Tuesday, August 26, 2008

Portland Housing Market: Case-Shiller August

Here are the latest Case-Shiller numbers through June of 2008 for Portland, Seattle and the 20 city composite.  The story for Portland and Seattle is similar, a considerable softening has happened but we are still not seeing the continued decline as seen elsewhere.  There is a lot of speculation that we are just 'behind' the nation and will eventually get there.  But as I have stated before the fact that we were 'behind' at the beginning meant that we did not see the kind of home price inflation of California, for example.  So I do not expect that the 'correction' to be as severe.  However, there are a number of worrying signs.  The number of delinquent loans and foreclosures are going up rapidly in Oregon apparently.  The health of major financial institutions is also a worry right now, as is the Fed's ability to do much more to help ease the credit crunch.

We also learn today that consumer confidence is up, surprisingly, perhaps as oil prices retreated a bit.  But inflation is a concern and wages are not keeping up.  To me this all points to prolonged malaise in the US economy - I don't see it getting better until well into 2009.  As for Portland housing market.  If I were to guess, I would expect that prices will fall again int he winter, but not by that much and then, next spring we will start to see a recovery.

As for my field experiment - I have collected new data, but I shall report on this later once a resolution has been reached.  

Wednesday, August 20, 2008

Economist's Notebook: Is Neoliberalism Dead?

Generally considered synonymous with the fabled “Washington Consensus,” neoliberalism has been on the ascendancy since the early 1990s with the fall of the Soviet Union and subsequent weakening of state control in many economies, most notably China and India. The basic neoliberal agenda is to keep government as minimally involved in the economy as possible, to promote private property (laws/courts/enforcement of private property rights) and economic integration through free trade. The success of China and India in following neoliberal policies practically closed the book on state intervention that had been very common in the 1970s and 1980s.

Now, however, with the impact of economic activity on the global climate coming under intense scrutiny, the adverse affects of increased commodity prices especially on the poor, and the recent failure of world trade negotiations, there has been some very serious questioning of the entire neoliberal agenda by such prominent economists as Nobel laureate Joseph Stiglitz. These very vocal critics represent a sea change in the way neoliberalism has been viewed by the economic cognoscenti. The essence of these critiques, in my view, is whether the increased challenges of such externalities as environmental degradation, global climate change, poverty and inequality and the structural adjustments of domestic economies when integrating with the global economy (most notably in agriculture) can be adequately addressed by the market based neoliberal agenda. Or, put another way, can a neoliberal agenda bend enough to appropriately address these new challenges (well, not new, but of significantly increased seriousness)? Many think no, that as long as the neoliberal agenda is the starting place you can never have a serious enough effort to address the problems of poverty, inequality and global climate and environmental degradation. They argue that the world needs more, not less, governmental intervention and coordination across borders and neoliberalism is anathema to these efforts.

I am not ready to go as far as this. I will defend neoliberalism as it certainly has been shown to be effective in creating wealth and prosperity for hundreds of millions of people who would probably not otherwise have been able to obtain it. As a starting place then, I think neoliberalism has proven very effective. I also share the basic belief, common among economists, that markets are inherently democratic. I am not yet ready to say that neoliberalism is unable to accommodate government intervention to the extent necessary to solve the world’s ills. I think some evidence of this is the recent, massive shift in the awareness of global climate change. It was not very long ago that awareness was low and the impetus to meet the coming challenges was nonexistent. It was largely the (free-market) success of Al Gore’s movie and scientists and environmentalists working within the free marketplace of ideas that has brought the issue to the forefront of popular consciousness. Despite the current administration’s efforts to suppress these very efforts, the very neoliberal nature of the United States has proven too great to overcome and their efforts have failed.

So, I am still an advocate of free markets where appropriate and I remain a staunch defender of free trade in principle, but I also think that neoliberalism needs to become much more sympathetic to government intervention and must also be able to be flexible. Not every country is ready for a neoliberal revolution and the very immediate problems of poverty, inequality and environmental degradation must be addressed along with free market reforms. It is not enough to expect free markets to solve these problems over time, or to wait for government intervention until the reforms have had time to take hold. But is also impossible to utilize the resources of a country to address these problems without first creating these resources.

