the weakest spillovers from mean peer ability, but nonetheless may suffer sharp losses due to an increase in the share of peers of very low ability. The sizable effects observed in the nonlinear models are obscured in the linear-in-means models, within which we find only very modest, but positive, spillovers from mean peer ability. Furthermore, comparisons of effects between math and reading scores, and across different schooling levels, also depend on whether linear or nonlinear models are employed.

Considering the more nuanced results of the nonlinear models, the policy recommendations are not clear cut. For example, while low-ability students appear to benefit significantly from having top-quality peers, those peers will experience reductions in achievement gains from mixing with students of very low ability, reductions that may fully offset the weaker students’ gains. On the other hand, policies that mix middle and high ability students with each other are likely to strictly dominate those that segregate the top students in a separate track. While parents may prefer strict tracking, our results indicate that the highest-ability students actually benefit from mixing with students of middling ability. We also find that any negative peer effects from school choice programs are likely to be small. A choice program that attracted 2.5 percent students, all of them from the top ability quintile, would have only very small negative effects on the learning gains of lower ability student who remain behind.

So yes, peer effects are important, but the issue may be quite complicated in terms of how you sort and help low achievers without hurting high achievers. I think the lesson is that heterogeneity is a reasonable goal, but not a magic bullet to fix low achievement in schools and that a district has to weigh lots of factors when trying to find ways to improve achievement.  For example one way to ensure heterogeneity is to bus kids all over town, but then you potentially lower the neighborhood connection, parental involvement and most of all, spend a lot of money that may be better utilized in reducing class sizes or lengthening school years.

Income Inequality

Wall Street Journal Graphic

You might have thought that the recession has caused income inequality to fall, but you would be wrong: income inequality in the United States is still rising. From the Wall Street Journal:

The inequality, though, hasn’t gone away. Rather, it’s hitting new records. As the economy bottomed out in 2009, the hourly wage of employees in the 90th pay percentile—those whose wage exceeded that of 90% of the working population—stood at $38.50, according to a new study by the Congressional Budget Office. That’s 364% more than the $8.30 an hour earned by those in the 10th percentile. A decade earlier, the difference was 332%, adjusted for inflation. The difference is more pronounced for men than women, at 383% versus 319%.

The growing gap partly reflects the effects of globalization and technological change, which help highly educated workers get more for their skills. But inequality causes a lot of problems: It can contribute to political polarization, and it raises the stakes for less wealthy consumers who want to keep the American dream alive.

Apropos of my post yesterday, it is worth pointing out that unions are one way in which through collective bargaining, workers can get a bigger share of the rents from imperfectly competitive firms. This is the narrative I have in my head of the rise of early unions during the massive industrial expansion of the US where capital intensive oligopolistic firms employed huge work forces. Unions restored balance to labor markets and caused more wealth to flow to them. But the real narrative here, as Goldin and Katz points out is the ever increasing relative returns to skilled workers. Which suggests that neither unions nor time will stop this trend and we, as a society, are going to have to decide how we want address the trend.  One way is through better educational systems, yes, but there will still be an increasing wage gap between the more and less educated.

Of Wisconsin and Public Sector Unions

I had the great fortune to go to both middle school and high school (go Regents!) in Madison, Wisconsin. I say great fortune because at that time Wisconsin has one of the best public school systems in the country, and because Wisconsin is a wonderful state, full of honest, hard-working and unassuming people, and Madison is a great city - it was a great place to grow up.  Now, of course, the state, like many, has to do some belt tightening and the Republican governor is taking the opportunity to knee-cap state public worker unions by attempting to deny them their ability to bargain collectively.

So, the obvious question is, are public sector unions necessary?  How I think about unions starts with labor markets in general.  If labor markets were complete. they would be efficient and unions would not only cause distortions that reduced welfare.  Some believe this to be true, or that at least unions cause more harm through distortions than the good they provide.  It is also true that the efficiency of markets is completely unrelated to distribution and unions are a way in which we, as a society, provide some distributive pressure on the natural outcomes of markets.  We can either do it through unions or through tax and transfer policies - but the latter is generally unpopular.  

