Picture of the Day: Investing in Early Education

From The Economist:

Much Ado about Adu in Bahia

Funny however that they spelled his name wrong. There was a note today in the Folha paper in São Paulo about Freddy as well.  I have been a Bahia supporter since my first trip to Brazil which took me to Salvador in 2004 (I am also heavily influenced by my good friend who is a Bahia supporter) and will enjoy following Freddy here.  There is a lot of curiosity and talk of the 'American Pelé' given to him when he was 13.

So good luck to Freddy!  I hope he can get his career back on track.  And goodness knows Bahia could use him when he is on form - they only escaped being relegated last year on the last day and thanks to other results that went their way.

BAHIAAAAAAAA!

Prisons!

A couple of notes on prisons:

First there is Kitzhaber's suggestion that we cap the growth of prisons, something the Willamette Week suggests might be a mistake.

Next is something that Fred Thompson alerted me to: A Marginal Revolution post by Alex Tabarrok that quotes a New York Times article about the effectiveness of spending on police versus prisons.  Here is the same quote:

“The United States today is the only country I know of that spends more on prisons than police,” said Lawrence W. Sherman, an American criminologist on the faculties of the University of Maryland and Cambridge University in Britain. “In England and Wales, the spending on police is twice as high as on corrections. In Australia it’s more than three times higher. In Japan it’s seven times higher. Only in the United States is it lower, and only in our recent history.”

…Dr. Ludwig and Philip J. Cook, a Duke University economist, calculate that nationwide, money diverted from prison to policing would buy at least four times as much reduction in crime. They suggest shrinking the prison population by a quarter and using the savings to hire another 100,000 police officers.

The post goes on to cite his own study on police and crime in Washington, DC and other work which suggest that spending on both police and prisons reduces crime.  He suggests that police funding passes the cost-benefit test.

As any good economist knows, the cost-benefit part, that is a relative statement and this is where I, personally, remain unconvinced.  In such a tight budgetary environment which will have the greater long run impact on the Oregon economy and social welfare in the state: more education funding or more public safety funding?  This is an extremely tough question and simply saying our prison system is pretty good doesn't answer it.  Nor, of course does saying that more money would help create a better public education system.  The trick in policy is balancing the two.

For what it is worth, my first impressions of the governors budget proposal is quite positive.  I haven't really studied it to any meaningful degree and I have a quibble or two, for example I am still not entirely convinced about the CRC, but overall I like his priorities.

General Equilibrium, Cont.

Okay, I have answered a lot of questions about my post on the Portland Economy because I was insufficiently clear.  My apologies.  

I wasn't trying to denigrate the work nor do I think the conclusions about education spending are incorrect (though I think you can't really logically connect the dots except to say that the value of the marginal product is higher in some fields so we can try for more of them).

No my point was simply this: Wages are prices. Prices are set in equilibrium.  If Portland has too many of one type, wages will be depressed and the incentive for more to come or be created is less.  If Portland has too few of another type, wages will be elevated and the incentive for more to come and more to be created will increase.  That is how markets work.  So don't fixate on types.

To me the story is a growth story: let's focus on education and try and create a better economy in the future.  We can try and facilitate the growth of certain sectors by producing lots of one type locally but out power to engineer these things is limited.  So for me, let's just focus on education, research and a government/physical/policy infrastructure that will help promote growth.

I also made a point about the endogeneity of policy: If tax revenue is what you want you can't just say increased incomes will result in higher revenues because policy is not static - people vote.

Which in the end is ALL to say, that trying to engineer these things is very hard so let's focus on the fundamentals.

The Supreme Court Deals a Blow to Price Discrimination

Yesterday, the Supreme Court of these United States (I enjoy writing that while in Brazil) declared that companies that make and sell products overseas cannot prevent them from being re-sold in the US.  From the always excellent Nina Totenberg of NPR:

The case involves a part of the copyright law that was aimed at so-called gray market goods. These are U.S. copyrighted products — from textbooks to watches — that are manufactured in other countries for sale there, then purchased and imported to the United States for discounted resale.

Supap Kirtsaeng, a mathematics student from Thailand, discovered that some of his textbooks were being published and sold in Asia for less money. They were identical to the textbooks he used at Cornell and the University of Southern California, except that they were much cheaper and bore an inscription saying they could not be exported. He got his friends and family in Asia to send him many copies of the books, sold them on eBay and made about $100,000 profit.

