Portland Housing Market: Case-Shiller August

Here are the latest Case-Shiller numbers through June of 2008 for Portland, Seattle and the 20 city composite.  The story for Portland and Seattle is similar, a considerable softening has happened but we are still not seeing the continued decline as seen elsewhere.  There is a lot of speculation that we are just 'behind' the nation and will eventually get there.  But as I have stated before the fact that we were 'behind' at the beginning meant that we did not see the kind of home price inflation of California, for example.  So I do not expect that the 'correction' to be as severe.  However, there are a number of worrying signs.  The number of delinquent loans and foreclosures are going up rapidly in Oregon apparently.  The health of major financial institutions is also a worry right now, as is the Fed's ability to do much more to help ease the credit crunch.

We also learn today that consumer confidence is up, surprisingly, perhaps as oil prices retreated a bit.  But inflation is a concern and wages are not keeping up.  To me this all points to prolonged malaise in the US economy - I don't see it getting better until well into 2009.  As for Portland housing market.  If I were to guess, I would expect that prices will fall again int he winter, but not by that much and then, next spring we will start to see a recovery.

As for my field experiment - I have collected new data, but I shall report on this later once a resolution has been reached.  

Economist's Notebook: Is Neoliberalism Dead?

Generally considered synonymous with the fabled “Washington Consensus,” neoliberalism has been on the ascendancy since the early 1990s with the fall of the Soviet Union and subsequent weakening of state control in many economies, most notably China and India. The basic neoliberal agenda is to keep government as minimally involved in the economy as possible, to promote private property (laws/courts/enforcement of private property rights) and economic integration through free trade. The success of China and India in following neoliberal policies practically closed the book on state intervention that had been very common in the 1970s and 1980s.

Now, however, with the impact of economic activity on the global climate coming under intense scrutiny, the adverse affects of increased commodity prices especially on the poor, and the recent failure of world trade negotiations, there has been some very serious questioning of the entire neoliberal agenda by such prominent economists as Nobel laureate Joseph Stiglitz. These very vocal critics represent a sea change in the way neoliberalism has been viewed by the economic cognoscenti. The essence of these critiques, in my view, is whether the increased challenges of such externalities as environmental degradation, global climate change, poverty and inequality and the structural adjustments of domestic economies when integrating with the global economy (most notably in agriculture) can be adequately addressed by the market based neoliberal agenda. Or, put another way, can a neoliberal agenda bend enough to appropriately address these new challenges (well, not new, but of significantly increased seriousness)? Many think no, that as long as the neoliberal agenda is the starting place you can never have a serious enough effort to address the problems of poverty, inequality and global climate and environmental degradation. They argue that the world needs more, not less, governmental intervention and coordination across borders and neoliberalism is anathema to these efforts.

I am not ready to go as far as this. I will defend neoliberalism as it certainly has been shown to be effective in creating wealth and prosperity for hundreds of millions of people who would probably not otherwise have been able to obtain it. As a starting place then, I think neoliberalism has proven very effective. I also share the basic belief, common among economists, that markets are inherently democratic. I am not yet ready to say that neoliberalism is unable to accommodate government intervention to the extent necessary to solve the world’s ills. I think some evidence of this is the recent, massive shift in the awareness of global climate change. It was not very long ago that awareness was low and the impetus to meet the coming challenges was nonexistent. It was largely the (free-market) success of Al Gore’s movie and scientists and environmentalists working within the free marketplace of ideas that has brought the issue to the forefront of popular consciousness. Despite the current administration’s efforts to suppress these very efforts, the very neoliberal nature of the United States has proven too great to overcome and their efforts have failed.

So, I am still an advocate of free markets where appropriate and I remain a staunch defender of free trade in principle, but I also think that neoliberalism needs to become much more sympathetic to government intervention and must also be able to be flexible. Not every country is ready for a neoliberal revolution and the very immediate problems of poverty, inequality and environmental degradation must be addressed along with free market reforms. It is not enough to expect free markets to solve these problems over time, or to wait for government intervention until the reforms have had time to take hold. But is also impossible to utilize the resources of a country to address these problems without first creating these resources.

Consider this a first pass to start a discussion. So, discuss….

C-NIC OREGON: Fred Thompson, Guest Blogger

Ed. Note: Once again Fred Thompson checks in with an in-depth discussion of a local issue.


The legislature is currently holding hearings on the State of Oregon’s computing and networking infrastructure consolidation (C-NIC) project, the most ambitious technology project ever undertaken by the state (Statesman-Journal, 14 Aug 2008, p. 1). This topic deserves our attention. More than half of the activities performed by the state involve information processing, storage, manipulation, and analysis. How well the state government does its work ultimately depends upon the quality and effectiveness of its Information and communications technology.

