Economist's Notebook: Utter Stupidity

So, let me be the millionth economist to say it - slashing spending arbitrarily in the midst of a struggling recovery when borrowing rates are already incredibly low and on stuff that does nothing, nothing, to address long-term debt issues is just about the stupidest thing the government has done in my lifetime.

I cannot believe that we are being governed by grade schoolers.

Picture of the Day: Federal Spending in the States

Is this good news or a condemnation of our congressional delegation that is failing to bring home the bacon?

Compensation and PERS

Here is the problem with studies that look at PERS in isolation like the one by PSU that is featured in today's Oregonian: it is only one piece of compensation.  Oregon for many years appears to have saved on wage bills by shifting compensation more heavily to retirement.  This is, of course, problematic when it comes time to pay for the retirement of its workers.  It makes the accountants are happy at the time because the books balance and the unfunded liability stays hidden.

I can only speak for myself but when I took the job at Oregon State I had a job offer in hand for 20% more from a certain state to the south.  Oregon's generous benefits helped close the gap and the compensating wage differential meant that I was happy in the end to accept less to live in the state of my choice.  I am Tier III so don't get mad at me by the way.

To retroactively change the terms of the contract that workers agreed to at the time is not acceptable in my mind.  Economically the sanctity of contracts must be preserved. Going forward however, it would be better for Oregon to get more in line and shift more towards wages and away from defined benefits.    

Fred Thompson: Coal for the Powerplants of China

While away in Brazil, Fred Thompson, helps keep the blog relevant by commenting on local issues. Thanks Fred! [Need a hint about the title?]

Coal-fired power plants are a major source of greenhouse gases, carbon monoxide, nitrogen oxides, sulfur dioxide, and particulate matter. Compared to burning coal, burning natural gas is cleaner and, in the US, cheaper.

Increased reliance on natural gas in the US has led to substantial reductions in domestic coal prices, making US coal more attractive to European importers and potentially more attractive to East Asian importers as well. Nevertheless, despite steep cuts in US coal prices, once transportation costs are taken into account, the price of US coal, especially cleaner coal from the Great Basin, is often higher than the price of locally mined coal in Europe and East Asia. Evidently the reason that US coal is preferred in Europe and East Asia to local coal is that it is cleaner. Compared to the lignite mined in Europe and China, burning western coal from the US generates 50 percent less CO2, Carbon monoxide, and nitrogen oxides per unit of energy, 30-60 percent less sulfur dioxide and particulate matter, and one-tenth the oxides of mercury. Burning imported cleaner coal in European coal-fired power plants has, therefore, likely reduced global greenhouse emissions, plus most other kinds of air pollution, although it may have slowed the transition to alternative, cleaner energy sources. Burning cleaner imported coal in Chinese power plants should have an even greater effect, both because the Chinese burn more dirty coal than the Europeans and because they do not now anticipate an early transition away from coal.

Most US coal exports flow through US Atlantic and Gulf ports, like Newport News VA and New Orleans LA, which are a long way from markets in East Asia. Consequently, Canada is beefing up its Pacific Coast coal-handling facilities to take advantage of East Asian opportunities and ports up and down the West Coast of the US are contemplating expansion.

However, the most attractive Pacific Coast option in the US would probably involve diverting the coal now being shipped to a PGE power plant in Boardman OR, which is planned for closure by 2020, to East Asia. This option is attractive because the infrastructure needed to move coal from the pit to Boardman, which is on the upper Columbia River, is already in place and currently in use.

The only major question associated with this option has to do with getting the coal from Boardman to the sea. Here, there are two main alternatives: off-loading the coal trains to barges at Boardman and moving the barges to a deep-sea port on the lower Columbia River, where the coal would be loaded onto freighters for transport across the Pacific, or sending the coal trains on through the Columbia Gorge and the Portland-Vancouver metropolitan complex to a deep-sea port.

Under most circumstances, it might be hard to say which of these alternatives would be better without additional study. The former involves twice the freight handling costs; the latter entails higher transportation, environmental, and aesthetic costs and probably significantly greater traffic disruption, roadway and grade crossing improvements, and safety problems. Given the unusually high levels of unemployment currently obtaining on both the upper and lower Columbia rivers, however, it seems reasonable to discount the freight-handling costs associated with first alternative, since, in its absence most of the labor used would be unemployed, thereby adding to the net socio-economic gains associated with this project.

