Tuesday, June 30, 2009

Portland Home Values Down Again

The April Case-Shiller numbers are out and Portland's home values dropped 0.6% since March and 16% since last year at this time. The Wall Street Journal has a nice summary. I think the employment situation is really starting to hit the housing market which counters the low mortgage prices and the incentive programs. However, anecdotally, I haven't seen a huge difference in close-in neighborhoods in terms of homes for sale or length of days on market, so my impression is that this is still largely a suburban phenomenon.

Monday, June 29, 2009

Will Oregon Start to Recover Soon?

Tim Duy thinks so (as do I) but we both agree that the recovery could be a very slow one, especially as seen through the employment metric. I am still sticking to my Q4 of 2009 prediction of the end of the recession, but it won't be pretty for a quite a while after that.

Friday, June 26, 2009

Beeronomics: Peak Load Pricing

Pelican Brewery in Pacific City, Oregon is among the very best Oregon breweries (as evidenced by their many, many national and international awards) and yet it is very hard to find their beers in the store. This something that I wondered about: why aren't they more available in Portland (and other parts of Oregon)?

An answer immediately suggests itself when one visits the brewery. It is located at a wonderful spot on the coast, but Pacific City is a little out of the way as it is off US 101 a bit. It is also on the Oregon coast which is wonderful in summer but can be...er...damp in winter. One expects then that they have a familiar problem in economics: a fixed supply capacity (the brewery) and a variable demand. Electric utilities are the most common example given of this: there is high demand during the day and low demand overnight. For Pelican, one imagines that they sell lots of beer during the summer and have a lot of excess capacity in the winter. So they could increase capacity to sell more bottles in Portland but this would potentially exacerbate the overcapacity in the winter (or may not if demand for bottles is seasonal in the other way).

The economics answer to this problem is what is known as peak-load pricing, an extra charge for buying at a peak time. Perhaps Pelican should charge $6 for pints in May-October and $3 in November-April, for example. This would even out the demand during these periods and help solve the excess capacity problem.

Okay, so perhaps this is a bit fanciful, but I sure hope to find more Pelican Beer in Portland, it is great stuff.

Update: I was going to write another post about Full Sails new Session Black following John Foyston's great article in the Oregonian, but Beervana beat me to it and has an analysis that is pretty close to what I was going to write. Check it out.

Update 2: John Foyston has posted the original piece on Full Sail, intended for the business section, which is even more fascinating in terms of the business of beer.

Thursday, June 25, 2009

Eco-nomics: Will 'Cash for Clunkers' Reduce Carbon Emissions?

In my search for the perfect car to replace my current one, I have stated that I am in no hurry: mine is pretty fuel efficient, relatively low-mileage and has been a great car to own and drive. Above is a picture of the Tesla S, an all-electric car that should be available when mine is ready for replacement and can go up to 300 miles on a single charge. Now we are talking my language!

Anyway, the idea that I would hasten to trade-in my current car raises some interesting general equilibrium issues as I have mentioned: what does this do to the used car market, the volume of new car production, etc.

The new 'Cash for Clunkers' bill is a good vehicle to use to discuss these issues. In it, if you have a relatively low mileage car (18 mpg or less) no older than a 1984 model, you can get a voucher worth up to $4,500 for trading-in that car and buying one with significantly higher mileage. But will this lower fuel consumption and emissions? It is not clear. First, with all of these traded-in high mileage cars on the used car market we can expect the price to be pushed down significantly which will increase quantity demanded even with the high mileage. So people will buy these cars that might not have bought at car at all or who would have bought a higher mileage car. Second, this may lower the threshold for scrapping cars and increase the production of new cars which is pretty energy intensive one imagines. So will the net effect be a reduction in carbon emissions? I am doubtful.

Wednesday, June 24, 2009

Soccer News

Two soccer stories pop up at the same time making for one efficient blog post. And I know you all turn to the Oregon Economics Blog for your soccer news...

The USA soccer team defeated world number one Spain 2 to 0 in South Africa today in the FIFA Confederations Cup. Spain is far and away more talented top to bottom, but soccer is the ultimate team game and the USA just plain wanted it more. Bravo. They will now likely face Brazil on Sunday as Brazil play South Africa tomorrow. But after today, don't count South Africa out, especially as they are playing at home.

