Omnibus Post

Just a few notes on some media highlights on a busy Monday:

The New York Times reports on how US taxpayers are profiting from the bank bailout - so far - reminding us that the bailout was not based on grants but loans.

NPR has a nice chat with the undercover economist.

Greg Mankiw is not impressed by the correlation between income and SAT scores.

Paul Krugman has more to say.

Crazy 8s

The Crazy 8s are celebrating the 25th anniversary of their album "Law and Order" tonight at the Crystal Ballroom. Alas I will miss it, regretfully, as I spent many a wonderful evening with them in my youth. Perhaps I shall give the album a spin tonight in solidarity, but you should go.

Wow, 25 years already?... that settles it, I am old.

Beeronomics, Explained

From our friends at Beervana (the Blog) comes this explanation (via The Onion) of Beeronomics:

Eco-nomics: Time for a Better City Bus?

A good friend of mine who was studying automotive engineering at the University of Wisconsin and into using lasers and fluid dynamics to design a better internal combustion engine used to rant every time a city bus would start going after a stop in earshot. His complaint: enormous turbo-lag meaning that the turbo charger on the diesel engine would not kick in until the bus was well under way. What a waste of fuel, he would exclaim. Me, being the economist, would immediately wonder if the non-profit nature of the transit authority was responsible for this - surely a for-profit company would figure out all sources of waste and eliminate them? Anyway, for all of the technological advances in automotive engineering we have seen in the personal auto category, it seems strange that the same is not true for city busses (making me wonder if it is the incentives again - transit authorities are not as responsive to cost cutting perhaps?).

Well, the New York Times is reporting on the NYC transit authority's test of new diesel hybrid busses. Finally, a real advance in bus technology! No doubt these busses will be expensive and this will make it hard for transit authorities to adopt them as the fuel savings will probably not justify the cost. But when the social cost of emissions from city busses are accounted for I am confident they will be a sensible choice. So here would be a cash-for-clunkers program I could actually support: the government helping fund conversions to hybrid bus fleets for big city transit systems.

As an aside as hybrid cars are great in city traffic and diesels are great on the highway in terms of MPG, it seems obvious to build a hybrid diesel car, no? Apparently they coming and when they do, I think I'll have found my perfect car...and a Peugeot no less, super-cool!

Beeronomics: Anti-Trust

The New York Times comments on the declared intention of Anheuser-Busch InBev and MillerCoors to raise prices on their beers at a time when the economy is in the tank, sales are down and more and more consumers are going for craft beer. They go on to wonder if this is going to set off any anti-trust alarms in the Obama administration. Jeff over at Beervana wonders what the companies are thinking raising prices in the face of declining market share? But economists know that it's all about price elasticity of demand. You may make more money if you give up some sales but charge more. [As an aside, the same principle is true of parking lots. People often wonder why downtown parking lots charge so high a price that they don't fill up - how can it be a profit maximizing strategy to leave unfilled spaces? - the reason comes from the fact that they charge a single price and are responding to elasticities]

Anyway, the fact that the two companies have an 80% market share is part of the economic calculations that go into anti-trust investigations, but it is not the only thing.

One of the most important concepts in anti-trust is the contestability of markets: how easy is it for a competitor to come along and compete against you? And in this the beer market is pretty contestable as shown by the rapid rise of craft breweries. In fact, the very success of craft brewing over the last decade would be exhibit number one in an anti-trust hearing - this success shows that beer is an easy market to get into and thus there is intense competition. Now most of this competition is local and the big breweries have vast economies of scale on the national level, but their ability to rise prices is severely limited by fierce competition in local markets from craft brewing.

Or course this can be seen another way, because another concept in anti-trust that factors in is how we define the market. Are macro-brews and micro-brews really in the same market and thus micros are in fact real competition for macros? (And for that matter are all alcoholic beverages actually part of a single market so that the real share of these companies is quite small?) I have wondered in this blog many times about how high is the cross-price elasticity of micro and macro beer for this very reason, for it is with this figure that we decide how close the markets are. In other words when the price of Deschutes beer rises, how big a bump in the demand for Bud is there?

