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.

US Unemployment Falls to 9.4%?

Away from computer this morning, but a good jobs report today for the US. The unemployment rate is down (due largely to discouraged workers) and the rate of job losses slowed considerably and beat expectations by a good margin. This stongly suggests that the sitmulus plan is gaining some traction.

UPDATE: Remember when the same thing happened to Oregon's Unemployment rate? From March to April of this year the unemployment rate fell 0.1 percentage point. Lots of discouraged workers but it did not mean a reversal of the trend of increasing unemployment rates. As long as we are still shedding jobs we will see unemployment grow. It takes over 100,000 new jobs a month to keep up with the growing potential work force.

But as unemployment is probably going to be one of the last things to turn around, this, along with little bits of good news from other parts of the economy (credit markets, for example) is a reassuring sign that things are slowly turning around.

Politics and Economic Rhetoric

Law professor James Huffman, in today's Oregonian complains about politicians' claims regarding stimulus spending. [Not available on-line apparently, how shocking is that?] And he has a point, the number that state representatives have been using for the $176 million state stimulus package, 3,236 is pretty indefensible. But somehow this complaint about ways that politicians put a spin on their policies (this, in itself, a startling revelation) morphed into claims that stimulus spending is bad economics. And that is an even worse rhetorical slight of hand.

There are really two main points to make here. The first is that you can't have it both ways. Yes, the $176 million is a drop in the bucket that is likely to have a minimal impact on the real unemployment rate in the state. But this also means that it is a drop in the bucket in terms of a drag on the state economy in the future. For a $160 billion economy, $176 million just 'aint gonna do much either way. So don't complain about inflated job numbers and then turn around and make inflated claims about damage to the economy. This is true with criticisms of stimulus. If government spending is so useless in terms of job creation than it is disingenuous to suggest that taxation is, on the other hand, completely devastating in terms of job destruction.

The second point is that the jobs numbers from the federal stimulus package are derived from economic theory and empirical evidence about the correlation between changes in GDP and changes in unemployment. There will never be a counter-factual to use for comparison, so we will never be certain just how the stimulus spending performed. What you have to do in these cases is use the best available knowledge and data to guide policy. The entire point of stimulus is to counteract the bad times by borrowing from and tempering the good times. And there is no rhetorical trick to the phrase 'jobs created and saved," it is simply a recognition that the jobs created are created in a time of massive job losses, so it is a clarification that we are not talking about additional job on top of the peak employment numbers.

As as another side note on rhetorical malfeasance, Huffman suggests that the tax increases in Oregon are to finance the stimulus spending which is false. The tax increases are to counter fractionally the lost revenue that has resulted from the recession. Whether they are a good idea or not is a separate discussion

Huffman suggests that there is no escaping the economic wisdom of the political class - but the political class in Washington has surrounded itself with some of the very best economists in the world. We would be better off escaping the economic wisdom of the lawyer class.

Bad Omens

The Oregonian today reports on preliminary plans to renovate and expand PGE Park for soccer in preparation for the Timbers 'promotion' to MLS. Near the end the article addresses the field itself and states:

And the kind of field is also under debate. Although nearly all the soccer-specific stadiums in the league have natural grass, it's unclear how well that would work for Portland's climate vs. the park's 1-year-old artificial turf.

As I have stated before soccer on turf is a vastly inferior product to soccer on grass and the fact that they would make such an assertion reads to me like they have already decided on turf and are slowly rolling out their excuse: 'it's just too rainy in Portland." Please. Clubs in the Premier League in England often play in excess of 40 games in their home stadiums in the middle of the English winter. And every single one of them has a natural grass field. Surely if they can manage, an MLS team that plays largely in the summer can too. More forward thinking MLS teams that have built stadiums recently in cold winter climates have even installed field warming systems under the natural grass.

Besides, turf is a real obstacle to hosting top European and international teams. Witness Seattle, who last night drew almost 67,000 fans to watch the Sounders play FC Barcelona. To host Barca they had to spend $100,000 on a temporary natural grass field that was laid on top of the artificial turf. This expense may be justified in a stadium that can draw 67,000 fans, but is probably not economical in PGE Park. As an aside, these temporary installations of natural grass on top of turf suck: they provide bad footing and a rough surface which may make the quality of the soccer even worse than on turf. But at least you don't have the ball ping-ponging around.

