Eco-Nomics: France Gets Serious About a Carbon Tax

Hooray for France! The Washington Post reports on this very good proposal by Nicolas Sarkozy. The economics of the thing is simple: a Pigovian tax is one that equates the market price of an economic activity equal to its private and social cost resulting in an efficient market outcome.

From the WaPo article:

The tax would be initially based on the market price for carbon dioxide emissions permits, which is now euro17 ($24.74) per ton of carbon dioxide, Sarkozy said. At that level, the government expects to raise euro3 billion, which will be entirely returned to households and businesses through a reduction in other taxes or repaid via a so-called "Green Check," Sarkozy said.

[HT: Greg Mankiw]

Update: Math in Economics

Paul Krugman clarifies his views on the use of math in economics. His take is almost identical to mine: math is a means not an ends. It is an extremely important tool that provides clarity and precision but it is not, in itself, the point. He states: "What I objected to in the mag article was the tendency to identify good math with good work." Indeed.

Krugman: "So by all means let’s have math in economics — but as our servant, not our master."

Beeronomics Update: Hoppin' It Up in Hood River

I got a note from the good folks at the Hood River Chamber that the Hood River Hops Fest has a website with loads of information. From the website:

Featured breweries again will include Gorge favorites such as Double Mountain Brewery, Full Sail Brewing, Big Horse, Elliot Glacier, Walking Man and Mt. Hood Brewing.

Oh yum. Plus, if you go, you'll also be able to enjoy the delights that await you at the Double Mountain Taproom and the Full Sail Pub if you want some more Killer Green or Lupulin, are ready for a different variety of excellent beer or are just ready to sit and enjoy some good eats - you can't go wrong either place.

Beeronomics: Hop Shortage Update

In 2007 the worldwide hop shortage loomed as a potential disaster for breweries. Fortunately, those crafty craft brewers seemed to have weathered the shortage with aplomb. And now some good news: 2009 was apparently a bumper year for worldwide hop production. Why? Good weather and increased acreage that is a result of the recent high hop prices (hooray for markets!).

Expensive hops are partly to blame for increased beer prices. With a bumper crop, hops prices should return to something close to pre panic levels suggesting that we should see beer prices come down as well. However, economists have found that in many markets producers are quick to increase price when costs increase but slow to decrease prices when costs come back down - the classic example being retail gasoline and crude oil prices.

So, brewers, distributors and retailers: how are you going to respond?

Beeronomics: Going Local and Staying Connected

Regular readers of my blog will know that I am a bit skeptical of the net economic benefits to 'going local,' but this is often confused with lack of support. On the contrary, I am a supporter of the local economy, I just think claims about the economic benefit tend to be grossly over-inflated. But, though overall monetary benefits are likely small (and may even be negative), I support the local economy because I am a big believer in the public goods aspect of community itself. I believe that an inter-connected and supportive community reaps huge non-market benefits to all its members. I am also enough of a naturalist (though usually of the economic kind) to relish the ability to connect to the earth and its bounty as directly as possible.

This is why I rejoice in living in Oregon when the hop harvest time arrives. And it has arrived! What this means to you, dear closet economist and beer lover, is an astounding array of fresh, or 'wet' hop beers on offer throughout the state. Now, some purists decry the use of fresh hops as a gimmick that produces mediocre beer as the essence of wet hops are different and much more unpredictable than their dried counterparts. Bah! To me fresh hop ales give me a connection to the land from whose bounty beer is made that is unattainable in regular beers. I love those too, but to be able to taste the raw hop essence that Oregon soil has spawned is a delightful fall treat.

And each year the treats become more numerous. Here is just a sampler of what you can find this year:

John Foyston (who is responsible for these wonderful pictures - I stole them wantonly) is all over the latest Full Sail Lupulin offerings. Normally I save Beeronomics Posts until Friday, but am posting this early so that you know to get yourself to the Pilsner Room tonight to savor John Harris's latest fresh hop magic. Not to be missed (though you will have the opportunity to try them for a while at the pub). John is arguably the grand master of the fresh hop ale (arguably the grand master of northwest brewing, for that matter), and his 2007 Lupulin won Beervana's coveted Satori Award.

[Grower Doug Weathers and brewmaster John Harris at Sodbuster Farm in late August. Credit: John Foyston]

Eugene City Brewery, an affiliate of the Rogue empire, goes one better in the freshness quotient: Rogue grows their own hops and ECB managed to get their hops into the kettle just one hour and 37 minutes after the harvesting from Rogue's hop farm in Independence. Talk about fresh. The first taste is ALSO tonight so if you are in Eugene you can drown your sorrows about having a football team that is all flash and no substance in fresh hop beer! (Okay, that was a gratuitous and uncalled for jab - but it's all right, you can just come on up a bit north if you want to see how a real college team plays football).

