Thursday, January 28, 2010

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.

Wednesday, January 27, 2010

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]

Tuesday, January 26, 2010

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:

Monday, January 25, 2010

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)

Saturday, January 23, 2010

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.

Friday, January 22, 2010

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.

Thursday, January 21, 2010

Mistake Header

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:

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 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, 2010PPts
Manchester United2247
Tottenham Hotspur2238
Manchester City2138

Wednesday, January 20, 2010

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.

Tuesday, January 19, 2010

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).

Friday, January 15, 2010

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!

Haiti: Institutions and Development

Why is Haiti so poor? Tyler Cowan lists some possible reasons and there are other many other essays floating around in the blogosphere. They all have a common component: governance issues. Haiti is a former french colony, was occupied by the US, has had malevolent dictators and is rife with corruption. In economics, such issues fall under the general rubric of 'institutions.'

Institutions refers to a nations laws and legal system that protect individual and private property rights that promote private investment investment, and government and bureaucracies that provide infrastructure, education, regulation, etc. All of this is thought to be critical to development and most poorly performing economies can be described as having weak institutions.

Though it makes a lot of intuitive sense, it is a very hard thing to isolate in an empirical study. The problem, of course is that institutions and growth are very highly correlated, but is it good economic performance that accounts for the strong institutions or is it the strong institutions that created the preconditions for the strong growth? It is yet another case of correlation vs. causation.

In order to try and identify the causal link between institutions and development, you need to find a variable that helps explain the institutional quality of a country but is not correlated with the unexplained variation in growth. This is hard to do.

Three economists, Daron Acemoglu, Simon Johnson and James Robinson, wrote a seminal paper a few years back that did exactly this. They used settler mortality data to identify countries that were more and less hospitable to european settlement during the beginning of the colonial era. The idea is that in countries where settler mortality was relatively low, colonizers were more likely to set up more long term or more permanent institutions (England in the US, Australia and India for example), in countries with high settler mortality rates the incentives were to set up a minimal institutional architecture, extract resources, and get out (Belgium in the Congo and more generally tropical countries had more diseases). Of course the story doesn't work if the mortality rates are the same in the local populations, but in general those populations had become resistant to the local diseases and it was mainly the Europeans that were susceptible to these illnesses.

They use this disease climate variable as a determinant of the development of good institutions (while controlling for many other observable, like for instance, the nationality of the colonizer) and argue fairly convincingly that this settler mortality is unrelated to the unobserved unexplained variation in subsequent growth rates. Their findings are robust: good institutions are important for good development.

So where does Haiti stand in this study? Its settler mortality was in the middle and fairly average for the Caribbean, but it was colonized by France and there is some evidence that this is worse than being colonized by England or Spain as were other more successful Caribbean economies. But the kleptocratic Duvalier reign in Haiti was probably the most damaging aspect of Haiti's 20th Century growth.

Thursday, January 14, 2010

Haiti: Mercy Corps

From Mercy Corps:

As you know, Haiti—already one of the poorest countries in the Western hemisphere—was devastated by an earthquake yesterday. Portland-based Mercy Corps is sending an emergency relief team to Port-au-Prince, and we’d like your help in spreading the word.

Mercy Corps has extensive experience responding to earthquakes: Indonesia in 2009, China and Pakistan in 2008, and Peru in 2007. Please help us respond as quickly and effectively to this disaster as we did to those.

For more information about Mercy Corps’ efforts in Haiti, you can check out,, and Our efforts for Haiti have also been mentioned by The Huffington Post (, The New York Times (, The U.S. State Department (, and The Christian Science Monitor (

I have placed the banner on the sidebar - please consider contributing.

Wednesday, January 13, 2010

Haiti's Economic Performance

Catherine Rampell on the New York Times' Blog:

Even before Tuesday’s devastating earthquake, Haiti had a distressed economy.

It is one of the poorest countries in the Western hemisphere, with around 80 percent of the population living under the poverty line and 54 percent living in abject poverty, according to the CIA World Factbook. More than two-thirds of the labor force are believed to not have formal jobs, and just 62.1 percent of adults over age 15 are literate, according to the United Nations Human Development Report.

