It's Alive! The OSU Economics Club

After laying fallow for a season or two, the renewed energy of some economics majors has revived the OSU Economics Club.

The club is open to ANY OSU student interested in economics, regardless of major. If interested, check the web site for future meetings and for people to contact to get involved.

Eco-nomics: The Answer is Hops!

I had not heard about this one before. According to The New York Times, the federal government is planning on growing vegetation 200 feet up the side of the renovated Edith Green-Wendell Wyatt Federal Building in Portland:

As part of a $133 million renovation, the General Services Administration is planning to cultivate “vegetated fins” that will grow more than 200 feet high on the western facade of the main federal building here, a vertical garden that changes with the seasons and nurtures plants that yield energy savings.

“They will bloom in the spring and summer when you want the shade, and then they will go away in the winter when you want to let the light in,” said Bob Peck, commissioner of public buildings for the G.S.A. “Don’t ask me how you get them irrigated.”

Rainwater, captured on the roof, and perhaps even “gray water” recycled from the interior plumbing are both possibilities, the architects say. But they concede that they are still figuring out some of the finer points of renovating the Edith Green-Wendell Wyatt Federal Building, which was completed in 1975 and is currently 18 stories of concrete, glass and minimal inspiration.

Who will prune the facade? Maybe the same folks who wash skyscraper windows, the architects say. Perhaps the exterior concrete panels removed in the renovation could be reused as salmon habitat in a nearby river.

The G.S.A. says the building will use 60 percent to 65 percent less energy than comparable buildings and estimates a savings of $280,000 annually in energy costs. Solar panels could provide up to 15 percent of the building’s power needs. The use of rainwater and low-flow plumbing fixtures will reduce potable water consumption by 68 percent. And energy for lighting will be halved.

“It will be one of the more energy-efficient high-rises in America, possibly in the world,” said James Cutler, whose architecture firm, Cutler Anderson, led the design work.

But apparently they don't exactly know yet what vines to use:

This summer, he said, landscaping experts will experiment with vines and cover plants that can endure Portland’s wet, mild winters and its dry, hot summers — and do so at varying heights.

“We may train them on some vines in the nursery,” Mr. Eggleston said. “About 50 percent of the windows we need to shade every summer. You can’t take little seedlings up there in Year 1, because you won’t have anything up there for five years.”

The answer to this is clear: Hops! It is the Northwest after all, where hops thrive, and, if the government is going to spend all of this money, might as well plant a cash crop and try and recoup some of it. We have 42 breweries in the Portland area alone after all, so the demand is here. One variety per fin, I say.

Joking aside, this should be a fascinating project. Will it work? - one wonders...

More and Better Economics Reporting?

Yes!

Economist's Notebook: Bradbury's Bank of Oregon Proposal

Gubernatorial candidate Bill Bradbury has come out with a proposal to create a "Bank of Oregon" where all state agencies would be required to deposit their funds. Then the bank would be required to invest only in in-state projects. It is an interesting idea, modeled on a similar bank in North Dakota that has been aroundn for 90 years.

The populism of the idea is clear, 'boo, big multinational corporate banks!,' but is it a good idea?

Well, it is hard to say. It seems to rest on the premise that worthy in-state ventures cannot get access to capital. This is not hard to believe is true to some extent at the moment, but putting aside a once-in-a-lifetime credit market collapse, is this an accurate premise in general? I am not convinced.

Which then would imply that the bank would end up being a lender that would undercut competitors essentially subsidizing Oregon businesses or lend to more risky ventures that might have a hard time accessing capital due to the risk factor (essentially a subsidy as well). Generally, this is where venture capital comes in for new or young ventures, so in some part, I suppose this bank would be filling in for a lack of or an unwillingness of venture capital to fund these projects. If this is the case, I am not sure it is the role of a quasi-governmental agency to play this role. It is easy to see how incentives can become distorted and bad risks are taken or underperforming loans are propped up by even more capital.