I have to admit that my sense is that the AB InBev and MillerCoors could make a pretty spirited defense of their case in an anti-trust hearing. They could show how in local markets beer sales are very competitive and that the national economies of scale they enjoy are not easily leveraged in local markets to keep prices artificially high. To me, the decision to raise prices just seems like simple profit maximization - and good news for local craft brewers as it appears there will be more market share to be had.

Baseball and Portland: Winner-Take-All Markets and Demand

I came across an interesting post on the Portland Architecture Blog (where I indulge my fantasy life as an architect) which muses whether Portland has grown beyond the minor leagues. The idea, in essence, is that Portlanders are no longer in minor league sports because we have become a major league city even without the major league teams. It is an interesting notion but it made me think about another aspect of the economics of sports.

Winner-take-all markets are those in which extremely small differences in ability can lead to humongous differences in rewards (compensation). These markets are usually characterized by reproducibility of effort. Popular music is one classic example. It used to be that musicians had to preform live and necessarily to a limited audience. So a slightly more talented musician may draw a few more people in the audience, but the differences were small. With high fidelity recordings, suddenly the market was virtually unlimited and a slightly more talented musician could sell perhaps millions more than a slightly less talented one.

Modern sport shares this same aspect. Now that sports have become a global media phenomenon it shares the reproducibility aspect in that sports performances can be beamed into billions of households around the world. What this means is that small differences in ability - the difference between being a major league level player and a AAA player - may be very small, but the rewards that go to the slightly more talented player may be ten, one hundred, one thousand times greater than the rewards to the slightly less talented one.

This is all well-known now thanks to Bob Frank of Cornell's Business School who (to my knowledge) coined the term. But what I wonder is how this translates to the demand for the goods whose markets are characterized by this winner-take-all aspect. [Perhaps this has been studied, but I am not aware of such studies] I wonder if consumers take short-cuts in deciding how to value such a product, and the short cut is that they make the assumption that these markets are efficient and if players are getting one hundred times the salaries, the product they are producing must be around one hundred times better. So it may be that the quality of the baseball played by the Beavers is just a tiny bit below the Mariners, but people look at the outsize salaries MLB players make and assume that the quality of the Mariners must be a lot better.

Now, even if true, this is only one difference that matters for demand. The modern major league ballpark is a far cry from PGE and offers a host of amenities not just the baseball, or as the Portland Architecture Blog wonders, maybe demand is wrapped up in self-image. But the baseball played on the fields is really not that different. So I wonder how reflexive is demand to the winner-take-all aspect of the market for players...

By the way, if this is true, what does it mean for MLS, where typical players don't make that much more than their USL counterparts?

Portland Home Values: Case-Shiller June Numbers

The June Case-Shiller numbers are in and the news is good for Portland: a healthy jump in home values from the month before. No one should get too excited, we are still well down from the peak, the numbers could reflect simply a seasonal bump, and there are still many out there who predict housing prices will continue to fall especially due to the rising foreclosures arising form unemployment. Nonetheless, it is another indication that we are, hopefully, nearing the bottom of the recession. It is also an indication that efforts on the part of the Fed and the Obama administration to stir a little life into the housing market has worked. Mortgage rates are exceptionally low and it appears that many are choosing this opportunity to become first-time homebuyers. All in all, I expect that the erosion in home values is essentially over, we may see a little more in the fall and winter, but nothing too substantial, but it will be a few years before any really healthy appreciation happens again.

The above graph charts the raw numbers and this graph below shows the year over year percentage change in home values for Portland, Seattle and the 20 city composite.

Oh, and by the way, apropos of the previous post, the stabilization in the housing market should help stabilize the MBS market, perhaps restoring the market for those 'toxic assets.' Maybe the Fed was right after-all...

Bernanke and Popping Bubbles

Stephen Crowley/The New York Times

The New York Times, reports that President Obama is keeping Ben Bernanke on for a second term as Chairman of the Federal Reserve. This is very good news. Bernanke has responded to the crisis forcefully, creatively and decisively and I have no doubt that his quick actions prevented a much worse economic crisis.