To me the fact that labor markets are not efficient is incontrovertible.  Employees face considerable search costs and switching costs.  That is, it is hard and expensive to find jobs and once in a job switching is costly, often involves giving up retirement benefits, etc.  It is also expensive for firms to search, but not nearly as costly, and turnover may cost firms in terms of productivity but allows them to shed higher salaries for lower ones.  I think the social welfare calculus is pretty simple: the imbalance in labor markets creates efficiency losses and unions help to restore the balance.

In the public sector, employees and bureaucracies are often subject to the political cycle and are often targets of budget cutting politicians.  What unions to to benefit all of us is create stability in our public sector that preserves services, promotes productivity enhancing tenure and morale, and helps to ensure that government bureaucracies can compete for the best talent.  The proof that they are not creating more distortions lies is studies that find that, once you control for education and experience, public sector workers earn less than their private sector counterparts.

Unions are not without fault, for sure, no organization is - the internal political economy of teacher unions, for example, causes them to protect underperforming teachers and limit the ability of school systems to distribute teachers most efficiently.  Unions have to be able to change and help find solutions to thinks like underperforming schools. But this does not mean they unions don't play a vital role in the US economy and, most importantly, does not negate the fact that the US is probably better off with unions than without.  

And we should not forget the history of unions, which, during the industrialization of the nation, were able to bargain for a share of the economic rents that the largely oligopolistic firms enjoyed. This created a more just and equitable income distribution and created a consumer class that helped fuel the economic growth of the 20th century.

Portland Home Values: Case-Shiller December Numbers

And now for your monthly Case-Shiller update.  The December numbers are out and things continue to look grim for Portland (and the US in general).  With the federal new home buyer credit ending, the backlog of defaults and the continuing unemployment situation, the downward pressure on prices is still strong.

But, in some better news, consumer confidence is up sharply.

First Take on the Kicker Reform Bill

As an ardent supporter of kicker reform to support a permanent rainy-day fund I am following, with considerable interest the new proposed bill in the state legislature.

Here is a synopsis from the Corvallis Gazette Times [which is a lot better than the fairly incoherent one in the Oregonian which is linked above]:

Here’s how [the] plan would work: At the beginning of each biennial budget cycle, the Legislature would set aside the first 3 percent increase in general fund appropriations over the previous two-year budget (after accounting for inflation and population growth) to go into the rainy day fund.

Any general fund money left unspent at the end of the biennium — up to 1 percent of general fund appropriations — would also go into the rainy day fund.

The measure would also divert most of the money from the state’s kicker law into reserves. Currently, any time general fund revenues exceed projections by more than 2 percent, the excess is kicked back to taxpayers — both personal and corporate — in the form of a refund.

Under SJR 26, half of the personal kicker would still go back to taxpayers, with the remainder going into the rainy day fund.

All of the corporate kicker would go into the university stability fund. Once the fund reaches its maximum — 15 percent of the prior biennium’s higher education budget — additional deposits would flow into a subaccount set aside for maintenance and capital improvements.

The rainy day fund also has a cap, set at 12 percent of the previous biennium’s general fund revenues. Any deposits beyond that level would be refunded to taxpayers.

I have not had a chance to examine it carefully but here are my first thoughts:

1) It isn't nearly big enough. Most economists who study these things advocate for a reserve that is 5% of state GDP. In Oregon's case that would be about $8.25 billion. The bill call for the rainy day fund to top out at 12% of current biennium revenues which today would be in the $1.8 billion range. The current biennium is facing a 3.5 billion shortfall and the past biennium there was about a 3.8 billion shortfall.  Clearly the proposed size of the kicker is too small.

2) Diverting general fund revenue before the kicker is a bad idea for a state with underfunded services.  With a sufficient rainy-day fund this should not be necessary and will be especially damaging to K-12 education.  Just how bad are we willing to let K-12 get?  