Most of the scrutiny directed at C-NIC has zeroed in on the fact that it was over budget and behind schedule. The business case for the project looked primarily at operating cash flows and depended primarily upon personnel reductions. Bob Cummings, the information technology analyst for the Legislative Fiscal Office, has subsequently acknowledged that it was unrealistic for state officials to think they could cut staffing while consolidating complex operations. In any case, C-NIC’s is currently $67 million over budget (Statesman-Journal, 14 Aug 2008, p. 1). Some of us said so at the outset.

Construction of the hardened facility, installation of mainframes, and configuration of the new network architecture was supposed to be complete by the end of 2005, with migration of operations from the three largest existing data centers to the consolidated data completed by the end of 2006. As it happens the project is still not entirely complete, which has doubled transition costs and substantially delayed benefit flow from the project. Moreover, payback depended upon the project staying on schedule and being completed on time. That was also unlikely, although not necessarily for the reasons given.

Nevertheless, knowing what we now know, if we treat the project as a standard capital budgeting problem with a life of 25 years and a discount rate of five percent, it looks better than break even, even before taking account of benefits accruing from greater security, substantially increased peak capacity, learning-curve effects, or buying power. Moreover, according to DAS Director Scott Harra, consolidation has generated an additional benefit: "Departments can focus on their core business.” Department of Revenue Director Elizabeth Harchenko agrees, she no longer has “to worry about having her own agency maintain the necessary staff, software and equipment to do the work” (Statesman-Journal, 14 Aug 2008, p. 1). So by any reasonable standard, C-NIC has been a qualified success, which is occasion for self-congratulation, especially given Oregon’s history of IT fiascos.

Nevertheless, instead of patting ourselves on the back, we ought to ask what can be learned from this experience.

For students of e-government C-NIC reflects two noteworthy design choices. First, its designers chose to break no new ground, but, instead, they were content with paving the existing cow paths, justifying their effort in terms of standardization, departmentalization, and operational cost-efficiency. Consequently, C-NIC architecture reflects existing agency databases, which are built around general ledgers rather than geographic locations, and make limited use of meta-data and intelligent agents, unlike the systems implemented by governments on the leading edge of IT development. Moreover, the project’s governing board evidently never considered making database information available to the public. Instead, they redefined the security challenge C-NIC was meant to address. Rather than a terrorist attack, they now emphasize C-NIC’s capacity to maintain data confidentiality.

Second, the project’s governors chose to consolidate all of the state’s data processing and storage at a single hardened site. Indeed, the only alternative they formally considered was consolidating processing at two locations, the primary location and a backup, which they rejected for reasons of cost. The consolidation option was largely driven by fairly mundane considerations: the existing data centers were highly vulnerable to physical attack, existing server capacity was often underutilized, but was insufficient to meet peak demands as configured.

However, given this problem diagnosis, the best prescription would seem to be grid computing, which would distribute computing power throughout the state, In that case, over half of the nodes in the state could be destroyed and the system would continue to operate. Instead, we chose to put all our eggs in one basket.

The implicit decision to ignore these basic, conceptual design issues was never seriously questioned. Why didn’t the dog bark? One answer is that the project’s governors, the heads of participating agencies, were largely unfamiliar with digital organization or even the basics of IT -- when the project began, fewer than half of the board members answered their own e-mails. It probably never occurred to them to consider these alternatives. Moreover, as the State’s former IT manager, Mike Freese, explained (October 4, 2005), Oregon lacked “the technical expertise to implement grid computing.” He continued, “The best solution to an IT problem is useless if it cannot be implemented, so we looked for an 80 percent perfect answer that we could actually pull off – from this perspective, consolidation was a no-brainer.” One cannot fault Freese’s logic, but the proper lesson to be drawn here is somewhat different. If one accepts that information management is a core function of government and that Oregon hasn’t developed the necessary capability to perform that function, it follows that Oregon lacks the capacity to perform one of its core functions. It needs to develop that capacity. Further, top managers who do not understand the IT function shouldn’t be top managers.

In this case, legislative interest in consolidation preceded executive commitment to shared services. According to the Statesman-Journal (14 Aug 2008, p. 1), the 2005 Legislature approved C-NIC’s two-year budget of $100 million, including money for a new building on Airport Road SE in Salem, “with little opposition.” This means that C-NIC missed the legislative scrutiny an administrative proposal of its magnitude would normally receive prior to authorization. Again, one suspects that the legislature failed to scrutinize this project because it lacked the expertise to do so.

Most of the delays associated with the C-NIC project resulted from governance failures. These have been manifested in an inability to make timely decisions, but the dithering over policies and priorities seems to reflect deeper difficulties.
First, there was the conflict over the independence of the data center and the governance role of shared-services board. C-NIC’s designers drew a sharp distinction between shared and centralized provision of support services. They assumed that data processing would be consolidated into a stand-alone business unit that would be owned by its clients and whose only mission would be client service. They further assumed that the consolidated data center would negotiate service-level agreements, specifying standardized services and mutually agreed upon rates, with each agency, relying on quasi-market mechanisms to link the center to its clients or customers

By making data processing the unit’s sole purpose, they hoped “to elevate the importance of this back-office function to front-office status” and, thereby, “increase customer focus and employee motivation and ownership.” This logic was outlined in the shared-services governing board’s initial report, Shared
Services: A Strategy for Reinventing Government (DAS, August 2004).