Some, like this post at Calculated Risk, are criticizing him, saying that he was late to recognize the housing market problem and should have done more earlier to prevent it. This is similar to more general calls for the Fed to be more forceful in the presence of bubbles. Why don't we pop bubbles before they get too big, they ask? It all sounds good in retrospect, there was a lot of talk about unsustainable housing prices long before the crisis and many criticize both Bernanke and his predecessor, Greenspan, for keeping money loose during the amazing home price inflation. The problem with this logic is that the market has built in mechanisms to pop bubbles. If it was so obvious that there was a bubble, where were the short sellers that would have taken the air out of the market? Why wasn't there a flood of short selling on mortgage backed securities, which would have made them much less profitable and would have lessened the demand for new mortgages?

In essence, the bubble popping crowd is saying that a few individuals in the government can do a better job than the 'wisdom of the crowds,' that somehow a few bureaucrats are better able to tell when there is a bubble then tens of thousands of professional investors who have a huge amount of money at stake. I have a hard time buying it. Perhaps the lesson to learn from looking backward is not that the government should step in when there is an obvious bubble, but that the bubble was not at all obvious and government interventions are not likely to do good when they are so hard to pinpoint.

On a related note, many of those that criticize the Fed for not tightening the money supply to cool off the housing market and thus deflating the bubble, have been harsh critics of the TALF and other programs to deal with toxic assets. But these programs are essentially bubble popping programs. If we define a bubble as a price that has become disconnected to some notion of true value, well the justification for the toxic asset program was just that - the price of toxic assets had basically gone to zero while there was still some real value in them. So the plan was to essentially prop up the price of the assets until the panic subsided. This is bubble popping in reverse, if you will. Of course the rationale was different - the Fed felt forced to do the latter to prop up banks that were poised to fail and it wasn't really an intentional bubble popping mission.

At any rate, I, for one, will sleep better with Bernanke still on the job.

Beeronomics: News and Notes

On a short little getaway to Seattle, so a quick post today on a couple of little news tidbits.

First, The Oregonian reports that the OLCC is considering doing away with its prohibition on happy hours advertisements. Ads are an interesting thing in economics. Some types, like ones that say "this dish soap really cleans well" seem to be purely a waste of money - they all say it and the consumer is no better informed for having seen the ad. So why do they do it? (Scour this blog to find the answer). Another type of ad we call informational and their utility to consumers is obvious: they inform consumers about particular product features, prices, hours of operation, etc. This reduces search costs which is good for competition and usually results in more sales and lower prices - both good for consumer welfare. So in this case, were alcohol like any other good, this would be unequivocally good for consumers. To the extent that happy hours ads promote excessive drinking and this excess has a social cost, one could argue that the net effect is ambiguous. For my part, I think it is good. Happy hours are no mystery (bars and restaurants can advertise in the establishment all they want) so allowing outside advertisements I don't think is going to increase consumption much, but it will allow consumers to make more informed choices when it comes to happy hour, and this is a good thing.

Second, via the Beervana blog, comes news that craft beer sales continue to rise despite the recession, albeit as a slightly lower pace than a year ago. As I have mentioned a number of times before, it was not at all clear if macro-brews were seen by consumers as a close substitute to craft beer, so that when times got tight, coupled with rising prices, consumers would flee craft beer en masse. The answer appears to be nope. That is very good news indeed.

Enjoy the weekend.

Allocating Resources in Higher Ed

The Wall Street Journal's economics blog reports on a Webber and Ehrenberg paper that looks at the way higher education institutions allocate resources and finds that more money spent on support services improves graduation and persistence rates, especially at institutions that have low rates to begin with. They suggest that at such institutions, spending more on services and less on instruction might be a beneficial reallocation of scarce resources.