On the other side, the state may deposit money in out-of-state banks but the returns on those deposits come right back to the state. And if the state bank is going to underperform - which is almost certainly is be definition, undercutting or taking on more risk - then this will lower the returns on those deposits and essentially this becomes a taxpayer subsidy for business. And we could do that much more effectively through more direct measures.

So what this does, potentially, is create essentially a less efficient bank that will pay lower interest on the deposits of state agencies in order to either, one, offer lower-interests loans to Oregon projects that could get credit elsewhere, or two, fund more risky and/or less worthy projects and this would all lead to higher costs for Oregon taxpayers.

Now, it is possible that I don't understand how much of a disadvantage are in-state projects and how they cannot access funds from regular in-state and out-of-state commercial banks. Anyone want to educate me?

Because at first blush, I just don't see it.

PS, the North Dakota idea is 90 years old, from a time when credit for rural North Dakotan farmers was hard to access. The world has changed a lot since then.

Okay, I want one...

For no good reason mind you, but isn't that the genius of Apple?

Econ 539-Public Policy Analysis: Data Analysis

One of the most difficult aspects of social science is the fact that we don't often get to test policy in a lab, we have to use real-world data and try and isolate effects from all of the noise. Fortunately we have become pretty sophisticated at doing so and even more adept at designing policy implementation in a way that gives us some experimental evidence. Today in class we will discuss data analysis and different ways of teasing out causality and the necessary caution one must have in interpreting results.

As an example we will think about perhaps the most commonly used example: the education - earnings relationship.



We will also study the empirical evidence on class size and discuss the STAR study and it limitations.



In other words, what do these two graphs tell us and how much should we trust conclusions based on these pieces of evidence?

The Aftermath

Today is not a happy day in Oregon. I am pleased that we have passed Measures 66 & 67 because I feared for public education. But passing these measures does nothing to fix the fact that we have, by most meaningful metrics, one of the worst public education systems in the country.

The state must now, finally, undertake the hard work of designing a stable and sufficient revenue base to bolster education funding and to avoid more costly disruptions in support levels. Another reason I am pleased at the passage of Measures 66 & 67 is I think that it is actually more likely, with the passage of these measures, that this will now happen. Why? Because no one is happy that it had to come to this and conservatives now must realize that Oregonians value the public services that the government provides so we can't just cut spending to fix all our revenue problems.

I think there is a very broad consensus that a permanent rainy day fund is essential and this should be the top priority of lawmakers in February. A sales tax does very little to solve the volatility issue but it could help prevent us from being an outlier on the income tax front, but we can't replace one with the other. In the future then, we have to look at property, sales and income taxes together and forge a sensible government funding model. But this is secondary, a rainy-day fund is the order of the day now. Let's get it done.

[I am pleased that the editorial board of The Oregonian has essentially the same message this morning]

Portland Home Values: Case-Shiller November Numbers

The November Case-Shiller numbers are out and Portland was one of only five cities to see an increase over the month before. This is a bit interesting because of the high unemployment rater in Oregon. Clearly the two-pronged approach to the housing market - the new homebuyer tax credit and the Fed's intervention in the long term debt market to keep mortgages low - was a big part of the story here. This is evidence that the hosing market in Portland has stabilized for now, but I expect some erosion in values through the winter and unless the pace of job creation picks up significantly I don't see much hope for any near-term sustained increase in values.

Here is the graph of the raw month to month numbers:



Here is the graph of the year-to-year percentage change in home values:

Econ 539-Public Policy Analysis: Game Theory

A big part of the class will be spent studying how and when markets fail and what (if any) are the appropriate policy responses. Though it may seem unusual for a public policy class, an important way that markets can fail is if there is strategic behavior. This is perhaps the most well-known result from game theory: in situations where strategic behavior is important, individually rational, self-interested behavior may not yield an efficient outcome.

For the purposes of this class, we will look closely at only the basic normal form games and see how this result comes about. I will also talk about sequential and repeated games in general and what additional important results come from these situations.

