Soccernomics: Kits

The Oregonian has a nice article on the huge push Nike has made over the last 10 - 15 years to become a major player in soccer, once dominated by Adidas.  But the article does contain one absolute howler of a mistake that exposes how far the general population of the US still has to come:

At the World Cup this year, Nike will sponsor nine teams --its most ever -- including the United States, the United Kingdom, Portugal and Holland.

United Kingdom!?! Dear oh dear oh dear.  Please don't let anyone in Scotland and England (not to mention Wales and N. Ireland) know that Nike has overruled FIFA has forced them to compete as one country. As far as England are concerned, the new Umbro strip is fantastic, a classic look harkening back to their lone world cup triumph in 1966.

Speaking of harkening back to history.  Nike has also given a nod to a strange moment in world soccer history in the new US world cup strip.  In 1950, the US beat England in Belo Horizonte, Brazil by the score of 1 - 0.  England was a dominant power then and the US team was a bunch of part-time amateurs, but funny things happen in soccer.

They wore shirts with a sash on the front and Nike (as seen in this picture) and Nike has reproduced this look for the world cup.  This is fitting given that the first US match in South Africa will be against the England squad.

One final interesting point on the local front: the Timbers are currently outfitted by hometown Nike, but Adidas has the contract to outfit the entire MLS.  So, as things stand, when the Timbers make the move up they will switch to Adidas uniforms.

The current uniform is now sponsored by SolarWorld, by the way, making for a nice little green economy tie-in with he local team dressed, appropriately, in green.

And, yes, this was a post about, basically, nothing.

Is Prohibiting Potential Employers from Using Credit Checks a Good Idea?

Oregon state Senate Bill 1045 prohibits most employers from using credit checks in their pre-employment screen of job seekers.  It has passed the house and senate and awaits the Governor's signature.

It is not clear to me where the market failure is here.  It seems to me that proponents of the bill are suggesting two problems: the information is not meaningful (good people caught due to no fault of their own), or the information is wrong.  If the information is not meaningful or inaccurate then the market should take care of the problem by itself: employers will find that using credit reports does not yield good information and costs money and time and thus they should decide that it is not worth the effort.

So if the argument that the credit score has nothing to do with whether a person will be a good employee is true then the worth of credit scores to employers should quickly be revealed to be nil and they will stop on their own.  In which case there is no need for a legislative solution.

Now there is one way in which I can see a problem that may need a legislative solution: if the information is wrong but not randomly wrong, systematically wrong.  In other words if one group's credit scores are systematically lower due to error. For instance if racial minorities are more likely to have mistakes on their credit reports which lowers their scores.  In this case using a credit score is equivalent to discrimination (albeit unwittingly).  If this is true, however, the problem is with the credit rating agencies themselves and has many more implications than just hiring.  The solution to this problem is regulating the agencies themselves. [Note: a quick search of the literature revealed no study claiming bias in the scores themselves though the scores themselves may be indicative of discrimination - e.g. giving minority applicants access only to sub-prime loans even if they qualify for better. But also note that if using biased scores leads to discrimination on the basis of sex or race then there is already a law that prohibits such behavior - for any reason]

Employers base their hiring decisions on many factors that aren't always in our complete control and can be victims of circumstance. A health emergency that may have ruined someone's credit may have also caused some bad grades in college.  But GPA is an acceptable piece of information to use and no one proposes regulating using it.  Smart employers will ask why the GPA is low or the credit is bad before making their decisions, because more information in markets is almost always a good thing. For this reason, I don't think deliberately limiting the information prospective employers can collect is a good idea.

Note: I imagine a large number of my readers will disagree - please do so politely and on the merits of my analysis, but please do comment!  

The Fourth Estate in Trouble

News today that The Oregonian is laying off news room staff is deeply troubling.  Why?  Well, let me give you just one example: Harry Esteve's excellent reporting on the cost of the business energy tax credit (BETC) and the subsequent legislative actions to reign in the runaway costs of the program as a direct result.  In other words the role of the press as a government watchdog.  I study too many developing countries rife with corruption to feel comfortable with the shrinking press corps in the US.

The newspaper business has always been a private concern in the United States and for a very good reason, if the press is truly the fourth estate it cannot be beholden to the government.  And yet, in broadcast media, we subsidize news gathering though the Corporation for Public Broadcasting and feel comfortable that, in general, public broadcast news is not unduly influenced.   But if news reporting is a public good (and it meets the test of being to a large extent non-rival and non-excludable) we know full well that private markets will provide too little.  So how much longer can we leave the whole business to the private market?