Consider this a first pass to start a discussion. So, discuss….

Friday, August 15, 2008

C-NIC OREGON: Fred Thompson, Guest Blogger

Ed. Note: Once again Fred Thompson checks in with an in-depth discussion of a local issue.

The legislature is currently holding hearings on the State of Oregon’s computing and networking infrastructure consolidation (C-NIC) project, the most ambitious technology project ever undertaken by the state (Statesman-Journal, 14 Aug 2008, p. 1). This topic deserves our attention. More than half of the activities performed by the state involve information processing, storage, manipulation, and analysis. How well the state government does its work ultimately depends upon the quality and effectiveness of its Information and communications technology.

Most of the scrutiny directed at C-NIC has zeroed in on the fact that it was over budget and behind schedule. The business case for the project looked primarily at operating cash flows and depended primarily upon personnel reductions. Bob Cummings, the information technology analyst for the Legislative Fiscal Office, has subsequently acknowledged that it was unrealistic for state officials to think they could cut staffing while consolidating complex operations. In any case, C-NIC’s is currently $67 million over budget (Statesman-Journal, 14 Aug 2008, p. 1). Some of us said so at the outset.

Construction of the hardened facility, installation of mainframes, and configuration of the new network architecture was supposed to be complete by the end of 2005, with migration of operations from the three largest existing data centers to the consolidated data completed by the end of 2006. As it happens the project is still not entirely complete, which has doubled transition costs and substantially delayed benefit flow from the project. Moreover, payback depended upon the project staying on schedule and being completed on time. That was also unlikely, although not necessarily for the reasons given.

Nevertheless, knowing what we now know, if we treat the project as a standard capital budgeting problem with a life of 25 years and a discount rate of five percent, it looks better than break even, even before taking account of benefits accruing from greater security, substantially increased peak capacity, learning-curve effects, or buying power. Moreover, according to DAS Director Scott Harra, consolidation has generated an additional benefit: "Departments can focus on their core business.” Department of Revenue Director Elizabeth Harchenko agrees, she no longer has “to worry about having her own agency maintain the necessary staff, software and equipment to do the work” (Statesman-Journal, 14 Aug 2008, p. 1). So by any reasonable standard, C-NIC has been a qualified success, which is occasion for self-congratulation, especially given Oregon’s history of IT fiascos.

Nevertheless, instead of patting ourselves on the back, we ought to ask what can be learned from this experience.

For students of e-government C-NIC reflects two noteworthy design choices. First, its designers chose to break no new ground, but, instead, they were content with paving the existing cow paths, justifying their effort in terms of standardization, departmentalization, and operational cost-efficiency. Consequently, C-NIC architecture reflects existing agency databases, which are built around general ledgers rather than geographic locations, and make limited use of meta-data and intelligent agents, unlike the systems implemented by governments on the leading edge of IT development. Moreover, the project’s governing board evidently never considered making database information available to the public. Instead, they redefined the security challenge C-NIC was meant to address. Rather than a terrorist attack, they now emphasize C-NIC’s capacity to maintain data confidentiality.

Second, the project’s governors chose to consolidate all of the state’s data processing and storage at a single hardened site. Indeed, the only alternative they formally considered was consolidating processing at two locations, the primary location and a backup, which they rejected for reasons of cost. The consolidation option was largely driven by fairly mundane considerations: the existing data centers were highly vulnerable to physical attack, existing server capacity was often underutilized, but was insufficient to meet peak demands as configured.

However, given this problem diagnosis, the best prescription would seem to be grid computing, which would distribute computing power throughout the state, In that case, over half of the nodes in the state could be destroyed and the system would continue to operate. Instead, we chose to put all our eggs in one basket.