Nominally all of the members of the shared services governing board endorsed this vision. However, DAS was responsible for managing the C-NIC project. DAS is not only Oregon’s central control agency (budget and financial management); it also supplies other agencies with a variety of support services – space and facilities, maintenance and landscaping services, utilities, the motor pool, etc. As it happened, project management gradually evolved into program management and, whether by accident or design, the consolidated data center came to be treated a simply another arm of DAS.

Unfortunately, customer service is rarely if ever a high priority of control agencies. DAS is no exception to this rule. Its priorities are central control, economy and efficiency, and adherence to rules. Even if DAS had in this instance been truly concerned with providing the consolidated data center’s clients with the best possible service, past experience with its service delivery practices might have led them to doubt its good intentions. Consequently, DAS’s unilateral rejection of the shared services concept, which had led to the creation of the shared service board in the first place, disgruntled some of the agencies represented on it.

Second, establishing a program management (as opposed to a project management) office was repeatedly delayed. The program management office was supposed to be put together from personnel drawn from longstanding functional units, who had worked with different kinds of data and applications processing styles. C-NIC’s designers assumed that personnel from different processing centers could be gradually integrated into a single functioning team with a common mission, regardless of their prior task-orientation or role. Cross-functional integration proved very difficult for the C-NIC project management team. This too was partly due to agency distrust of DAS. As it became increasingly clear that things were going to be done DAS’s way or not at all, their erstwhile partners turned increasingly uncooperative.
The third lesson, there is a fundamental conflict between DAS’s service-delivery mission and its fiscal-control mission. The time has come for Oregon to assign those missions to different agencies.

Economics, Politics and Demographics: The Big Sort

There is a new book getting quite a bit of press coverage: The Big Sort. The very basic premise is that people are increasingly choosing to live near people with similar political and social views. The book is largely about the social and political implications of this phenomenon and I leave it to those experts to comment on this, but the economic undercurrent is interesting to me.

Modern economic organization has made us a country of drifters. We think nothing of applying for jobs across the country, or to move to where we want with some confidence of making a living. Part of this happens because we generally have had a very low unemployment rate so there is a lot of truth behind the belief that jobs can be found most places (at least in bigger cities). Part of this happens because it is so easy to do so. Improved information technology it is easier for firms to recruit across the country (and now the world - imagine the big sort on a international scale...) and for job seekers to find jobs across the country. Highly liquid credit markets make moving much less burdensome than in many other countries. With strong tax incentives to own homes, development of new homes and communities is very rapid, allowing for easier sorting.

So it may be that sorting is happening and threatens the fabric of our society, I don't know. What I am pretty sure of is that this is yet another phenomenon that could not have happened without the economic development and economic system we have developed in the late 20th and early 21st century. So it does not surprise me that this is a very recent phenomenon.

Beeronomics: What's Up at BridgePort and Rogue?

Word on the street is that BridgePort, the godfather of Oregon craft brewers, is faltering. In a time where almost all craft brewers are seeing double digit growth in sales, Bridgeport is going backward. I have no way to confirm or disprove this but, if true, it is surprising for a company with such a storied history and strong brand identity. Bridgeport's IPA is, probably, the quintessential NW IPA. They are fully invested in the latest trend of brewing special brews and those brews, like the new Hop Czar, are often excellent. They also have a signature brew pub in the newly trendy Pearl. All brushed aluminum and gleaming timber. Unfortunately for those of us who used to frequent the BridgePort when it was all brick and odd little nooks and crannies in the then still quite ragged Pearl, the new brewpub seems sterile and uninviting. I wonder if this has rubbed off on the brand. For whatever reason the bloom seems to be off the rose.

Contrast this with the thriving Rogue Brewery. I was in Newport over the weekend with the in-laws and my father-on-law, who arrived first, called up from the grocery store to ask what beer to buy. When in Newport, get Rogue, said I. Later, with a sixer of Dead Guy in hang, he was amazed at the price: "I have never in my life pain $11 for a six pack of beer, how can they possibility sell any beer at that price?" It was a very good question. Rogue is always the most expensive beer in my local grocery, and yet they thrive. I told my father-in-law that they have a loyal following and a strong brand identity, but that felt a little hollow even to me. I rarely buy Dead Guy, it is good, but there are almost always just as good beers for two to three dollars less. Over the weekend I lunched at the restaurant in the brewery. It is a decidedly low key place, especially compared to the BridgePort. Plywood and unfinished surfaces, wobbly tables and no decor. And yet they charge $15 for a hamburger and had a line out the door of people waiting to get in. Go figure. The food, by the way, was good, and the beer was exceptional. I brought home a bottle of Juniper Pale Ale and blew the father-in-law away.