Bill at It's Pub Night reports on a first taste of Deschutes' King Cone Ale which is currently pouring at the Portland pub.

The Oregon Brewers Guild has also announced the fresh hop "tastival" schedule: October 3 - Hood River Hops, October 10 - Oaks Park, Portland, October 17 - TBD, Eugene. Oh happy day! I live just a hop skip and jump from Oaks Park, so hopefully I can manage to swing by...

And finally, what hands down is the coolest fresh hop happening of them all (even if it doesn't necessarily yield the 'best' beer of the bunch): Angelo of Brewpublic reports on The Lucky Lab's all-comers hop harvest ... The Mutt is a-brewin'!

And who could resist stealing Angelo's wonderful photograph of this guy. I wonder who he is?...

Are Universities Failure Factories?

The New York Times' David Leonhardt has a provocative piece on the graduation rates of US colleges and universities. The essence is that some universities have pretty abysmal retention rates and that this represents a massive failure of the system. Now, of course, the first criticism is pretty obvious: if you want better graduation rates all you need to do is just lower the bar. A more thoughtful response is given in The Economist magazine's Free Exchange blog. In it the author points out that a lot of economic research has shown that troubles in education start early. So even though students from poorer schools might end up in universities that are lower ranked than ones in which they could have enrolled, their preparation might be very different than students form more wealthy schools - a difference perhaps not well measured by GPA and the SAT.

Looking at the chart above from the NY Times article, less selective colleges do worse than more selective colleges across the board. The explanation for this is not just the level of preparation of students (though I suspect that this has a lot to do with it), but the resources available to students who struggle academically.

I have taught at three very different places: Cornell University, Oregon State University and the University of Colorado Denver (listed in order of selectivity). At Cornell, 'at risk' students are identified before they even arrive on campus, their performance is monitored while classes are in progress and an entire office staffed with full time professionals and a cadre of student tutors are ready to serve these students. Any red flags in performance are responded to by reaching out to the individual student with offers of help. By contrast, poorly funded state campuses like UCD offer almost nothing and most students there are on campus only when they have classes and are juggling full-time or close to full-time jobs. The difference in the average preparation of students for the college academic curriculum is also markedly different. It is little wonder, then, that retention rates are very different across these two campuses. Making more resources available to students will inevitably help, but better K-12 education is just as, if not more, critical in my opinion (though this is informed opinion, nothing more - I'd love to see more data).

[Thanks to commentor Oliver for the tip]

Portland is Stressed Out?

Forbes magazine lists what they consider the most stressful cities in America. Portland comes in at number 14. Actually this is not so bad, the city is dinged especially for its high unemployment rate and dearth of sunny days (where it comes in at #1 with Pittsburgh a close second), but given that these are particularly high we might have expected worse. I don't know, but it seems like the weather is endogenous to a pretty relaxed attitude. So rather than being a source of stress I think of it more as a buffer against stress. Since it is gray and rainy outside, why worry about trying to do too much? Now depression, that's another matter...

[HT: Portland Business Journal]

"Rapid De-leveraging" = Paradox of Thrift

NPRs Planet Money reports on the record fall in consumer borrowing. Americans slashed their borrowing by $21.6 billion from June to July. They go on to state that this represents a crisis of rapid de-leveraging. But while this might be a new and fancy-sounding term, it is nothing new: this it the same thing as the paradox of thrift. Individuals that increase savings are considered to be doing a good thing, but when everyone in an economy does it at the some time it can cause a big drop in consumer demand. As consumer spending represents about 70% of the economic activity in the US economy, this can be a painful adjustment process. What this report shows is that we are still well in the process of this adjustment and thus we should not be looking for a robust recovery any time soon.

Why You Should Be an Economics Major

For those of you getting ready to go off to college (perhaps to OSU) and still wondering what to study, here are some data:

Best Undergrad College Degrees By Salary

Methodology Annual pay for Bachelors graduates without higher degrees. Typical starting graduates have 2 years of experience; mid-career have 15 years. See full methodology for more.

See the full report here. HT: Greg Mankiw, who notes that this is not necessarily value-added since it does not control for self-selection. For example studies have shown that more attractive people do better in the job market and everyone knows that the most attractive college students are always the econ majors. Oh, and it also does not account for people who got a degree in these fields and are unemployed. So, for example, Aerosopace engineering may be incredibly lucrative, but only for those who can actually land a job (get it? ... 'land' a job ... I crack myself up) - jobs are scarce. So, you'll be happy to know that the employment rate for econ majors is very good.