Closer to home, the Portland City Council did the right thing and decouple the Beaver's search for a new stadium and the MLS to PGE park deals. Bravo again. Without this, MLS in Portland would certainly have been scuttled. As I have said many times, is there is better model for the viability of PGE Park than MLS? I don't think so. The Beavers are leaving anyway, best to focus on how to save PGE Park from being a budgetary black hole and provide another entertainment option for poor deprived Portlanders.

Now at the risk of sounding like the crank extraordinaire, Jack Bog, whose rants to me are entirely pointless - what the heck is up with Amanda Fritz? She does not seem very engaged and her stance against the stadium deal is without nuance or sense. I worry that she gets the static picture but not the dynamic one when it comes to economic growth and financial stability. Even Fish is on board with this one...

Eco-nomics: Zen and the Art of Buying a Fuel Efficient Car

In my previous quick post about pondering the decision to trade in my car for a Prius I was trying to make the simple point that MPG figures can be misleading in terms of how much going up in fuel efficiency can reduce overall gas consumption. I mentioned that a 5 MPG bump when you start at 15 MPG is better than a 20 MPG bump when you start at 30 MPG. But as I was writing it I could not help but start to think about the general equilibrium aspects of the question (I am an economist after all - once you have swallowed the red pill there is no going back). What I wrote about was really the partial equilibrium - the cost to me all else remaining the same.

The interesting comments I received make me even more curious to know the answers to questions like: What are the effects on the used car market and on overall energy consumption if high mileage cars start accumulating? What are the effects on the markets for inputs (commenter Stacy mentions Lithium mining)? What about the energy inputs into the manufacture of a new car (as Becky mentions), should trading in a relatively new car give me pause? I mentioned the Prius, but until the new one's better mileage ratings, I had assumed that a new 'clean' diesel would be the better option given the preponderance of highway driving I do (as Spencer and Oliver mention), is this a better option? What about the disposal of all those batteries (again, as Stacy mentions)? And, finally, how much should I expect from the promises of newer and better technologies coming soon? The Volt sounds pretty good, for example, but Spencer is a skeptic.

I have a feeling that many others have explored these issues and that there is a lot of information out there of varying quality. So I would like to enlist your help in answering these questions - can you direct me to sources of quality reliable information and research about these issues? I promise to write about what I discover.

Tuesday, June 23, 2009

Econ 101: Opportunity Cost

One of the most important concepts in economics is opportunity cost.  Economists know that the true cost of any economic activity includes the value of the next best opportunity that you give up.

Thus, I know that on a day that is relentlessly sunny, warm and breezy the cost of blogging is too high...

Monday, June 22, 2009

Eco-nomics: Should I Buy a Prius?

My wife recently suggested that, with my frequent commuting to Corvallis and the excellent mileage of the new 2010 Prius, I should consider purchasing one.

At roughly 50 MPG on average it seems to make a lot of sense. But I have a pretty good car already, my Saab averages over 30 MPG in all of my driving which combines a lot highway and a fair amount of city. [This is a lot better than it is supposed to according to the EPA estimate, not sure why]

So here is the thing, assuming I drive 15,000 miles a year (this is high, but for argument's sake...) I will save about 200 gallons of gas.  So, at $4 a gallon this saves me about $800 a year.  Add another $1 for the cost of my carbon consumption (reasonable figure according to some estimates) and the total comes to $1000 a year.  This is considerable, but not as good as you might think given the additional 20 miles on a gallon of gas I gain.

And thus I run into an error of logic that a lot of people have been talking about recently: going by the MPG numbers gives you a distorted sense of the benefits of fuel efficiency.  To see this, consider if I  had a car that got 15 MPG and switched to a very modestly better car that got 20MPG.  Over the same 15,000 a year, I would save 250 gallons of gas!  