Rogue seems to play by its own rules, and for whatever reason almost everything it touches, turns to gold. My impression of owner Jack Joyce is that he doesn't care to think too much about it, but rather go with his gut. He is also not really interested in going for the big selling high-volume beer. And even they have had some misfires: remember the short-lived packages with historic photos of fishermen and such? No? I got your back. But in all of this remains a mystery of the business. How do you stay fresh and relevant in consumers eyes? Jack Joyce does it by following his inner muse. BridgePort seems to be trying to listen to its inner MBA. The former is not always a good idea - many a good brewery has been lost to those not very business savvy. And the latter is not always bad. Full Sail's regrettable new packaging, session beer and slogan "Brewed to Stoke, Stoked to Brew" seems to have worked out very well.

Economics has lots of theories of branding, advertising, consumer preference and the like, but when it comes to trends, fads and the like. We are just as in the dark as everyone else. So, ideas?

Trying Hard

I have been struggling to find time and energy to blog lately and in one area in particular I have been especially lax - the comments.  I have received many excellent comments even in this slow summer of blogging and have responded to almost none.  I shall try and rectify this - even if very late in the game - in the next few days.  

Anyway, thanks for your patience and I apologize for the slow blogging this summer.  I have been making considerable progress on my field experiment for this blog, I shall update that soon.

Econ 101: Anti-Trust and the Whole Foods/Wild Oats Merger

From the Oregonian, I learned of a federal appellate court ruling that sent a decision allowing the Whole Foods/Wild Oats merger back to district court. Here is a link to the LA Times as the Oregonian website is not letting me access it - big surprise.

I thought this is a good chance to discuss a few aspects of anti-trust oversight in the United States. The basics of anti-trust in such a case is pretty clear: when firms get too much market power (have too few competitors) the profit incentive causes them to raise price and lower output which causes a loss in social welfare. Fewer consumers get to consume and those that do consume at a higher price while the firm gets excess profits.

But determining market power is often quite difficult for the simple reason that 'markets' are very hard to define and therefore 'competitors' are hard to identify. Take Whole Foods, what exactly is their market? Is it organic, gourmet and overpriced groceries. Just gourmet? Groceries full stop? Whole Foods argued that in today's market there is no longer much distinction between them and major grocery chains like Safeway because the latter also is stocking more organic and gourmet foods. So Whole Foods wanted to define the market as groceries in general and thus all the major chains are competitors, so a merger with Wild Oats is not a concern - there is plenty of competition left over. The Federal Trade Commission wasn't so sure, they argued that Whole Foods serve a distinct market - gourmet and organic foods - and thus opposed the merger. [By the way, it is very rare that these things get to court, they are usually settled between the two parties]

So who is right? Well it is pretty hard to tell. The usual course is to look at the cross-price elasticity of demand. This measure, for example, the change in demand for Whole Foods goods when Safeway changes their prices. As you can imagine trying to isolate this effect in the world of supermarkets where prices are always and constantly in flux is almost impossible. Another thing that matters is the 'contestability' of the market - how easy would it be for a new competitor to enter the market. This limits firms' ability to exploit concentration by raising prices because it would encourage the entry of new competitors. I imagine that the current state of Safeway-type stores has a pretty minimal influence on Whole Foods demand, but that is would be very easy for Safeway-type stores to ramp up their offerings to compete. In general, I would not be that worried if I were the feds.

NB: It seems a little absurd in the land of New Seasons and other such stores, but when I lived in Denver, Whole Foods and Wild Oats were the entire organic market. I used to frequent Whole Foods until my local Safeway started stocking many more organic alternatives - which is why I am a bit sanguine about the merger.

Portland Housing Prices

The latest from Case-Shiller is here. I promised the kiddies a trip to the Zoo on the Max so I shall post them with little comment. Nationwide, the news is pretty dismal, but Portland is seeming to still escape the really bad stuff. In fact, we finally see the seasonal uptick in Portland, and Seattle is holding pretty good as well.  But we are still down quite a bit from a year ago.

Bad Bags

From the Rose City a proposal by the Mayor Elect (does one capitalize an informal title?) to implement a fee for anyone wishing to have their purchases at a grocery store placed in a plastic or paper bag.  Seattle too.  So what does economics have to say about this?  Well, it depends.  

But before I get to that, some preliminary details that are not at all clear this this observer:

Exactly what category of store does this apply?  And, why not all if there is some distinction?

Why the same fee for both paper and plastic bags?

To whom do these fees accrue?

What is the estimate of the cost of the bags to society?