As examples, we will talk about the incentives of Wall Street banks and have a look at this Bob Frank column in the New York Times. We will also discuss another interesting example of game theory at work in my little take on unsigned intersections. (Which reminds me, I haven't been keeping up on the Economist's Notebook thing lately - I'll try to do more)

What Passes for Good Economic News in Oregon

Don't get me wrong, any investment in the state is great, especially now, and especially for a community like Prineville. But the amount of attention that the decision by Facebook to build their first data center in Prineville is receiving is a little out of whack. For example, the Oregonian editorial board cheers this as a major statewide success story - but then these are the same folks that urged a no vote on 66 and 67, and I see a clear connection between the two.

You see, this type of investment is indicative of where Oregon has arrived in terms of its investment in human capital and in research and innovation. What comparative advantage the state has at the moment is in cheap power, cheap land and cheap labor. This is not a success story this is a failure story. What the state needs to be is a place where we have a comparative advantage in human capital and technology, and that means investments in education and in research in partnership with research universities. What we are is a poor and poorly educated state that is like a domestic developing country that will do the low value-added work because it is all we can get.

So the real story should not be how wonderful this investment is, but what does it signal in terms of the future of the state's economy? The fact that The Oregonian's editorial board didn't ask this question is a clear signal that they just don't understand the fundamentals of economic growth. Because if you think this is a good path we are on, I got news for you: As much cheap land, power and labor we have, there are many, many more countries that have much cheaper land, labor and even power. I don't know the technology too well, but I suspect that the only reason this data center is here (as well as the Google data center in the Dalles) and not in China is due to some specific costs involved with distance and the provision of bandwidth. More and more manufacturing, even in high-tech, is leaving the state and the forces of globalization are only getting stronger, which means our competitive edge has to be that we are on the technological frontier or we will be competed away. Without hugely increasing our commitment to education in this state, it is hard to see how that could happen.

Perhaps a good question to ponder is why isn't Facebook itself in Oregon? When I was visiting relatives in the Bay Area over the summer I passed Facebook's corporate headquarters on Page Mill Road in Palo Alto - right in the heart of Silicon Valley - on some of the most expensive real estate in the world. The reason it is there is because, despite its expense, Silicon Valley offers many advantages: a rich supply of highly skilled and knowledgeable workers, close proximity to venture capital, proximity to business partners and proximity to Stanford and Berkeley, two enormous engines of new research, technology and ideas. In other words, despite absolute disadvantages in terms of cost, the Valley still has a comparative advantage because of a cutting edge technological environment, proximity of businesses and human capital.

Silicon Valley did not happen by accident, but neither was it engineered. If the state of Oregon thinks it can buy its way, through tax breaks, to become the center of renewable energy research it is wrong and it is ignoring the lesson of Silicon Valley. Only by creating an environment of high human capital and technological innovation can Oregon have any hope of creating the next Silicon Valley.

Programming Note

I just taped a KGW show, "Straight Talk," this afternoon (tanked up on decongestants - so that was fun) which will air tomorrow (Saturday) at 6:30pm. The show is about the economics of 66 & 67 and featured me and Eric Fruits, and Jeff Mapes of The Oregonian talked about the special election. I will link the video when available.

Update: Here is the link. In my defense, I think I was a bit more affected by decongestants than I would have liked.

Beeronomics: Signalling Redux

The blogger and graphic artist whose "nom de plume" is Samurai Artist popped me a note to inform me of his very interesting interview with Brett Joyce of Rogue (the above is a sample of his work). During the interview he asked Brett about a post I had done in the past about Rogue and signalling. At the time Brett appeared quite annoyed by my post, and I was completely perplexed. But then I realized the problem, people were not understanding it as an equilibrium concept. Anyway, here is the exchange:

SA: There was another blog post (on the Oregon Economics Blog) that suggested that you guys use the economic term 'signalling' by pricing yourself higher to signal to consumers that your beer is of a higher quality. I know that you said that wasn't true, but I would like to see if you have more of a response to that.