Today's announcement by The Oregonian is an example of the struggle of the private market to provide a socially optimal amount of reporting and oversight.  At a time when politics appear to be more polarized than ever, when beliefs seem to trump facts, I despair over the fate of the newspaper industry.

[Note, I know that these last two impressions are the subject of some debate - it may not be true historically, but it does seem to me that the more that simple facts are disseminated the better]

Economist's Notebook: Cost Disease

The Oregonian reports today on a new survey that shows that Americans are becoming more are more skeptical that colleges and universities are "cost-effective and doing all they can to keep tuition affordable."

Unfortunately, this skepticism starts to make Americans question the wisdom of investing in a college degree at the very time that the rewards have never been greater. Given my recent post on agglomeration externalities, this is a troubling trend as individuals personal education decisions affect the overall prosperity of the communities in which they reside.

Part of the problem is the failure of economists to explain the phenomenon of cost disease.  And part of the reason for this failure is that it is a hard concept to explain (as I found out last night at the end of four straight hours of teaching and trying to explain the concept off the cuff).

You see, the cost of a university education rising faster than inflation is not evidence of profligacy on the part of administrators, but a natural byproduct of the fact that the production of knowledge is not terribly more efficient today than 100 or 200 years ago.  And this makes universities among a minority of industries where productivity gains have been very slow.  What this means is that in order to maintain a staff of professors they have to compete with industries that have seen vast productivity gains over the years and so salaries (which account for most of the cost of delivering a university education) have risen as well.

So what you see in the end is that the cost of a college education rises faster than inflation because inflation is a measure of the price of a basket of goods, many of which are produced more productively each year.  Thus what you have to give up (the opportunity cost) of a college education therefore increases.

This idea was first proposed by William Baumol, who called it cost disease, and in the original telling he used an example of musicians performing a Mozart concerto as a classic case of an industry that is absolutely no more productive than hundreds of years ago.

James Surowiecki in The New Yorker a few years back had a very nice explanation that incorporates the musician example:

...And then there’s college: tuitions at private colleges have jumped 5.6 per cent annually over the past three years, according to the College Board, and public colleges are even worse. In times like these, it’s hard to get worked up about deflation.

Why the divergence? It may have something to do with Mozart. When Mozart composed his String Quintet in G Minor (K. 516), in 1787, you needed five people to perform it—two violinists, two violists, and a cellist. Today, you still need five people, and, unless they play really fast, they take about as long to perform it as musicians did two centuries ago. So much for progress.

An economist would say that the productivity of classical musicians has not improved over time, and in this regard the musicians aren’t alone. In a number of industries, workers produce about as much per hour as they did a decade or two ago. The average college professor can’t grade papers or give lectures any faster today than he did in the early nineties. It takes a waiter just as long to serve a meal, and a car-repair guy just as long to fix a radiator hose.

The rest of the American economy functions differently. In most businesses, workers are continually getting more productive and can produce a lot more per hour than they could ten or twenty years ago. In 1979, workers at G.M. needed forty-one hours to assemble a car. Today, they need just twenty-four. In the nineties, according to the consulting firm McKinsey & Company, retailers boosted their sales per hour by sixty per cent, and that was nothing compared with computer makers, whose productivity since 1995 has gone up sixty per cent each year. Because companies are producing more for less, they can hold down costs, and when times are good they can raise wages without hiking prices. So, in the late nineties, as productivity rose, wages did, too, though inflation lay dormant.

Generally, productivity growth is a boon, but it creates problems for non-productive enterprises like classical music, education, and car repair: to keep luring talent, they have to increase wages, or else people eventually migrate to businesses that pay better. Instead of becoming nurses or mechanics, they become telecom engineers or machinists. That’s why teachers are getting paid a lot more than they were twenty years ago. (The average salary for an associate college professor has risen almost seventy per cent since the early eighties, and that’s if you adjust for inflation.) To pay those wages, schools and hospitals have to raise prices. The result is that in industries where productivity is flat costs and prices keep going up. Economists call this phenomenon “Baumol’s cost disease,” after William Baumol, the N.Y.U. economist who first made the diagnosis, using the Mozart analogy, in the sixties. As anyone with kids knows, cost disease is alive and well. A recent study by the economists Jack Triplett and Barry Bosworth demonstrates that among the service businesses that have been least productive in recent years you’ll find education, insurance, health care, and entertainment. These are the ones that have seen steep price hikes.