Shipping cleaner coal from the Great Basin to East Asia via the lower Columbia entails tradeoffs, as do all activities. But its net economic benefits are clear. It even appears, on balance, that its environmental benefits could easily outweigh any environmental costs, although not necessarily the local ones, which under the first alternative are likely to be small. 

Economist's Notebook from the Southern Hemisphere: In Praise of Bulk

Before I begin, let me just say that I do not own a big car, I am not a member of Costco or other such bulk store and I generally do not buy in bulk.

But the proto-typical American stereotype of the SUV driving Costco shopping consumer is the subject of much ridicule, especially from enviro-types, and I think unfairly so.  Because bulk is efficient. Assuming that overall consumption does not go up (and therefore essentially assuming prices are the same) bulk saves packaging, saves carbon emissions from consumer trips and saves energy from storage.

I bring this up because on the plane ride down to São Paulo, my wife had a very pleasant conversation with a Paulista woman who was very environmentally minded and critical of the US for all the packaging they use.  I was very confused, in my mind Brazilians love wrapping things up: here in São Paulo they will bag any purchase in a little plastic single-use bags and if you say you don't need it they look at you cross-eyed.  At the grocery store they will practically bag each item individually and plenty of fresh stuff (veggies and such) come pre-wrapped.

But more than that with the small Euro-style packages and refrigerators I go through much more packaging than at home.  Little jars of sauce for pasta, small packages of crackers and cereal and so on accumulate rapidly.  It may be kind of romantic to stop at the store every day and buy food for one day, but it is terribly inefficient.

Now of course the fact that bulk and low prices lead to increased overall consumption is another matter but as far as saving resources, bigger is often better.

So make fun of big US refrigerators if you like, I prefer to buy my milk by the gallon not the liter and using a quarter of the packaging.

Fred Thompson: Don't Fix What's Not Broken

While away in Brazil, Fred Thompson, helps keep the blog relevant by commenting on local issues. Thanks Fred! 

In a recent editorial entitled “Oregon dawdles while other states take action on taxes,” the editorial board of the Oregonian called for bold tax reform, concluding that we must find a way to balance “the progressivity Oregonians demand with the need for a broad revenue base.” To be honest, my gut instinct is to reject this advice. There is one point that almost all economists who study public finance agree on: other things equal, the most important efficiency attribute a tax system can have is predictability – up to point, whatever is, is right. Don't change things unless the change is clearly for the better.

In this instance, however, I have more to go on than gut instinct. A couple of former students and I did a ranking of state and local tax systems on the bases of fairness, adequacy, and efficiency. We were surprised to find that OR ranked #2 overall out of fifty-one. In other words, our tax system may not be perfect, but it’s not bad. Consequently, to the question, what would the ideal tax system for Oregon look like, I answer: a lot like the one we have now.

Our result was surprising because theory tells us that balanced tax systems have a lot of advantages and Oregon’s tax system is more unbalanced than most. Unbalanced tax systems are supposed to be bad because they increase revenue volatility and because they necessitate high marginal tax rates, which impose substantial deadweight losses on an economy. It turns out, however, that the volatility reducing portfolio effects of relying on multiple tax types are small. Portfolio effects result from the fact that various revenue sources are uncorrelated. But all major tax bases – income, consumption, wealth, real property values – turn out to be highly correlated, >.85. In practice, the tax designs actually found in the US reduce these correlations to between .60 and .70, but at the expense of reduced progressivity – equally progressive tax systems would be equally volatile. Besides, the real fiscal problem is spending volatility, not revenue volatility. As for deadweight losses, tax rates at the state and local level are simply too low to cause big inefficiencies. The implications of these facts are that the costs of balancing Oregon’s tax system would be outweighed by the federal tax penalty involved, not to mention the reduced progressivity and increased administrative costs that sales and transactions taxes impose.

To say our tax system is pretty good doesn’t mean that it is perfect. The main issues that I think need addressing have to do with the property tax, the personal income tax, and upgrading the state’s Department of Revenue.

The property tax is potentially a really good tax; it is also unpopular with voters, especially those who own their homes free and clear and who take the standard deduction on federal income taxes. We can and should make paying property taxes a lot easier and more convenient for those folks. That is something every jurisdiction that relies on the property tax ought to do. I find it astonishing that they fail to do so. Property tax problems specific to Oregon include assessment distortions and multi-jurisdiction compression. Property tax assessments and obligations ought to track market valuations more closely. A reasonable move in that direction would be reassessment at title transfer. Given our land use planning policies, increasing tax rates on land and reducing them on improvements might make a lot of sense. (I think that ALL land ought to be assessed and charged property taxes and discriminatory rates eliminated wherever possible, but this is probably too radical to contemplate.) Compression is a harder nut to crack. (A return to a levy-based as opposed to a rate based property tax system would do the trick, but this is also probably too radical to contemplate).