Since the city has approval rights over the design, they should insist on grass as it will have a real bearing on the long term success of this agreement. I, for one, am not paying top dollar to see soccer played on plastic. And big European clubs, who are a top draw when they come over for summer warm up matches often refuse to play on it. Since the city has a financial interest in the success of the team, they should not be passive on this issue.

Oregon's Economy About to Turn the Corner?

Tim Duy of the Oregon Economic Forum thinks it will happen this year - but it hasn't happened yet. The leading indicators he complies are still negative but this is due to the two usual suspects: residential construction and employment. These will lag the recovery and as the other sectors are up, it is likely we'll see a return to growth by the end of the year. I am still sticking with my Q4 prediction.

Econ 101: Price Discrimination and Arbitrage

On Craigslist just now, I found a 1995 Ford F150 truck advertised for $1000. I could buy this truck and immediately turn it in for a $4500 Cask for Clunkers rebate on a car that got at least 25 MPG. Or I could turn around and sell it to someone walking onto a new car lot who is ready to buy a car. In fact I am not sure why new car dealers are running around snapping up cars like this to offer to prospective customers so that they may take advantage of the Cash for Clunkers program (or perhaps they are). This example illustrates the difficulty of price discrimination.

Price discrimination is, among a few other things, charging different people different prices usually based on their willingness to pay (demand) for it. A classic example is the movie theater with its adult and child prices. Adults are generally willing (able) to pay more for a movie than children are. In the Cash for Clunkers program the government wants to essentially charge a lower price to people with cars that are not very fuel efficient. The challenge to such pricing schemes is that you have to be able to prevent arbitrage - the buying and selling of the same good for different prices. Otherwise you would have kids camped outside of theaters buying up tickets and reselling them to adults. Or people like me buying up old cars and reselling them to people without poor fuel efficiency cars so that they may enjoy the Cash for Clunkers rebate. In this case the program is temporary and the cost of searching for, re-titling the car and turning it in is probably enough to prevent this from happening too much - maybe. But the theater example is easy, which is why there are ticket takers at the door that check that adults are not entering with kids tickets.

Since businesses go for price discrimination it is probably pretty obvious that it is a profit maximizing strategy. In fact, in general, the more businesses are able to price discriminate the more profit they make. Interestingly, however, it is also generally true that more price discrimination leads to more sales which is good for market efficiency. Is it good for consumers? Well when it is done on the basis of group membership it usually depends on which group you are in. For example, when airlines charge more for business travelers and less for vacationers, the business travelers are paying more than they would in the absence of price discrimination, but leisure travelers pay less.

Another example of price discrimination that was brought to my attention is the reciprocal agreements that museums and zoos have. For example, a family membership in the Science Factory in Eugene costs $55, while a family membership in OMSI is almost twice that. This is a type of price discrimination as well - although the products aren't identical it is likely that the demand for science museums are different in the two cities. There is no restriction to becoming a member of the Science Factory as a Portlander and since the two museums have a reciprocity agreement, you could get into OMSI as much as you wanted on the Science Factory card. I almost didn't blog about this as I worried I would spark a surge of defecting OMSI patrons, until I scoured the OMSI website and found the link to the Association of Science - Technology centers which states this about the reciprocity agreement:

Please note—local restrictions apply

1. Based on your science center's/museum's location: Science centers and museums located within 90 miles of each other are excluded from the program unless that exclusion is lifted by mutual agreement. 90 miles is measured "as the crow flies" and not by driving distance. Science centers/museums may create their own local reciprocal program. ASTC does not require or participate in these agreements, or dictate their terms.

2. Based on your residence: To receive Travel Passport Program benefits, you must live more than 90 miles away from the center/museum you wish to visit. Admissions staff reserve the right to request proof of residence for benefits to apply.

So either they were smart at the outset or quickly learned about arbitrage the hard way (I hope OMSI staff are checking). The zoo association has only weak language about not offering to member of zoos that are too close but does not have the residency requirement. So here is a hint for you folks living in Seattle: the Oregon Zoo charges $69 for a family membership, while the Woodland Park Zoo charges $110. Why would you buy a membership up there when you can save $41 a year as an Oregon Zoo member? Oregon is much hipper anyway and this can give you the vicarious thrill of belonging, in some small way, to the state.