These details are pretty important because if you are to make an economic argument for such a fee, it would be along the lines of Pigouvian taxes.  Which is to  say that if an economic activity yields a cost on others not directly involved in the transaction, taxing that activity the amount of this external cost will create an efficient market outcome.  So I would like to know to start, what is the cost of these bags to society?  Yes their manufacture is expensive, but that cost is born by the stores.  So I imagine that it is a combination of the carbon emissions from the manufacturing process, the cost of improperly disposed of bags on the municipality and, what else, the cost of the pollution in terms of despoiling habitat?  I don't really know all of the bad things that bags are supposed to have done to society so feel free to fill me in.  If these are serious and the fee is commensurate with these costs, then as an economist I have no problem with an appropriate tax.  

But as an aside, I often reuse my bags (I have a dog - I need say no more) and extras I bring back to the store to recycle - does this really help, or does the energy that is used in the recycling process mostly wipe out the gains?

However, this fee is not being talked about in these terms, but more in terms of "how much would it take to really get people to opt out of getting bags with their purchase?"  Which, as an economist with a bit of a libertarian streak, I find irritating.  Government has no business deciding how we should behave above an beyond these social costs.  Also, as I mentioned above, there should be no distinction between grocery stores and any other store if we are being honest and consistent.  A bag is a bag - let the patrons of all stores pay the true social cost!  (Let me venture to guess that more patrons of Victoria's Secret than of the Disney Store would opt to pay for the bag - but that is another economics lecture).  

So I think this talk of twenty cents is absurd.  This seems much too high for the Pigouvian tax - but I am ready to be shown otherwise.  Also, if we are serious about the 'right' tax, then paper and plastic should be different costs presumably.  So this really is about behavior not true social costs and, as such, a dangerous and very tricky path to tread for a mayor - social engineering.  There are lots of things we wish people would do - be nice to each other for example - but are we going to start charging for rudeness?   

Let me be absolutely clear.  These bags may be a serious problem (though I think we are really talking about the plastic ones not paper - though paper has its own issues) and as such, may be an entirely appropriate case for a fee, but before suggesting a random fee, be serious in thinking about the external costs and sell the fee as good economics.  I think it would be great if everyone used reusable bags, rode bikes everywhere and such, but there are many, many things that are in some way bad for us and the environment (e.g. beer) that once you start with the logic that government should start telling us what we should do, it is hard to stop.  This is really my point about must policy, there should be good economics behind it, not just good intentions.

A final side note, the accrual of these fees would presumably go to the municipality to offset the extra cost they impose, otherwise it would seem a bit pointless but so far I have failed to notice how this tax would be implemented.

Beeronomics: The Oregon Brewers Festival

Just a quick note about the Oregon Brewers Festival and economics.  If you are a brewery, what beer do you send?  Do you try and make a splash with a new concoction, or send a tried and true favorite?  The costs and benefits of both are pretty clear.  My first thoughts are that if you are an established brewery like, say, Rogue, the incentives are to try and make a new exciting brew and try and solidify a reputation for interesting beers.  But if you are small and relatively unknown like, say, Ninkasi, the incentives are probably to send a tried and true beer that people will encounter on tap and in stores and might just have again and again.   

Your thoughts? 

Incentives and Life

It is not without a certain level of embarrassment that I will admit that the house I owned in Corvallis was a new house in a new development that was almost 3000 square feet.  My wife and I never felt entirely comfortable there, neither of us really felt at home in a new neighborhood and we missed the character of older houses. Still, it was bought at a time when alternatives were very few and because we knew there was a reasonable chance we would make the move to Portland and it seemed a safe investment (it was).  Sure we have two kids, but we always felt the house was just too big for us.

Now, for a time, we are installed in a old 1000 square foot bungalow and the transition has been quite interesting for this economic naturalist.  You see, economics is all about how rational people respond to incentives, and in moving from 3000 to 1000 square feet, the incentives have sure changed.  In 3000 square feet there is no incentive to choose, to limit yourself, you never have to dispose, donate or never acquire in the first place.  This is especially true with the kids stuff.  Many old gifts that are now long forgotten and no longer played with remained stuffed all around the house.  Now, at 1000 square feet, every thing has to be carefully selected - so the toys have diminished considerably and guess what - the kids couldn't care less.  

So the cost of having stuff has gone way up and the incentive to have less stuff is now much stronger. Low and behold, it turns out we really don't need much stuff.  But I guess the real story is how just 2 years in a big house led to a massive increase in the amount of stuff - a fairly quick response to the lower cost of storage.  And we are not big consumers, its just that we never got rid of anything like infant clothes and supplies (e.g. a crib we hadn't used in a year).

So the point of all of this is that I don't think that your life determines what size house is right for you, I think its more that the house determines how you live.  Its the incentives once in a dwelling that kick in and define and guide your subsequent choices.  At 1000 square feet we are doing just fine and it is good to be reminded of what is really necessary and what is surplus to requirements. We haven't changed through the house changes and I thought that the big house would just remain pretty empty, but nope, the incentives were just too pervasive. Anyone in the market for old toys?...