Brett: Yeah, I'm not smart enough to know what 'signalling' is, but I would just say this, there is a lot that goes into the packaging, there is a lot of hops and malt that goes into our products. We have never told John in 21 years what to put into the beer. He is an artist, and it is our job to get out of the way and let him practice his craft, and it is our job to go sell it, go market it. Our beer is not inexpensive to make. It's because of ingredients and because of packaging, not because of 'signalling'. I don't even know what that means!

This is a good illustration I what I mean. I would not say that Rogue 'uses' signalling. What I was trying to provide an explanation for was the popular beer blogger complaint that Rogue is too expensive. Given that the craft brew industry in Oregon is intensely competitive it is hard to see how Rogue's prices are sustainable in the free market of beer. Signalling provides a potential explanation (not necessarily the right one or the only one, but a possible one): if people think price contains some information about the quality of a product that they cannot themselves determine before they purchase it (as opposed to something like a new shirt that you can touch feel, try on, etc.) then they may act on that information by purchasing it. Of course, all beer companies could try this, but the companies with a lesser product would find out quickly that consumers learn and their sales would plummet. Packing plays a similar role - Rogue's packaging is more expensive and a signal of the quality of what's inside. Other breweries could do the sam but if their beer is of inferior quality than their attempt to signal becomes a costly waste of time.

If the consumer tries the expensive beer and likes it then their assumption about the price being indicative of quality is correct. Only though repeated tries would the consumer learn that price is a reliable signal. And this confirmation will happen only if it is truly just the better beers that are more expensive (in general). So you see, signalling is essentially an equilibrium where better beers are priced higher, and consumers act on this knowledge.

This is why I was perplexed about Brett's annoyance with the story: it is an equilibrium story that is not an explicit strategy by Rogue. In fact it happens simply because Rogue responds to the incentives that are already in the market. And it only works if Rogue's beer really is thought of as that good once buyers purchase it. I think he thought I was saying it is an explicit strategy you can use to fool consumers and get a higher price. Precisely the opposite: it is a market outcome whereby better beers price higher and lesser beers price lower and it works because in equilibrium consumers are then correct about how price and quality are related. [Note that good and bad craft beer aren't necessarily any more or less expensive to produce so there is more to price differentials than the cost of ingredients clearly]

Full disclosure, I love Rogue and Brutal Bitter is among my top five favorite beers, but that has nothing to do with it. The answer to "how do they get away with charging so much?" is simple: the market thinks their beer really is that good. And as good beeronomists we should know not to question market outcomes, our task is to simply try and understand them better.

Finally, this model was originally applied to education: people get college degrees because they want to gain more skills and knowledge but (perhaps unbeknownst to them) it also serves as a signal to firms that they are smart and worthy of hiring. Getting a degree is hard, however, but a lot harder if you are not smart than if you are truly smart. So firms take the degree as a signal of quality and they are right to do so - because, in equilibrium, only the smart ones will find it worthwhile to spend the time and effort getting the degree.

Haiti: Another Appeal

From the inbox:

Dear Patrick

International Medical Corps is a global, humanitarian, nonprofit organization, founded by volunteer doctors and nurses and dedicated to saving lives and relieving suffering through relief and development programs. Our emergency response team is in Haiti responding in force and I would like to ask for your help to get the word out to the readers of The Oregon Economics Blog. There are still thousands of patients seeking treatment of which approximately 80% are in need of surgery and are running out of time - especially with the tremendous aftershocks still devastating this country. The team is treating crush injuries, trauma, substantial wound care, shock and other critical cases with the few available supplies - And they're in it for the long haul. I would love your help spreading the word by blogging or tweeting about IMC's rescue efforts. We've put up a blogger friendly widget here on our site:

http://www.imcworldwide.org/haiti

With the widget it's really easy to let your readers know that donating $10 to help the people of Haiti is as simple as sending a text message of the word "haiti" to 85944. If you have any questions just let me know and I will do my best to help you out. If you are able to post the widget or tweet, I would appreciate it if you could send me the link.