The moral is that all the people that trade in their reasonably efficient car for a Prius, don't do nearly as much to reduce carbon emissions as a person who went from a Suburban to a regular sized SUV - or to a Prius.  [Of course this doesn't factor in the secondary market in which poor fuel economy cars are becoming incredibly cheap - encouraging people to buy them]

It doesn't meant that I shouldn't buy a Prius and when I my current car wears out, I will look to find a fuel efficient alternative, but in a few years I hope to have even better options.

Wednesday, June 17, 2009

Blues Fest

It seems since my recent volunteer work with the Oregon Food Bank has been all about getting the word out about the Blues Fest, that I might as well take the opportunity to plug it here.

You should go.

Tuesday, June 16, 2009

Saab Lives On

Swedish super-car builder Koenigsegg has agreed to buy Saab (with lots of help from the Swedish government).

I am not exactly sure how this deals with the economic fundamentals of the situation: Saab is a small company making cars for a niche market in a country where it is particularly expensive to do so. Koenigsegg has no experience in mass production and Saab's current line up of cars were all designed eons ago. And whatever loyalty people once felt for the brand was largely wiped out by GMs corporatization of the brand.

But at least now I can remain a loyal customer and have this as my next car:

Monday, June 15, 2009

Oregon Unemployment: 12.4%

After a brief pause, the unemployment rate in Oregon rose to 12.4% in May. This surpasses the worst unemployment during the early eighties recession when unemployment rose to 12.1% in 1982. Interestingly, leisure and hospitality, trade and transport, and construction were bright spots. Construction may be partly due to state and federal spending on projects.

Unfortunately the labor force actually shrunk between April and May, reversing a recent trend (perhaps people fleeing for other states?), but the number of employed fell faster.

The rate of decline is clearly moderating, but we have not hit bottom yet.

Sunday, June 14, 2009

Oregonian Edition: MLS, Credit and Taxes

David Sarasohn has an Op-Ed in today's Oregonian (not on web site) in which he suggests the MLS team and the Beavers could share PGE park and in which he makes the erroneous claim that "several" MLS teams share stadia with baseball teams.  This is demonstrably false and very easy to check - only Kansas City shares at the moment in a temporary two year arrangement while they develop a soccer-specific stadium.  It also ignores the fact that on most days, the Beavers fill less than 10% of the seats of PGE park making for a fairly dismal fan experience.  I think it needs to be recognized by members of the press that MLS is the only current viable plan for PGE Park, full stop.  MLS will not work in PGE park sharing with the Beavers because of space constraints (permanent stands will need to be constructed long the 18th Ave side) and the difficulty providing a top quality natural grass field with a baseball infield.   MLS has made it clear to all teams that the sharing will not work and most MLS teams are either playing in, or in the process of, developing soccer-specific stadiums.  What to do with the Portland Beavers is a tricky problem, and the abandonment of the Rose Quarter so quickly thanks to a tiny, but vocal group who want to preserve Memorial Coliseum for ... what exactly? ... makes their continued presence in the city questionable.  And maybe having them depart for the 'burbs is the right answer.  Saltzman's Leonard's insistence that his support for the MLS plan is contingent on keeping the Beavers is myopic and may end up costly when, in a few years, PGE Park is vacant.  

Also in Sunday's paper, Ryan Frank has a great story on Tom Moyer and his stalled tower.

And finally A very nice editorial by Susan Nielsen asking the same questions I have: why hasn't there been any real effort on the part of Democrats to go after wholesale reform of the states fiscal system.  This dovetails nicely with a good article on the state tax system in general - mirroring some efforts I have made to try and make sense of it.  Dems' insistence on piecemeal hole plugging is pretty troubling and their justifications pretty weak in my opinion.

Friday, June 12, 2009

Economists Notebook: Why Higher Education Matters

On the eve of Oregon State's graduation ceremony (congrats grads!), and on the precipice of a fiscal cliff over which Oregon's public universities and university students are about to fall, it is worth remembering why it all matters.

This outstanding article from Goldin and Katz provides a nice and reasonably accessible synopsis. Here are the main points nicely summarized:

The American Dream has been placed on hold. Putting aside the recent financial meltdown and the current recession – if you can – the main reason is an educational slowdown. For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed. The slowdown in education spells trouble for economic growth and economic inequality, as many authors have noted, e.g. Heckman (2008).