2) Dedicating the entire corporate kicker to universities is great for me but not a good move overall.  I am not a big fan of dedicated revenues and would prefer more independence for state universities rather than dedicated funding streams.  I do think support should rise, but I think K-12 is probably as or more important as universities are able to deal with low support levels by more price discrimination, more out of state and international students, etc.

Now, political realities are what they are, but I don't see why, after the mess we have been through, the simpler keep all kickers until we have a 5% of GDP reserve.  The kicker still does it's job in restraining state spending but also provides for the other side of the equation - allows sustainable spending levels during recessions.  I await the citizen sponsored referendum!

And, in case you are interested, you can read what I have posted previously on rainy-day funds by clicking here.

Public Goods and the Free Rider Problem

If you want a perfect example of the problem of the provision of public goods and the free rider problem, look no further than yesterday's Oregonian:

"Clackamas County voters likely to decide Sellwood Bridge fee; rejection could doom project"

By the way, if you want a clear indication of how pathetic OregonLive is as a web portal for The Oregonian, go there and type 'Sellwood Bridge' in to their own search box and see what you get.  You would expect a list of articles, beginning with the most recent, that mention the bridge.  What you get is a hodge-poge of old articles. Ridiculous.

Free Trade is Good Overall, but Creates Winners and Losers

This is the ultimate message of the theories of trade based on comparative advantage that I try to convey to my students.  In other words, trade makes societies richer, but depending on where production ends up, how groups feel about trade depends on whether they are in an industry in which their country has a comparative advantage.  For example, it may be true that trade makes us wealthier as a society, but tell that to US workers in wood products who are finding more and more of the production ending up occurring in other countries. They key is whether a country can use the benefits from trade to compensate and accommodate (retrain) the losers.

Which, by the way is an argument for the continuation of the timber payments for rural counties in Oregon, but that is a topic for another day.

Anyway, I am still battling a sinus infection and am getting further and further behind so I direct you to a good piece on the gains from trade from Greg Mankiw in The New York Times and a response from Uwe Reinhardt in the Times' Economix Blog.

Good, and thoughtful, stuff.

Let Us Now Praise Famous Men

We interrupt your regularly scheduled econo-babble for something really, truly, important: the immense triumph of the Arsenal Football Club over FC Barcelona last night in London in the UEFA Champions League.  The Gunners were thoroughly outplayed in the first half and went down 0-1 after a clinical attack by the Catalans.  But they came out in the second half and played with heart and courage and got two late goals to win the night.  They still have to travel to the Camp Nou and will have a real fight on their hands, but right now we can all bask in the glory of a night of beautiful football at the highest level.

Wilshere was every bit as good as Iniesta and Xavi

And just how good is 19 year old English midfielder Jack Wilshere?  Barcelona puts players under tremendous pressure, swarming to the ball, but Wilshere was strong, poised, and clinical in his possession and distribution.  Time after time he received a ball under tremendous pressure only to control and dribble out of it unfazed and unruffled. He looked more like a 10 year veteran than the very young man that he is.  Amazing performance and he just may be the future of the England team.

Koscielny played great, but here Villa scores the opening goal.

Kudos also to defender Laurent Koscielny who played the best game of his career last night.  Strong on the ball and unafraid to apply high pressure and win the ball up the field he looked magnificent.  Alex Song was similarly strong and composed, though was a little too aggressive at first, earning a yellow card very early in the game.  I thought it a harsh decision by the ref, but it did cool things down and let the beautiful football flow.

It has to be said that Arsenal were lucky that Lionel Messi was not in top form, uncharacteristically missing a couple of goals.  But then Robin van Persie was off his form too until his late equalizer.  Barcelona may be the better team, but Arsenal thoroughly deserved their victory last night.

He shoots...

...he scores!

Barcelona are always a joy to watch - their pressure and passing game are a marvelous spectacle - and I am a big supporter of them as well, but it is not the same.  After they tore my heart out in 2006, I want nothing more than to see Arsenal knock them out.  It will be a huge night on Tuesday, March 8, in Barcelona.

