Oh Ouch! Kolbert Smacks Down Levitt and Dubner and All Economists in the Process

Elizabeth Kolbert in her Dubner and Levitt smackdown piece in The New Yorker throws in this haymaker:

"Neither Levitt, an economist, nor Dubner, a journalist, has any training in climate science—or, for that matter, in science of any kind."

This is in reference to the now infamous chapter in their new book about geo-engineering solutions to climate change. I am not about to touch that with a ten-foot pole, go knock yourselves out with a little google search, but this is a low blow.

Okay, so economists like to think of themselves as a type of scientist - we make models, we test them in 'nature,' heck we even do controlled experiments, so we use scientific method - but we are merely social scientists. One presumes that Kolbert considers science to be only of the natural kind (though one could argue that the distinction between human and non-human is not terribly relevant when we look at behaviors influenced by incentives - are dogs and humans much different?). So even though economists have pretty advanced training in math and statistics, apparently in Kolbert's mind, these are 'formal' sciences and are, therefore, inferior.

But Kolbert says "science of any kind," and this is simply untrue. Besides I bet that at least as undergrads Levitt and Dubner had classes in natural science so what do we consider that? Taking this kind of snarky and superior attitude, and resorting to ad-homonym attacks is beneath Kolbert and The New Yorker. But it interests me because this, and the greater outrage over Levitt and Dubner's book chapter, seems to me a symptom of the poisoned debate that human induced climate change has become. Sure, it is true that for years climate scientists had to struggle to be heard and taken seriously, but that has now, finally, changed. The correct thing to do is take the high road and not engage in the same type bad behavior that was directed to them. It is hard to see how progress will be made without it.

For the record, Levitt and Dubner push this 'economists are coldly rational and can therefore see what the rest of you emotional weenies can't' thing way, way too far and in this way are a bit of an embarrassment to economists in general, who are generally pretty nice (really!) but do tend to tell really bad jokes.

And also for the record, I call myself a social scientist - you can make of that whatever you like - but I make no claims to omniscience (except to my kids).

Economist's Notebook: Is Portland Really a Safe Walking City?

The Oregonian reports on the Transportation for American and Surface Transportation Policy Partnership's report on the safest walking cities in America. Portland was #9, but is it really a safe walking city?

Perhaps, but the methodology is seriously flawed and clearly designed to make a political point and not provide meaningful data. The way they compiled the ranking was to divide the number of pedestrian deaths divided by the number of people who walk to work. What you would ideally want is some measure of total pedestrians or, better yet, total pedestrian-hours. So proxying this by using walking to work may seem like a good idea, but I doubt that it is. Clearly walking to work is very, very highly correlated with urban density but I don't think it is terribly correlated with the population who walk for any reason at any time. So you skew the statistics and, not surprisingly very dense cities are great, sprawling cities are not. Which is, I imagine, their point.

Now, I hate sprawl as much as the next guy, but it is not necessarily bad for walking safety in general. Yes, you can't walk to get anywhere, but walking around inside of the little cloistered neighborhoods that were the rage before the new urbanism ethos kicked in is probably pretty safe. What it is bad for is walking in general. I don't think conflating the two is helpful.

Steig Larsson

Public radio's The World had a nice bit yesterday on Stieg Larsson, author of a trilogy of crime fiction novels, the first of which is called "The Girl With the Dragon Tattoo" in the US and apparently "Men Who Don't Like Women" in Sweden. Larsson died of a heart attack at the age of 50 before any of the novels, which have become an international sensation with over 20 million copies sold, were published.

As an unabashed addict of crime fiction I can recommend the books highly (or at least the first two, the third has yet to be released in the US), and I am saddened that I cannot look forward to many more. As an aside, many of Larsson's characters share names with characters in Henning Mankell's Wallander series in what I take to be a nod this other Swedish crime writer (apparently Larsson was equally addicted to crime fiction).