Haiti also has among the world’s lowest levels of gross domestic product per capita.

Despite the destruction wreaked by multiple tropical storms in 2008, in many ways Haiti’s economy and infrastructure-building seemed to be turning a corner in recent years, aided by international support and debt relief programs.

In fact, Haiti was one of only two Caribbean countries expected to grow in 2009. There were hopes of a tourism revival, reinforced by the announcement that a new Comfort Inn would open there this May. In a sign of its growing structural sophistication, Haiti even recently announced that it would begin collecting better national statistics, with the help of theInternational Monetary Fund, so that it could better assess and calibrate its economic policies.


For more information on Haiti’s economic development and challenges, gohere, here, here, here and here.

Update: Here are some theories from Tyler Cowen about why Haiti has remained so poor.

Disasters and Development

I was going to post on today's Public Policy Analysis class, but little else seems to matter relative to the disaster in Haiti. To be sure a 7.0 magnitude earthquake would be a disaster in any built environment and yet it is so much worse in a poor developing country like Haiti due to poor construction, poor infrastructure, and poor services including emergency response.

The reality of the world is that while even developing countries have come a long way, the inequality among nations continues to grow. Here is a chart of some selected countries which illustrates this point.

Haiti's GDP per capita is about $1700, compared to the US's which is about $43,000. Over time this difference has grown and continues to do so. Here is a graph that illustrates the growth in inequality in the world.

Most policy that has any real affect (outside of trade policy) is national in nature, so transfers to developing countries are essentially voluntary charitable donations. And while much effort has been spent to try and improve developing country economies so that they too can enjoy rapid sustained growth, the reality has been dismal - especially in Africa.

Events like the earthquake in Haiti serve as stark reminders how much of the world is being left behind and how many people are living lives characterized by poverty and risk.

Update: Nicholas Kristof has a nice blog post on the same topic.

Tuesday, January 12, 2010

More on Measures 66 and 67

Jeff in the comments section of my post of my Op-Ed, points to an excellent piece by Bill Jaeger in the Register-Guard (how nice it must be to be given an opportunity to write more than 500 words!). One open question for many people are the competing claims by economists about the true effect of the taxes and Jaeger ends thusly:

Professional standards in our field include a peer review process for quality control, and the backing of a well-established research institute, university or respected consulting firm. Research results always are made transparent, and data and methods are made available freely to other researchers who might want to examine them in detail.

Claims that 70,000 jobs will be lost due to the “job killing taxes” represented by Measures 66 and 67 are not based on estimates that conform to these standards of the economics profession. These estimates were not subjected to peer review — at least not voluntarily. When examined by nationally recognized experts on state and local public finance at the Brookings Institution, the result was a scathing report concluding that the analyses were “without merit.”

The economists behind these job-killing estimates have failed to fully explain their methods. Indeed, months after presenting to voters their estimate of 70,000 lost jobs, they are now backtracking on these “guesstimates.” They recently substituted a new paper that purports to come to the same conclusions but using completely new data and different statistical methods. However, they have refused to make their new data and new methods available to other economists or the public.

In addition, these economists have misrepresented the conclusions of scholarly publications and institutions (including statements in the Oregon Voters’ Pamphlet). Perhaps most tellingly, none of these economists is affiliated for purposes of this analysis with an institution with a reputation for unbiased research.

Voters should understand that there is no exact way to estimate the long-term effects of changes in taxes and public services on jobs and economic growth. The evidence from 30 years of economic research, however, reinforces common sense: When your taxes and public services are among the lowest in the country, the benefits from improving poor public services — especially education — are likely to outweigh the costs of modest increases in taxes.

Yes on Measures 66 and 67

Here is my take, published today on The Oregonian's web site:

I support measures 66 and 67 because, based on economic evidence, I believe that the risk to the economy from declining education funding far outweighs the potential harm of the taxes themselves.

Economists understand that taxes have consequences, but the effect of these taxes on most businesses and individuals in Oregon will be minimal and the state will remain one of the lowest business tax states in the country. How low? According to the conservative Tax Foundation, even with the new taxes, Oregon will rank 14th in lowest tax states. Thus Oregon businesses are neither excessively burdened by taxes, nor likely to find greener pastures elsewhere. The effect of the new taxes on employment is therefore likely to be very small, and may be more than offset in the short-run by jobs preserved in social services, public safety and education.