And if you aren't a soccer fan, take a look at this and tell me this isn't the greatest sport in the world:

The Bag Ban and Price Floors

I can't decide if I support the bag ban because I can find precious little real evidence of the menace of plastic bags other than the occasional anecdote and I can't find anything about the ease of recycling said bags.  So there you are, if the societal cost of the bags is high enough and there is no better alternative solution (e.g. making retailers that use them accept them for recycling) then I support it.  But if either is not true (and I admit to being a bit suspicious that they are) I do not support it.  What I don't support is making public policy in the dark and until there are very good answers to these two questions, I find it hard to support action.  It seems to me considering all the packaging that the stuff we put into these bags come with, the bag itself is hardly the point.  In any case, my preferred solution is a tax equivalent to the cost to society they impose, proceeds of which can be used to deal better with them.  Then the market will provide the appropriate amount of plastic bag use.

But that's not what I wanted to talk about here.  What I want to talk about is the mandated price for paper bags (five cents) that comes with the bill.  This is asinine in my view.   First, most retailers give a five cent discount for reusable bags and thus will shift from a discount for reusables to a charge for non-reusables - creating no new incentive to use reusables.  But more importantly, the charge will create a market distortion.  Retailers that can buy paper bags for considerably less will actually have an incentive to sell them rather than encourage the use of reusable bags - all thanks to the government that is trying to get people to do the opposite.  This is a perfect example of why all legislators and policymakers should have to understand basic economics ... or read my blog. ;-)

By the way, Polti-Fact Oregon is making a fuss about the word tax, and I agree the bag fee is not a tax (to be so it has to be transferred to government in most working definitions of 'tax') but it is a price floor.  So here is a question, other than minimum wages, can you all think of examples of other government created price floors in Oregon.  The bottle bill is a deposit so it is pretty close but not exactly the same, so what else?

The Portland Youth Magnet

Portland got another national star turn this morning on NPR with a story about the migration of twenty somethings to the city despite relatively high unemployment and low pay.  The usual suspects are trotted out as reasons - lifestyle, hipsters beget more hipsters, etc.

It seems to me, however, there are two points that keep getting missed in the discussion that provide the essential linkages to provide at least a plausible explanation of the phenomenon.

The first is that as societies grow more affluent one of the biggest jumps on consumption we see is a jump the the consumption of leisure time. Affluence buys us rest and relaxation - and the related vacations, travel, etc.  This has been true for some time, over the 19th and 20th centuries we saw the amount of leisure time increase dramatically in high-income countries.  But I wonder if now what were are seeing is a generation that puts more worth on lifestyle as opposed to more material goals.  So it is now no longer just more leisure time, but the quality of your leisure and your work time.  Being in a community that affords quality leisure time activities, like minded individuals and a pleasant atmosphere is worth a lot to the youth of the 21st century in America.  For this reason they are cashing in on the compensating wage differential - accepting lower pay for the chance to live in Portland.  And they are not just willing to accept lower salaries, but are actively looking for places that match their preferences and thus are willing to move without job prospects - suggesting that the value they place on lifestyle is extremely high.  This is not lack of ambition, but just the opposite - the ambition to make a life that is the most fulfilling holistically, not just materially.

The second point is that this should be a source of comparative advantage for the city not disadvantage.  The recent report from ECONorthwest lamenting low salaries, in my mind, got it all wrong.  The fact that skilled wages are depressed (if, in fact, they are - they did not account for education) are a sign of an incredibly successful job done by city government in creating a place where educated young people want to come and live.  They are willing to pay for the chance to live here and they do so by accepting lower wages.  Is is also a source of economic strength: that there are talented people here willing to work for less means that Portland should be a good place for companies to come and set up shop.