.........

Cost disease isn’t anyone’s fault. (That’s why it’s called a disease.) It’s just endemic to businesses that are labor-intensive. Colleges, for example, could do many things more efficiently, but, since their biggest expense is labor, the only way to reduce costs is either to increase the number of students each professor teaches or to outsource the work to poorly paid adjuncts. The same goes for health care: you can control drug costs and limit expensive new procedures, but, when it comes to, say, hospital care and doctor visits, the only way to improve productivity is to shrink the size of the staff and have doctors spend less time with patients (or treat several patients at once). Thus the Hobson’s choice: to lower prices you have to lower quality.

Once upon a time, economists worried that cost disease would wreck the economy, as services started to eat up more and more of people’s budgets. But the evidence now suggests that it can be contained. As long as the productive industries keep growing quickly enough to offset the sluggards, the economy as a whole can stay in good shape. The most significant consequence of Baumol’s cost disease, in fact, may be political, rather than economic. Some of the most important services that the government provides—education, law enforcement, health care—are the hardest to make more productive. To keep providing the same quality of services, then, government has to get more expensive. People pay more in taxes and don’t get more in return, which makes it look as though the public sector, at least compared with the private sector, is inept and bloated. But it could be that the government is merely stuck in inherently low-productivity-growth businesses. It’s not inefficient. It’s just got a bad case of Baumol’s.

Which is the point. Yes, college is more expensive in that you have to give up more and better consumption goods to get it. But overall consumption and standard of living has gone up as well, so we are still better off. And the rewards to a college education in the adult labor market and very large and growing, so it is still, despite the cost increases, a good deal.

And, as a bonus, here is a nice application of cost disease to healthcare from The New York Times.

Saab-Spyker

About a month ago my Saab suffered the humiliation almost all Saabs made by GM face: the falling off of the logo from the trunk or hood plate.  It seemed fitting at the time, Saab was doomed, and the timing suggested that my car understood that there was no future in being a Saab.  [It is extraordinary how many Saabs you see with the logo gone, by the way]

But alas, 'twas not to be, word today is that Spyker cars of Holland has completed the deal to buy Saab.  I am not entirely sure this is a good thing, seems like there is a good chance it could all come crashing down in a relatively short time period (I would also not be surprised to see them pull out of the US).  But I am happy, my car has been fantastic: fun to drive, very reliable and powerful yet extremely efficient (I average about 32 MPG on driving that is mixed, but contains a lot of 65 MPH cruising to Corvallis). Nonetheless I am an economist and not terribly sentimental about Saab save for the fact that it would be awfully nice to have some parts available as my car ages.

Anyway, I wish Spyker luck and I think that for a first order of business coming up with an emblem that does not peel off in five years or less would be a decent place to start...

Portland Home Values: Case-Shiller December Numbers

The Case-Shiller numbers are apparently so popular now that the Standard and Poors website is non-responsive, so I'll just steal this interactive data table from The Wall Street Journal's Economics Blog.

The story for Portland is essentially a holding pattern, the raw number is down slightly from November, the seasonally adjusted number is up slightly.  I think we are in for a year of stasis in terms of home values, there are a lot of current foreclosures, but the delinquency rates are on the decline.  So the bottom may be near in terms of the shake-out, but the incentives that have propped up are going away as well, including the Feds efforts to keep mortgage rates low.  

So I think that, like the economy as a whole, we are in for a year of very slow recovery.

Sigh...

Home Prices, by Metro Area

Metro Area	December 2009	Unadjusted Change from November	Seasonally Adjusted Change from November	Year-over-year change
Atlanta	108.52	-0.7%	0.0%	-4.0%
Boston	153.77	-0.1%	0.9%	0.5%
Charlotte	117.78	-0.7%	0.1%	-3.8%
Chicago	127.27	-1.6%	-0.6%	-7.2%
Cleveland	103.93	-0.8%	-0.2%	-1.2%
Dallas	118.84	-0.9%	0.1%	3.0%
Denver	127.2	-0.8%	0.1%	1.2%
Detroit	72.59	0.0%	0.2%	-10.3%
Las Vegas	104.39	0.2%	0.9%	-20.6%
Los Angeles	171.4	1.0%	1.4%	0.0%
Miami	148.66	-0.3%	-0.2%	-9.9%
Minneapolis	123.32	-0.5%	0.3%	-2.3%
New York	171.91	-0.7%	-0.5%	-6.3%
Phoenix	112.53	0.5%	1.2%	-9.2%
Portland	149.95	-0.3%	0.5%	-5.4%
San Diego	156.29	0.1%	1.1%	2.7%
San Francisco	136.41	-0.2%	1.0%	4.8%
Seattle	147.54	-0.7%	0.2%	-7.9%
Tampa	138.87	-0.6%	-0.4%	-11.0%
Washington	178.82	-0.2%	0.5%	1.9%