Now I haven't read the paper other than the abstract and what the WSJ reports (once victim of reduced budgets at state universities - no access to NBER working papers), and I know Ron Ehrenberg and he is an excellent economist (and one of the nicest guys you'll ever meet), but one problem jumps out at me immediately and it is not one that has an easy control in the statistical examination of the data. It may well be that increased spending on student services, especially for schools with a large population of struggling students can lead to a dramatic improvement in drop out rates and graduation rates. I have no problem believing this finding. At such schools, this effect may be larger than the impact of an extra dollar spend on instruction. But making the logical leap that perhaps resources should be taken away from instruction and put toward student services is tricky.

Here is the problem in my mind: an instructor with too many class and no job security has a very clear incentive to make the class easy for students. It significantly reduces headaches from having to give extra help to struggling students and has a direct and dramatic impact on student evaluations of the teacher - which help when it is time to renew contracts. [As an aside, I once asked a group of students who were all raving about a particular class and instructor what they liked about the class so much, their response was that it was the easiest class at OSU and everyone got an A - this was apparently a legendary class among undergrads, everyone wants in. Sigh...] So the increase in success rates from spending more on outside the classroom services could be because these services are so useful or it could be because the drop in allocation for the classroom (read more instructors and fewer professors) have made passing classes and graduating easier.

In other words an easy way to improve 'success' rates in any endeavor is to make it easier, but is this really benefitting students? I am all for increasing student services, but we have already ventured too far along the instructor track in my view. It is not, by the way, that instructors are bad teachers, they are generally exceptional. But incentives matter, so we should be making these instructors professors.

Bike-o-nomics

In the Freakonomics Blog, Robin Goldstein reports of coming to Portland and being unable to find an inexpensive used bike. He wonders whether the demand for bikes is causing an inflation in used bike prices. He imagines that there are simply not enough used bikes to go around and thus this scarcity is causing prices to rise.

You have got to be kidding. Is it hard to import bikes to Portland?

His main problem is his limited conception of supply and demand. The used bike market in Portland is not disconnected to the new bike market so there is no real reason to expect there to be a bike shortage in Portland, nor any real difference in the equilibrium price of bikes here versus any other city. Just look around at all the bike stores in the city - supply equilibrates demand.

When Goldstein walked into a hip SE bike store and found a dearth of cheap bikes has much more to do with demand than supply. The bike store has found that nicer used bikes (that can go for thousands of dollars new) are desired by bike commuters and serious bike riders. They probably also allow the bike store a higher margin. So the store is simply responding to the demand curve of its customers. What Goldstein has encountered is a self-selection phenomenon. People who go looking for bikes in inner SE hip bike stores are not typically looking for a 1976 Schwinn Varsity. The store knows this and caters to their interests (and thus also reinforces that this is not a shop for the Varsity folks).

My favorite bike shop, Sellwood Cycle Repair, which is a nice mix of a hip cyclista shop and a down to earth neighborhood shop has a $75 used GT bike for sale and a number of other quite inexpensive used bikes on offer. I would imagine if he went further out to, say, Lents, he would find a plethora of cheap bikes.

By the way, in economics we call this error of inference a small sample bias: he has based his assertions of Portland being an expensive bike town on a tiny, non-representative sample.

Oregon July Unemployment: 11.9%

Oregon's July unemployment was 11.9%, virtually the same as the (revised) 12% figure for June. The good news is that the pace of job losses is slowing dramatically. 700 jobs were lost in July compared to 3,400 (revised) in June and way down from the peak of the job loss figures we were seeing at the end of last year and the beginning of this year.

What does it all mean? I think we can be reasonably confident that the official recession in Oregon will end this year (and may have already). So we are close to bottoming out. But the recovery is going to be slow and I believe it will take a few years to regain the jobs we lost.

On the bright side, the economies of East Asia and Europe appear to be recovering so demand for Oregon exports may begin to improve soon - especially in the high-tech sector as businesses that delayed upgrading their technology start to do so again. Residential and commercial construction will take mush longer to recover so I don't anticipate the wood products industries to rebound quickly, but we may be close to the bottom there too. Finally, as the federal stimulus package really starts to hit the ground this fall, that could provide an enormous boost to the overall recovery of the national economy which will help all states, including ours.