Needless to say, the publisher of the textbooks, John Wiley & Sons, didn't like that one bit. It sued Kirtsaeng for copyright infringement and won in the lower courts. Kirtsaeng was ordered to pay $600,000 in damages.

I went a little Twitter crazy about this yesterday because I think it is absolutely the correct decision from a purely libertarian property-rights perspective but also because it is such a good teachable moment. 

Why, you ask (or should), do firms charge different prices anyway, especially on copyrighted material that they have a monopoly over? Wow, what an excellent question!

 It all has to do with price discrimination. If you know the willingness to pay on average is lower for some markets than it is for others (due to many things but the most obvious is income) then it is a profit maximizing strategy to charge those with lower willingnesses to pay a lower price.

Companies would love to do this all the time but it can be hard to know about willingness to pay and you have to be able to deal with the arbitrage problem. Income per capita figures that are readily available are one way to find out about willingness to pay across countries as is simply market experience, so international sales are ripe for price discrimination.

The arbitrage problem is what this lawsuit is all about. Companies want to stop precisely what Mr. Kirtsaeng was doing, taking advantage of the wedge between the prices in the US and Thailand that they created through this law. They like the ability to do this because they make more money that way.  If you cannot stop arbitrage then you can't maintain the wedge between prices.  For example if there was not a ticket taker at the movie theater then enterprising kids would just buy tickets for adults and charge them less than the full adult price.    

Mr. Kirtsaeng learned his economics well at Cornell (maybe he had me as a TA...) and engaged in arbitrage. And why not? Once you purchase a good it becomes yours. I'll agree that he cannot copy it but just as I can go down to Powell's and sell my book, why can't he get on a plane from Bangkok and sell his book at Powell's? In my opinion restricting resale across international borders is a mistake.

Thankfully the court agrees:

Kirtsaeng appealed to the U.S. Supreme Court, contending that he was protected by a rule called the first sale doctrine, which says that once you buy a product, it is yours to do with as you please.

On Tuesday he won in the high court. Writing for the court majority, Justice Stephen Breyer said that to impose geographic limits on the first sale doctrine would make no sense. He cited statistics from retailers indicating that $2.3 trillion worth of foreign goods were imported to the U.S. in 2011, and many of those products were subject to copyright protection when they were made.

Automobiles, calculators, microwaves, tablets, personal computers — all may contain copyrighted software programs or packaging, and many of these products are made abroad with the U.S. copyright holder's permission, Breyer observed. To forbid their importation unless the copyright owner agreed would mean, in essence, that a car owner whose GPS, radio or carburetor was made abroad could not freely resell his vehicle without the copyright owner's permission. Therefore, said the court, goods, once sold lawfully — whether in the U.S. or elsewhere — can now be resold in the U.S. without the copyright holder's permission.

The textbook analysis of the result of this decision is that we should expect prices for textbooks and other goods that have enjoyed the protection of this law to become cheaper in the US and for textbook prices to rise in Thailand and other less wealthy countries thanks to the law of one price that will now be in effect. Also, overall textbook sales and profits should fall for publishers.

Now, I have nothing against price discrimination in general. I think it is both just and efficient that I pay a higher price than a kid does at the movie theater - I simply think that this law went a bit too far.

One final note: Scalia, Ginsberg and Kennedy were the dissenters! Wow, what a Motley Crüe (TM)!

Oregon is Creating Jobs at a Healthy Pace

Molly Young has a nice article in The Oregonian today about the new Oregon jobs report.  She focuses her attention in the unemployment rate that hasn't budged much (the February rate is 8.4%) and the overall decline in the labor force.  Go there for that discussion, she covers it well and it is interesting to think about the supply side of the market, but my attention is on the demand side.

On the demand side, however, Oregon added 6,800 jobs in February on a seasonally adjusted basis, 6,000 of those in the private sector.  Additionally, they January number was revised up to 5,400 jobs.  That is a very healthy pace of job gains, it remains to be seen if this can be sustained, but remember, Oregon has been one of the leaders in the national recovery, our economy was one of the fastest growing in 2012.  So signs are good....or were until the sequester boondoggle.  Alas, we'll just have to wait and see how that plays out.

Still it is good to see signs of a sustained recovery.  

The Portland Economy and a Lesson in General Equilibrium

The Oregonian today contains a fascinating article on an equally fascinating report about the Portland economy from the Value of Jobs Coalition (and prepared by ECONorthwest).  It is fascinating reading and something that will now stick in my head as I sit and ponder what characterizes the Portland economy.  And the conclusion that we should focus better on eduction and work to increase the number of STEM graduates is spot-on and universally correct no matter what the economy looks like.