A problem has arisen, however, in that at the time of his death Larsson has few assets and a life partner whom he had never married and he left no legal will. So when all of the money came flooding in from the proceeds of the books, it went to his father and brother who have so far not shared any with his partner. Alas.

Economics: Elephants

The New York Times reports on efforts by Zambia and Tanzania to reclassify elephants to allow the legal sale of government stockpiles of ivory. As you might expect, many conservation groups are not happy about this.

This made me think of a well-known economics paper by Michael Kremer and Charles Morcom entitled, simply, "Elephants." In this paper the authors argue:

Many open-access resources, such as elephants, are used to produce storable goods. Anticipated future scarcity of these resources will increase current prices and poaching. This implies that, for given initial conditions, there may be rational expectations equilibria leading to both extinction and survival. The cheapest way for governments to eliminate extinction equilibria may be to commit to tough antipoaching measures if the population falls below a threshold. For governments without credibility, the cheapest way to eliminate extinction equilibria may be to accumulate a sufficient stockpile of the storable good and threaten to sell it should the population fall. [Emphasis mine]

So, this proposal would allow these governments to sell off the stockpile, which in Kremer and Morcom's analysis is a good thing IF this is part of a government policy of doing so strategically and only as a way to depress world prices when elephant populations are becoming dangerously small.

Just food for thought on a rainy monday...

Beeronomics: New Pubs Aplenty

Friday. Beeronomics day. But I am busy and later I shall be making my own beer, so I'll farm this beeronomics post to the Portland Biz Journal.

Here is a teaser:

Even though it won’t open for two months, success could be on tap for Coalition Brewing.

The new brewpub will occupy a neighborhood, near Portland’s East Burnside Street and 28th Avenue, known for innovative restaurants and bars. Coalition’s space is also well known because it formerly housed the popular Noble Rot wine bar.

Coalition will join an industry that, thanks to Oregon’s brewing pedigree, is sizzling. Coalition is one of 15 breweries or brewpubs — which sell beer made on the premises and food — that will have started operating in Portland between summer 2009 and early 2010.

The 2009 openings, which roughly double 2008’s, defy national trends. Just 80 such operations will open across the country this year, down from 112 in 2008.

The openings stretch from Portland, where eight new pubs or breweries have begun or will begin operating, to Joseph in northeast Oregon.

“To see so many opening in one state is highly unusual,” said Paul Gatza, director of the Boulder, Colo.-based Brewers Association. “But Oregon does continue to be fertile ground for craft brewing.”

Things are Getting Better...Slowly

Despite the dismal US unemployment report, there are signs that the economy is stabilizing and even turning the corner, albeit slowly.

In Oregon, The UO Index of Economic Indicators rose again last month suggesting that the state is, along with the US, gradually coming out of the recession.

So how is the economy in the US overall. Well, there is a lot to be hopeful about, but still a number of cautionary signs which, to me, tell a story of recovery, but slow and 'jobless.'

Here is a look at some recent signs of US economic health:

Productivity growth soared in Q3, increasing at a rate of 9.5%. October retails sales in the US showed healthy growth as well. Initial jobless claims are decreasing and have been for a while, but are still high - suggesting that job losses will continue for some time yet. [And note that productivity soared with a cutback in labor utilization] Vehicle sales and home sales are up after having been spurred by incentive programs, so it is not clear that they will continue, but the programs have succeeded in staunching the bleeding in those sectors.

Credit markets have stabilized, but banks are still hoarding capital and focusing on investments rather then commercial banking so credit is still scarce. Today's Oregonian has a nice graphic showing how SBA backed small business loans have reduced significantly in the state (but, of course, it is not available on line).

Also, consumption spending, which had been recovering, took an unexpected fall in September as did real disposable personal income. Consumer confidence also dropped.

However, factory orders are up and inventories are down which is good news.