The implicit decision to ignore these basic, conceptual design issues was never seriously questioned. Why didn’t the dog bark? One answer is that the project’s governors, the heads of participating agencies, were largely unfamiliar with digital organization or even the basics of IT -- when the project began, fewer than half of the board members answered their own e-mails. It probably never occurred to them to consider these alternatives. Moreover, as the State’s former IT manager, Mike Freese, explained (October 4, 2005), Oregon lacked “the technical expertise to implement grid computing.” He continued, “The best solution to an IT problem is useless if it cannot be implemented, so we looked for an 80 percent perfect answer that we could actually pull off – from this perspective, consolidation was a no-brainer.” One cannot fault Freese’s logic, but the proper lesson to be drawn here is somewhat different. If one accepts that information management is a core function of government and that Oregon hasn’t developed the necessary capability to perform that function, it follows that Oregon lacks the capacity to perform one of its core functions. It needs to develop that capacity. Further, top managers who do not understand the IT function shouldn’t be top managers.

In this case, legislative interest in consolidation preceded executive commitment to shared services. According to the Statesman-Journal (14 Aug 2008, p. 1), the 2005 Legislature approved C-NIC’s two-year budget of $100 million, including money for a new building on Airport Road SE in Salem, “with little opposition.” This means that C-NIC missed the legislative scrutiny an administrative proposal of its magnitude would normally receive prior to authorization. Again, one suspects that the legislature failed to scrutinize this project because it lacked the expertise to do so.

Most of the delays associated with the C-NIC project resulted from governance failures. These have been manifested in an inability to make timely decisions, but the dithering over policies and priorities seems to reflect deeper difficulties.
First, there was the conflict over the independence of the data center and the governance role of shared-services board. C-NIC’s designers drew a sharp distinction between shared and centralized provision of support services. They assumed that data processing would be consolidated into a stand-alone business unit that would be owned by its clients and whose only mission would be client service. They further assumed that the consolidated data center would negotiate service-level agreements, specifying standardized services and mutually agreed upon rates, with each agency, relying on quasi-market mechanisms to link the center to its clients or customers

By making data processing the unit’s sole purpose, they hoped “to elevate the importance of this back-office function to front-office status” and, thereby, “increase customer focus and employee motivation and ownership.” This logic was outlined in the shared-services governing board’s initial report, Shared
Services: A Strategy for Reinventing Government (DAS, August 2004).

Nominally all of the members of the shared services governing board endorsed this vision. However, DAS was responsible for managing the C-NIC project. DAS is not only Oregon’s central control agency (budget and financial management); it also supplies other agencies with a variety of support services – space and facilities, maintenance and landscaping services, utilities, the motor pool, etc. As it happened, project management gradually evolved into program management and, whether by accident or design, the consolidated data center came to be treated a simply another arm of DAS.

Unfortunately, customer service is rarely if ever a high priority of control agencies. DAS is no exception to this rule. Its priorities are central control, economy and efficiency, and adherence to rules. Even if DAS had in this instance been truly concerned with providing the consolidated data center’s clients with the best possible service, past experience with its service delivery practices might have led them to doubt its good intentions. Consequently, DAS’s unilateral rejection of the shared services concept, which had led to the creation of the shared service board in the first place, disgruntled some of the agencies represented on it.

Second, establishing a program management (as opposed to a project management) office was repeatedly delayed. The program management office was supposed to be put together from personnel drawn from longstanding functional units, who had worked with different kinds of data and applications processing styles. C-NIC’s designers assumed that personnel from different processing centers could be gradually integrated into a single functioning team with a common mission, regardless of their prior task-orientation or role. Cross-functional integration proved very difficult for the C-NIC project management team. This too was partly due to agency distrust of DAS. As it became increasingly clear that things were going to be done DAS’s way or not at all, their erstwhile partners turned increasingly uncooperative.
The third lesson, there is a fundamental conflict between DAS’s service-delivery mission and its fiscal-control mission. The time has come for Oregon to assign those missions to different agencies.

Tuesday, August 12, 2008

Economics, Politics and Demographics: The Big Sort

There is a new book getting quite a bit of press coverage: The Big Sort. The very basic premise is that people are increasingly choosing to live near people with similar political and social views. The book is largely about the social and political implications of this phenomenon and I leave it to those experts to comment on this, but the economic undercurrent is interesting to me.

