Walk + Bike Day is Today!

Today is Walk + Bike to school day in Oregon (I am a little late with the post) - but it is never too late to pick up your child on foot if you drove this morning. I was handing out prizes at my son's school and the only problem became where to park all the extra bikes! Thanks to all those who participated.

The best comment of the morning was a mom who said "you know we walked and we actually got here sooner and my blood pressure is lower!"

Rio: A Study in Contrasts

Lalo de Almeida for The New York Times

Compare the celebration of the awarding of the olympics to Rio with this article by the exceptional John Lee Anderson at the New Yorker magazine. There is not really a place you can be in Rio without a favela in clear sight as they have taken over marginal hillside land all around Rio (and hills are everywhere) which means that there will really be no way for the olympic organizers or the media that cover the olympics to ignore the abject poverty that surrounds the city. Wonder how this will all play out..

H1N1 in the Southern Hemisphere

One other little note from my trip to Argentina, which is emerging from its winter season: hand sanitizer everywhere. In my hotel: at the front desk, in the lobbies, in the elevator in the rooms. At the conference: in the restrooms and by the coffee break locations. In the city: just about everywhere you looked.

Sign of things to come in Portland?

Back...exhausted

On the way to Argentina, a fire in the airplane forced an emergency landing in Cancun. After a 19 hour delay in Cancun where I got maybe 4 hours of sleep, we continued our journey and finally made it to Buenos Aires in the middle of the night and I got another 4 hours of sleep. After that, I was never able to catch up, and then hopped on the overnight home to find the flight from Dallas to Portland was cancelled. Sigh....

So I am too tired to think...or blog. Though the former is not always a conditions for the latter.

Try to get some energy tomorrow. Until then a random observation:

The one interesting difference in the talk at the conference this year relative to last was that last year it was all about how big the crisis was going to be, how long it was going to last, etc. This year is was all about lessons learned for economists and how these can be incorporated into economic theory. Just about everyone thinks the main crisis is over, BTW, but that the recovery will be long.

Oh and one other observation: when the host city for the 2016 Olympic Games was announced my Brazilians friends were bemused. They kinda like the idea or Brazil being chosen, but the reality of the diversion of public money and the inevitable corruption that would ensue was not worth it in their minds. Still it is a good time to be a Brazilian in Argentina: the footballing fortunes of the two countries are divergent and the World Cup and the Olympics are both going to go to Brazil in the near future. Brazil really has transcended the rest of South America and is poised to be the leader in the 21st century.

Portland Home Values: Case-Shiller July Numbers

Heading off to the airport, so here is the picture: edging slightly higher in July. Would not be surprised to see it fall again slightly in the Fall.

Slow Blogging Ahead...

Slow blogging ahead, I am off tomorrow for Buenos Aires to attend the 2009 LACEA-LAMES conference. I am woefully unprepared, so lots of scrambling today. Sporadic blogging from BA if I have the time and inclination to follow.

New Poll: Oregon's New Taxes

Tell me how you intend to vote when the referendum to repeal the new tax increses shows up on the ballot in November. Poll closes at midnight on October 31 - Halloween - because taxes are scary after all...

Update: Sorry I had to redo it, Henry in the comments noted my language was a bit off and I agree that I should be consistent with the ballot. And yes, I do know that there are two seperate taxes that are being referred, but I figured I'd keep it simple, if you will be voting for one but not the other, tell me why in the comments.

North and South: The G20

[Photo: Jim Bourg/Reuters]

For decades development economists such as myself have been hoping for robust and sustained development from lower income countries. We have generally been disappointed. But the recent economic success of China, India and Brazil has been encouraging. In the political economy realm there has long been distrust of the countries of the 'north' a misnomer perhaps that came to symbolize the US and Western Europe dominance of the world economy, by countries of the 'south' (which would include China and India - thus the misnomer). The dependency school claimed that the rich countries tilted the playing field to their advantage and deliberately kept the rest poor so as to have access to cheap natural resources. So, for this reason the news that the major economic summit will permanently become the G20 is very welcome.

It is also true that the key to our future health and prosperity lies in being able to carefully assist poorer countries with their development in ways in which their needs are addressed but with greater reliance on renewable energy, sustainable agriculture and the like. It is hard to do this without these selfsame countries having a seat at the table.

This is a very good move.