The Oregon Housing Market: My Field Experiment

This graphic from the New York Times indicates the fall-out of the Fannie and Freddie troubles.  It also indicates a general tightening of credit markets, just when were are looking for signs of life from housing markets.  My house in Corvallis is sold - and there was not a single hiccup, but here in Portland I am hearing more and more of deals facing financing troubles and falling through.  Anecdotally, the market appears definitely to be softening, even in the close in east-side neighborhoods that I am looking in.  Lots of unsold homes, "price reduced" stickers on signs and houses going under contract and then reappearing on the market.  This is all good for me as a potential buyer, but the rising interest rates are not helping my bottom line.  Still they are low by historical standards.  

Add to this news of a surge in bankruptcies and more shedding of jobs in Oregon and things might get quite a bit worse before they get better.  For my part, I am back to renting after 12 years of ownership and am in no great hurry to purchase.  I anticipate even ore choices and better deals soon.  

So the field experiment continues...

Eco-nomics: Partial and General Equilibrium

Economics is often taught using partial equilibrium - studying one market and assuming away any spillover effects.  Think of the classic example of the market for orange juice - teachers may (and usually do) ask about the effect on the OJ market from something like a hurricane that wipes out half of Florida's orange crop.  When you say that input costs will increase, shifting the supply curve to the NW and thus price will rise and the quantity sold will decrease you are ignoring any other effects - like perhaps that, without a crop to pick, there will be a flood of labor supply to OJ factories lowering costs for producers.  This last example is an example of general equilibrium - trying to trace the effects of some change through all effected markets.  We don't emphasize it much in undergraduate classes because it is HARD.  It is like trying to figure out global weather - there are so many interconnections, coming up with a good model is very difficult.

I mention this because this is one reason it is very hard to say what effect the push for biofuels will have on the prices of other crops and on overall welfare.  If there is increasing demand and thus price of corn, what will happen to the price of other crops in the short and long term?  Well it depends on what is being planted and where, the magnitude of the cross-price elasticity of demand for other crops - even how new fuels will effect transportation costs.  As you can see, blaming biofuels for rapid commodities price escalation (or defending them) is dangerous business.   It is also true, however, that general equilibrium effects are often not thought about very much in casual discussions of environmental economics.  

For example, I wonder what the effect would be if there was mass consumption of Priuses (Pri'i?). On the one hand this would reduce gas consumption dramatically, but it would also put pressure on the production of all the junk that goes into the batteries.  How much energy does it take to get the stuff?  How much pollution does this create?  What about waste?  I don't know the answers to these questions, but many good ideas, when considered in mass amounts, often become questionable. 

This, apparently, is true of biodiesel.  Now that many people have converted to biodiesel the supply of used cooking oil is not keeping up with demand (despite my appetite for fish and chips).  So now what? - the economic rationale has changed, does biodiesel still make sense?  I don't know.  But I do get grumpy when good ideas in isolation are not thought about in a general context - in the general equilibrium.

One final example.  My wife and my mother were talking very admiringly about the freecycle movement and the idea that one could help the world by not buying new stuff.  Hmmm...  OK, so I am an economist and not helping my rep by taking this on - but I see a few problems with this.  First, there is a market for this stuff, from people who can't afford new.  If middle class people started gobbling this stuff up, that would just either increase the demand for Wal-Mart style cheap stuff from China of further impoverish people who are already impoverished by driving the price of used stuff up beyond their means.  To put it plainly, you are not decreasing the demand for the stuff, just shifting who buys old and who buys new.  Also, why s consumption of new stuff such a bad thing?  This adds income and thus growth to the world.  If you care about poverty, this should be reason for pause.  

This did not go over well with the wife and mother.

My apologies for the slow blogging - life has been a bit crazy.

Econ Major

There are many reasons to choose a major and at my undergraduate institution marketability and earning potential were definitely not considered good reasons.  Nevertheless, the economics major appears to endow students with a set of skills that the market values highly.  What I like about economics is the variety of things you can do with it.  It is not an easy major - when I was at the U of Colorado, economics and physics classes had the lowest grade point averages - but the effort is well worth it.

Internet is back!

Safely installed in Sellwood, broadband internet connection working, life slowly returning to normal.

Regular blogging to return soon...

The Oregon Self-Service Gas Petition!

Do you support allowing self-service gas in Oregon?  Let me know by signing the on-line petition which, if successful, I hope to send to state representatives in Salem.

To support this effort, go to the petition, it is simple and direct.

Gasp!....no....internet...connection....

I am on vacation and have almost no access to the internet.  I had plans to continue blogging during this time but circumstances will not allow.  I shall resume next week.

Apologies.

The Economics of Soccer: Euro 2008

Perhaps it is a stretch to try and justify the amount of time I have spent (late at night with my DVR after shielding myself from news reports all day) watching Euro 2008 matches by trying to do an economic analysis. But here goes.