Source: Standard & Poor’s and FiservData

ECON 462/562: Managerial Economics

After an odd snafu with the registration system that listed only the 400-level version of the class as 'unavailable,' ECON 462/562: Managerial Economics is now open for registration.

The class this year is being revamped to limit the review of the basics preliminary section and to focus more on strategy.  Should be a fun class.

Agglomeration Externalities Redux

Enrico Moretti of the University of California at Berkeley has yet another fascinating empirical paper on agglomeration externalities which relates directly to my earlier piece. Here is the abstract:

We quantify agglomeration spillovers by estimating the impact of the opening of a large manufacturing plant on the total factor productivity (TFP) of incumbent plants in the same county. We use the location rankings of profit-maximizing firms to compare incumbent plants in the county where the new plant ultimately chose to locate (the “winning county”), with incumbent plants in the runner-up county (the “losing county”). Incumbent plants in winning and losing counties have economically and statistically similar trends in TFP in the 7 years before the new plant opening. Five years after the new plant opening, TFP of incumbent plants in winning counties is 12% higher than TFP of incumbent plants in losing counties. Consistent with some theories of agglomeration economies, this effect is larger for incumbent plants that share similar labor and technology pools with the new plant. We also find evidence of a relative increase in skill-adjusted labor costs in winning counties, indicating that the ultimate effect on profits is smaller than the direct increase in productivity.

This has to do with manufacturing specifically, but it is not hard to imagine the same is true for high-tech industries.

Economist's Notebook: Agglomeration Externalities

Agglomeration Externalities is the technical term of art economists use to describe the benefits non-participants get from other economic activities taking place nearby.  I have talked about them a lot in this blog, especially in conjunction with my advocacy for increased support for public education.  In the education example, an educated population not only increases individual productivity but also gives an extra boost to group productivity.  The empirical evidence has shown that, for example, cities with higher proportions of college graduates have higher productivity firms and pay higher real wages to those without a college education.  In other words, public investments in things like higher education benefit more than just the students themselves, but benefit the community as a whole.

Given the sorry state of Oregon's public investment in education then, it is interesting to read Mike Rogoway's article in The Oregonian on the flight of some high-tech start-ups from Portland.  Though not specifically tied to education, the theme is the lack of a critical mass of human capital - an example of agglomeration externalities.  Firms benefit from having that human capital surrounding them, not just from those they hire.  This contradicts those that think we don't need to invest in education because we can just import high productivity people.  But firms, especially small start-ups, find this difficult to do.  Young, talented and productive people in this fluid job market look for a community not just a single firm, as the likelihood that they will stay in one form for an extended period is small.  Add in things like the proximity of venture capital and the problem becomes even more acute.

The question then is what do you do?  Well, trying to manufacture a high-tech or a bio-tech sector is a fool's errand when you don't have the fundamentals in place, and one could argue (and I do) that the current paucity of high-tech human capital in Portland is a result of decades of underinvestment in education.  Unfortunately, those in government rarely think beyond dots that they can connect in four years or less, and so the emphasis is on new bio-tech districts, business energy tax credits and the like.  And voters, who gleefully pass measures like 5, 50 and the kicker need to accept that with limited government size can also come limited economic vitality. Sure government can be too big and can cause inefficiency, but we are no where near size that in Oregon.  Economic research has shown that government investments in human capital are vital for future economic prosperity and in Oregon we are no where near that size of investment either.

One final note, I think it is really time to stop talking about K-12 education and higher education in separate discussions.  In today's world the expectation should be that everyone should have access and be expected to complete a college degree.  Perhaps it is time to start talking about K-16.

Economist's Notebook: Corruption

Over at the World Bank's blog site comes this interesting tidbit about efforts to control corruption in India. Students of development know that the two main areas of focus in development are increasing human capital and the building of stronger institutions.  The term institutions refers to everything from the rule of law to the protection of private property rights to effective bureaucracies and the control of corruption.  These are all combined into one because they all have huge impacts on both the amount and effectiveness of private investment as well as the efficient and effective governance of the economy.

