Gone Fishin'

Well, not really, but I am off in Minnesota for my brother's wedding which is on a lake in the north.  Sorry.

Believing in the Efficiency of Markets

Below, in its entirety, is a response from a blog post in the NYTimes' Economix Blog about needing a job to get a job in this recession:

This is exactly why I won’t date a women who is not already married. If she’s still single there’s probably a very good reason.

Ah, but the problem in dating is an information asymmetry, so believing that the market has achieved an efficient result is questionable.  The market for lemons rears its ugly head.

NB: It is also a matching process: most people are not acceptable or unacceptable but right for the right person.    

Portland Home Values: Slight Increase in May

The May 2011 Case-Shiller numbers are out and the values increased 1.6% over the previous month for Portland.  16 out of the 20 metro areas in the index saw increased home values.  What I have plotted above are the seasonally adjusted numbers which show a slight decline for Portland (not the normal spring uptick).  Annually Portland lost 9.1% of its home value which puts us in the top 5, not surprising given the state's unemployment levels.  Overall the 20 city index showed a 1% gain for the month, but a 4.5% loss from a year ago.  I still feel reasonably good about my statement at the beginning of 2011 that I didn't think that the year would see substantial decreases or increases but there are 7 more months of data to go so we'll see.

Picture of the Day: Spending

From the New York Times [HT: Jeff Alworth].  Let's forget the war spending (too hot button) and focus on the Bush tax cuts which had dubious affects on growth but serious implications for the deficit.  And yet we can't get a budget deal passed that includes their sunset.

The Promise and Perils of Growth: Brazil's Improving Poor and Stressed Middle Class

Today I direct your attention to an excellent article from the Financial Times (whose pay wall seems to allow access) about the affect that growth has had on Brazil's middle class.  Last fall I wrote about the dizzying sensation of coming from an economy that is in the depths of a deep recession to an emerging economy in the midst of a economic boom as I traveled to São Paulo.  Economic boom sounds like it should be great for all, but it does put pressure on prices which hurts if your income is not rising as fast.

But Brazil, which has long been one of the most unequal countries on earth, has finally seen real progress in raising people out of poverty and lowering inequality (thought the very wealthy have done very well too) for example the Gini index has fallen from over .6 in the late eighties to almost .52 today. So growth overall has been very good for the country and its poor, but it does have many subtle consequences.

Here is an excerpt from the FT article:

Speaking to Melissa Beeby, you would not know that Brazil is enjoying its most prosperous period since the “economic miracle” of the late 1960s – as the country’s last great boom is known.

Like other members of Brazil’s so-called “traditional” middle class, things have become harder for Ms Beeby in recent years. The prices of meat and petrol have doubled, highway tolls have risen and eating out or buying property have become prohibitively expensive.

“The middle class basically is in debt. That’s how people manage,” says Ms Beeby, who runs the Bridge Restaurant at the British Centre in São Paulo. “People have more dinners at home and when they do go out, they go to simpler places.”

The story of Brazil’s success in lifting millions of people out of poverty over the past decade has really been a tale of two middle classes.

While headline economic growth has not been as spectacular in Brazil as in China and India, at an average of about 4 per cent a year between 2003 and 2010, the balance of income distribution has improved more rapidly in Latin America’s largest economy than in the other large emerging markets.

In Brazil, mean household income since 2003 rose by 1.8 percentage points a year above the rate of gross domestic product growth, helped by generous increases in the minimum wage and welfare handouts. In China, by contrast, the rise in household income trailed GDP growth by 2 percentage points a year.

On the winning side have been an estimated 33m people who since 2003 have risen to the ranks of the so-called “new middle classes” or above. Today, 105.5m Brazilians out of a total population of 190m are members of this group, who earn between R$1,200 ($767) and R$5,174 per household. Also better off are the rich, who have profited from a stock market, commodities export and consumption boom.

On the losing side, say sociologists, are the 20m or so people of the “traditional” middle classes who earn more than R$5,174 per household. Unlike in India, where the old middle class benefited from the creation of new industries, such as information technology outsourcing, many in the Brazilian middle class complain of rising prices, taxes, congested infrastructure and increased competition for jobs.

I encourage you to read the rest at the FT and a related article at the Newsweek site.

The Debt Ceiling

This is the topic I have been avoiding studiously as I am not sure there is anything of value I can add.  My basic take is that allowing a government default would be the stupidest thing the US government has ever done and would convince me our democracy is broken.  So there you have it.

Fortunately there are some exceptionally smart people out there giving more sober analyses.  The best have seen is this piece in Project Syndicate by Simon Johnson.  Here is an excerpt:

WASHINGTON, DC – Leading United States congressmen are determined to provoke a showdown with the Obama administration over the federal government’s debt ceiling. Ordinarily, you might expect House Republicans to blink at this stage of the negotiations, but there is a hardline minority that actually appears to think that defaulting on government debt would not be a bad thing.