But there is a big problem in the interpretation that what we are seeing is the result of how we have engineered the economy and that by increasing the locally produced STEM graduates we will increase the tax revenues we take in.  The problem is that this is a partial equilibrium analysis - where we assume lots of other things stay fixed (like for example, the wage differentials, and the migration of workers). In fact this snapshot is of a general equilibrium.  You may not like it but it is hard to engineer away and it is easy to come to false conclusions if you don't consider the wider general equilibrium implications.

Let's take a step back and look at the 'puzzle' they are trying to solve:

Figure 1 from: Higher Education and Regional Prosperity

Portland has fared poorly in terms of per capita personal income relative to other US metro areas.  Looks pretty bad but a better comparison would be to look at cost of living adjusted personal income and apparently if you take away a couple of outliers like Washington DC and NYC, Portland is pretty close to average.  In a general equilibrium, prices rise with incomes as upward pressure is put on the demand for goods and services.

But to the extent that Portland is below the national average it is very important to remember that wages are also an equilibrium price.  The first thing you should ask is that if STEM graduates are so scarce and needed why aren't their salaries above the overage?  And if local salaries are low to what extent does that reflect a compensating wage differential where people are willing to accept less to live and work here.

This is what I mean about general versus partial equilibrium.  You can look at the figures and say we need more of those high paid engineers, but if you make more wages could just as easily decline.  And certainly there is nothing in theory that suggests that MORE STEM types will raise local within occupation pay to something closer to the national average!

The worry that lower incomes mean lower tax bases also seems misguided - from recent poll results folks are also willing to pay more in taxes to support public goods and I suspect that the two are related: the same folks that are willing to take less to work less and enjoy the Portland area are also willing to contribute more to public goods.

Really the story that is being suggested is a long term growth effect: that by investing more in education and focusing more on STEM areas the local economy will evolve in a way that creates high-tech industries that will employ folks at relatively high salaries.  I agree with that but looking at current relative wages isn't entirely appropriate - or I guess I should say ONLY looking at current salaries is not appropriate.  This is an general equilibrium growth story not a static, partial equilibrium story.  Yes the former is much harder to communicate to lay folk so I am not prepared to condemn the exercise but the point should be made by someone somewhere (thank goodness for blogs!).  I support investments in education in general for growth reasons and I support emphasizing STEM fields for the same reason.  There is not much in this report however, that confirms or undermines my conviction.

And finally, circling back to cost of living and tax revenues.  Higher local wages are no guarantee of funding anyway.  When local costs go up you have to pay teachers more, principals more, and so on.  What is most important is the willingness of the electorate to pay for such things and I would argue (as above) that the self-selection that is bringing all the humanities-types to Portland is probably hugely positive for future funding of schools.

Okay, this is a bit disjointed because I am rushed and now I have to get back to work!  Apologies.

Soccernomics: Timbers

Why is it that MLS crests have the little TM on them - even on the game jerseys?
If Barça, ManU, Munich, Milan and others don't need it, do we? Looks cheesy to me. 

Interesting to read (if only from afar) The Oregonian editorial board's take on the MLS Timbers 3 years later.  I find it hard to argue that the Timbers has been anything but a runaway success is just about any metric one uses to measure such things.  But of course there is always those that try and push the economic development engine that is, or is not, professional sports.  I have stated this before that this is not what spectator sports should be sold as. On the other hand there is nothing wrong with providing a city an entertainment option that is clearly valued and valued greatly.  Anyway, all I can say is it is nice to see old Civic Stadium reborn as centerpiece to the city for no other reason than I think it is a cool aspect of the city that I, personally, value.

Now that I have some excuse I can now chat randomly about the Timbers.  [This is, by the way, by popular demand - I have resisted so far to get a better idea of what the Timbers are and about but now I feel as if I am getting to know them better]

Unfortunately, my ability to follow the Timbers in Brazil is severely constrained - I have been able to watch the last two games only through the great and noble efforts of the great citizens of the Philippines, Belarus, Russia and other far flung places that manage to stream live TV on the internets. [Amusingly during Saturday's match with the sounders the person whose TV was being live streamed decided to set his DVR for another game - all of which I watched live and discovered that this person is a Comcast customer in the US]  The first match was televised here on ESPN+ which I don't get but luckily there are bars that do.