Anyway, when thinking about the path that led us to the Portland that is now the media darling. I always think about the downtrodden, blue-collar city of my youth that specialized in cheap, home-grown diversions.  It was a great place to be a college student or aimless twenty-something even then, as rents were incredibly cheap, you could go to the Mission Theatre for free and then spend your few dollars on local beer.  What more could you want?  I think that these trends start slowly and then gain feedback momentum and this is where my consciousness begins - Portland in the early 80s.  Looking back we look for big answers, but often the roots are humble.

Eco-nomics: Roof Tiles and Positive Externalities

Im my Public Policy Analysis class we are studying market failures and appropriate policy responses.  Here is an example from Greg Mankiw's blog today: smog-eating roof tiles.  From the news article:

A California company is selling a “smog-eating” concrete tile roof that it says neutralizes the nitrogen oxides spewed by automobiles.

Boral Roofing says each year, one of its concrete tile roofs on a typical 2,000-square-foot house can break down the same amount of nitrogen oxides as a car’s engine typically produces during 10,800 miles of driving.

When sunlight hits the roof, it activates titanium dioxide, which breaks down the nitrogen oxides in the air into oxygen and nitrates, the company say. The tiles’ smog-fighting ability was proved in extensive laboratory testing and field studies conducted by a European Union consortium of academic and industry experts from 2002 to 2006.

Mankiw then prompts his students by asking for the appropriate policy response. Hmmmm, what a good exam question: Graph the situation, explain the market failure and the resulting efficiency loss and suggest a policy solution. Consider this an easter egg.

Picture of the Day: Forecasts

As I am still sick and now quite behind, all I offer today is this from a Wall Street Journal Survey.

Self-Enforcing Mechanisms

I am, for the second year in a row, felled by a nasty sinus infection.  So blogging from bed this morning and I can think of anything to write about save for another tale from Brazil.

In Brazil these days the federal government has a system that will refund to consumers part of the VAT tax they pay on purchases of consumer goods.  In order to claim the refund, you have to give the equivalent of your Social Security number to the cashier every time you check out.  These purchases get recorded in a central computer system and the government keeps a running tally for every citizen, which you can log in and check. [This is all, by the way, as I understand it and was explained to me - details might be a bit off]

Why, you might reasonably ask, doesn't the government just lower the VAT, or just have the retailer award the refund on the spot?  Because this system creates a natural enforcement system which compels the retailers to report all sales to the government and pay the appropriate tax, part of which gets refunded to the customers.  Failing to do so will cause a great kerfuffle among customers that find that a purchase was not recorded.

Pretty clever.  Of course this system only works in a modern age where computers and the internet are common.

On a side note, I was very proud of my nascent Portuguese last time I was there and would march up to the cashier of a store ready for whatever they said: "did you find everything you were looking for?", "is this all for you today?", do you want to pay in cash or credit?", "how are you today?"  Whatever.  Of course, every time I was dumbfounded by a quick question that was entirely incomprehensible to me.   So I had to mutter "er, I speak Portuguese badly and I didn't understand."  Of course what they were asking me for was my national tax number.  Brazilians are the most wonderful people though and rather than being nasty about my failures in their native tongue (ala the French, whose tongue I master pretty well, but still get snide attitude from Parisian shopkeepers), they are incredibly accommodating and delighted that you try.

My favorite story was from a bookstore where I, once again, forgot about the tax thingy and was dumbstruck at the question.  The cashier immediately apologized for embarrassing me and apologized that his English (which was great) was not so good.  I apologized that my Portuguese (which is poor) was poor and he said that, no Portuguese is too hard to learn and I shouldn't be expected to speak it in Brazil.  Too funny.  The reality is it is not very hard except for making the nasal sounds and it is a beautiful language that is super fun to speak because of all the wonderfully exaggerated intonation.

If I were not so sick I'd look the tax thing up and do a little real research on it, but I am too tired.  Comment with links if any of you are so motivated.

Picture of the Day: Inflation

Or why Ben Bernanke is telling congress that the Fed is more worried about unemployment and growth than inflation.   HT: Economix.

Ah, but what about expected inflation you say (as any good macro student should), well here you go:

The picture is messed up, but I am too old and technologically incompetent to fix it. Sorry.