Beeronomics: Ending Slavery

From an Advertising Age article on the National Beer Wholesaler's Association Show (read: beer distributors):

The convention's liveliest speech came from Boston Beer CEO Jim Koch, who employed the frankness of, as he described himself, a public company CEO "who owns all the voting shares and can say what I want." Mr. Koch's talk covered a range of industry topics. To point out how profitable the U.S. beer market is, he pointed to the $2 billion in cost cuts currently being inflicted upon A-B. "You can take $2 billion out of what everyone thought was a well-managed company," he said. "Imagine being able to piss away $1 million an hour and still being able to get what you need." He also implored wholesalers to abandon strict franchise agreements that make it difficult for small brewers to choose who distributes their beer, not a popular point in a room full of wholesalers. "I believe in the 21st amendment [abolishing prohibition], but I also believe in the 13th amendment [abolishing slavery]," he said.

On another note, as an addendum to my post on fresh hop ales, I found myself at the Rock Bottom recently and they have, on tap, a delightful wrinkle: a fresh hop lager. Very tasty and exceptionally quaffable.

And yes, this is a post of a man with no real time to blog - sorry. Enjoy the weekend!

Economies of Scope and Scale: Pearl Jam

In the heyday of the music business, record labels were important and successful because they could offer two advantages to musical acts: economies of scale and scope.

In the 'old' days getting potential consumers to know about you and your music was very difficult. Big record labels were able to offer a world wide distribution network that worked because the label was able to sign numerous acts and 'scale up' the operation, meaning that they were able to build a huge PR department because of the size of the artist roster and this allowed them to become very efficient at what they did. The also had economies of scope, meaning that they not only got records in stores, provided posters and promotional material, they got the music out to radio, helped artists book venues and TV appearances, and so on, and all of these different activities were mutually beneficial.

The thing is that all of these scale and scope efficiencies were a result of the difficulty of distributing and promoting music. These days the internet and digital music files have almost completely obliterated the source of these advantages and so it is no wonder that the old music industry is in trouble. New bands are using new media more often to reach out directly to fans and to establish an audience. It is still not and easy thing to do by any means, and thus the vast PR shops of the record labels still have a lot of power, but much less so than 20 years ago.

Now established acts are starting to think about whether they need labels at all. In perhaps the biggest move that highlights the shifting economics of the music business the band Pearl Jam has cut the middleman and is releasing an album by itself - in other words, not using a major label. It will be interesting to see if this path breaking approach catches on, for the other thing a multi-album deal on a major label does provide a bit of risk insurance. Consider R.E.M.s five record deal with Warner Brothers in 1996 that paid them $80 million. This was at the height of their popularity and subsequent sales have been disappointing. If Pearl Jam's sales fall short, they are the ones taking the hit, not a big record label.

By the way, the new album is fantastic, in case you were wondering. I even found my way to a Target so I could actually by the physical disk. Call me sentimental but iTunes joust doesn't produce that same level of excitement I remember from my adolescent years where going to the record store and actually holding the album was a source of rapture. Bringing home the album (yes, they were vinyl in my youth) and pouring over the art and liner notes while listening to it was sheer joy. I am also old enough to remember Mother Love Bone at the Satyricon, the Vedder-fronted Mookie Blaylock at the Melody Ballroom and then the overwhelming rocket to stardom that soon followed the release of their first album as Pearl Jam. Boy I am getting old quickly - fun then to have the band playing like a bunch of teenagers on this album, albeit exceptionally talented teenagers...makes me feel young.

Oregon's Recovery: Asia and Exports

This article on the strong rebound in economic activity in Asia is good news for Oregon, whose economy exports substantially to the far east - Japan, China, South Korea and Malaysia accounted for about 32% for Oregon's exports in 2007 ($5.3 billion):

Asian economies slumped steeply when exports plunged during the winter, but most of the region is now rebounding quickly, the Asian Development Bank said in a report released on Tuesday.

The multilateral institution, based in Manila, declared that economic growth in China would be 8.2 percent this year, 1.2 percentage points higher than the bank’s forecast in March, and 8.9 percent next year.

The bank raised its 2009 growth forecast for India to 6 percent, from 5 percent predicted in March, and for developing Asian countries as a group to 3.9 percent, from 3.4 percent.

“Developing Asia is proving to be more resilient to the global downturn than was initially thought,” the bank said in a statement accompanying its semiyearly assessment.

A common factor among countries doing better than expected is that they have been able to offset weak exports by stimulating domestic demand more than anyone expected. Chinese banks have lent heavily, while the Indian government has gone on a spending spree.