Some are now arguing that a new round of fiscal stimulus is needed to sustain, and make more robust, the recovery. I disagree. It may be true that more stimulus could be helpful, but I just don't think that we can accomplish it given they way it has been handled up to this point. Frankly, it is hard to spend that much money quickly and effectively. I thought the first round was so necessary that it was worth the tradeoff, I don't think that about the second. Perhaps if we were talking about block grants to the states...but even then I think the marginal positive impact of additional stimulus is now outweighed by the marginal negative impact of the additional debt necessary to fund it.

And, of course, unemployment is going to be the last thing to improve, so as today's unemployment report illustrates, things can be getting better but we can still see the worsening of the unemployment situation.

US Unemployment Rises to 10.2%

The US unemployment rate, as expected, rose to 10.2% in October. The economy lost an additional 190,000 jobs. It would not be surprising to see double digit unemployment persist until spring.

Education and Democracy

From Ed Glaeser writing in The New York Times:



Glaeser:

One way to read the graph is that there are basically no countries with very low levels of education that have managed to be democratic over the long term, and almost every country with a high level of education has remained a stable democracy.

Thomas Jefferson wrote that “if a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.” In 1960, 36 nations had less than 1.74 years of schooling (which happens to be the level that Afghanistan has today). Of those 36 countries, only two — India and Botswana — managed to have average democracy scores above 4.2.

Out of the 19 countries in this sample with more than 5.3 years of schooling (the current level in Iran) in 1960, 17 have average democracy scores above 7.9. Fifteen of these have been perfectly democratic, at least by the standards of Polity IV. Only Poland and Hungary were dictatorships, and one can certainly argue that those places would have been democracies in 1960s if it were not for Soviet troops.

But in the middle ranges of education, between two and five years on average, almost anything goes.

Some places, like Costa Rica and Italy, have been extremely democratic, while others, like Kuwait and Paraguay, have not. Iraq falls into this category today, which suggests a fair amount of uncertainty about that country’s political future.

Why do I think that the chain of causality runs from education to democracy rather than the reverse? Democracy in 1960 is essentially uncorrelated with subsequent growth in the levels of education. Education in 1960, on the other hand, does an extremely good job of predicting increases in democracy.

The ability of education to predict the durability of democracy is well illustrated by the paths of former Communist bloc countries. Initially well-educated places, like the Czech Republic and Poland, have managed to transition toward being well-governed republics. Poorly educated places have not.

Why is there a connection between human capital and freedom?

Giacomo Ponzetto, Andrei Shleifer and I have argued that the connection reflects the ability of educated people to organize and fight collaboratively.

Dictators provide strong incentives for the ruling clique; democracies provide more modest benefits for everyone else. For democracy to beat dictatorship, the dispersed population needs to have the skills and motivation to work collaboratively to defeat dictatorial coups and executive aggrandizement.

Education teaches skills, like reading and writing, that enable people to work collaboratively. At younger grades, teachers spend a lot of time teaching children how to get along. In the United States, education is strongly linked to civic engagement and membership in social groups. The ability to work together enables the defense of democracy.

Update, I had a busy morning, so I could not add my own two cents until now, but I am not entirely convinced abut the chain of causality. What interests me is whether countries who are experiencing vast expansions in education are finding their democracies stabilizing. Anecdotally for Glaeser's example, Argentina, the answer appears to be no. The differences between Argentina's and Brazil's democracies are quite stark. Argentina's democracy is, to my mind, immature, while Brazil, after an unfortunate period of dictatorship has developed quite a mature and stable democracy. In these data, Argentina is well above Brazil in 1960 in terms of average years of education and remains so today though both have doubled. So perhaps it has more to do with INSTITUTIONS (of which education is a part) is what is really important. Perhaps good education is just a proxy for good institutions (laws, courts, bureaucracies, etc.)

Hooray for the Mainstream Media!

I complained about a "Think Out Loud" show recently, so it behooves me to mention when I think a show is exceptional. And I think today's show on PERS was exceptional. Yes, there were advocates for and against structural changes, but there was the PERS administrator to state the facts and even the opposing sides did a good job explaining the system and their respective takes on the current problems and what, if anything, should be done to address them. If you did not know much about it to begin with, this show was an excellent place to start learning about it. It will be on again tonight and will live on in the internets so I recommend it to anyone interested in PERS.