Anyway here is my analysis, FWIW.

The team is impressive and much improved over last year's team.  The biggest misconception about playing the 'Barcelona-style' possession game is that it is all about the movement and short passing.  The most under-appreciated aspect of Barcelona is how, when dispossessed of the ball, they immediately press as a team (from Messi on back) and make it incredibly difficult for the other team to work.  They generally win back the ball quickly.  This is a key component of the possession style game and it takes commitment and effort from all 10 field players - one person slagging off leaves gaps and openings that relieves the pressure.  I have been impressed with the Timbers so far on this account.

It is very hard to get teams to play this way for 90 minutes as you are asking a lot of your players.  Bringing in players like Will Johnson who provides the leadership and the effort is key.  It has to come from the field.  Chara has always been this kind of player and, so far at least, Valeri, Nagbe and Ryan Johnson (to name a few) have shown a great deal of industry and effort that shows they are buying in.

Often the way teams try and play against this style is to pack in the box and counterattack (read: Montreal).  The Timbers have shown some frailty in this area and need to improve, but given that Silvestre had little time to get used to Jean-Baptiste, who is young and a bit erratic but looks every bit the real deal, I am not too worried.

The desire to get the outside backs into the attack has hurt them a couple of times.  In my book a balanced attack will push one back up into the attack while the weak side back tucks in for cover.  Something that seemed to be much better against the sounders.

It is really the working through the center of the midfield that stands out to me.  Too often in the last couple of years the ball immediately went out to the wings for a generally poor cross rather than trying to break down the center of the defense (Songo'o at his peak at least showed some willingness to try).  There is a real emphasis on this in this new team, it seems. And Valeri is extremely adept at this and is already showing his class.

The real offensive machine takes a while to work itself out as players get more and more sued to each other.  I expect that the Timbers will, over the course of the next 4 games or so, start to become even more dangerous.

All in all then I give the Timbers an excellent mark so far in the season.  Yes results matter but already they are much more fun to watch and they seem o have much more heart and desire than in previous years.  That said, they still have some big steps to take and the results will have to start coming.

Some other quick thoughts:

Porter seems to be the real deal.  He already has placed his stamp on the team, has them playing exceptionally hard and has done pretty well dealing with the near crisis the center back position has been in (injuries, inexperience, late-arrivals. etc). Putting his faith in Jean-Baptiste is courageous and smart.  He will learn a lot from Silvestre and only get better with more field time.  He got the tactics and adjustments just right against Seattle IMHO, and if not for a blazingly quick and exceptionally well-excecuted counter, we would have shut them out.  He has a clear philosophy and appears, at this point, to be a good man-manager.

On that note, I am waiting to see what he can get out of Alhassan.  He is as talented as you get but still needs to learn to do the dirty work and translate his exceptional technical ability into team-orientated movements.  He is getting better, but I was sad to see him dropped from the Seattle game if only because I love to watch him play and would like to see him successful.

Valeri is the man so far.  Great find.

Wider field is working.  Great to see the Timbers fix a mistake (if not admit it) and make the field wider, it has a noticeable impact on the beauty of the game on the field.  Next up: shift the South goal back about 5 yards and it will be perfect....except for the grass.  Not saying now, but in 5 years that turf has got to go...

Wallace - please don't start calling for him to be in the starting lineup (eg, Geoff Arnold). His energy is great but his technical ability lacks.  He is the perfect super-sub and excels in that role.  It is nice that Porter has identified subs that can come in and inject something into a game.  This was one of the real failings of Timbers past - subs that did nothing to change the game.    Right now Wallace and Valencia both do a lot as subs and make life hard for tiring defenders.

Finally, it is a long and grueling season in the MLS, well see if the Timber can keep up the kind of energy and commitment throughout the year.  I hope Porter is thinking about this as this is a huge difference from the college game.

Oh and the new kit?  Meh.  I didn't mind the new shirts that much but now that I see them in action I think they are a step down from the previous ones.  My kids don't like all the detail that is missing from the youth versions.  Still, they could wear pant suits for all I care as long as they play well...

Go Timbers!

Ghost Bike in São Paulo

Sad but interesting to see the Ghost Bike memorial has made it to São Paulo.  I assumed it was about this horrible accident, but the bike is a few blocks away from where the accident occurred.  So I realize that it is for this accident a year ago, but I'm pretty sure the bike has been newly placed there - perhaps two new bikes have been placed motivated by the accident over the weekend.