Here are the total tonnage statistics for the Port of Portland. Note how 2009 is way down, but August was a strong rebound over the preceding spring and summer months. Not a trend yet, but could be a sign of things to come.

Summers on Schumpeter: Creative Destruction and Growth

An interesting blog post by Larry Summers, Director of the National Economic Council:

During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation. As Keynes famously observed, during those rare times of deep financial and economic crisis, when the "invisible hand" Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function.

The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year. After the collapse of Lehman Brothers last September, government policy moved in a strongly activist direction.

As a result of those policies, our outlook today has shifted from rescue to recovery, from worrying about the very real prospect of depression to thinking about what kind of an expansion we want to have.

An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter.

One of Schumpeter’s most important contributions was the emphasis he placed on the tremendous power of innovation and entrepreneurial initiative to drive growth through a process he famously characterized as "creative destruction." His work captured not only an economic truth, but also the particular source of America’s strength and dynamism.

One of the ways to view the trajectory of economic history is through the key technologies that have reverberated across the economy. In the nineteenth century, these included the transcontinental railroad, the telegraph, and the steam engine, among others. In the twentieth, the most powerful innovations included the automobile, the jet plane, and, over the last generation, information technology.

While we can't know exactly where the next great area of American innovation will be, we already see a number of prominent sectors where American entrepreneurs are unleashing explosive, innovative energy:

In information technology, where tremendous potential remains for a range of applications to increase for years to come;

In life-science technologies, where developments made at the National Institutes of Health and in research facilities around the country will have profound implications not just for human health, but also for the environment, agriculture, and a range of other areas that require technological creativity; and,

In energy, where the combination of environmental and geopolitical imperatives have created the context for an enormously productive period in developing energy technologies as well.

It is all a nice way of talking about the forces of economic growth. The problem I am having (as are many economists) is where growth is going to come from in the near term. However, I am optimistic that our environmental problems will actually be the genesis of a period of sustained growth through vast improvements in energy usage (efficiency) and generation (renewable energy).

Eco-nomics: Full Information and Efficiency

One of the requirements necessary for a free market to reliably achieve an efficient outcome is full and symmetric information. So this article on a smart electricity grid pilot project is pretty interesting. What this project did, in essence, is give customers real-time information on energy usage from all parts of the house.

Consert attached controllers on hot water heaters, air conditioners and pool pumps and then let customers go online and set targets for their monthly electricity bill. Smart meters and a wireless communications system provide real-time electricity consumption data to allow the utility to cycle appliances on and off to achieve the savings and help it manage peak demand.

The initial results are pretty dramatic: a 20% decline in average energy usage.

Regardless of the 'target' usage, what this system does is provide information to consumers about how much energy they are consuming and how much it is costing them. Not knowing this information apparently causes consumers to use more energy than they would in the full information setting. This suggests that current market outcomes for energy are inefficient (in the economics sense - we are not maximizing societal welfare) and that this inefficiency comes from an asymmetric information problem.

I think what this suggests in general is that if technology can allow consumers to understand the real-time monetary cost of energy usage, some pretty substantial conservation could be achieved, both in current consumption (like the pilot project) and in energy saving investments which, this suggests, would more likely occur if the true cost of energy usage were immediately apparent.

A Mankiw Monday: On Healthcare and Keynes

Greg Mankiw is an economist with whom I often disagree when it comes to policy but nevertheless is someone who I think is an extremely smart and thoughtful purveyor of his discipline. It does not bother me that he often comes to different conclusions in policy matters, for this is generally a matter of opinion about the magnitude of the market failure and the ability of government to correct it efficiently and effectively. I tend to have more faith in government than he and see market failures as a bigger deal, but I always try to continually challenge my own assumptions and reading his take is always useful (and occasionally convincing).

Mankiw is also an exceptional writer and he had two articles in major newspapers over the weekend that are well worth reading. The first, in Sunday's New York Times, is a worthwhile piece on the realities of modern medicine and societies role is its distribution. An excerpt:

An optimist might hope that my doctor, or someone higher up in the health care hierarchy, made a rational cost-benefit calculation on society’s behalf. To figure out whether my treatment makes sense, one would have to weigh the cost of the drug against the benefit of an extended life. And to do that, one would have to put a dollar value on my life — the kind of calculation that makes everyone but economists squirm.