And I can't help chiming in: though it was mentioned a number of times, PERS benefits are a part of a total compensation package, so it is not at all clear that by reducing benefits you will help the fiscal situation of state agencies out at all. They may just have to increase salary to compensate. I am a tier 3 PERS person, so it is not really any better than what I was offered by other states, by the way, but the salary was significantly worse...

And three cheers for the Oregonian, who have fulfilled their role as the fourth estate in bringing to light potential excesses in the green energy tax credit scheme, immediate changes have resulted from their reporting. Do you really want to live in a state without a major daily where such scrutiny does not happen? I didn't think so.

Kudos.

Poll Results: End of the Recession and Taxes

I realize that polls like this tell me more about my readers than about how the general public will vote, but I am sometime surprised at the results I get.

My readers seem to be pessimistic as the last poll, about the end of the recession, suggests (results in the right hand column). The answer to this question is Q3 given the way I defined it which was simply "return to positive GDP growth." Of course we could turn negative again so the pessimists may yet be proven right.

But reader of this blog appear very willing to support the tax increases enacted by the legislature. By a two to one margin readers responded that they would vote yes on measures 66 & 67. Perhaps many of my readers have children in public schools like I do so they can see firsthand the effects of the budget cuts. Perhaps my readers have had to rely on state provided social services in this downturn and worry about their availability if these measures don't pass. I don't know, but I had guessed about a 50/50 split when I posted the poll so I am surprised at the result.

Anyway, thanks for voting, thanks for reading and thanks for commenting on the blog.

Economist's Notebook: Correlation and Causation, MD Version

Yesterday, I caught a kittle bit of NPR's Talk of the Nation. Monday's show featured a doctor, Rahul Parkih, who who doesn't think tort reform will help keep down health care costs. Interesting, thought I and so I lingered around the radio. Then came a statement that got me ranting at the radio. Here is a paraphrase of the statement made by a doctor:

-The Congressional Budget Office has reported that over the last ten years the rate of malpractice suits has not increased but health care costs have. So it is not the threat of lawsuits that is promoting excessive or defensive medicine.

What is wrong with this statement?

The error of logic is that we don't know if lawsuits are a stable threat or if they have remained stable precisely because of excesses in the name of defensive medicine to avoid a lawsuit. I am inclined to draw the opposite conclusion: that with so many doctors claiming that they have become much more defensive and yet lawsuit rates are the same, so it is likely to be a bigger threat today then ten years ago.

Here is the piece he wrote for Slate that got him invited to share his views on Talk of the Nation which expands his argument but begins with this same assertion. Now he may well be absolutely right about tort reform, but this is his first and biggest piece of evidence and to me it says absolutely nothing. This is also true of a study he cites that found most malpractice suits are not frivolous, but this is also consistent with an increase in defensive medicine.

Whether defensive medicine is actually driving up health care costs is an open question and he does not believe they are. In which case the tort reformers argument would lose a lot of its punch.

For the record, I am personally skeptical of tort reform because I am a hopeless believer in markets, but I want to see real data not this kind of sloppy thinking (something he accuses others of filling up the back pages of newspapers with).

Eco-nomics: The Trouble with Picking the Winners

Thomas Boyd/The Oregonian

This story in The Oregonian on Sunday about how the cost of the green energy tax credits are much higher than have been presented and how millions of dollars have gone to failed companies illustrates something that I have been arguing for a long time now to anyone who will listen: trying to create a green energy economy in Oregon is a mug's game. What will be the best technology: wind, wave, solar, geothermal, something else? Which companies are going to come out as leaders in the future? The answers to these questions are far from clear so trying to read the tea leaves and throwing hundreds of millions of dollars at a wall to see what sticks is not necessarily a good idea.