Nevertheless I think we are in for a long, slow recovery as there just isn't that obvious engine of growth out there at the moment. But that is not to say that one won't appear, it is just not likely to do so in the short term.

So though I expect Oregon's unemployment to hover around the 12% range for a while, I am optimistic that it has essentially peaked, and I am pretty confident that we will avoid the 13% that some have predicted.

Soccer on Grass

OK, I have soccer on the brain after the Arsenal's magnificent 6-1 season opening victory at Everton ... on grass.

Which brings me yet again to the possibility that PGE Park as a soccer specific stadium might stick with turf because, well, the climate might not be too suitable for it.

Rubbish. Oregon's climate during the MLS season is perfectly suitable for a natural grass playing field. English professional soccer is played exclusively on grass throughout the extraordinarily wet and gray English winter, and most English stadiums host many more games than the typical MLS season.

In addition, the game is much better on grass, particularly for spectators. Even modern turf, while much better than the old stuff, causes the ball to bounce too high, roll too fast and the game quickly becomes more like ping pong than top quality soccer. Players are reluctant to tackle and so the game looses its element of physicality that makes it compelling to watch. I, for one, plan to attend many games if a grass field in installed, but will be only an occasional patron if they don't. I don't think I am alone.

Evidence that success in Toronto and Seattle with turf fields is meaningless - once the thrill of a new team wears off, a quality product on the field will keep fans returning year after year. The success of the team concerns both the owners of the team and the city, which has a financial interest in the success of the franchise and the number of people they are able to draw to the stadium.

Not having natural grass jeopardizes the team's chances of hosting national team matches and top European clubs, most of which refuse to play on turf. Temporary installations of grass for this purpose are incredibly expensive (reports of $100,000 for the one use field recently installed in Seattle) and of poor quality making the game even worse to watch and probably ruling it out as a surface for a national team match that matters. As these games are huge draws and important for stadium revenue, this is an important consideration.

Besides, grass may cost more to maintain, but additional groundskeeping staff is in keeping with the idea that and MLS PGE Park will provide employment and economic stimulus. (okay, I have pushed it too far, perhaps?)

Finally, this is Oregon, grass-seed capital of the world and a place that thrives on being an outdoor paradise for visitors. Not having grass because of the climate goes against this heritage and image and further reinforces the stereotype that Oregon is always rainy which is detrimental to tourism.

The fact that PSU plays about five football games at PGE park does make the task of maintaining a top quality field for soccer more difficult, but not impossible. A number of MLS soccer specific stadiums host football and many of the games will be played after the end of the MLS season. Modern grass fields with top quality drainage systems and synthetic fibers sewn in to keep the turf in place can withstand both weather and wear much better than in the past. English soccer stadiums often host rugby matches which are equally rough on the field.

For these reasons I hope the Timbers soccer team to install a natural grass field, but the Portland City Council should insist on natural grass at PGE Park as it has a real interest in the success of the team. Or it should do it for me....

Speaking of success and the Timbers, it looks like they may be finding a little offense to go with their fantastic defense: A great result at Rochester this weekend.

Fuel Efficiency

Apropos of nothing, here is a nifty little chart based on US DOE data that I grabbed from Wikipedia.

Transport mode	Average passengers per vehicle	Efficiency per passenger
Vanpool	6.1	1,322 BTU/mi	87 MPG
Motorcycles	1.2	1,855 BTU/mi	62 MPG
Rail (Commuter)	31.3	2,996 BTU/mi	38 MPG
Rail (Transit Light & Heavy)	22.5	2,784 BTU/mi	41 MPG
Rail (Intercity Amtrak)	20.5	2,650 BTU/mi	43 MPG
Cars	1.57	3,512 BTU/mi	33 MPG
Air	96.2	3,261 BTU/mi	35 MPG
Buses (Transit)	8.8	4,235 BTU/mi	27 MPG
Personal Trucks	1.72	3,944 BTU/mi	29 MPG
Toyota Prius	1.57	1,659 BTU/mi	69 MPG

So, are you better off driving a Prius to work than taking a bus? No. This data is determined by average ridership, switching to a bus would increase the average. And an average bus during rush hour has a lot more than 8.8 people on it. It looks like they assume average fuel efficiency for a city bus is about 3MPG, so, a bus with 23 people or more would beat the average Prius and even fewer if you are driving alone.