Modern economic organization has made us a country of drifters. We think nothing of applying for jobs across the country, or to move to where we want with some confidence of making a living. Part of this happens because we generally have had a very low unemployment rate so there is a lot of truth behind the belief that jobs can be found most places (at least in bigger cities). Part of this happens because it is so easy to do so. Improved information technology it is easier for firms to recruit across the country (and now the world - imagine the big sort on a international scale...) and for job seekers to find jobs across the country. Highly liquid credit markets make moving much less burdensome than in many other countries. With strong tax incentives to own homes, development of new homes and communities is very rapid, allowing for easier sorting.

So it may be that sorting is happening and threatens the fabric of our society, I don't know. What I am pretty sure of is that this is yet another phenomenon that could not have happened without the economic development and economic system we have developed in the late 20th and early 21st century. So it does not surprise me that this is a very recent phenomenon.

Monday, August 11, 2008

Beeronomics: What's Up at BridgePort and Rogue?

Word on the street is that BridgePort, the godfather of Oregon craft brewers, is faltering. In a time where almost all craft brewers are seeing double digit growth in sales, Bridgeport is going backward. I have no way to confirm or disprove this but, if true, it is surprising for a company with such a storied history and strong brand identity. Bridgeport's IPA is, probably, the quintessential NW IPA. They are fully invested in the latest trend of brewing special brews and those brews, like the new Hop Czar, are often excellent. They also have a signature brew pub in the newly trendy Pearl. All brushed aluminum and gleaming timber. Unfortunately for those of us who used to frequent the BridgePort when it was all brick and odd little nooks and crannies in the then still quite ragged Pearl, the new brewpub seems sterile and uninviting. I wonder if this has rubbed off on the brand. For whatever reason the bloom seems to be off the rose.

Contrast this with the thriving Rogue Brewery. I was in Newport over the weekend with the in-laws and my father-on-law, who arrived first, called up from the grocery store to ask what beer to buy. When in Newport, get Rogue, said I. Later, with a sixer of Dead Guy in hang, he was amazed at the price: "I have never in my life pain $11 for a six pack of beer, how can they possibility sell any beer at that price?" It was a very good question. Rogue is always the most expensive beer in my local grocery, and yet they thrive. I told my father-in-law that they have a loyal following and a strong brand identity, but that felt a little hollow even to me. I rarely buy Dead Guy, it is good, but there are almost always just as good beers for two to three dollars less. Over the weekend I lunched at the restaurant in the brewery. It is a decidedly low key place, especially compared to the BridgePort. Plywood and unfinished surfaces, wobbly tables and no decor. And yet they charge $15 for a hamburger and had a line out the door of people waiting to get in. Go figure. The food, by the way, was good, and the beer was exceptional. I brought home a bottle of Juniper Pale Ale and blew the father-in-law away.

Rogue seems to play by its own rules, and for whatever reason almost everything it touches, turns to gold. My impression of owner Jack Joyce is that he doesn't care to think too much about it, but rather go with his gut. He is also not really interested in going for the big selling high-volume beer. And even they have had some misfires: remember the short-lived packages with historic photos of fishermen and such? No? I got your back. But in all of this remains a mystery of the business. How do you stay fresh and relevant in consumers eyes? Jack Joyce does it by following his inner muse. BridgePort seems to be trying to listen to its inner MBA. The former is not always a good idea - many a good brewery has been lost to those not very business savvy. And the latter is not always bad. Full Sail's regrettable new packaging, session beer and slogan "Brewed to Stoke, Stoked to Brew" seems to have worked out very well.

Economics has lots of theories of branding, advertising, consumer preference and the like, but when it comes to trends, fads and the like. We are just as in the dark as everyone else. So, ideas?

Wednesday, August 6, 2008

Trying Hard

I have been struggling to find time and energy to blog lately and in one area in particular I have been especially lax - the comments.  I have received many excellent comments even in this slow summer of blogging and have responded to almost none.  I shall try and rectify this - even if very late in the game - in the next few days.  

Anyway, thanks for your patience and I apologize for the slow blogging this summer.  I have been making considerable progress on my field experiment for this blog, I shall update that soon.