I am not against all government incentives, but the best investment the state could make if it really wants to promote economic growth in the state, green energy or otherwise, is in education, and if it is serious about a green energy economy, investing in research universities seems about as safe a bet as there is. You get research and technology spillovers that are centered in the state and you educate and train a new generation of entrepreneurs and workers to take those new technologies and run with them.

It seems that in Oregon these days the balance is out of whack...

Beeronomics: Artisanal Products and the 'Novelty Curve'

Busy day today (week actually) so I'll farm this one out to Beervana blogger Jeff Alworth who has a fascinating tidbit about what Karl Ockert of Bridgeport calls the 'novelty curve.'

Here is Jeff's quote from Karl:

"Every beer that comes along goes through a novelty curve, and ours is no different. [Brewery X] is the current big one on the streets. They’re going through a novelty phase where people are out there trying and sampling. All breweries go through that. If I left BridgePort now and went out and started a new brewery, I could do the same thing. I could take tap handles right and left and get a lot of sampling. But it’s that “stayability”—being able to develop loyalty. That’s the tough part."

This is true of lots of industries, especially ones in fashion (Crocs), technology (Palm) and food (restaurants in general). There is always a new trend, fad, technology, chef, whatever that captures the attention of consumers. But artisanal products like beer are particular in my mind. They can be recreated faithfully over time like cheese, bread, etc., but are always subject to new varieties and tastes. So it has always seemed to me a challenge to stay faithful to the core products and yet maintain interest through new creative pursuits. Bridgeport and Deschutes seem to me the exemplars of this strategy at the moment with their core beers and their special offerings (Stumptown Tart, The Abyss).

But overall this says to me that the market for craft beer is exceptionally healthy. From a Schumpeterian point of view this innovation and creativity will leave some breweries behind, but this is all part of a healthy creative destruction process. So it is both a pretty exciting time and a pretty scary to be in the business, bit overall it seems lie a market that has huge potential to keep expanding for a long-long time and the winnowing out of less exceptional and creative breweries will actually help this process.

Eco-nomics: Energy and Development

As a companion to the post on population here is a little data to think about regarding development and energy usage. We often see the chart of energy usage per capita which shows the high income countries (and especially the US) as outliers using huge amounts of energy per person. But this is not the right way to think about it in my mind. Compared to most of the world we in the US enjoy long lives relatively free of hunger, malnutrition, disease, infant mortality, war, famine, etc. I would hope that we all think that every human being should be able to live similar lives. So a chart of energy per capita seems to suggest that the best thing for the planet is for us all to be poor. But I am uncomfortable with the notion that the rest of the world should not strive to have an equal quality of life.

We know this connection between poverty and environmental sustainability is not true either, just look at the way poverty taxes natural resources - the deforestation of the Brazilian Amazon for example. Rich countries can afford to protect natural resources much more than can low income countries. A picture of energy use per capita also diverts attention to the big threats in the future: densely populated developing countries that are experiencing fast growth.

The fact is that the energy efficiency of the US economy has improved tremendously. Here is a graph of the energy use per dollar of GDP since just 1980.



Here is a similar picture for the US since 1950.



How does this compare to the rest of the world? Here is a graph of a set of countries and their energy use per GDP. Note that the middle income countries, those that are moderately industrialized, tend to be the least efficient (there is also a very strong correlation between inefficiency and resource availability - take Venezuela for example). While the US, and especially Western Europe where energy is very expensive, are relatively efficient. So are lower income economies that are still largely traditional. [As I mentioned above, don't romanticize traditional economies, they tend to have things like infant mortality rates and life expectancy rates that would make you wince] By the way, these are selected from a list of countries from North America, South American, Western Europe, Eastern Europe, Middle East, Africa, and Asia, in that order. Here is the source data for both this graph and the first one.



Finally, here is a scatterplot that plots energy usage per GDP against GDP (in this case using a PPP rather than an exchange rate comparison - better but harder - so you might notice a difference)

Eco-nomics: Population

The Economist has a nice piece on the environmental impact of population growth that mirrors things I have said here. But they are the economist so it is ever so much more persuasive.