Rejecting these new taxes will, however, likely lead to very severe and long-run consequences on the Oregon economy through the decline in investment in education. The positive economic effects of education are empirically well founded. Economic research by Eric Hanushek of Stanford University has found ‘significant growth effects’ from the improved cognitive abilities that result from investments in education. Claudia Goldin and Larry Katz of Harvard have found that a large part of what explains the phenomenal economic success of the United States in the 20th century is the investment the country made in education. The same is true for states: more educated states tend to be more economically successful than less educated states. It is no accident, for example, that the state of California built the world’s best system of public higher education and saw its economy grow to the 10th largest in the world and become a key engine of growth for the US economy in the second half of the 20th century.

So how is Oregon currently doing in terms of public investment in education? Miserably. In K-12, Oregon currently ranks 49th in the nation in terms of class size and has a school year that is three weeks shorter than the national average. In higher education, Oregon ranks 41st in terms of per-student funding. The percentage of Oregonians earning a college degree is actually decreasing through time. Clearly we are not currently on track to create an economy characterized by healthy growth and job creation and we cannot afford to fall any farther behind.

It is also important to note that private business benefit directly from public investment in education: research by Enrico Moretti of the University of California at Berkeley has found that businesses enjoy increased productivity from locating in cities with a large share of college graduates. In other words, a highly educated population makes businesses more productive.

The Oregonian and others have argued that we should hold out for something better and reject 66 and 67. But the country and the state are in the midst of the worst economic crisis since the Great Depression, we do not have the luxury to wait for something better. Research has shown that even temporary disruptions in education can have lifetime consequences for students. Inarguably the state needs to fix its broken revenue system and we should all demand that it do so soon. But we need the temporary fix that 66 and 67 provide right now. Without investment in the education of Oregon’s children, the future economic prosperity of the state is at risk.

Last week Fred Thompson shared his take on the measures on this blog. I largely agree with him but I am less sanguine about the disruptive effect of the failure to pass the measures and about the legislature's ability to come up with a quick compromise solution (including borrowing). Though I am much less of a student of the state government than Fred is, so keep that in mind.

Monday, January 11, 2010

ECON 539-Public Policy Analysis: Incentives Matter

Finally time to get down to brass tacks and start some real teaching after a delayed start to the quarter caused by a chilly visit to Atlanta. I am teaching a class in the Masters in Public Policy program (and cross-listed as ECON 439 for our advanced undergrads) and will add a discussion here as an experiment in new media teaching.

Today's class will be about the basics of economic theory: how individuals respond to incentives. Economists believe that they do so in predictable ways. A more nuanced statement might allow for many personal idiosyncrasies but that on average people tend to behave like economic theory predicts.

I will start the class with a discussion of a paper by a friend of mine, Stacy Dickert-Conlin, who found a (surprisingly?) large response from the financial incentives to have a baby before midnight on December 31 from the US tax code and EITC.

With this as background we will go over the basics of preference theory, optimal choice and utility maximization.

Then, we will examine things that affect choice: changes in income (new Oregon income taxes), prices (tax on gasoline) and new technologies that alter costs like hybrid cars. We will also look at policies like food stamps which change the shape of the budget constraint.

Finally we will review the most fundamental concept in economics in my opinion: the concept of Marginal Benefit = Marginal Cost (MB=MC).

My class is overstuffed - literally - apparently there were jokes about calling the fire marshal in the first class (covered by a colleague), so no more can join this term. But the class will be offered again next year if anyone is interested.

Friday, January 8, 2010

Fred Thompson on Measures 66 and 67

Fred Thompson checks in with his take on 66 & 67:

Most of the public debate about Measures 66 and 67 is not very edifying.

Will passing Measures 66 and 67 cost a lot of jobs? Probably not.

They may retard the expansion to full employment and, once there, reduce average job quality, but people who want to work at the compensation levels offered will; others will drop out of the job market or go elsewhere, but 70k? I don’t see it. Moreover, proponents of these measures are almost certainly correct when they argue that cutting state spending would cause more fiscal drag than the tax increases would.