These representatives – with whom I've interacted at three congressional hearings recently – are convinced that the US federal government is too big relative to the economy, and that drastic measures are needed to bring it under control. Depending on your assessment of “Tea Party” strength on Capitol Hill, at least a partial debt default does not seem as implausible as it did in the past – and recent warnings from ratings agencies reflect this heightened risk.

But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid.

The reason is simple: a government default would destroy the credit system as we know it. The fundamental benchmark interest rates in modern financial markets are the so-called “risk-free” rates on government bonds. Removing this pillar of the system – or creating a high degree of risk around US Treasuries – would disrupt many private contracts and all kinds of transactions.

In addition, many people and firms hold their “rainy day money” in the form of US Treasuries. The money-market funds that are perceived to be the safest, for example, are those that hold only US government debt. If the US government defaults, however, all of them will “break the buck,” meaning that they will be unable to maintain the principal value of the money that has been placed with them.

The result would be capital flight – but to where? Many banks would have a similar problem: a collapse in US Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets.

There is no company in the US that would be unaffected by a government default – and no bank or other financial institution that could provide a secure haven for savings. There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.

Go and read the entire piece, it is sobering reading.

Picture of the Day: Housing Starts

From the Wall Street Journal

Oregon Unemployment 9.4% in June

A little late on this today as I was otherwise occupied until now, but the Oregon employment picture looks a lot like the national one which is essentially stuck in neutral (oh, how many metaphors am I going to have to use?).  The unemployment rate is basically the same at 9.4% but the real information is in the jobs number which is at plus 800 for June.    As the employment department report notes, the Oregon economy has essentially added no net jobs since February. Ouch. The nice gains in private sector job growth in professional and business services (+1,200 jobs), educational and health services (+2,200), and leisure and hospitality (+4,400), were counter weighted by losses in government (‐2,900 jobs), manufacturing (‐2,000), and trade, transportation and utilities (‐1,800). The government number shows the anti-stimulus effects of state government cutting sharply right when the economy is trying to get a little momentum.

It is a little tiring trying to think of something new to say each month as each month is the same basic story: tiny glimmers of a recovery, but not enough to provide any light.

Beeronomics: When Competition is Good for All

[Note: this is a rare cross-post with the Beeronomics blog as it really is economics first, I post it here as well]

This is something I have discussed before in these (what, pages? files? screens?), er in this blog, but is illustrated nicely in this interview Andy Crouch, the Beer Scribe conducted with Alan Pugsley of Shipyard brewing company in Portland, Maine.

AC How has [the craft beer market] changed to now?

AP It's completely changed. The bigger market for craft beer exists now, obviously. The craft beer market since those days has grown every single year.The craft brewing segment of the market is not going away. Back when Geary's started, Sam Adams was just starting. Even though it really wasn't a microbrewery as such, it was a contract brewing operation where all the money raised went into marketing. Jim Koch is a very good marketer. He did a great job in getting it out there and turned it into a multi-million dollar brewery. So that brand in itself helped pull others with it. All of his marketing money was not only making people aware of the Sam Adams brand, it was making them aware there was something outside of Budweiser. And that's really what he did. Even though we're competitors, at the end of the day, you say 'well done' and if you're honest, you say 'thank you for doing it that way'. It certainly did help.

AC After outgrowing the Federal Jack's location, you opened a package operation called Shipyard Brewing Company in Portland, Maine, in 1994. What was the result of this move?

AP The odd thing is that as opposed to taking away from Geary's sales, it actually increased them. The reason being there was one little face of Maine-made beer on the shelf which was easy to miss. When you put Export Ale here and Geary's Pale Ale here, all of sudden you've got a billboard. If you look in the supermarkets today, you've got Shipyard with three or four shelves and Geary's with three or four shelves and that's how you sell beer. Ironically, our growth and establishment helped Geary's. Plus, I think it gave them a little bit of a kick in the pants and realized they had some competition. They realized they needed to do something else and that's when they came out with Hampshire Special Ale. [emphasis mine]

Normally when we talk about competition we are talking about the number of firms that serve a given market that has a fixed (static) demand curve.  In most standard models of imperfect competition, increases in competition are good for consumers (more get to purchase at a lower price) and bad for firms (they have to accept lower prices).  But things change when demand it itself a function of the number of firms.  In this case more competition does two things, it has the traditional role of adding to the competition for existing customers, but it also increases the number of customers as well.  How this tension is resolved determines how an establish firm should feel about a newcomer.

Relations between craft brewers, in my experience, is exceptional - it is a very chummy industry.  This, to me, suggests that the tension right now is being resolved in favor of new firms.  Anecdotally, this seems largely true: new craft beer companies are finding new markets and virgin territory, pushing their way into venues that have heretofore been strictly macro-brew, creating even more shelf space in supermarkets as the number of craft beer drinkers continues to increase.