An educated populace is a key source of economic growth directly, through the improved productivity of workers, and indirectly, by spurring innovation and aiding the diffusion of advanced technologies. Broad access to education was a major factor in US economic ascendancy and in the creation of a broad middle class. The American Dream of upward mobility both within and across generations has been tied to educational access.

Ever since the beginning of the twentieth century, technological change has operated to increase the relative demand for educated and skilled workers. In academic parlance, technological change has been “skill-biased” – smart machines require smart workers. Technological change increases the relative demand for skilled and educated workers, but educational advance increases their relative supply. This “race” between education and technology can produce rising, declining, or stable levels of economic inequality.

US economic inequality has been on a roller coaster ride during the past century. Wage inequality and educational wage differentials decreased from around 1910 to 1950. They remained fairly stable until about 1980, after which economic inequality soared. The contrasting descent and rise of economic inequality in the twentieth century is linked to the history of educational attainment.

Here is the picture worth, in this case, probably about ten thousand words:

Source: U.S. Census Bureau, Historical Income Tables, table F3, updated September 15, 2006.

Note: The figure plots the annual percentage growth rate in mean real family income by quintile and for the top 5 percent of families for 1947 to 1973 and 1973 to 2005. Incomes are converted to constant dollars using the Consumer Price Index Research Series (CPI-U-RS). The income concept used is the official U.S. Census Bureau measure of pre-tax, post-transfer money income.

What this graph shows is how, since the mid seventies, economic growth has been concentrated in the wealthier quintiles. What Goldin and Katz state quite convincingly is that this is an education story, full stop.

As Goldin and Katz note: "For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed." In Oregon this trend has already reversed and is only getting worse. To me what this means is that Oregon's future economic prosperity is increasingly going to be tied to well educated immigrants from other states and that native Oregonians are going to find themselves increasingly poorer relative to those immigrants.

Beeronomics: Search Costs

Economists describe the cost of having to search (for a product, a low price, a mate, etc.) as, you guessed it, search costs.  The result in equilibrium is that the higher the cost of searching the less you will do.  So, for example, I was much more inclined to buy a CD, say, at whatever price I saw it for it the store I happened to be at than I am now that I can search for low prices easily on the internets.  (Yes, I know, I am a dinosaur, I still buy the occasional CD)  This leads to more intense competition, lower prices and, ironically, less of a need to search in the end because price disparities will be lower.  

It is for this reason I celebrate the release of Beer Signal, a new free iPhone app that allows you to search the current tap lists of Portland-area pubs.  I'll let Jeff of Beervana explain it in detail.  My first try, based on first hand knowledge of a neighborhood pub I patronized yesterday with an end of school year celebratory fish and chips with my son suggests it has some work to do to become very accurate (which will be helped along by users so I am acting in a self-interested way in publicizing it).  Still, it lowers search costs, enhances consumer welfare and will promote diverse and often rotating taps.

Better living through technology indeed...

Poll Results: Uncertainty Reigns

The poll has been closed for a week now and I have been meaning to talk about it for a while and now I shall finally do so.  There was a broad consensus that sometime in the range of Q4 2009 to Q2 2010 we will see the recession end - but also that the contraction will extend into 2011, suggesting that there is a lot of pessimism out there still.  Though I wonder if some have in their minds when the economy will recover, not start to recover as the poll was asking.

In a related topic Moody's Economy.com labeled Oregon as one of the states it expects to see turn around first.  I hope that they are right, but I am a bit skeptical: I am not sure that pent-up demand for technology is going to really filter down to Oregon that quickly unless there is strong demand from abroad as well, and that is a big question mark.    

But I hope they are right.  I answered Q4 2009 in the poll, by the way, and I still think we will see an end of the fall by then, but I also anticipate a slow recovery.

Thursday, June 11, 2009

Eco-nomics: Oregon's 'Green' Economy?

Apparently it is not all just talk. According to one metric, Oregon has the lead: over 1% of all jobs in Oregon, according to the Pew Charitable Trust are in: clean energy; energy efficiency; environmentally friendly production; conservation and pollution mitigation; and training and support. That is the highest in all 50 states and DC.