In a nutshell, my take is that population is an aggregate problem, not in individual one. By this I mean that population growth rates are correlated with many macroeconomic and socio-economic factors, therefore the way to achieve the decline in population growth that environmental alarmists wish to see is not to appeal to individual's guilt but to focus on economic development. High income country fertility rates are below replacement level in many cases, France for example is trying hard to get it up, not down. And, in general, fertility is falling in the world fairly rapidly thanks in large part to improvements in development.

Anyway here is an excerpt of The Economist's take:

Astonishing falls in the fertility rate are bringing with them big benefits

THOMAS MALTHUS first published his “Essay on the Principle of Population”, in which he forecast that population growth would outstrip the world’s food supply, in 1798. His timing was unfortunate, for something started happening around then which made nonsense of his ideas. As industrialisation swept through what is now the developed world, fertility fell sharply, first in France, then in Britain, then throughout Europe and America. When people got richer, families got smaller; and as families got smaller, people got richer.

Now, something similar is happening in developing countries. Fertility is falling and families are shrinking in places— such as Brazil, Indonesia, and even parts of India—that people think of as teeming with children. As our briefing shows, the fertility rate of half the world is now 2.1 or less—the magic number that is consistent with a stable population and is usually called “the replacement rate of fertility”. Sometime between 2020 and 2050 the world’s fertility rate will fall below the global replacement rate.

At a time when Malthusian worries are resurgent and people fear the consequences for an overcrowded planet, the decline in fertility is surprising and somewhat reassuring. It means that worries about a population explosion are themselves being exploded—and it carries a lesson about how to solve the problems of climate change.

Today’s fall in fertility is both very large and very fast. Poor countries are racing through the same demographic transition as rich ones, starting at an earlier stage of development and moving more quickly. The transition from a rate of five to that of two, which took 130 years to happen in Britain—from 1800 to 1930—took just 20 years—from 1965 to 1985—in South Korea. Mothers in developing countries today can expect to have three children. Their mothers had six. In some countries the speed of decline in the fertility rate has been astonishing. In Iran, it dropped from seven in 1984 to 1.9 in 2006—and to just 1.5 in Tehran. That is about as fast as social change can happen.

Falling fertility in poor and middle-income societies is a boon in and of itself. It means that, for the first time, the majority of mothers are having the number of children they want, which seems to be—as best one can judge—two. (China is an exception: its fall in fertility has been coerced.)

It is also a boon in what it represents, which is greater security for billions of vulnerable people. Subsistence farmers, who live off their harvest and risk falling victim to rapine or drought, can depend only on themselves and their children. For them, a family of eight may be the only insurance against disaster. But for the new middle classes of China, India or Brazil, with factory jobs, cars and bank accounts, the problems of extreme insecurity lie in the past. For them, a child may be a joy, a liability or an accident—but not an insurance policy.

And falling fertility is a boon for what it makes possible, which is economic growth. Demography used to be thought of as neutral for growth. But that was because, until the 1990s, there were few developing countries with records of declining fertility and rising incomes. Now there are dozens and they show that as countries move from large families and poverty into wealth and ageing they pass through a Goldilocks period: a generation or two in which fertility is neither too high nor too low and in which there are few dependent children, few dependent grandparents—and a bulge of adults in the middle who, if conditions are right, make the factories hum. For countries in demographic transition, the fall to replacement fertility is a unique and precious opportunity.

Nonsense, say Malthus’s heirs. All this misses the point: there are too many people for the Earth’s fragile ecosystems. It is time to stop—and ideally reverse—the population increase. To celebrate falling fertility is like congratulating the captain of the Titanic on heading towards the iceberg more slowly.