Oregon should impose a smaller personal income-tax burden on families with low incomes. My preference would be to reduce state personal income-tax rates on the first two brackets to zero. But reducing collections from the poor could be accomplished a lot of different ways, including increasing the state’s EITC. Actually, thousands of low-income individuals fail to file tax returns. In many of those cases more has been withheld from their pay than they owe. Moving to a taxpayer-passive administrative system for personal and corporate income taxes could fix this problem and also increase collections significantly, but that would necessitate a significant upgrade of Oregon’s Department of Revenue.

From a state and local perspective, escaping a jurisdiction’s tax net does not necessarily involve physical movement. It can be accomplished by “a mere stroke of a pen,” or a mouse click. This is especially true of corporations, which are legal fictions or constructs. But it is nearly as true for anyone with enough wealth to make tax arbitrage worthwhile. Relatively high marginal tax rates, which we have, call for more and better tax administration. We have too long ignored that fact in Oregon. As a consequence we allow excessive non-reporting and under-reporting of income and do a half-backed job of collecting taxes owed. This is basically an information management problem and it is a critical one.

The Department of Revenue needs to re-engineer its core administrative processes for all tax types. Modern information technology could reduce both the fixed and variable costs of gathering, entering, storing, organizing and searching data on the tax base, deductions, exemptions, credits and liabilities, and payments, which is fundamentally what the DOR does, but, right now, compared to what is needed or even some other states, let alone what is possible, not very well.

Bike-o-nomics: Bike Research (Correlation and Causation Redux)

I have held my tongue for a while about some of the bike research that is being reported on by the Oregonian, The Atlantic Cities and others because I did not want to seem to be bashing the research.  Nor do I want to really bash the fact that it is being reported on.  Mostly though I do not want to be branded an enemy of the state by bike fanatics whom I have found at times to be a little less than circumspect about their own cause.  But I do want to point out some serious problems with the way the findings are being presented and discussed.

So, what studies am I talking about? First there was a lot of coverage of the PSU study that found that bikers spent more money in local stores.  Then there was a study from PSU that found that bike commuters were happier, and today I learn from Joseph Rose that the Danish have produced a study that said that bike riding children concentrate better in school.

Now, a few things first: I am an avid biker, I chose to live in a place where I can walk and bike to most things, my kids bike to school almost every day of the school year, rain or shine, my wife, when she worked downtown bike commuted everyday and has led the Walk + Bike to school activities for my children's school, so my family has plenty of bike cred.  Additionally, I want to state again that I have nothing against these studies nor their being reported in local and national media.

What I have a problem with is the way the media (and sometimes the authors themselves) fudge the distinction between what the studies find - some very interesting correlations - and the inappropriate causal interpretation of the results.

Here is an example:

Kelly Clifton has heard this stereotype a number of times: "Cyclists are just a bunch of kids who don’t have any money," says the professor of civil and environmental engineering at Portland State University. "They ride their bikes to a coffee shop, they sit there for four hours with their Macintoshes, they’re not really spending any money."

...Clifton says, "we start to see businesses say, ‘Hey, wait a minute. You’re taking away on-street parking to put in bike lanes, you’re taking away the one parking spot in front of my store to put in a bike corral. I don’t see many bikers around here. So what does this mean for me?" 

...Until now there hasn’t been much empirical evidence to allay such concerns. Clifton and several colleagues have attempted to fill that research gap in a project for the Oregon Transportation Research and Education Consortium.

But the study, though interesting and of plenty of merit in its own right doesn't really address the business owners concerns at all.  The study asked folks exiting a set of selected stores how they got there and how much they spent.  There is a problem of selection here in the way stores were chosen but mostly there is a problem with establishing any sort of counterfactual.  The business owner's concern is about the relative revenue impact of lost car parking and additional bike parking.  I'd like to think it is positive, and I think there is a good chance it is, but the study does not address that at all.

The study asks about the money spent at the time of the interview, in some cases the average was higher for car drivers than bikers (grocery stores) and some times it was lower (smaller stores).  They do a good job controlling for some household characteristics (especially income) but they still end up with some controlled correlations of one variable: spending for that trip.  This also does not address overall spending habits hoe biking correlates with spending or how biking affects consumer behavior.