Thanks so much,

Ellie

--
Ellie Brown
International Medical Corps

Omnibus Post: Because Good Lord I am Sick

I am prone to sinus infections, but this one is a doozy. I made it okay through my classes yesterday only to be walloped extra hard today. My ears are throbbing, my head is throbbing and my eyes are bulging. And to add insult to injury, my local pharmacy is out of Amoxicillin, oh no! Luckily, they promise me some after lunch.

All this by way of excuse, lots of stuff happening and I am going to punt on it to other sources.

Jobs: Finally, some actual job growth in Oregon to report. Though the unemployment rate held steady at 11%, the real news is that 2,900 new jobs. Not enough to celebrate, but 'it sure beats losing' to quote from Bull Durham.

Banks: The Obama administration proposes regulations with some pretty big teeth.

Soccer: finally, truth, justice and righteousness has been restored to the world of professional soccer:

English Premier League
January 20, 2010	P	Pts
Arsenal	22	48
Chelsea	21	48
Manchester United	22	47
Tottenham Hotspur	22	38
Manchester City	21	38
Liverpool	22	37

Econ 539-Public Policy Analysis: The Basics of Macro Policy and Growth

Today's class will have a look at the seminal paper by Mankiw, Romer and Weil as a way of introducing the topic of economic growth (and macroeconomics in general) and the appropriate role (if any) for government in the process. The role question will be largely relegated to a later discussion, while today's class will try and covey the basics about macro and growth and governmental manipulation.

I will start with a basic overview of the aggregate demand curve with a mention of the aggregate supply curve and talk about the natural level of output and deviations from it. I will also talk about the Phillips curve relationship, whether it really exists and what a government can try and do to deal with high unemployment episodes.

Finally we will chat a little about agglomeration externalities, urban redevelopment zones and fixed-route transit.

Uh oh...

...I may have to stop blogging, so much do I depend on what The New York Times gives me for free.

Apparently it 'aint gonna be free no more.

Economist's Notebook: Sports Teams and Social Value

The Wall Street Journal has a nice article on the attempt to use contingent valuation (CV) to assess what the Minnesota Vikings are 'worth' to the people of Minnesota. The answer? $700 million. The problem is, of course, that what we answer to a hypothetical question like "how much would you be willing to pay to keep the Vikings in Minnesota?" may have little to do with how we would actually behave when it became time to pony up. One of the big problems is the free rider problem whereby you don't pay anything assuming that the fat cats will pay a lot. Environmental economists have, for many years, used CV methods to try and place a value on a forest, stream, or other environmental attribute (e.g. clean air). But this is the first time I have seen it for sports which surprises me. I would think that folks like Merritt Paulson would do something like this to try and convince city leaders that what he has to offer people care about.

Here are some excerpts from Conor Dougherty's article:

MINNEAPOLIS—Christopher Slinde, a lifetime Minnesota Vikings fan who has endured decades of heartbreak and lots of overpriced beer in supporting his team, believes Vikings fandom is priceless. According to economists, it's worth $530.65.

********

As fans pack stadiums and couches to watch the National Football League's divisional playoffs this weekend, they care about victory. Economists are tackling a more abstract challenge: putting a price on the emotional benefits of having a pro sports team in town.

The worth of fandom may seem theoretical, or even silly. But it's serious business for teams like the Vikings, who want Minnesotans to help them pay for an $870 million stadium to replace the Hubert H. Humphrey Metrodome in downtown Minneapolis. The Vikings' Metrodome lease runs out in 2011 and the team says it won't sign an extension without a deal for a new stadium.

The team hasn't explicitly said it will bolt without a deal. But it insists the Metrodome cannot support a modern NFL franchise. So, many fans are convinced that without a new stadium, the Vikings will take their quest for football greatness to a warmer state with no Nordic heritage.

Sports teams sell their facilities as economic-development projects that create jobs and generate tax revenue. But a slew of studies have shown that publicly subsidized stadiums—usually paid for by selling bonds and paying the cost and interest with tax revenue–rarely return the money governments put into them. Teams continue to argue, often successfully, that they are worthy of subsidies because they are a source of civic pride and purpose.