I think Portland, Oregon is an interesting laboratory for this: it is hard to imagine being a beer drinker that moves to Portland and isn't moved by the omni-present craft beer scene to give craft beer a fair hearing.  Many will decide they not only like craft beer, but that craft beer transforms their beer drinking experience into a adventurous experience that provokes thought, discussion and passion.

There will come a time (and we may be quickly reaching it in Oregon) when the growth of breweries outpaces the growth of craft beer demand and competition becomes more serious among craft brewers, but for the time being, I think the attitude that all breweries are rowing the same boat in the same direction is accurate.

Picture(s) of the Day: Grade Inflation

From Catherine Rampell of The New York Times:

Stuart Rojstaczer and Christopher HealyNote: 1940 and 1950 (nonconnected data points in figure) represent averages from 1935 to 1944 and 1945 to 1954, respectively. Data from 1960 onward represent annual averages in their database, smoothed with a three-year centered moving average.

Stuart Rojstaczer and Christopher HealyNote: 1960 and 1980 data represent averages from 1959–1961 and 1979–1981, respectively.

The relevant question to me is does it matter?  Are grades relative measures or absolute measures?  If the former, then we all understand the modern grade distribution and judge performance relative to it.  If the latter, then this suggests that our metrics are getting out of whack.  I tend to believe the former and thus am not terribly agitated about graphs such as these.  For example, I do not think, when giving grades of normalizing them to universities across the US from Harvard to Podunk State.  I think only of the expectations I set for my class which are themselves endogenous to the students I have.

The real problem, in my mind is that by squeezing all the grades to the top, you begin to become unable to separate truly distinguished performance from good performance.  The other problem is that economics is usually (with physics) the toughest grading subject around.  So with all the english majors getting As, it is important that outsiders understand that the grades themselves are discipline specific.

[Not picking on english majors, both of my parents were after all, but I served on a committee to choose a teaching award at the University of Colorado and we had a lively debate about the merits of an english professor that gave all As.  Not exaggerating - every single student earned an A in his classes.  Not sure if this was a philosophical stance, but his evaluations were excellent.  For some reason students liked him. Go figure.]

Picture of the Day: Oregon Personal Income Growth

For the analysis, go to the source: the Oregon Office of Economic Analysis.

US Unemployment Climbs to 9.2% in June on Dismal Job Growth

The BLS reports today that the US economy added only 18,000 jobs in June and the unemployment rate was essentially unchanged at 9.2%.

There is really not much to say other than this is as dismal as it gets.  Energy prices seems to be the main culprit most business economists are citing but I think it has a lot to do with all of the drastic cutting going on in the states.  Just as fiscal stimulus can help bump aggregate demand and stimulate the economy, states cutting back can depress aggregate demand and depress the economy.

Maybe now the folks in Washington can start to focus on jobs again and stop spending all their energy on the debt.  

Update: It turns out David Leonhardt beat me to it - he makes the same point about state austerity.  We have lost about a million jobs due to state and local government cutbacks.

College is a Smart Investment

[Note: I am back from vacation but had to have some surgery this week so intermittent blogging will continue as I convalesce.  Sorry.]

So for today I simply direct you to an excellent article by David Leonhardt in The New York Times which makes the case for a college degree even in a down economy and skyrocketing public university tuition.

Here is a taste:

ALMOST a century ago, the United States decided to make high school nearly universal. Around the same time, much of Europe decided that universal high school was a waste. Not everybody, European intellectuals argued, should go to high school.
Multimedia

It’s clear who made the right decision. The educated American masses helped create the American century, as the economists Claudia Goldin and Lawrence Katz have written. The new ranks of high school graduates made factories more efficient and new industries possible.

Today, we are having an updated version of the same debate. Television, newspapers and blogs are filled with the case against college for the masses: It saddles students with debt; it does not guarantee a good job; it isn’t necessary for many jobs. Not everybody, the skeptics say, should go to college.

The argument has the lure of counterintuition and does have grains of truth. Too many teenagers aren’t ready to do college-level work. Ultimately, though, the case against mass education is no better than it was a century ago.

The evidence is overwhelming that college is a better investment for most graduates than in the past. A new study even shows that a bachelor’s degree pays off for jobs that don’t require one: secretaries, plumbers and cashiers. And, beyond money, education seems to make people happier and healthier.

“Sending more young Americans to college is not a panacea,” says David Autor, an M.I.T. economist who studies the labor market. “Not sending them to college would be a disaster.”

Go and read the reat at the Times.

Larry Summers on Marketplace

Just back late last night from vacation, but former OPB Central Oregon reporter, and now Marketplace producer, Ethan Lindsey sent me an e-mail to alert me to a fascinating interview with Larry Summers on the debate over raising the debt limit.

Here is the teaser:

In one of his first interviews since leaving the White House, former National Economic Council director Larry Summers says he believes "reason will prevail" in negotiations over the debt limit because a default would spark a second, scarier economic crisis, a "Lehman Brothers on steroids."

Check it out.