It has been a great tournament, and I think what it has represented is a pretty dramatic change for the usually stultifying international tournament fare. Why this is, in my opinion is the lack of risk-aversion that usually dominates strategies in such tournaments. There is obviously a reason for this - it is usually quites successful. But many teams at Euro 2008 were relatively young and inexperienced either due to the overall pool of players or due to some untimely injuries. I think the fact that inexperience means you can't play the strict, organized defense necessary to pull off the risk-averse strategy, liberated the tournament from such teams. In any event, young attacking teams like the Netherlands, Turkey, Russia were a delight to watch. Even the Germans, who are usually masters of such a strategy, realized a couple of years ago that they could no longer rely on defense and have opened up. Italy still got very far employing such a strategy, but ultimately fell to a superior Spanish side.

The surprise of the tournament, and until yesterday the Cinderella story, was the young Russian team who (after a terrible opening performance against Spain) seemed to throw caution to the wind, play open, inventive attacking soccer and were rewarded by some marvelous results. None more so than the brilliant display against the Dutch who were deservedly beaten. They were a revelation and a delight - and given their age should be a force at the next World Cup.

The Dutch themselves were open, inventive, shockingly fast and beautiful to watch in the group stage (where the pressure is diminished), but seemed to wilt under the pressure of the knock-out stages and seemed lost and rudderless against the Russians who ran circles around them.

The aforementioned German team have been over-achievers in my opinion. Typically well-organized (insert your own Teutonic quip here), the German team have been able to be attacking without throwing caution to the wind. The semi-final game against Turkey, where three goals were scored in the dying moments of the game to thrice alter the fortunes of the two teams, was the game of the tournament. [Unfortunately, most of the world could not watch the events live as lightening knocked out the international feed] Philipp Lahm's final seconds goal (a beauty - above) , atoned for a Turkish goal, minutes earlier that was the result of a Lahm blunder. This is why this is the beautiful game!

I am feeling pretty smug now, as my Spain prediction is looking very good at the moment. Thanks mostly, in my unbiased opinion, to ARSENAL midfield magician Cesc Fabregas who came in for an injured David Villa and changed the entire game. Will he get a well-deserved start in the final game? He should.



So what we have on tap Sunday's final is a neutral's delight: a young German team playing more open and attacking football, but still keeping amazingly well-organized versus a Spanish team that in renowned for folding under pressure yet who delight in picking teams apart with intricate and inventive passing - in the highest pressure situation of most of these player's lives. Should be a great game. I am sticking with my prediction: Spain 2 - Germany 1.

Field Research: The Oregon Housing Market

I have now written many blog posts about the Oregon housing market. In them, I inevitably talk about some new data that have been released and what they mean. But out of loyalty and devotion to you, dear readers, I have decided to go one step further - I have conducted my own field experiment. Well, okay, it is not exactly an experiment.

I am moving to Portland so that my wife can continue her career as a non-profit fundraiser. This means that I had to sell a house in Corvallis, find a rental in Portland and will soon begin the search for a house to purchase. The Corvallis end went shockingly fast - we had an offer accepted the very day it was listed - no sign of a housing slump from my experience. Talking to the realtor I think our experience, while exceptional, is evidence of a real estate market that is fairly solid in Corvallis. The supply of new houses slowed quickly as the market softened and now the market for the stock of existing houses is fairly strong.

The Portland side also looks pretty strong in relative terms, but nothing like two years ago when we were deciding between Portland and Corvallis as a place to live. As we are focused on a close-in neighborhood (Sellwood), the softness of the suburban developments is not very apparent.

What was striking was the trouble we had finding a decent rental. I have a theory: because the credit crunch is national many would-be buyers, even in Portland, are being pushed onto the rental market. However, as the market, especially in near-in neighborhoods, is still pretty robust, there have not been many houses pushed into converting to a rental. So tight supply versus strong demand make for a tough rental market.

By the way, I am still keeping my position at Oregon State, so thank goodness I have a very fuel-efficient car. Our families carbon footprint is going to be slammed by my energy profligacy. But we should come out ahead, I reckon, because we can walk everywhere in Sellwood to get what we need, and my wife, who will work in Old Town, plans on commuting mainly by bike and bus.

[By the way, this explains recent and near-future spotty blogging - my apologies]

Energy Policy: Fred Thompson, Guest Blogger

Once again, The Oregon Economics Blog welcomes Fred Thompson writing about something I have been thinking of writing about for a while - energy policy.  Hopefully, if I can find the time, I will share some thoughts as well.  Here's Fred:

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A friend and former boss, who is also now a serious mover and shaker
the energy biz, recently privately opined:

"This country has had no energy policy for almost three decades.
Both parties are equally culpable for a situation that places our
economy in peril for many years to come. My answer for a
comprehensive energy policy:

1. Incentives and requirements for bio-fuels and alternative energy
sources now.

2. Revitalizing our nuclear energy program, ala France.

3. Opening up off-shore and ANWR drilling. (I am not convinced that
the shale program is feasible.)

4. Immediate construction of refinery capacity.

5. Immediate regulation of hedge fund investing in commodities that
have driven prices up for all commodities with no economically
productive purpose. (I don't completely buy into the argument that
these markets provide stability required by the refiners.)