But what is that worth? Economists Aju Fenn and John Crooker tried to answer the question in a study published in July 2009 in the Southern Economic Journal.

The two used "contingent valuation methodology," which is a nerdy way of saying they surveyed people and used statistical models to turn the answers into an average price Minnesotans place on the Vikings.

The result: The Vikings' "welfare value" is $702,351,890— $530.65 for each of the roughly 1.32 million households in Minnesota.

*********

You couldn't touch that money. It's an abstract figure meant to catch everything from the joy of donning blond braids and Vikings horns to the feeling of pride that even nonfans get from living in a "major league" city. In the broadest sense, Mr. Crooker says, "welfare value" represents the worth Minnesotans place on having the Vikings in Minnesota.

It's tough putting a price on feelings, which is why some economists are skeptical of contingent value studies.

"It's not that this is capturing nothing, it's just that it's not legitimate to interpret people's answers as if folks were spending their own money," says Peter Diamond, an MIT economist. He co-authored a 1994 paper titled: "Contingent Valuation: Is Some Number Better Than No Number?"

**********

Survey questions were fine-tuned by the Metrodome experience. In the 2002 off-season (to minimize in-season emotions), Messrs. Fenn and Crooker mailed 1,400 surveys to households across Minnesota, capturing both fans and nonfans.

The study's figures were based on the mail surveys, which had 30 questions ranging from demographic information to how much time the person discussed the Vikings at home and at work. But the so-called welfare value was generated from a single yes or no question: Would you be willing to pay $X out of your own household budget for the next year to make a new stadium possible? There was one price on each survey (it ranged from $5 to $100).

Mr. Fenn cautions that the $702 million welfare value doesn't mean that helping the Vikings with a stadium would be the best use of the state's tax dollars.

"We're not suggesting that the state of Minnesota act a certain way, or that voters support [a new stadium], or not support it," he says. "We're just pointing out that the Vikings mean a lot to the average Minnesotan."

Also, here is a nice Q&A With Jerry Bell of the Minnesota Twins (who are building a new stadium).

MLK

Beeronomics: Economies of Scale?

In the past year or two, under the 'Bond Street Series' moniker, Deschutes has sold a marvelous beer in 22oz. bottles: Red Chair IPA. I used to find it in my local Safeway and New Seasons for about $5.50. I loved it, but would buy it infrequently as the price was pretty intimidating. Now Deschutes has rechristened it 'Red Chair Northwest Pale Ale' and has placed it into their seasonal line-up and is selling it in six packs. A few days ago I bought a 12 pack for $12 in my local Safeway.

In the 22oz bottle it was going for $0.25 an ounce, now it is selling for as low as $0.0833 an ounce. First off, this is a fantastic beer selling at a regular price and I can't be happier. Second, unfortunately this is a Jan through April release, so start hoarding now - I don't think there is anything 'seasonal' about this beer and it should sell year round. But lastly, what can possibly explain the fact that the new price is 1/3 the old? Partly this has to do with niche marketing - going from a specialty beer aimed at the top of the demand curve to a mass market beer aimed at the heart of the demand curve. But, it probably has a lot to do with scale as well. Estimates exist of scale economies in brewing overall (i.e. the size for the brewery), but I wonder if any beer geeks can enlighten me about scale economies when it comes to producing a particular beer? It seems to me that this must be a big part of the story.

Finally, some gripes: I am pretty sure that it was I that came up with the whole concept of the 'Northwest Pale Ale,' I have been advocating for a long time for smaller but hops infused beers - hoppy beers don't have to be super-big. In fact I have been trying to perfect this concept in my kitchen and decided to call the result a 'Northwest Best Bitter,' the idea being a best bitter taken to the land of hops and given a re-education but with about the same alcohol content of an English version. I have every intention of creating a new category of beer. Of course my result pales in comparison to the Deschutes offering, but I await my royalty check for the NWPA idea.

Anyway, Red Chair is one of my favorite beers ever and the Deschutes move to more mass production is wonderful - so thanks Deschutes!