Power Point and the 'Cost' of Learning

Findings from a study of student engagement in the classroom, contained in an article from The Chronicle of Higher Education about the efforts of one administrator to reduce the dependence on Power Point, suggest that Power Point is one of the worst ways to teach. This will surprise few professors - many of whom feel obligated to use Power Point as universities have gleefully invested in 'smart' classrooms and created the expectation among students that all they need in terms of class notes and study materials will be provided for them - but who don't necessarily like it.

I know I felt obligated to use Power Point when I first got to OSU and was assigned to teach a large lecture of international economics. With very little support available, I had to rely in electronic crutches and there is an ever increasing expectation among students that they will have notes provided for them. And because OSU has designed these smart classrooms in such a way that most often the screen upon which Power Point slides are projected covers the entire board, it is very hard to do a lecture that is not entirely in Power Point. Now I am sure that some subjects lend themselves very well to Power Point, but I don't think economics is one of them, what with all of the equations and graphs. I settled on a hybrid style for international economics, where I show Power Point slides, but also derive all equations and graphs on the board.

All of my other classes are strictly 'old school': it is me, the blackboard and a piece of chalk. Though this technique lacks a certain pizazz that I suppose today's kids are used to given all of the electronic entertainment they have grown up with, it also demands that students come to class, pay close attention and go through the act of taking notes. It is my opinion that the very act of writing down material that students are expected to retain is an essential part of learning it. Teaching this way is hard, and after 110 minutes of lecturing and writing on the board, I am exhausted. But that is a good feeling - economics is a hard subject and mastering it is really hard work. Students seem to regard work and struggle in a class as a failing of the professor - surely there is a way that it could be made easier the thinking goes. But the truth of learning is that it is hard and all of these technological aids can't alter that fundamental fact.

What I have found is that ex ante students will often express a preference for Power Point (not all though, students who tend to be engaged prefer old school lectures), but ex post almost all prefer the old school style because I think they realize that more learning has occurred. There is some endogeneity involved - as I don't like teaching with Power Point and find it a bit unnatural, I am sure I am not very good at it (although I have gotten much better over the last few years).

But what I dislike is higher educations fantastic embrace of technology in the classroom (in Colorado, I was even offered a free Palm Pilot as an incentive to use all of the classroom gizmos). This creates the expectation among students that lectures are passive, available on-line if the don't feel like attending, and that learning should be easy. It is a consumer-driven approach to higher education. But without external standards the internal incentives of the university are clear: offer your customers a degree with a high grade point and little effort. But a university has to maintain the standard of quality education, even when students would prefer the easier way out. In other words, technology is promoted, in essence, as a way to reduce the cost of an education in terms of 'boring' chalk and blackboard lectures and hard work, and students buy into this. But do we really want to lower these costs? Aren't they essential to the process of learning?

I should note that I think Power Point can be a tremendous supplement to a class and I wish OSU's smart classrooms would have the screen to the side so I could use it that way. When I teach development economics I use Power Point to show pictures, data tables and graphs and this is a wonderful thing. Luckily, last term, I had a classroom that allowed me to have at least some blackboard while I projected these slides on the screen. I also think Power Point is great for professional presentations, talks and the like. But as a pedagogical tool, I think it falls short (at least in subjects like economics).

But this is a teacher's perspective, anyone out there ready to defend Power Point?

Eco-nomics: Is Cash for Clunkers Bad for Transit?

The New York Times reports today on the Obama administration's claim that "Cash for Clunkers" is improving the average gas mileage of American's cars. I have no doubt that they are correct as statistically when the marginal gas mileage is above the average, the average has to go up (that for my students). But that this program might lower American's gas consumption is far from assured. For as American's trade in older more expensive cars to drive for newer cheaper cars to drive, they will undoubtedly drive more. Given that driving is relatively inelastic with respect to gas prices, it is likely that overall consumption would fall if this program were continued.

So this is good news for the atmosphere in the short-run, but in the long-run this will encourage more driving and less reliance on mass transit. It seems highly likely that this program will work against the administrations efforts to -promote transit and mass transit seems pretty key to a low energy future. Meaning that the atmosphere my suffer in the long-run. While good for consumers, this program is probably bad for transit.