And what is with light rail averaging only 22.5 people? I think the main reason for these transit numbers is off hour service. Anyway, not really going anywhere with this post except that I was curious and thought the data were interesting.

Beeronomics: Good News

The Portland Business Journal is reporting that the Craft Brewers Alliance, created in the merger of Widmer and Red Hook, which had had to weather some merger related bumps in the road, has had a very strong quarter and has returned to strong profitability.

This is a much more complicated business structure than most, but to the extent that it shows craft beer sales are remaining strong in the recession, it is welcome news.

Good on ya Bros.

Economist's Notebook: Incentives and Soccer

Update: Mexico wins 2-1, and deservedly so: after a bright start to the game the US seemed lethargic, even given the 7,200 foot altitude. Still it was heartening to see a game played with passion and respect, without the general nastiness that used the characterize these matches. There is a part of me that is happy Mexico won, I hope they qualify for the World Cup and loosing would have put their bid in serious trouble. In 2002 the USA and Mexico played a great match in the World Cup (which unfortunately dissolved into nastiness in the end with Rafa Marquez's karate kick on Cobi Jones), and I hope they can do it again in South Africa. But the USA needs to regroup quickly and win convincingly at home versus El Salvador next month in Utah. And yes, the name of the blog is Oregon Economics....

As the United States National Team prepares for a World Cup qualifying match in Mexico City, in a stadium, Azteca, where they have never won, and as Portland readies itself for a jump into Major League Soccer, it is a decent time to ask why the US is not a better soccer playing nation.

The modern reasons are pretty clear to an economist's eyes: the incentives, both financial and social, are such that the best US athletes are drawn into football, baseball, basketball, ice hockey, individual sports like running, tennis and golf before they consider soccer. In the past, most of the best US players have come from households that already have a built in strong predilection for soccer, stemming from immigrant roots. Still, in a nation of 300 million people where sports are so important and a strong part of the youth experience, it is amazing that we have not produced more and better players.

The historical reasons are less clear to me, but I suppose most of the blame lies with baseball. As the sports of rugby and association football were splitting and evolving into their modern incarnations in England, they had already arrived in the US and morphed into American football - our take, essentially, on rugby. The association football version of the sport never really caught on. I imagine that this was largely due to baseball having already cemented itself as the casual pastime of kids in the US, much like soccer is for kids everywhere else. American football and then basketball quickly gained popularity and soccer was left relatively unloved. Perhaps it has something to do with eschewing the traditions of the former colonizers, but I doubt it.

At any rate, the US gets by on determination, athleticism and good organization, and is a decent but mediocre team by world standards. If we ever start producing players of real quality, then these established traditions could make the US a tough team to beat. The MLS is starting to change the modern incentives. Yes, salaries in the MLS on average are terrible, but good American players are now getting noticed by European teams and they pay great. So youth players can now see a clear path to success and riches that should provide motivation. Also, as European soccer is becoming more and more visible in the US, the world of soccer that exists beyond our borders is much clearer to an American kid whose parents don't know the sport.

So I predict failure today in Mexico, but I think in another 20 years, the US team will consistently be among the top ten and hopefully develop a little flair along the way.

By the way, as a footnote, I once read a book about the origination of association football which claimed the term 'football' does not have to do with the fact that you kick a ball with your feet but rather came from the fact that these were commoners' sports that were played on foot (as opposed to horseback). So now you know.

Speaking of Externalities...

Around the corner from my house someone has replaced their front lawn and parking strip with artificial turf. Is this imposing a negative or positive externality for those that live nearby?

This also represents a bit of an environmental conundrum: it uses no water but it is made of plastic....