The second is a review of a new book on Keynes by the author of the authoritative three part biography on Keynes, Robert Skidelsky. Skidelsky's new book talks about the sudden and swift revival of Keynes's theories in the recent crisis. Mankiw, writing in the Wall Street Journal, is impressed with Skidelsky as an historian but less so with Skidelsky as an economist. He takes umbrage at Skidelsky's distain for math in economics:

To economists his discussion of macroeconomic theory will seem pedestrian and imprecise. To laymen it will seem abstract and hard to follow.

As an ardent fan, Mr. Skidelsky fails to give Keynes's intellectual opponents their due. In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago, who won the Nobel Prize in 1995. His great contribution to the discipline was to analyze how government policies influence the economy in part through their effect on people's expectations—a lesson that Keynes would likely have appreciated but that early followers of Keynes often ignored.

Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.

This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking."

Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes's theories—I have conducted such research myself—tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.

Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

I am like many PhDs of my generation in that I was raised on Keynes as an undergrad (and as a masters policy student) and then disabused of all things Keynes in grad school in economics where the 'real business cycle' school was dominant. To use the vogue term of art, I was taught by a freshwater economist (in this case a Minnesota-trained one). But I also had the very useful experience of having previously taken a graduate level macro class in Keynesian economics which was engaged in just the endeavor to which Mankiw refers: trying to apply modern mathematical logic to Keynes and see if it can survive. [The answer, by the way, was yes, but with some pretty strong assumptions that may or may not be realistic - however the notion is sticky prices and wages is pretty well established now and is perhaps the most important assumption to get Keynes in the modern economic world]

I agree completely with Mankiw in his take on math, it is indeed the language of logic and for that we can all be thankful that it has a prominent place in economics. And just as it can be taken too far, where mathematical elegance is prized above economic insight, dismissing economics too quickly as just mathematical abstraction is equally wrong.

Paradoxes in Economics: The Ultimatum Game

Economics, with its basis in rational decision making, can lead to paradoxical results. One classic paradox is the ultimatum game whereby one player has an amount of money (say $100) and has to make an offer to share some part of it with the other player. The second player can only say 'yes' and both players get the agreed upon shares, or 'no' and both players get nothing. It is played only once.

The economic solution to the game simple: the first player offers the smallest amount possible (say $1) and the second player agrees (as $1 is better than nothing). In the real world, however, this rarely happens - the second player will often say no to too small an offer as the dis-utility of the feeling of being cheated is worth more than $1. [This by the way, just means we have to be more careful when we describe the 'true' payoffs to players and include psychic costs] The first player is also motivated by the positive utility one gets from being generous.

I was reminded of this last night when I watched a wonderful Argentinean movie "Nine Queens." [I have to travel to Buenos Aires for a conference and this was suggested as a good movie to watch to see a little of the city] You can get the gist of the plot from the trailer (though it is a pretty awful trailer - don't worry the movie is very good), but in it there is a scene that illustrates the ultimatum game perfectly. A forger has made a perfect copy of some extremely rare stamps and is ready to sell them to a wealthy collector when he falls ill and is unable to complete the transaction that absolutely has to happen that day. So he calls a fellow confidence man to help him and offers a 50-50 split. The con man realizing the nature of the game says "no: 90% for me and 10% for you." What is the sickly forger to do? 10% is better than 0, so he agrees. Of course the con man should have realized he could have offered only 1%, but perhaps the dis-utility from the feeling of being taken advantage of may have led to a refusal, so he adjusted.

Its a good movie and highly recommended, especially if you want to practice your spanish with a rapid-fire Argentinean accent. [If not, the sub-titles are fine]

The ultimatum game is one paradox of economics, I'll leave you with another classic: why do you leave a tip after service in a restaurant at which you are not a regular?

Can you think of other paradoxes in economics?

Unions and Wage Effects

I am trying to occasionally come back to some unfinished business, today's being another look at the economic effects of unionization. A while back when the Employee Free Choice Act was in the news I promised a series of posts on the effects of unionization. I started the endeavor but quickly lost the plot. So here is another look at some research (here and here) I recently came across that generally confirms the positive effect unions have on wage formation (meaning unions are successful in negotiating higher wages). What does this due to firms, well this paper suggests that it cuts into firm profitability but only the amount of the wage premium. In other words unions are able to negotiate a bigger slice of the pie.

So, again, the evidence seems to square with a overall general characterization of some real wage premiums from unionization and some small hit to overall firm performance. The overall welfare implications of this are therefore unclear.