Now both the author and the reporter are careful not to say that you get any firm answers from this study but they sure do fudge the point and make it appear that you would do fine drawing your own conclusions.  What would I like to see?  A better factual description of the actual study, a frank discussion about what it found and some of the potential conclusions an equally frank discussion about the limits of the study and what you cannot say from the findings.

Here is another example:

A new study by Portland State University urban studies doctoral candidate Oliver Smith found that getting to work via “active transportation” – e.g., under your own power – “increases commute well-being, even when controlling for distance, income and other factors.”

Um, no it doesn't. It finds a correlation between commuting and self-reported happiness. It doesn't say that if you take car commuters and force them to ride bikes to work they would be happier, it says that those that self-selected biking to work instead of driving are also more likely to describe themselves as happy. Full stop.

The fact that you control for income, distance and other factors does not change the fact that this is a correlation from which you simply cannot make a causal statement.  Again, this interpretation is, I hope, true, and certainly excercise and happiness are very, very closely related for myself, but this study does not allow that type of causal interpretation.

Finally, we have this:

Every day outside my son’s Brooklyn school, no matter what the weather, you will see a distinctive pale blue bicycle locked to the rack. It belongs to a 7th-grade girl from a Dutch family whose members have stuck with their traditional practice of riding to school each day, despite finding themselves in the not-so-bike-friendly United States for a few years. This lovely blue city bike was a gift from the parents to their eldest child... 

According to the results of a Danish study released late last year, my Dutch friends are giving their daughter a less tangible but more lasting gift along with that bicycle: the ability to concentrate better. (emphasis mine)

No, no a thousand times no!  According to your interpretation of the results of the study which found that bike riders could concentrate better (a correlation), bike riding improves concentration.  Again, this is likely true but the study was of self-selected bikers (as far as I can tell from second-hand descriptions, the study itself in in Danish) not of a group of students some of whom were randomly chosen to bikes and other who were driven - so no such causal interpretation is appropriate.

So as not to be a scold, here are some helpful hints:

-Report that studies find correlations or say "those who bike also X..."

-Be careful not to say or imply that "biking causes, or leads to, X..."

-If you want to make the link, use language like "it is possible that biking causes X..." but if you do make sure you qualify by saying that the results do not support such a conclusion.

-Yes I know reporters rely on academics to interpret their work, but we are not copyeditors, and since you don't have them anymore anyway, you have to be careful in your use of language not to imply causality when there is none.

-Academics, make sure you tell reporters the limitations of your study so it does not look like you are selling conclusions that your research cannot support.

Shopping Malls

Shopping Paulista - in the heart of the business district

Yes I am still alive. It turns out the process of moving an entire family to Brazil, getting settled, setting up and apartment, dealing with Brazilian bureaucracy and finalizing and starting school for the kids and getting myself settled that the university is a pretty long and exhausting job so please excuse my absence.

I did manage to get a pedantic blog post on mergers and anti-trust on the beer blog which is pretty straight econ - so go and have a look if you are having withdrawals - and I managed a few tweets.

Today I'll make a less than spectacular return to blogging my mentioning something from the local paper. [One of two thriving print dailies in São Paulo, by the way, maybe budding reporters in the US should consider a change of hemisphere!  It is nice to have a big fat paper to read through every morning, though a sad reminder of how much we have lost with our local paper fading into a 5 minute read...but I digress]  The Folha de São Paulo reported over the weekend on the flood of new shopping centers being built in SP, 19 over the next two years.  What was interesting to me was the figures they cite that 60% of all retail transactions in the US happen in shopping malls, whereas the figure for Brazil is only 19%.  The latter doesn't surprise me but the US figure, while not really surprising when you stop and this took me aback a little when I saw it.

So here are a few random thoughts:

In a place like São Paulo, where transit is a nightmare, parking difficult and safety an issue, the rise of the shopping mall makes a lot of sense.  With the booming economy, the growing middle class and the increased consumer culture it might be sad but perhaps inevitable that shopping malls would come to dominate the landscape like they do in the US.

Though I am no expert, though they certainly exist in Europe, I do not remember them creeping their way into central cities - my experience in seeing them is mostly on the periphery.  But in SP, they are in both the central districts as well as the periphery

Shopping malls lack romance, but I wonder how to feel about them ecologically.  They seem pretty darn efficient in general (though I am thinking of them in a partial equilibrium - that is I am taking the amount of consumerism as a given and not thinking about how malls may effect it).  

That is all for now, I'll try and keep up a reasonable stream of posts from here out.