And what can you do with your degree? Here is a list of the most popular choices and the median salary:

Popular Jobs for Economics Degree

Methodology Jobs ranked by popularity among graduates. Annual pay for Bachelors graduates without higher degrees from all colleges. See full methodology for more.

Tuesday Notes

Paul Krugman had a very nice essay in the NY Times' Sunday Magazine about how the economics profession missed the current crisis completely.

One of his theses suggests that mathematical fireworks became more important than the utility of the models themselves. Paul is the perfect person to make this claim: his work is delightful in that it is amazingly lucid and insightful with sparing use of high-level math. Try and publish some of his same seminal works today and you would have trouble - "too simple," referees would inevitable say. And yes, this resonates with me as I strive for the same simplicity in my theoretical work but sometimes wonder whether I should dress it up will a bunch of useless math. And I can't tell you how many papers I have received to referee from good journals that have pages and pages of math and proofs all to make a simple point that could have been made with one simple algebraic equation. That said, the introduction of serious math into economics has been hugely beneficial - allowing for precision and insight that would have not been there in its absence. But like anything, there can be too much of a good thing, however, it is this pushing of the boundaries, however, that enhances the profession overall. I don't think that Paul would argue for less math, just more attention to what it buys you in terms of insight and a much lower reliance on the rule of thumb that more math means better economics. In fact, I think it is more likely that the opposite is true.

Also in the NY Times, a nice article about how stimulus spending is being dwarfed by state level cuts (in this case in education), something I have talked about before. Having just returned from dropping my child off at his second grade classroom that is overstuffed with little bodies, I can relate.

Eco-nomics: Dense Living = Green Living

Via the Oregonian comes news of this new study on the correlation between driving and density. Portland, Oregon was used as the primary case study for this analysis. From the Oregonian story:

"The evidence indicates that Portland's policies to steer growth into more compact, mixed use development have paid off, not only in revitalizing the downtown and many of its neighborhoods, but also in changing travel behavior, the primary concern of this study," the report says.

Portland-area residents drive 17 percent less than the U.S. average, because denser development provides shorter travel distances and higher mass transit use reduces driving. From 1993 to 2003, the region's mass transit ridership grew 55 percent and housing density grew 18 percent, while the population grew 21 percent.

Now, I believe that dense living is easier on the environment and I have reported on some careful economic studies that have shown this to be true (at least in the form of apartment towers). And I am also pretty sure that dense living cuts vehicle trips for the very simple reason that you don't have to go as far when all the amenities are around you. But as I have said many times you have to be careful about making causal statements from correlations. In this case it is impossible to deal appropriately with self-selection.

Here is an example - a statement that says something like "based on the evidence from Portland if all people in the US lived in equally dense areas we would see an overall drop in vehicle miles travelled of similar proportion to Portland." But this would be incorrect. Many of the people that live in inner SE Portland have chosen to live there because that area matches their lifestyle preferences. They are already predisposed to walking, riding a bike or taking mass transit. If you were to take the average Happy Valley resident and move them into the inner SE, you would likely see a decrease in driving but of lesser proportion to the overall average difference between Portland and the US.

I say this not with the intent of debunking the report or its findings, for it seems rather careful about this precise problem. Rather, I say this with future users of this report in mind. For if we are going to get serious about promoting density, we need to be exceptionally clear and accurate about its social welfare benefits. Overstating them is not useful in the long run (to this academic, at least - I suspect my more politically minded friends would disagree).

US Unemployment Rises to 9.7%

[Charts from the BLS press release]

The latest jobs report is out and the numbers are just about exactly as expected, the US August unemployment rate stands at 9.7% and the number of job losses is at 216,000. Job losses continue but the rate is falling and the unemployment rate is hovering in the mid 9 percent range. There are some rays of hope now - increased industrial activity, Europe and the Far East recovering a but more quickly than expected, and stimulus money that is finally finding its way into paychecks - that should help the situation. But consumer confidence remains low, retail sales are weak and the housing sector is and will be depressed for some time.

All of this points to an ending of the free fall but a long time digging out of the pit. I am optimistic that nationally we shall avoid double digit unemployment and the 13% level in Oregon, but I am prepared for a 2010 that has a stubbornly slow rate of growth, especially in employment.

Blog/Stimulus Update

Sorry, slow to no posting this week. This is the last week of summer for my kids and I am devoting this week to them.

In the meantime, here is a nice Wall Street Journal article about the effects of the stimulus package.

Omnibus Post

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

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

NPR has a nice chat with the undercover economist.

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

Paul Krugman has more to say.

Crazy 8s

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

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

Beeronomics, Explained

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

Eco-nomics: Time for a Better City Bus?

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

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

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

Beeronomics: Anti-Trust

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

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

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

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

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

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

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

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

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

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

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

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

Portland Home Values: Case-Shiller June Numbers

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

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

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