The Malthusians are right that the world’s population is still increasing and can do a lot more environmental damage before it peaks at just over 9 billion in 2050. That will certainly be the case if poor, fast-growing countries follow the economic trajectories of those in the rich world. The poorest Africans and Asians produce 0.1 tonnes of CO2 each a year, compared with 20 tonnes for each American. Growth is helping hundreds of millions to escape grinding poverty. But if the poor copy the pattern of wealth creation that made Europe and America rich, they will eat up as many resources as the Americans do, with grim consequences for the planet. What’s more, the parts of the world where populations are growing fastest are also those most vulnerable to climate change, and a rising population will exacerbate the consequences of global warming—water shortages, mass migration, declining food yields.

In principle, there are three ways of limiting human environmental impacts: through population policy, technology and governance. The first of those does not offer much scope. Population growth is already slowing almost as fast as it naturally could. Easier access to family planning, especially in Africa, could probably lower its expected peak from around 9 billion to perhaps 8.5 billion. Only Chinese-style coercion would bring it down much below that; and forcing poor people to have fewer children than they want because the rich consume too many of the world’s resources would be immoral.

If population policy can do little more to alleviate environmental damage, then the human race will have to rely on technology and governance to shift the world’s economy towards cleaner growth. Mankind needs to develop more and cheaper technologies that can enable people to enjoy the fruits of economic growth without destroying the planet’s natural capital. That’s not going to happen unless governments both use carbon pricing and other policies to encourage investment in those technologies and constrain the damage that economic development does to biodiversity.

Falling fertility may be making poor people’s lives better, but it cannot save the Earth. That lies in our own hands.

GDP on the Rise: Great but...

...don't look for unemployment to come down much. Don't misunderstand, 3.5% GDP growth is fantastic news, and you gotta start somewhere, but if you are more interested in unemployment (which is what most households care about rather than GDP), 3.5% doesn't move the unemployment rate much.

Paul Krugman has the sobering details:

Here’s the scatterplot of annual growth versus annual changes in the unemployment rate over the past 60 years:

--REMOVED--

Note, the graph did not display well with my black background, so here is essentially the same information (in this case 8 quarters rather than 4) from a graph made by Brad DeLong:

The average, according to Krugman, is about a half a percentage point, but notice on the graph that there are data points both in the positive and negative range for change in unemployment. How can that be? Well, productivity can go up (it is), the underemployed can work more (but this is not reflected in the base unemployment number) and discouraged workers can re-enter the work-force which counters job creation in the unemployment stats.

Savvy readers will recognize this picture as as graph of Okun's law. A fairly standard rule of thumb is about a .5% decrease in unemployment for every 1% increase in GDP so at the higher end we might expect a bigger impact on unemployment but as there is so much slack in employment (lots of underemployed and discouraged workers) we might not see much movement at all at least for a while.

Economist's Notebook: Just Who is Getting the Home Buyer Credit?

Economists always talk about how a tax never stays where you put it. If you tax producers or consumers makes no difference, in the end prices adjust and the tax is shared the same way in either case.

But the same can be said of a credit. The government is giving new home buyers $8000 for purchasing a home, but its it the buyers who are actually getting it? The recent Case-Shiller numbers suggest that a lot of this money is actually going to sellers. It makes sense, if you are a potential buyer and you suddenly have an additional $8000, you are probably willing to pay close to $8000 extra for a home. To try and ensure you get the home you want, you are likely to bid up the price close to that $8000. So call it a home buyer credit if you will, in the end it is more like a home seller subsidy.

That said, it does not make much difference from a public policy perspective. The point of the policy was to get homes selling again and put a floor underneath home values to staunch the bleeding going on in the real estate market and all evidence suggests it has been very successful.

But with the winter season approaching and unemployment still high, it appears that this credit is probably going to need to be extended until spring.

By the way, for econ students a quiz: what determines how a tax is shared among buyers and sellers, and how do you think it relates to the housing market?

Soccer on Grass...Again.

The New York Times' Goal blog has a nice update on the new Red Bulls Arena and the transition of the team to the new surface. Here is the key passage which concerns the Red Bulls star Juan Pablo Angel and his concerns about artificial turf:

Angel, the team’s career leading scorer, has often complained about the artificial turf at Giants Stadium, which exacerbated his nagging back problems... “Everyone knows I’ve been the biggest critic, I never liked the turf,” he said.