Regardless, the program does seem to be having its intended first-order benefit: US automobile manufacturers are seeing huge increases in sales. But this massive transfer of American's tax dollars is benefitting all car companies, not just American companies or cars made in the US (to do so would create some sticky trade policy problems).

I have a better idea, how about a carbon tax where the proceeds go to fund research and development of newer more efficient automobiles, transit and renewable energy?

Eco-nomics: Carbon Footprint and Children

The Oregonian reports on a study by OSU statisticians that suggests that the biggest carbon footprint we have is our children. This begs certain moral and metaphysical questions like is it appropriate to control individuals' fertility decisions, and when is my carbon footprint my own and not my parent's? But to me, the focus on the individual aspect of population growth it totally misses the bigger points: one, what are the incentives for families to have children and what can we do to alter these incentives; and two, do the incentives that more people provide actually represent the solution to the climate change problem?

In high income countries, birth rates are very low - in fact in some Western European countries, they are below the replacement rate. This is true for may reasons but some of the biggest are the expense of children (more space, more food, more clothes, etc.), and the fact that children are less important for ensuring the welfare of the parents in their old age. In the United States space is generally less expensive and old age benefits smaller, but education is much more expensive for individual families and there are less generous benefits for families who have children. In general, however, as societies become more wealthy, birth rates decline. Families in low income countries face a tremendously higher risk of a child dying in infancy, often need many children for labor and security and may have lower access to birth control information and supplies.

As energy becomes more expensive it will further increase the expense of children in high income countries and we might expect birth rates to fall farther. So, once again, it is the middle income countries with relatively high birth rates and rapidly increasing energy needs that are the most pressing challenge to the global climate. Countries like India are going to be the key. So continuing to focus on what we are doing at home is great, but misses the real elephant in the room (to quote the LA Times): high-income countries must become serious about assisting low and middle income countries develop and do so with moderate energy usage if we are going to address in any meaningful way global climate change. As these countries become more prosperous, it is highly likely that population growth rates will fall significantly.

The other problem with this assertion about children having to do with incentives is the fact that population pressures create the very incentives that can transform the energy economy. [And what is shocking is that the authors of this study are statisticians and yet they seem comfortable assuming that correlation and causation are the same thing] Demand pressures on oil are raising the price of gas and spikes in gas prices (like last summer's) are just about the only thing that can cause people to drive less and drive more efficient cars.

To understand how this study assumes correlation and causation are troublingly conflated, consider this thought experiment: if the globe had a significantly smaller population, would the climate be much better off as is assumed? I am not so sure, it has been the pressures of population that have made us concerned about acid rain, the health concerns from pollution, the dirtying of rivers, the collapsing of fisheries, the effects of rising sea levels and on and on and on. With fewer people we can more easily ignore the impact of our actions. And going forward will more people actually create the very incentives to make rapid changes to our energy consumption - I think it pretty likely that it will. And as I have said before, in each new person comes the potential for creating the new technology or coming up with the next great idea that will transform the way we live. It is people who have discovered the global climate - human activity link. It is people who are figuring our how to effectively harness the energy of the wind, sun and waves. And it is future generations that provide us the incentives to be good caretakers of the planet.

So I am not afraid of population per se. I see it largely as a development problem and another aspect of the challenge high income countries face when they ignore the reality of poverty in the rest of the world. It is becoming harder and harder for the high income countries of the world to consider themselves as insulated from the problems in other countries. The externality aspect of global climate change make that less and less true. This calls for a new engagement with the developing world.

...and This Just In

From the New York Times:

"[Professor Gates] said that instead of his usual Red Stripe, he drank a Sam Adams at the meeting in honor of an ancestor who fought in the American Revolution."

So apparently he reads the blog.

Beeronomics: Normal and Inferior Beer

Speaking of macrobrewing...

And so it come to pass: sales of beers like Bud, Corona and Miller are falling precipitously, while sales of beers like Busch and Keystone are up. Inferior goods are goods for which demand rises when incomes fall. Of course these infoerior beers are made by the same folks that make the normal stuff, so there is no reason for the beer companies themselves to be hurting.

I keep getting mixed reports about how craft beer is doing. I know anecdotally that some company's sales are soaring, like Ninkasi (proving that there is justice in the world) whole some are struggling. The question is, do consumers of craft beer think of it as distinct from macro lagers (as I do) or just a bit better? In economics terms, how close a subsitiute are macro lagers to craft beers (especially ales)?