Ho ho!! Look at this old dog figuring out how to fix it. I converted it into a PDF and then back into a JPEG. That got the white background I needed. I know, Photoshop. But I don't have photoshop. What I have are my wits and they are fading fast...

The Birth of Modern Development Economics

This is sure to be a controversial statement and commentators may rightly point to much earleir work by Rostow and Lewis, for example, but if I were to point to one paper that ushered in the era of modern development economics it would be Harris and Todaro's "Migration, Unemployment and Development: A Two-Sector Analysis.”

To me this paper was important for two reasons: one, it was the first time a paper used the tools of modern neoclassical economics but pointed to a particular stylized fact about developing countries and followed through on that observation to its conclusion to show how a particular distortion can arise in a developing country; two, it was published in the top journal of economics.  This second part is no small beer as development economics has always struggled to be seen as important in the profession.  [Yes, this last statement is remarkable considering how much is at stake - but there you are]

Anyway, I mention this because the American Economic Review arguably the top journal in our profession (and inarguably among the top three) has turned 100 years old and has identified the top 20 articles of its history.  To my surprise Harris and Todaro are one.

Here is the list and a brief description of each.  They are all big deals, including Krugman's seminal paper on increasing returns and trade, Dixit and Stiglitz's paper on monopolistic competition and product variety that, in part, provided the framework for Krugman, Milton Friedman's paper on monetary policy and Anne Krueger's paper on rent seeking that set the table for much work on corruption.

Also in there is Kuznets' paper on income inequality which is still the starting point for all measures of inequality and is used in development economics all the time.

The list is an interesting primer for students of economics on some the the foundational work of the modern discipline.

I am Old

So I have this Twitter thingy account and it is amusing and all, but today I accidentally pushed some button and all of a sudden a list of Tweets that mention my @OregonEconomics pops up.  Thing is, many of these I never saw at the time.  I suppose they pop up in my timeline, but I don't obsessively check Twitter so it looks like I have often missed them.

All this is to say I am sorry to those that tried to communicate with me via Twitter.  I am old and easily befuddled.

[I am also very busy these days so it'll be light blogging this week - sorry]

  

Packers

It is hard to describe the anachronism that is the Green Bay Packers.  It is absurd that a small rust belt town would have and even own an NFL team and while I was living in Wisconsin as a kid it seemed that perhaps they wouldn't last.  They were playing half their games at County Stadium in Milwaukee (they only place I have seen them play live) and, the exploits of Lynn Dickey and James Lofton notwithstanding, they were not very good.

Anyway yesterday I watched and celebrated their victory as any good Wisconsin boy would: brats and beer done right - boiled in beer and onions and then grilled to juicy perfection.

Unable to find Leinenkugels, Miller had to suffice.

What a year it is shaping up to be: my itinerant youth has made me a lifelong supporter of the SF Giants, the Green Bay Packers and the Trailblazers.  Two championships so far this season, maybe the Blazers can shock the world!

By the way, I was morose at halftime, certain in the knowledge that the Steelers would come back and win.  For my other team, Arsenal, managed to squander a 4-0 lead to Newcastle just the day before causing a fit of apoplexy.  And it almost happened, but once again the Pack came through.

An interesting economics question about the value of spectator sports to cities is if Green Bay's remaining economy owes a lot to the team.  By which I mean if people choose to live and start up businesses in Green Bay simply because of the presence of the Packers.  Now that shipping on the Great Lakes is not such a big deal, the reasons for the existence of Green Bay Wisconsin are few.

Oregon Economy Improving

The U of O's Oregon Index of Economic Indicators rose 2.7 percent in December, continuing a rise that began in September.  This is a sign that the economy is picking up some momentum (and momentum is an appropriate word as feedback loops are very important in this process) which can be sustained with any luck.

But spare a thought for poor Tim Duy, author of the index: whenever I speak to reporters my first thought is to at all costs avoid saying something dumb that shall be memorialized for all posterity in print.  I don't always succeed.  But I have never suffered the ignominy of having a dumb quote put in bold type and placed above the article as the Oregonian did to poor Tim.