Corruption is one of the big symptoms of ineffective and weak institutions and is considered a major obstacle to growth.  But how to combat it when it is so entrenched in many societies - so much so that it is often considered part of the legitimate compensation for a public sector job - is an open question.

Here is one novel response.  A group called 5th pillar in India has distributed the zero rupee note with the idea that when a public official asks for a bribe for something that is supposed to be provided at no charge, you hand them the zero rupee note as a form of protest.  In other words it is a consumer driven approach to combating corruption.  But how it is really supposed to work is not clear to me.

This excerpt from the blog provides some explanation:

Anand explained that a number of factors contribute to the success of the zero rupee notes in fighting corruption in India. First, bribery is a crime in India punishable with jail time. Corrupt officials seldom encounter resistance by ordinary people that they become scared when people have the courage to show their zero rupee notes, effectively making a strong statement condemning bribery. In addition, officials want to keep their jobs and are fearful about setting off disciplinary proceedings, not to mention risking going to jail. More importantly, Anand believes that the success of the notes lies in the willingness of the people to use them. People are willing to stand up against the practice that has become so commonplace because they are no longer afraid: first, they have nothing to lose, and secondly, they know that this initiative is being backed up by an organization—that is, they are not alone in this fight.

This last point—people knowing that they are not alone in the fight—seems to be the biggest hurdle when it comes to transforming norms vis-à-vis corruption. For people to speak up against corruption that has become institutionalized within society, they must know that there are others who are just as fed up and frustrated with the system. Once they realize that they are not alone, they also realize that this battle is not unbeatable. Then, a path opens up—a path that can pave the way for relatively simple ideas like the zero rupee notes to turn into a powerful social statement against petty corruption.

It seems to me that after a while no one will care that you hand them a zero rupee note, but maybe I am wrong.

The Money Illusion

The Onion, once again, has the exclusive:

U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion

WASHINGTON—The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

Calling it "basically no more than five rectangular strips of paper," Fed chairman Ben Bernanke illustrates how much "$200" is actually worth.

What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy.

"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless." ............... 

Read the rest at The Onion and start buying your gold here.

Bill Jaeger: Which Economic Analyses Can Oregonians Trust?

NOTE: William K. Jaeger, Professor, Graduate Program in Applied Economics, Oregon State University asked for space in this blog to post his essay on competing economic analyses.  Here it is:

Now is a good time to reflect on the just-concluded debate over Measures 66 & 67; issues of taxes and public services, kickers and rainy day funds, are unlikely to remain on the back burner in Oregon for long.

In the run-up to the vote last month, there was a wealth of useful information, opinion and passionate testimonials that helped to inform the debate. Oregonians also heard from a number of economists who conveyed what economic research tells us about the effects of changes in taxes or public services on jobs and economic growth.

For every economist saying one thing, however, there appeared to be another economist saying pretty much the opposite. And while economists often disagree on matters of interpretation and policy, what Oregonians saw recently reflected much more than the usual differences of opinion among well-informed economists. Indeed, what occurred in Oregon recently included efforts by a small number of economists that misled Oregonians by: a) misrepresenting what scholarly economic research tells us about state and local taxes and public services, and b) portraying their own estimates as having the same credibility as published, peer-reviewed research.

These efforts represent an extraordinary break with established professional standards in economics – or in any other scholarly field – whether those economists are affiliated with universities, research institutes, or respected consulting firms. Moreover, these efforts make it difficult for the general public to distinguish between the valid insights from scholarly economic research, versus the often-contradictory claims made by three economists supported by the Portland-based libertarian Cascade Policy Institute (CPI).

It is important to be clear on what these three economists (Randy Pozdena, Eric Fruits and Bill Conerly) wrote and said, and how their words and analysis compare to established economic research and established professional conduct. First, they referred to peer-reviewed scholarly research, but repeatedly misrepresented the findings of that research. Here are a few examples:

Beeronomics: Fighting

Time to return to the beeronomics gig. Perhaps you have heard of the new pint glass technology in the UK that prevents them from shattering. The idea being that this will reduce the incidence of serious injury from drunken fights. And if you have ever been in London (prior to the change in the law in 2006) at the 11pm closing time for bars, you know just how violent and ridiculous bedrunken Brits are as they spill on to the street with bellies full of beer and nothing to do for the remaining hours of the night. The new glassware technology may help avoid some of the more serious lacerations but will it help reduce drunken violence?