The Tax Kerfuffle

To become further tech savvy I have enabled the post by text message function in Blogger. So here is the first test.

I think Sen. Hass is right but more because piecemeal approaches to the state's revenue are not sensible long term approaches. Make them temporary and work on wholesale reform.

Update: This compromise I like (divert to the rainy-day fund after 2013), but still can't we do this in a more thoughtful way? Still, I understand the budget needs to get done now, so all in all this seems like a good deal, but taxing you way out of a recession is not a good idea, so we need to be prudent about all of this and I think in general this has been the case.

Wednesday, June 10, 2009

The Economic Crisis and Reed College

If you are from a wealthy family and want to go to Reed College, your chances have gotten much better.


Of course if you prefer to attend my alma mater, Lewis & Clark College - and you would (and should) - it is, as far as I know, still welcoming those of modest means.

A caveat, if you are of modest means (as I was) you may end up like me - writing a check every month for 25 years to pay for your education.

Given the premium on a college degree in the adult labor market, however, it is a very good investment. I don't regret it.

Tuesday, June 9, 2009

Econ 101: Compensating Wage Differential

Right in the heart of Portland, I took this picture on a lovely Sunday walk. Can you guess where it is?
The fact that you might have trouble identifying it is testament to the fact that the city is blessed with an abundance of natural forested parklands.

Of course Oregon in general is a beautiful place, and as someone who relishes the gray damp wonder that is the Oregon winter, I get a lot of utility from living here. Because of my strong preference for living in Oregon, I accepted a job that payed considerably less than competing offers I had - in the most dramatic case about 50% less than what a big midwestern state university was offering.

Economists call this a compensating wage differential: the extra money you have to pay to get people to accept unpleasant jobs or the lower salaries you have to offer to people for particularly pleasant jobs. You may have to pay more then for a person who pumps septic tanks all day than someone who delivers flowers. It is a simple idea, you have to compensate people for the difference in the disutility of doing different jobs.

Politicians love to say that it is okay that salaries in Oregon's state universities are much lower than other places because of this: Oregon is such a wonderful place to live that talented academics will come anyway. There is some truth to this statement, but Oregon isn't the only place to live and the population of people like me who are willing to accept much less to be here is pretty small. For instance I was offered quite a bit more to go to a university in a lovely seaside California town - I don't suspect many would have made the decision I did. So, yes, economic theory suggests that Oregon can get away with slightly lower salaries, but there is a limit.

As I talk to some OSU students who are graduating and who have more than one job prospect, I emphasize that they should look past raw salary differentials and think hard about how much they will enjoy the work they will do in each job and ask themselves, how much is the extra pleasure of working at a particular place worth in terms of salary?  What I am telling them, in other words, is figure out your personal compensating wage differential. 

Good luck grads!

Friday, June 5, 2009

Beeronomics: Drink Beer not Gatorade!

Via John Foyston (from whom I shamelessly stole this beautiful picture) come some wonderful news: beer is a better rehydration agent than water, or so say Spanish researchers:

Researchers at Granada University in Spain have come across a discovery that will undoubtedly please athletes and sports enthusiasts - a pint of beer post workout or match is better at rehydrating the human body than water.

Professor Manuel Garzon, a member of Granada's medical faculty, made the finding after tests on 25 students over several months. Researchers believe that it is the sugars, salts, and bubbles in a beer that may help people absorb fluids more quickly.

My soccer team will be so pleased to hear that they were right all along...

US Unemployment Hits 9.4%

More...um...good news?  US unemployment has risen to 9.4% but the rate of job losses is slowing considerably.  The unemployment number is a big bigger than what was generally expected, but the number of jobs lost was quite a bit smaller than expected at 345,000 jobs lost.  So what gives?  Once again, the civilian labor force increased by 350,000 over the month and the participation rate increased as well, so there are more people looking for work at the same time jobs are decreasing.

No matter what you think about the state of the economy and what the tea leaves are saying, the employment situation in the US is going to be dismal for a long, long time.

NOTE: Today is the last day to vote on the end of the recession in Oregon.