"I'm much more optimistic than I would have been three months ago."


It is too bad he wasn't alive three months ago to know his optimism level!  I assume he meant either that his is more optimistic now than three months ago, or that he is more optimistic now than he would have been if the index had shown a 2.7% improvement three months ago.  This could easily be the fault of a reporter taking a quote out of context (for example the real quote could have continued "...if the index had risen 2.7% then") but the cringe inducing result is the same.    

Of course I blog which means that I have now made a hobby of making public and preserving my words for all the world to dissect and make fun of - which has been one of the hardest things to adjust to.  I am used to crafting research papers for months and even years so that every sentence is precise and correct.  Blogging is the complete opposite and has forced me to become comfortable with thinking aloud in public.

Not an easy thing for an academic to do.

US Unemployment Falls to 9% in January but Job Growth Slow

NY Times Graph

The BLS released its latest monthly report today and the news is mixed.  While unemployment in January fell to 9%, the monthly job growth number (36,000) was terrible.  In general, economists believe the economy need to add well over 100,000 jobs a month just to keep up with work force growth.  Yes, bad weather certainly played a big role in the disappointing jobs number, but even still the number is bad.

So once again we are repeating the same mantra: the economy is recovering but painfully slowly.

Happy Birthday Portland Tribune

The Portland Tribune turns ten today.  In an era of ever dwindling reportorial staffs on metro dailies, it is nice to know that publications like the Trib can provide an additional watchdog role.  Investigative reporting is a public good and as such will always suffer from lower than optimal private investment, having philanthropists like Bob Pamplin support such journalism is a welcome thing indeed.

Paradox of Corporate Taxes

David Leonhardt has another excellent and provocative article in The New York Times, this time about the paradox that US corporate taxes are at once among the highest in the world and also don't generate a lot of revenue.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.

“A dirty little secret,” Richard Clarida, a Columbia University economist and former official in the Treasury Department under President George W. Bush, has said, “is that the corporate income tax used to raise a fair amount of revenue.”

This is a classic example of what I call 'policy persistence' - the lock in effects you get from the benefits a small and highly motivated group gets from a policy makes it very hard to undo.

Economists have long pleaded for an overhaul of the corporate tax code, and both President Obama and Republicans now say they favor one, too. But it won’t be easy. Companies that use loopholes to avoid taxes don’t mind the current system, of course, and they have more than a few lobbyists at their disposal.

The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes. In effect, the Roundtable wants a tax cut for its members regardless of how much the tax code is simplified — or whether the budget deficit grows.

Of course this is all good business for economists. A small army of economists at accounting firms like PriceWaterhouseCoopers run around selling 'transfer pricing' services. This service is particularly useful for multinational corporations. Through internal pricing among its divisions located in different countries, it can shift all the profits on its books to divisions in low tax countries. Thus GE in the US makes very little profit.

G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.

Of course such a flawed tax system creates serious costs for an economy but our democratic process makes it hard to fix.

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”

A lot of economists agree. Then again, any system that creates as many winners as this one won’t be changed easily.

The Governor's Budget Proposal

Read it and summaries here.

The Invention of Money

My mother alerted me to this show on "This American Life" devoted to exploring the idea of money.  It is a little silly given that it is the "Planet Money" team that is reporting this and that only after a few years on the job did they stop to consider what any principle of macroeconomics student is immediately faced with: how to explain money (or if you take Money and Banking you have to study the definitions of money).  You also have to endure the tired and (to my mind at least) incredibly annoying mannered style of Planet Money as well as This American Life, the show upon which it is modeled.  Nevertheless, it is an interesting show and I recommend it to those without an economics background and suggest it to those with or for those who haven't really thought about it.

I will stay they start off on the wrong foot in talking about all the 'money' that was lost in the housing bubble recession.  It wasn't money as much as 'value.'  But in a sense this is the point - people don't get the distinction.