I am not sure. For many years I have had a theory about this which I first developed in a conversation with my British cousin. By cosmic chance we both happened to attend graduate school at Cornell at the same time and he was the absolutely stereotypical upper class Brit (he is Welsh he would want me to make clear), right down to his first in physics from Oxford and love of long walks in the woods. Anyway, he lamented the gun culture in the US and I said that it may be true that we have a problem with gun violence but based on personal observation, the US had a much smaller problem with casual violence than did the UK. My theory was that it was guns that made the difference.

The idea is essentially a game theory idea: the prevalence of guns in the US make the probability that any violent confrontation may turn lethal much greater in the US than in the UK - in other words the stakes are much higher in the US. So you don't engage in casual violence nearly as readily.

Here is a normal form game representation of what I am talking about:

In the UK, if drunken posturing occurs and the choices are to fight or walk away (run perhaps?), the payoffs might be something like the above. Walking away invites social opprobrium so it is particularly bad if you are the only one to do it: you get a payoff of negative 50 and the opponent gets 0. If both of you walk away then the stigma is attached to both but not so bad: negative 5 for each. If you fight I will assume you both get hurt, but nothing so bad that a little ice and time won't fix: negative 10 for each. Note that I have designed this as a prisoner's dilemma game where fighting will take place even though it is a second best.

Now let's consider what the game might look like in the US where guns are common.

The only difference here is that now the expected payoff to fighting is much worse because of the possibility of guns leading to hospitalization or death. Notice that the Nash equilibrium is now not to fight (and it is Pareto efficient). So the threat of death that guns provide actually prevents the engaging in violence in the first place.

A DISCLAIMER: This is all in fun - I know that this is a lot like gun advocates' claim that guns lower crime, a claim that has been shown to be false by serious study. But it is possible that in this context, the presence of lethal weapons lowers the incidence of minor violence between two willing parties.

So what will the new glassware do? It may in fact encourage more fighting by lowering the stakes. Now that you don't have to worry about getting seriously cut, why not engage in a little of the ultraviolence?

Time will tell...

Fiscal Stability

My Op-Ed in The Oregonian today:

A rather depressing sense of complacency seems to have settled over the state Democratic leadership after the passage of Measures 66 and 67. But celebrating their passage as a major political victory -- and allowing their passage to become an excuse not to immediately address the fiscal instability that necessitated the new taxes -- is a serious mistake.

The taxes were not a victory to celebrate but a disheartening sign of the dysfunction of the state's fiscal system. The fact that we had to pass them should be seen as a defeat, not a victory, and as a condemnation of our stewardship of the state's finances. Letting these new taxes take our eyes off of real reform is to squander an opportunity to permanently fix what's wrong with the state's revenues.

.....................

Read the rest at the Os web site.

For Shame

Fred sent me the piece below yesterday before the Governor's statement came out about the death of kicker reform. Now is seems quaint and optimistic that we should expect state Democrats to act like responsible adults and work on real fiscal reform.

Democrats seem all too much concerned with political expediency than with doing something that will benefit generations of Oregonians. There is nothing, in my mind, that is more important and would be more beneficial than fixing our broken and dysfunctional system, and there will never be a better time to get it done. And yet the Democrats don't have the courage to do it.

For shame.

Once More on the Kicker

Fred Thompson chimes in again on kicker reform:

Chuck Shekatoff of the Oregon Center for Public Policy reminds us of a very simple fact, one that probably ought to be obvious, but evidently isn’t: “revenue stability shouldn't be the goal...stability of the fiscal system should be the goal.” The things that government does for us, the services it provides have one fundamental attribute: they are all things we depend upon to get by – the legal system, incapacitating criminals and fire protection, education, a transportation network, a social safety net, clean water, etc. Moreover, deferring their delivery is prohibitively costly; these services must be provided in real time. That means their providers cannot be permitted to fail. If one were to formulate an objective function for most government programs it might look something like the following: maximize sustainability or reliability, subject to some minimum performance constraint. The essential requirement for meeting this service objective is stable funding.