Yes, Giants stadium has the new, modern turf. So it is not a matter of what fake grass it is, it is a matter of fake grass, full stop.

Juan Pablo Angel has been perhaps the most successful foreign star to join the MLS. While not a superstar, he was a successful striker in the English Premier League and could have signed a very lucrative contract with a team in that league when he decided to come to the MLS. He immediately became the most dangerous striker in the MLS (and he is all class to boot). So if he is dissatisfied with the turf, it suggests that other high quality players will balk at signing with a team that plays on turf.

Something else for the Timbers to think about...

Beeronomics: Hops and Asymmetric Prices

Faith Cathcart/The Oregonian

After my rather lengthy disclaimer about how talking about beer is a device through which I discuss economics principles and have some fun in the process, I tenuously dip my toe back into the beeronomics pond...

The always reliable John Foyston has a great article in today's Oregonian on something that I informed my loyal beeronomics devotees of a month and a half ago: the hop shortage is over and in fact we are in a hop glut.

But I am not a reporter. Thankfully, John is and he has uncovered some fascinating aspects of the current situation. One interesting fact is that apparently because the hop shortage convinced breweries that they needed to contract in advance for their hops, there is currently no spot market at all for hops. So excess supplies have no where to go. Amazing.

The big news, which is in Foyston's lede is that this glut of hops should not result in lower beer prices, even though prices rose significantly with hops prices.

This comes as no surprise to an economist. For one reason, the statement above about how all hops were forward contracted means that prices cannot fall due to the glut in supply. Brewers locked in higher prices as an insurance policy to ensure a supply of hops and, well, lost the bet in essence. Foyston himself makes this point.

But the other reason that this economist is not surprised is what I mentioned in that previous post. Across a huge array of industries, price changes tend to be asymmetric. Industries are very quick to raise prices in response to higher costs but very slow to lower them when costs come back down. This does not seem to be true of individual retailers, by the way, so don't blame them, but it is especially true of industries like beer that have complicated wholesale distribution networks.

Here is Sam Peltzman of the University if Chicago writing in the Journal of Political Economy:

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gaso- line, agricultural products, etc.), this one uses large samples of di- verse products: 77 consumer and 165 producer goods.

So it looks like the craft beer industry is no different. So even when forward prices adjust to the increased hop supplies, we shouldn't expect beer prices to follow suit.

One quick note on the ephemeral nature of fresh hop beers, since we are on the subject of hops. I finally got my hands on a bottle of Deschutes Hop Trip which was, by most accounts, one of the real gems of the fresh hop beers this year, so I was excited. Unfortunately it was a total dud. It was brewed a while ago now and the hop essence had completely disappeared from the bottle. The beer was thus an under-hopped disaster. And for $5.50 this is a problem, I expect a superior beer at that price. This, I think, illustrates the difficulty of bringing a fresh hop beer to a mass market in bottles, though in the past few years I have not had the same experience.

Although, strangely enough this is why I like fresh hop beers so much: they are as far away from industrial macro lagers as you can get. They exist only in a moment in time and are connected to the land like wine. So I don't mind suffering the occasional dud. But I do think breweries are going to have to keep track and establish "sell by" dates to limit the number of dud beers sold.

Portland Home Values: Case-Shiller August Numbers

The August Case-Shiller numbers are out and the news is good...for now. The housing market appears to be stabilizing in Portland and across metro areas in the US. This first picture is the raw C-S numbers for Portland, Seattle and the 20 city composite.



The next picture is the year over year change in home values for the same three indices.



The combination of low interest rates for mortgages and the new home buyer tax credit seems to be having a substantial impact, however with the tax credit potentially expiring (if it is not extended), high unemployment and a shadow inventory of foreclosed properties that will take a while to work through the market, I would not get too optimistic about the next year or so. I would expect these to take a dip in the winter and perhaps, finally, by the middle of 2010 we'll see sustained improvement.