Economist's Notebook: GDP

In an Op-Ed in Sunday's New York Times, Eric Zencey goes on at some length about why Gross Domestic Product (GDP) is a poor measure of the health of the economy. He notes that beneficial activities like letting the wind dry our clothes would actually cause GDP to fall and then goes on to suggest that the very use of GDP would cause these activities to be officially discouraged. The first point is a fair one, the second is just dumb.

The first point, made in about 3,000 words, is incredibly easy to sum up for those that know some basic economics: GDP does not include externalities. GDP is simply the adding up of the price of all final goods and services produced during a period of time. Note that GDP is a flow variable not a stock variable, it is only looking at new production, not the accumulation of old production. Anyway, externalities can be both positive and negative and GDP does not account for either, precisely because GDP sums up prices and by definition, externalities do not show up in prices (though their effects may - e.g. if a harmful vapor escapes a chemical plant and sickens people, the medical bills are a part of GDP). So if one cleaning services air dries your clothes and another machine dries them and they charge the same amount, the contribution to GDP will be the same even though the machine dry place contributed to carbon emissions which impose a cost on society. On the same token, a person who hires a landscaper to clean up their front yard and, in so doing, increases the enjoyment of all the neighbors will contribute to GDP only through the hiring of the landscaper.

The second point, that the very use of the GDP measure is harmful, is dumb because no one that matters in terms of economic policy believes that GDP is the objective. Externalities are well known and the point of much of economic policy. Still, it is worth noting that almost every outcome we care about is positively correlated with GDP: education, infant mortality, life expectancy and, yes, energy efficiency (among middle and high income countries). So while GDP may not be the ends, it is an important means to the ends. The fact that GDP is of limited usefulness is precisely why other measures of well-being have been created, most notably the Human Development Index that looks at GDP along with measures of health and education. The UNDP is currently going one step farther and trying to develop an even more encompassing measure of economic opportunity.

Despite this, GDP is still a very important measure. Market based economic activity is how almost all households earn their livelihood, and an absence of such activity (or a decrease) means that there is less income being earned and almost all of that has little to do with switching to air drying our clothes. So if we care about the suffering of US households in the current economic downturn, we should care about GDP.

So GDP does measure consumption, but does not encourage consumption. I don't think about how my activities are effecting GDP when I choose what to do, buy, or trade. It is important to note that efficiency is also positively correlated with GDP, so you can't say in one breath that GDP encourages consumption and discourages efficiency. If I start a GPS traffic navigation service that directs people away from congestion in real time, this will save energy, save time lost waiting in traffic, reduce carbon emissions and positively contribute to GDP through the value of the service I create and charge for.

GDP is not the problem and focusing on a metric is a nonsensical approach. Focusing on the real goals and objectives is where our attention should be placed.

Eco-Nomics: Carbon Taxes and Cap-and-Trade

An excellent primer on the similarities and differences and where the current legislation falls by Greg Mankiw in Sunday's New York Times. Here are the highlights:

During the presidential campaign of 2008, Barack Obama distinguished himself on the economics of climate change, speaking far more sensibly about the issue than most of his rivals. Unfortunately, now that he is president, Mr. Obama may sign a climate bill that falls far short of his aspirations. Indeed, the legislation making its way to his desk could well be worse than nothing at all.

Let’s start with the basics. The essential problem of climate change, scientists tell us, is that humans are emitting too much carbon into the atmosphere, which tends to raise world temperatures. Emitting carbon is what economists call a “negative externality”— an adverse side effect of certain market activities on bystanders.

The textbook solution for dealing with negative externalities is to use the tax system to align private incentives with social costs and benefits. Suppose the government imposed a tax on carbon-based products and used the proceeds to cut other taxes. People would have an incentive to shift their consumption toward less carbon-intensive products. A carbon tax is the remedy for climate change that wins overwhelming support among economists and policy wonks.

*******

What Mr. Obama proposed was a cap-and-trade system for carbon, with all the allowances sold at auction. In short, the system would put a ceiling on the amount of carbon released, and companies would bid on the right to emit carbon into the atmosphere.