I think a provocative question for the 21st century is: are unions as necessary in a world in which information is so readily available and switching costs relatively low? And if health care reforms happen that make employees less tied to their firms, will this erode the influence of unions even further and it this a good thing?

Beeronomics & Bikeonomics: The Greatest Thing Ever

Via John Foyston, the greatest thing ever:

That would be Hopworks's Christian Ettinger on the new HUB BarBike.

You got to love it, but I would not want to try and pedal that thing up Powell when full.

Eco-nomics: Another 'Green' Revolution

A few of days ago, Norman Borlaug died at the age of 95. Borlaug was widely known as the father of the green revolution, the advances in crop science that dramatically increased yields in the developing world and averted what certainly would have been numerous mass famines. The obit linked to above does a good job of explaining his importance to the world as well as giving a little time to his critics. In my primary field, development economics, there is little debate about the importance of his work and what it has meant to developing countries. In the intervening half century it is simply mind-boggling to think of how many lives these advances have saved.

Criticisms of the green revolution raise very important questions, however, and it is time that the world start addressing these problems. I think of the criticisms not as attacks on what Borlaug did, but on what has happened in the last 40 years, which is to say not much. But let me back up. The essence of the criticism of the green revolution is that the new crop strains developed by Borlaug and others are highly dependent on fertilizers and pesticides and in some cases extensive irrigation. An effect of this type of farming was the displacement of many small scale family farms who did not have access to these modern seeds and chemicals - leading to the rise of more industrial agriculture in the developing world. Sure the use of petrochemicals and digging of tube wells enabled massive increases in crop yields, the argument goes, but it also has lead us on a path of un-sustainability and has caused environmental damage on a mass scale. [A more subtile criticism, never made directly but euphemistically, is that these advances lowered the cost of babies and thus enabled the population growth of the last 40 years] So going back the my point: I think these advances were extraordinarily important, but since then, there has not been enough work done to try and move toward more sustainable practices and away from chemically intensive farming. With the specter of mass starvation gone, the incentives of the developed world to continue to make advances in this area were drastically reduced.

The new reality of increased population pressures, global warming and depleted and contaminated ground water supplies are going to likely lead to another crisis in the next decade or two and thus another green revolution will be needed, however this time the green revolution will need to be truly 'green' in the modern usage of the term.

Oregon August Unemployment: 12.2%

With a loss of 6,600 jobs, Oregon's unemployment rate rose to 12.2% in August. Still wallowing at the bottom and, as I said before, we could be there a while...

Who is Afraid of Non-Profits?

You may have noticed that I have said nary a word on the health care debate. Not that I think it is unimportant or not worth of my time, but I just have had nothing to add to the conversation. But one thing about the recent debate has really started to annoy me, and that is the idea that promoting non-profit insurance is a threat you the nation's insurance industry. Come again?

There has been a lot written about how for-profit and non-profit health care insurers already coexist and criticism from the left (about how private non-profits are insufficient) and the right (about how non-profits are going to destroy the for-profit industry). Both views are misguided in my opinion.

But first it is useful to remember that there is no prohibition against not for profit businesses in any industry, so if they somehow represent unfair competition, why do we not all shop at non-profit supermarkets, buy gas from non-profit gas stations and buy our TVs from non-profit electronics companies? The answer is, of course, that non-profit does not necessarily mean lower cost and capital flows to where it finds the highest return - so it is the very incentive for higher return that causes for-profits to be as efficient as possible.

So, there is really no reason to expect that promoting private non-profit health care providers will do any serious damage to the for-profit sector. For profits will continue to attract capital that will continue to promote more efficient management.

At the same time there is no real reason to expect that a government run, but self-funded, non-profit would be any better (or worse) than private entities. A self-funded government agency (of which examples abound - I used to work for one nobody has heard of, OPIC, and the reason no one has heard of it is that it runs on its own dime) has no more advantages than a private non-profit, except I suppose the government ensures it presence at the outset. Still, this could happen with the private sector as well fairly easily with well thought out legislation.

I think it is clear, or should be by now, the real problem with the health care system is the incentive for insurers to cherry pick the healthiest and wealthiest leaving the sick and the poor to rely on the public safety net. This costs us all immensely even though it is reasonably hidden-medicare and medicaid are ballooning as entitlement programs and this required the devotion of more and more revenue (tax dollars).

So I don't care if there is a public option or not, but I believe that regulating insurers behavior and mandating health insurance is essential. The whole point of insurance is pooling risk. This is what needs to happen so let's stop quibbling over non-profits.