Thursday, June 4, 2009

Economics and NBA Referees

My colleague Dan Stone, has his research covered in today's Oregonian:

An academic study of NBA officiating found little to no evidence that referees favor teams from large media markets in the playoffs, a favorite conspiracy theory of skeptical fans.

But the same study found that NBA referees tend to favor home teams, teams trailing in a game and teams trailing in a playoff series.

The study, conducted by three economics researchers, fuels the perennial debate about the influence of NBA officials on games. It suggests that forces ranging from league executives to simple human psychology can influence calls in a measurable way -- though not always enough to affect a game's outcome.

Wednesday, June 3, 2009

A State and Local Tax Primer

NOTE: Apparently the figures are too hard to see so scroll down for a Scribd version of the original document.

A couple of weeks ago I wrote an initial post trying to better understand the facts in the Oregon tax debate so that I, and my readers, can make informed judgements about the suggested changes to Oregon's tax structure.  It is a pretty complicated thing to make any real blanket statements about, so I decided to do what any good economist does - go to the person with the comparative advantage.  In this case, Fred Thompson.  Take it away Fred:



Most states are in fiscal hot water, regardless of their tax structures

Figure one shows the year-over-year quarterly changes in state revenues from major tax sources for all fifty states. Because this is a sum, it tends to smooth out inter-state variations owing to differences in tax rates and bases, income recognition policies, and the like. The figure also suggests that the portfolio effect from relying on a variety of tax types is pretty small.

Figure 1


State tax revenues are volatile; Oregon’s are more volatile than most.

Figure 2 shows year-over-year quarterly changes in total state revenues over the past ten years. While the fluctuations are less dramatic than in Figure 1, the revenue trend is nevertheless characterized by a lot of volatility. These fluctuations are largely driven by underlying changes in the real economy. Another way of putting it is that the systematic component of state revenue growth is driven by changes in GDP. Variations in state product is one explanation for state-specific deviations from the systemic component of state revenue growth; differences in state tax structures and tax administration is another; the rest is random noise.

Generally speaking the more progressive the overall tax structure the greater its volatility. States that rely heavily on a progressive personal income tax, for example, tend to have more volatile revenue growth than states that rely on more regressive tax sources. That is the bad news. The good news is that the elasticity of revenue with respect to income is approximately ergodic. You tend to obtain about the same results over a moment in time that you get over a period of time. What that means is that revenue structures that are more volatile because they are more progressive, also tend to grow revenue faster over time, even without increases in tax rates or coverage.

Figure 2


Oregon state relies heavily on progressive personal income taxes, as seen in Chart 1.

Chart 1

Moreover, while Oregon’s PIT is characterized by a flat marginal tax rate, its pattern of exemptions, exclusions, and deductions renders it highly progressive on average, especially where the household is treated as the unit of analysis, rather than the individual. (I’d like to see the state eliminate the first step of its PIT and expand the EITC, but that is a subject for another time).


Oregon is a low tax state

That claim is true whether one looks at state taxes alone or state and local taxes combined (although that claim would have to be somewhat qualified, if one were to take local user fees into account – these are now the highest in the US by most measures). It is also true whether one looks at average taxes paid or taxes as a proportion of disposable income.

One might ask, how did that happen? It wasn’t very long ago that Oregon was near the top of the tax tables – in the top quartile in terms of taxes paid per capita and the top decile in terms of tax take as a share of disposable income. The answer is fairly straightforward: caps on the rate of growth in the property tax (Measures 5 & 47), the inability of the state to increase taxes (see Figure 3), and changes in corporate-income tax assessment that were supposed to be revenue neutral that weren’t. Oregon also spends more of its tax revenues on tax rebates than any other state (the Kicker).

Figure 3

A State and Local Tax Primer A State and Local Tax Primer patrick_emerson6704

Tuesday, June 2, 2009

Game Theory, Evolutionary Biology and the Financial Meltdown

Bob Frank (who was my teacher, boss and neighbor in grad school and whom I admire immensely) puts an interesting spin on the credit market meltdown. It is actually a narrative that I have told often using game theory as a setting: no one financial institution could be the one to not engage in the risky behaviors without potentially jeopardizing its survival even though they might have known that by doing so it was jeopardizing its survival. But if all agreed to do so together they woudl all be better off (and so would we). It is a classic prisoner's dilemma.