Such a system is tantamount to a carbon tax. The auction price of an emission right is effectively a tax on carbon. The revenue raised by the auction gives the government the resources to cut other taxes that distort behavior, like income or payroll taxes.

So far, so good. The problem occurred as this sensible idea made the trip from the campaign trail through the legislative process. Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

The numbers involved are not trivial. From Congressional Budget Office estimates, one can calculate that if all the allowances were auctioned, the government could raise $989 billion in proceeds over 10 years. But in the bill as written, the auction proceeds are only $276 billion.

*******

How much does it matter? For the purpose of efficiently allocating the carbon rights, it doesn’t. Even if these rights are handed out on political rather than economic grounds, the “trade” part of “cap and trade” will take care of the rest. Those companies with the most need to emit carbon will buy carbon allowances on newly formed exchanges. Those without such pressing needs will sell whatever allowances they are given and enjoy the profits that resulted from Congress’s largess.

The problem arises in how the climate policy interacts with the overall tax system. As the president pointed out, a cap-and-trade system is like a carbon tax. The price of carbon allowances will eventually be passed on to consumers in the form of higher prices for carbon-intensive products. But if most of those allowances are handed out rather than auctioned, the government won’t have the resources to cut other taxes and offset that price increase. The result is an increase in the effective tax rates facing most Americans, leading to lower real take-home wages, reduced work incentives and depressed economic activity.

Most people I talk to don't really understand Cap-and-Trade and think it just represents a loophole for polluters. No, but I agree with Mankiw that these permits need to be auctioned and not given away. In fact this article described the sentiment of most economists I talk to (of all political persuasions). The differences in opinion among my conversants are in how much they are willing to compromise in the face of political reality. Has the Obama administration bowed too much? I think the most unfortunate reality is that people just don't understand what it is and what giving the permits away v. auctioning them means and for this I applaud Mankiw for a lucid description. I think if people really understood what was going on, the energy industry would not be able to hijack this process and we would see auctioning.

Beeronomics: Coopetition

Beervana, the Blog has a nice follow up on the state of the Green Dragon, an independent tap house in SE Portland that was treasured by the beergnoscenti, but which ran into financial trouble and was bought out by Rogue. You might expect Rogue to transform the Green Dragon into a Rogue house featuring all or mostly Rogue beer. You would be wrong. They have kept it largely as it was and sometimes it can be hard to find Rogue beer there at all.

In fact as, Jeff points out, Rogue is going one step farther and hosting an 'Indie Beer Fest,' and wonders why they would highlight their competition? Well it is likely because they are cool and don't see their business as a zero-sum game. And they might be right.

There are many instances in economics where business relationships are both competitive and cooperative. One example is where there are network externalities: the more people use a product the more other potential buyers value it. Consider the very first phones, if you were the first person to own a phone in the US, it wasn't worth much, but once your entire community got one, everyone got more value from it. So if you were a single phone manufacturer, sure you wanted to get as many sales as possible for yourself, but the price you could charge and the number of potential customers increased with the number of sales your competition made as well.

Another example is where you have a demand that evolves, like from weak diner coffee to strong Starbucks coffee. Customers learned to prefer strong coffee and began to demand it everywhere. So if you were a coffee house selling strong stuff, having Starbucks expand locally was both direct competition, but it also served to increase the demand for your coffee.

Both of these type of situations are probably relevant for the pub business. A pub business specializing in craft beer in Portland will be enhanced the more good beer there is to serve and the more people have learned to prefer craft beer. Even if you brew your own beer, exposing more people to good craft beer might lead to a net increase in demand for yours as well.

I doubt that Rouge thinks in these terms, but that is the thing about economics - understanding why patterns exist even if the participants don't understand the incentives involved. Jack Joyce once described the craft beer industry as jerk-free (OK, he used slightly more colorful language). I think that this is partly that there is a recognition that while there are many competitive aspects of the business, each individual success bleeds over to group success. With the focus on taking away market share from macro-brewers and creating more demand, there is just less focus on internecine battles.

OK, head too full of economics, getting too serious about all of this. Time to relax and have an Oregon beer. Cheers, and have a good weekend.