The extreme measures taken by public officials to stabilize service delivery, together with persuasive evidence that spending volatility severely degrades service performance in government, attests to the critical importance of stable funding. For example, during New York’s fiscal crisis I observed that the City’s first response was to cut maintenance. From a purely financial perspective this make no sense. A properly maintained bridge wears out a rate of 1-2 percent a year; a bridge that isn’t maintained at all wears out at a rate of 15-20 percent a year. That’s a very costly source of cash. When one asked why, the answer usually went to the need to maintain services. Maintenance can be deferred, at a cost, operations can’t. Besides, what New York paid for cash by deferring maintenance is actually less than the price Oregon has often paid during past recessions, when the state borrowed from PERS at an implicit interest rate that exceeded twenty percent.

Instability can be attributed in part to the myopia of existing public-sector budget norms and rules, which tend to focus on balancing budgets one year at a time. Consequently, many students of budgeting want to put spending growth on a more stable path by basing it on long-term revenue growth rather than annual forecasts. Aaron Wildavsky, for example, proposed that the average rate of revenue growth should determine the permissible rate of expenditure growth. If cash outflows nevertheless continued to outstrip cash inflows, he further argued, a percentage or two ought be knocked off the planned (real) rate of expenditure growth until it looks like spending was back on a sustainable path.

The effectiveness of this general approach, both for controlling expenditure growth and for stabilizing programmatic support, is suggested by various case studies, most persuasively by the Chilean experience. The Chilean government has adopted a budget rule that allows a steady rate of spending growth adjusted for changes in its net worth. This system allowed Chile’s President, Michelle Bachelet, to resist intense pressure to boost spending earlier in her administration, when government revenues soared. Then, when the global recession came and revenue fell sharply, it allowed Chile to continue to grow spending at a sustainable rate, using assets that it had acquired during the boom. The upshot of this is that Bachelet is leaving office with the highest approval ratings of any President since the return of democracy to Chile.

It would be easy to make such a system work for Oregon. By basing our annual revenue forecast on the geometric mean of past revenue growth and balancing the budget against that forecast, we could put the state on a stable, sustainable spending path. Then, if revenues exceed the forecast by more than 2 percent, the excess would be placed in a rainy day fund and prudently invested by Oregon’s Treasurer. If revenues turned out to be less than the forecast by a similar amount, the Treasurer would go to the credit market to redress the cash shortfall. My own view is that kicker funds should never be returned to taxpayers except when the corpus of the rainy day fund exceeds the sum of the state’s general obligations debt plus a safety stock for emergencies – 30 percent of general fund outlays would be sufficient to cover shortfalls about seventy percent of the time assuming a three percent real growth rate in spending. Beyond that point, I have absolutely no reservations about returning any additional excess to taxpayers.

Under this proposal, the rainy day fund could only be depleted to make principal and interest payments on debt and those depletions would be automatic.

Economics of Growth and Location

Jack Roberts has a rather odd op-ed in The Oregonian today. I suppose I found it odd because it was about two economists written by a non-economist, but more so because it seemed to try and carve out a gulf where one doesn't really exist.

It was trying, I think, to make the distinction about how activist governments can be to try and create economic activity around a central theme. Roberts singled out Joe Cortright for his support of the 'creative class' idea that robust economies need creative individuals to drive and support them. I am skeptical of this notion but I doubt Cortright himself really pushes the link with economic growth that far. He may work closely with governments who, by their nature, like to do things - especially clearly identifiable things to 'drive economic growth,' but he is no yes man. He was a very public critic of the idea that Portland could successfully create a bio-tech sector, for example.

On the other had, Tim Duy I doubt very much would deny the existence of agglomeration externalities - what economists call the benefit like people and businesses get from locating close to each other. One only has to look at Silicon Valley to see how important these are. I think he is a pretty typical economist, however, in his skepticism of the ability to engineer the existence of such hubs of economic activity, as I am.

In the end we don't really get much out of this piece except for some vague statement about land availability and infrastructure from Duy. This surprises me as good empirical evidence about things like restrictive policies on land development and growth does not exist as far as I am aware and theoretically you can make the case either way. Infrastructure is important but the state of the state's infrastructure is far better than the public education system which has a much stronger empirical link to economic growth.

And by the way, the evidence against focusing on making Portland livable is a comparison of average wages? You have to be kidding. This is an equilibrium outcome that is affected by: peoples choices about where to live, how much to work and what kind of work to do; firms decisions about where to locate, how much they have to pay to attract qualified people (which is negatively correlated with livability by the way - it is called the compensating wage differential); and the overall level of human capital, physical capital and technology in the state - how productive we are. This is not evidence of a poor business climate, full stop.