Frank puts this same narrative in evolutionary biology terms, but we know that evolutionary biology and game theory are very closely linked so it makes sense. But Bob is a master at telling a compelling story...

Though Adam Smith is ­almost universally regarded as the father of modern economics, most economists will eventually see Charles Darwin's ideas as the true intellectual foundation of our discipline. Smith's modern disciples celebrate his invisible hand theory, which says markets harness individual self-­interest to serve society's interests. Smith himself was more circumspect, claiming only that self-interested actions often lead to socially benign outcomes. But that claim is remarkable enough. Competition among greedy producers often yields innovations that result in cheaper and better products for everyone.

It was Darwin, however, who better grasped the complex relationship between individual and social interest. And we must turn to his account if we are to understand the recent meltdown in financial markets. His deep insight was that natural selection favours traits and behaviours according to their effect on individual organisms, not groups. Sometimes individual and group interests coincide. But interests at the two levels often conflict.

Male body mass is a case in point. Most vertebrate species are polygynous, meaning that males take more than one mate if they can. The qualifier is important, because when some take multiple mates, others get none. The latter don't pass their genes along, making them the ultimate losers in Darwinian terms. So it is no surprise that males often battle furiously for access to mates. Size matters in those battles. And hence the evolutionary arms races that produce larger males.

Bull elephant seals often weigh more than five times as much as females. But their size is a handicap, making them far more vulnerable to sharks and other predators. Given an opportunity to vote on a proposal to reduce their weight by half, bulls would have every reason to favour it. But they have no such opportunity. And any bull that weighed much less than others would never find a mate.

Similar conflicts arise when individual rewards depend on relative performance. This payoff structure, common in financial markets, helps explain why those markets sometimes fail catas­trophically. Wealth managers' salaries depend primarily on how well their investments perform in relative terms. Funds offering higher returns immediately attract cash from rival funds. If the invisible hand functioned as Alan Greenspan and other modern disciples of Adam Smith imagined, there would be no problem. Investors would be fully compensated for any additional risk they took in search of higher returns. But human brains forged by natural selection don't work as assumed in economics textbooks.

As our brains were evolving, immediate threats to survival loomed everywhere. Natural selection thus favoured a nervous system keenly sensitive to immediate relative payoffs, much less so to distant ones. Anyone disinclined to seize immediate gains at the risk of having to incur costs in the future would experience low relative rewards in the short run. And when competition was intense and immediate, such individuals often didn't survive to see the long run.

In market settings, a nervous system biased in favour of short-term relative reward is a recipe for disaster. When the price of an asset like housing is rising steadily, unregulated wealth managers can create leveraged investments that generate enormous rates of return. Even in the early years of this decade, many experienced analysts were warning that several mortgage-backed securities were poised to tumble. But investors faced a tough choice: they could earn high returns by continuing to invest in them, or they could move their money elsewhere. Many rejected the latter strategy because it would have required watching friends and neighbours pass them by.

Wealth managers felt compelled to offer the risky investments, since many customers would otherwise desert them. Managers also knew there would be safety in numbers when things soured, since almost everyone had been following the same strategy. The resulting collapse was inevitable.

Adam Smith's invisible hand is a truly extraordinary insight. But when rewards depend on relative performance, it doesn't always deliver.

The financial meltdown that caught Adam Smith's disciples off guard would not have surprised Darwin. One of his central themes was that because much of life is graded on the curve, wasteful arms races create conflict between individual and social interests. The good news is that unlike other animal species, humans can often resolve such conflicts through intelligent regulation.

Here is Bob on carbon offsets as well.

Monday, June 1, 2009

Econ 101: Opportunity Cost and MLS

John Canzano finally makes the point that journalists at his paper have not seen fit to discuss when reporting the 'economics' of the MLS in Portland deal - that the Beavers are not a viable tenant in PGE park:
Ignored in the great soccer-baseball debate is the possibility that the current Lents ballpark proposal blows up and Portland loses minor league baseball, too. The Beavers' lease at PGE Park runs through 2010, and the franchise pays the highest rent in the league.