At any rate, the recession is proabably a prime motivator behind the 'session' beers that are now becoming popular with craft brewers. I would be interested to know, for example how Full Sail's Session sales are doing compared to its regular line-up. My guess is pretty well since they just introduced a second Session.

None of my attempts to collect data to answer this question have yielded any fruit, so we can only wonder...

Anyway, my advice: if you are 'trading down,' go for the Session and skip the Keystone.

Beeronomics: Being a Populist in a Globalized World

There has been a lot of media coverage of the 'beerfab' that President Obama, Professor Gates and Sargent Crowley shall partake in this afternoon. Many media outlets are examining their choice of beer and what each symbolizes: Jamaican Red Stripe for Gates, Blue Moon for Crowley and, of course, the uber-populist choice of Bud Light for Obama (Bud light being the number one beer in America in terms of sales).

But if Obama were trying to go for the all-American beer, he missed the mark. Budweiser is owned by parent company InBev which is headquartered in Belgium. And if Gates's pick were seen a symbolic nod to the African diaspora, well, this too falls a little short. Red Stripe is owned by Diageo, the beverage giant that was formed in a merger of Guiness and another company and is headquartered in London. Even Blue Moon, which tries to sell itself as a microbrew is a Coors product. At least that is American, right? Umm...no. First, a merger of Canadian Molson with Coors created MolsonCoors which has a headquarters in Montreal. Then South African giant SABMiller, which is now headquartered in London joined in a joint venture called MillerCoors. So the simple story is that the world of macrobrewers is completely globalized now and 'local' brands are more about marketing than substantive differences in the beers.

What a shame. With a thriving industry of craft beer producers in the US, they have to go for the conglomerate beer. Sam Adams Founder Jim Koch was magnanimous on NPR about the shunning of US craft beer, but he shouldn't have been. Given that the kerfuffle that lead to this meeting happened in the Hub, a Boston lager would have both been appropriate and much more enjoyable.

White Roofs

White roofs are seeming like a very good idea these days, even here in the cool Northwest. When it is 90 degrees on my outdoor thermometer at 9:30 am, as it was yesterday, my black asphalt shingles are a real bummer. Too hot to blog...

Are Excess Reserves a Sign of Ineffective Fed Policy?

From a friend and classmate of mine in grad school, Todd Keister, comes this interesting paper (via the WSJ Real-Time Economics Blog):

Excess Reserves: Todd Keister and James McAndrews at the New York Fed offer a great explanation for why there are more excess reserves at the Fed. “The quantity of reserves in the U.S. banking system has risen dramatically since September 2008. Some commentators have expressed concern that this pattern indicates that the Federal Reserve’s liquidity facilities have been ineffective in promoting the flow of credit to firms and households. Others have argued that the high level of reserves will be inflationary. We explain, through a series of examples, why banks are currently holding so many reserves. The examples show how the quantity of bank reserves is determined by the size of the Federal Reserve’s policy initiatives and in no way reflects the initiatives’ effects on bank lending. We also argue that a large increase in bank reserves need not be inflationary, because the payment of
interest on reserves allows the Federal Reserve to adjust short-term interest rates independently of the level of reserves.”

By the way, Todd, as a Teaching Assistant, taught me just about everything I know about graduate level macroeconomics. His ability to explain both the technical aspects of the models and their intuition far surpassed the professor's. He is one of the smartest guys I know, and he works for the Fed. This is not unique - the Fed is in excellent hands and employs an astonishing number of exceptionally smart and independent economists.

Economist's Notebook: Trees, Redux

In a previous post I mused about why wealthy neighborhoods often have wonderful canopies of mature trees and less affluent neighborhoods of similar vintage do not.

Well, today I got the Economic Naturalist explanation I was hoping for. I was talking to a friend who is a contractor in Portland and I posed the question to him. He hesitated nary a second and stated flatly:

'Gardens! Poor people needed sunlight to grow their own food and the rich just wanted green grass. So the poor cut down the trees.'

Now I don't know how far this explanation goes, or even how true it is, but as an economic naturalist explanation, I love it. Perhaps my dear readers can help sort out the truthiness of this explanation.

I look forward to your responses...