The lesson I take from all of this is - hey guess what? - human capital. The extent to which we have to import high productivity people is an impediment to economic growth, to the ability to create agglomeration externalities, and to the business climate in Oregon in general.

So the answer to why Portland gets to be green but Seattle gets to be green and wealthy is long and complicated but probably has a lot to do with human capital. According to a quick check of some figures from 2007: Washington spends about $6,700 per student in higher ed, while Oregon spends $4,600. Not surprisingly, out net tuition is almost twice as high at $4,300 versus $2,200 for Washington. Is it any wonder our average wages are lower?

Oregon 's Exports: Troubles and Trends

Mike Rogoway in The Oregonian has a great piece today on the current state of Oregon's exports. Overall the news is dismal, echoing the astonishing decline in world trade that has resulted from the global recession.

Here is WTO data on global trade volume:

So Oregon is not exceptional in the overall decline in trade. But the main trend that is - perhaps not astonishing if you have been paying attention to the economic performance of countries -but remarkable nonetheless, is the soaring share of our trade with China. Most of this is due to the quick return to astronomical growth that China has experienced, but part of it is likely due to proximity. Despite all the advances in container shipping and other efficiency gains, proximity still matters in trade, and it matters a lot. So if there is good news for Oregon for the future it is the lucky fact that we are relatively close to China's enormous and rapidly growing market.

As Rogoway notes, right now a lot of what we are doing is sending computer chips to manufacturers of computers and electronics. This is great as long as what is being done in Oregon can't be done as well and more cheaply in China. For the time being this is true for the more advanced stuff - the cutting edge stuff where the engineers and the manufacturers work closely together - but the spectre of competition in the future is troubling for Oregon. And it once again leads me to make the point that in order to keep this competitive edge we need to invest in human capital. And apropos of the reigning in of the BETC, we need to transfer less taxpayer money to industries and companies that may or may not grow in Oregon and more money on the fundamentals of growth: education and technology.

Econ 539 - Public Policy Analysis: Cost-Benefit Analysis

Today in ECON 539 (a core course in OSUs Masters in Public Policy Program - I always forget to plug) we will look at cost benefit analysis. From and economics point of view the appropriate question is always about scarce resources and their best use. In cost-benefit analysis we use the concept of economic costs and benefits (not accounting costs and benefits) to get at the true social costs and benefits and allow us to determine the real net worth of particular policies.

Economist's Notebook: Taxes and the Rainy-Day Fund

A rather depressing sense of self-satisfaction seems to have consumed the state democrats after the passage of Measures 66 & 67. But celebrating their passage as a major political victory, and allowing their passage to become an excuse not to immediately address the revenue instability that necessitated the new taxes, is a serious mistake. The taxes were not a victory to celebrate but a disheartening sign of the disfunction of the state's revenue system. The fact that we had to pass them should be seen as a defeat, not a victory, and as a condemnation of our stewardship of the state's finances. To allow these new taxes to take our eyes off of real reform is to squander an opportunity to permanently fix what's wrong with the states revenues. Everyone is (or should be) upset, and motivated to fix what is wrong.

One of the main reasons for this lack of urgency, I believe, is the sense that these new taxes were carefully targeted, so that there is little real effect on most Oregonians - that we get a free lunch. But this ignores one of the most basic lessons in economics: TAXES DON'T STAY WHERE YOU PUT THEM.

Even a tax on the wealthiest households don't stay there. Research has shown that employer's pay is based on real wages net of taxes - so businesses will end up compensating highly paid employees for the new taxes - which increases their cost of doing business, which will end up in higher prices and lower share performance, both of which affect everyone. [This is the reason, by the way, why income taxes do not turn out to be very effective in addressing income inequality] New taxes on businesses will have the same effect, eventually making their way into higher prices and lower quantities which means - yes - jobs. The point is all Oregonians end up paying these new taxes in some small way and so we should all be upset that we got to this point in the first place.

I supported the new taxes and still do: they were necessary in my opinion and the net effect should be minimal. But there will be effects, make no mistake. I would have preferred them to be entirely temporary because of this.

So it is time for the state legislature to stop wallowing in self-satisfied complacency and get a permanent rainy-day fund passed this year. I have been very critical of the Governor in the past, but he is spot on this time in trying to get this moving now. Because whether you voted for or against Measures 66 & 67 you shouldn't be happy - you should be motivated for real reform.