There is no silver bullet, no single answer. Also, no short-term
solution. We are going to be in the energy soup for several years.
But we can find a way out of this mess with boldness and patience."

I have been hesitant to weigh in on this topic. I don’t have any
professional competence in the area of energy policy. However, these
are my thoughts.

It is true that last time (perhaps the only time) we had an energy
policy was during the Carter administration – remember the moral
equivalent of war? Those of you who are old enough will. The results
were not pretty.

The reason for current high energy prices mostly goes to supply and
demand for oil – energy prices are up because of booming demand for
oil from China, India and the Middle East and supply shortfalls in
the US, Mexico, Venezuela, Nigeria, Iran and Russia, not to say
Iraq. Moreover, while there are many substitutes for oil and gas,
few if any are cheaper, instead high oil and gas prices have merely
raised the prices of those alternatives. As my friend correctly
opines: “There is no silver bullet, no single answer. Also, no
short term solution.”

So, what about his proposals:

1. Incentives and requirements for bio-fuels and alternative energy
sources now.

I agree, we don’t do enough to promote energy conservation.
Moreover, what we do – direct regulation, for the most part, e.g.
the CAFE standards – is pretty inefficient. Most of our conservation
promotion programs seem ill designed from a behavioral standpoint.
On the other hand, we probably have sufficient incentives for the
production of wind and solar power right now, although only recently
have folks started to engage in serious genetic engineering to
reconfigure biological processes to generate increased energy from
solar power. Those programs should be accelerated, but it is
unlikely they will have a substantial payoff any time soon. In the
short run, it looks like Brazil has the capacity to increase sugar
cane ethanol production. Most developed countries won’t import it,
the US included. That is simply foolish. But I see no sense in the
multibillion-dollar government subsidies for domestic ethanol. Why
are higher food prices better than higher energy prices?

2. Revitalizing our nuclear energy program, ala France.

Absolutely. The French use half the oil per-capita we do. Nuclear
technology has advanced considerably in the last 30 years. It is
safer and cheaper. The lack of trained nuclear engineers is a
serious bottleneck, however.

3. Opening up off-shore and ANWR drilling. (I am less convinced
that the shale program is feasible.)

Makes sense to me. Again we know a lot more about off-shore drilling
now than we did when the Santa Barbara spill occurred. Listening to
the folks who are opposed, their main objection is to the
consumption of oil, not the danger to the environment from drilling.
I doubt that that argument has political legs. In the short run, I
agree with Nick about the shale program. One reason the tar sands in
Alberta work now and oil shale doesn’t is that the Canadians have
plenty of water in the right places. However, I have heard some
ideas about nuclear power/oil shale cogeneration that might solve
some of these problems, although this is certainly not a quick fix.

4. Immediate construction of refinery capacity.

Duh. Same goes for oil and gas pipelines and LNG terminals – some
environmentalists may not to see it, but these are primarily
conservation measures. Unfortunately, immediate construction in this
instance is something of an oxy-moron.

5. Immediate regulation of hedge fund investing in commodities that
have driven prices up for all commodities with no economically
productive purpose. (I don't completely buy into the argument that
these markets provide stability.)

I disagree. Hedging produces significant benefits for the risk
averse. Moreover, I don’t see how that options and futures trading
can distort spot prices without physical hoarding. Show me the
inventories and I'll reconsider the point. I would also note that
futures markets are different from carry-trade speculation
(borrowing at low interest rates to invest at higher rates).
Carry-trade speculation is dangerous, because you are betting
against the law of one price (uncovered interest-rate parity), in
other words, betting on your ability to time the market – when the
market turns, the herd stampedes. Moreover, in commodity trading
there is a counter position for every long position and, while you
can buy on the margin, you must mark to margin every day.

My big disagreement is with a point that is only implicit in my
friend’s comments. I want energy to carry a high price. That is the
best way I know to promote energy conservation and abate greenhouse
gases. Moreover, people will make the necessary investments in
plant, equipment, and lifestyle changes required to reduce energy
consumption substantially only if they expect energy prices to
remain high. Since there is but one thing more certain than taxes, I
think a high carbon tax is a great idea. Besides I’d rather the IRS
collected the rent than the Saudis, Russians, Nigerians,
Venezuelans, or even the Canadians. One could use the revenues to
offset social security and medi-care taxes on say the first $50k
(real $) of earned income as suggested by Irwin Seltzer, for
example. Actually, I think that is a marvelous idea for all sorts of
reasons. But that is a different story.