So here is a little lesson in economics, reporters: the economic 'cost' of an activity includes opportunity cost. So if you are looking at the cost to the city of doing the deal versus the cost to the city of not doing the deal, you have to consider what the alternative is. In this case it is pretty likely that it would be an empty PGE Park with a sizable debt load and no revenue stream to service it. In fact the 'cost' of not doing anything hasn't be reported on at all.

Baseball at PGE Park has been tried by a number of entities in the last 20 years, none with any real success. MLS is quite possibly the best option for keeping the stadium viable.

Of course, following my same argument, you would have to ask what the opportunity cost of keeping the stadium as a stadium and not selling off the property to developers. This is a serious question. But at least for the next few years, it is hard to imagine that there is any private capital for a new development project there and you would need some measure of the social benefit of the stadium and the events it hosts.

Why did Eugene Get the State University and Salem the State Pen? Salem Got First Choice

NOTE: Guest blogger Fred Thompson sends his latest comtribution:

When unemployment rates are pushing 12 percent, it’s hard to remember that economic growth and development is not simply about jobs, but that is the case. The sine qua non of per capita growth is increased total factor productivity. At the local level, economic development means replacing less productive jobs with more productive jobs. And, that means growing or attracting high-value added businesses to a region, especially those that export their services to folks who live outside the area. These days, that means activities like product development and design, biotechnology, medical services, mass entertainment, and higher education, generally the kind of work that requires substantial investments in human capital and large doses of creativity and imagination. Two things it does not mean are agriculture and forestry and mining and manufacturing, at least not the fabrication component manufacturing.

This last observation is somewhat paradoxical because no other sectors of the American economy have experience higher total factor productivity growth than these over the last 100 years or so. But the simple fact is that these sectors of the econmy are now so productive that direct labor adds little value to most products, in high-tech businesses, often less than five percent of the total.

This fact is illustrated by the tale of two cities reported in yesterday’s Wall Street Journal, Ann Arbor, Michigan, with a population of 116,000, and Warren, Michigan, population 126,000. Ann Arbor is the home of the University of Michigan; Warren is a factory town. “In 1979, the average family in Warren made $28,538 annually, not much below Ann Arbor's average of $29,840.” By 2007, before the recent layoffs and plant closures, Ann Arbor's average of $106,599 had nearly doubled Warren $60,813.

This is a general phenomenon. We know that manufacturing plants are disproportionately located in minority or poor communities. The environmental justice literature argues that this is because businesses disproportionately chose to site manufacturing plants in minority or poor communities. Recently, however, Ann Wolverton looked at the characteristics of those communities at the time the plant location decision was made, taking account of several variables that are important to a plant's location such as land and labor costs, the quality of labor, and distance to rail transportation. What she found is that, although communities accommodating manufacturing plants now have significantly higher minority and poverty populations, they were not generally poorer and definitely did not have higher minority populations on average when the plants were built. Indeed, according to Wolverton, poverty is generally a deterrent to plant location. The clear implication is that manufacturing plants are linked to poverty, not because poverty attracts them, but because they attract poverty, i.e., they retard local economic development. Similar results have been reported for farms and military bases.

Last year, Willamette University’s Center for Governance and Public Policy Research looked at the economic development of Salem and Marion County. We found that entities like Salem Hospital and Willamette University, even the state prisons (they have high-value added jobs and higher average wages than most of Oregon’s universities, provide services to the whole state, produce small negative spillovers), are the leading contributors to its economic growth. Statewide, one might infer that among Oregon’s more important engines of development are the major state universities – University of Oregon, Oregon State, Portland State University and Oregon Health Sciences University. Over the longer term, however, the state’s productivity growth depends upon the effectiveness of its elementary and high schools – high-productivity jobs are high skill jobs.

Oregon’s legislators should keep these facts uppermost in their minds as they practice the budgetary triage needed to cope with the current fiscal situation. Nobody wants them to be penny wise and pound foolish.