Credit and Brazil: A Puzzle

You can buy these shoes for R$129.90 or you can pay in 5 monthly installments for R$25.98

Credit markets were notoriously tight in Brazil until very recently.  The government tightly controlled the banking sector (and still has a big foothold in retail banking - both Banco do Brasil, my bank, and Caixa are government run)*, the rules for collateral and banks ability to collect on collateral were tight, and therefore finding consumer credit was incredibly difficult.  I remember my friend buying an apartment about 10 years ago required most of the price to paid up front - only a small amount could be borrowed.

From what I have been told the liberalization of laws, loosening of restrictions and especially the arrival of the Spanish bank, Santander, changed everything in less than a decade.  Suddenly credit is everywhere and you see the effects: cars are now affordable to working class people and the housing boom is continuing unabated.  This is generally the story you get about traffic - it wasn't so bad in places like Salvador until suddenly everyone could buy a car on credit.

But one aspect of the credit market puzzles me: just about anything you buy that is even remotely durable, you can buy in installments and for no interest.  For example, you want a blender and so you walk down to Extra and pick one out for R$60.  You can pay it all now or you can pay for it in up to 12 monthly installments - sem juros or no interest.  As an economist I know the rational thing is to buy in installments (the present discounted value is less than the one-time price) but as a consumer not used to such things I never do.  I am still taken aback when I book a plane ticket and I am asked if I want to pay for it in installments.

These installment plans are everywhere, from the aforementioned plane tickets to tennis shoes.  But why?  And maybe even more to the point, why not in the US?

One reason may be that credit cards are still scarce?  But still spreading out payments on credit cards in the US required you to pay a lot of interest.  I suspect that this is an aspect of social norms carried over from when credit was scarce and stores figured out their own credit.

It is also, I suspect, an aspect of the ubiquity of the taxpayer ID here in Brazil.  The CPF is a number you need for almost anything that requires monthly payments, opening bank accounts, cell phones, you name it.  And I have been told that if you get a bad mark associated with the CPF - for example if you fail to pay for your new Adidas - it is very difficult to clean up.  A form of bad credit score if you will.  The US doesn't have such a system that is so ubiquitous in everyday life.  Credit scores are for big purchases and credit cards.  

Anyway as a good economist I figure that both systems are equilibria in their respective countries, but I am not entirely satisfied that I have figured out why.  Ideas?

______________________________________

*Corinthians Futebol Club had to get special permission from FIFA to have Caixa as a shirt sponsor as FIFA has rules prohibiting state sponsorship of teams.

US Unemployment Down to 7.7% on 236,000 New Jobs

Pretty good news on the eve of the 'great and pointless austerity:' the US unemployment rate fell to 7.7% on the strength of 236,000 new jobs.  There was a time when I would find that number to be woefully insufficient given the depth of the crisis in jobs.  But after years of moribund growth, I'll take anything that is reasonably higher than the 100,000-plus-change jobs it take to keep up with the natural rate of growth of the US workforce.

Unfortunately any momentum that the US economy might have picked up is likely about to be scuttled or at least seriously slowed by the sequester...

 

Correlation, Causation and Gun Violence

I dont really want to get into the debate about gun laws but the causal link has been something of a holy grail for economists.  Look at earlier posts and reactions to get an ides of the complexity of trying to pin down causation.

So I'll leave this study for all you econ geeks to discuss, here is the graph reported on in the O:

Though you can't argue causality you can make the case that there is a pretty strong correlation and explanations that suggest that the true causal link is opposite (as some would argue) are a pretty big stretch.  It is hard to see how restricting firearms makes us less safe...

However states with little firearm affection are both more likely to pass legislation and less likely to have firearm deaths.  So is it the legislation that is driving the low deaths or other unobservable state characteristics?

Picture of the Day: x3

Ok, here are some images to provoke thought and wonder.

First, I bring you my current adopted hometown in 2025 according to McKinsey:

A GDP of $37,000 per capita would be roughly equivalent to today's UK.

Next, from the Wall Street Journal, I bring you this interesting graphic about the US savings rate, especially among the youngsters.  It seems the great recession has taught them a lesson about financial prudence:

Finally, again from the Wall Street Journal, a little reminder that the oft-repeated and completely incorrect assertion that the size of government is growing is, well, incorrect:

This is as a share of non-farm jobs.  And here comes the sequester!

At least you have been aggressively saving, right?