I am especially skeptical of Bill and Randy’s estimates. Even if their analytical assumptions were valid (and I am not persuaded that they are), their estimates would still be off by a factor of two, maybe more. Here, I am talking about their willingness to take the state’s revenue estimates at face value. That is na├»ve. Measure 67 has two main components: a substantial increase in the minimum corporate income tax and an increase in statutory rates on corporate income. The primary effect of the increase in the minimum tax would be to reduce the ability of corporations to defer tax liabilities.

Accelerating tax payments will increase state tax receipts considerably in the near run, but the discounted present value of all future increases is likely to be small. The increase in the statutory rate will motivate businesses to find new ways to recognize revenue in jurisdictions with lower rates and, if yes on 67 wins, Oregon will be surrounded by them. My hunch is that the estimate of the revenue gain from increasing statutory rates is at least 20 percent too high.

The problem with 66 opponents’ analysis of the effects of the increase in personal income tax rates is double counting. They assume both that the tax will be collected and that a lot of folks with high incomes will find ways to report their incomes in jurisdictions with lower rates, some by moving away (or just not moving here). Both assumptions cannot be true.

Will the fiscal policy effects of Measure 66 be worse than those of Measure 66. Probably. What I don’t like about 66’s personal income tax increases, both in the statutory rate and through the reduction in the federal tax exclusion, is that they are permanent. Most economists accept some version of the permanent income hypothesis.

Consequently, we believe that most of a temporary tax cut will be saved, while most of a permanent tax cut will be spent, which is why a dollar of government spending provides more fiscal stimulus than a dollar tax cut. The opposite is true of tax increases. Temporary tax increases mostly reduce savings; permanent ones mostly reduce consumption, therefore more fiscal drag. Not good. At least not at this time.

Is Federal tax deductibility regressive? Not very.

In Oregon It applies only to the first $10K of federal taxes paid for a married couple filing jointly and the first $5k on an individual filer. The effect of raising this cap from $3K and $1.5K a few years back had little effect on the progressivity of the state's income tax, although it may have slightly reduced the progressivity of the state and local tax structure as a whole. The adjustment to the Federal tax exclusion in Measure 66 is distinctly progressive, tacked on to a marginal rate increase, even more progressive. And all of this piled on top of a state tax structure that is already arguably the nation’s most progressive.

If these measures fail, will Oregon have to cut vital services? Probably not.

Oregon’s Constitution requires the enactment of a balanced budget, not a balanced budget. Were the choice between raising taxes or cutting spending, raising taxes is probably the better option, but that is not the only alternative. Oregon's Constitution requires the Governor to submit and the Legislature to enact a balanced budget. They did. If Measures 66 and 67 are rejected by the voters, the state may legally borrow to make up the shortfall, just as it did in 2003 and 2004, when broader tax increases were rejected by the voters.

Wouldn’t that cause the interest rates the state pays on the bonds to jump? It could. But we could fix that by dedicating future kicker funds to repayment of state debt.

I’ll probably hold my nose and vote for 67 and cross my fingers and vote against 66.

US Unemployment: Ugh

I don't have a whole lot to add to the report of continued 10% US unemployment and the surprising (and horrendous) 85,000 job loss number. It is bad, bad, bad. Count me as one of the economists who was thinking we might see positive job numbers in December.

Sputtering along, the question is for how long?

Thursday, January 7, 2010

Eco-nomics: Tidal Power

From The New York Times:

The SeaGen is akin to a submerged windmill that is driven by flowing water, and the Bristol-based company already has a small-scale operation established in Strangford Lough, Northern Ireland, where it has been generating 1.2 megawatts of electricity since April 2008.


Considering SeaGen’s development costs, its makers reckon the device generates electricity at about $5.5 million per megawatt installed — or roughly double the cost of offshore wind energy.

They consider that a victory.

“How many millions of kilowatts of wind are installed already, and here I’ve got one machine and I’m one small firm and I’m only twice the price?” said Martin Wright, the company’s managing director. “We haven’t even started going down the cost-reduction curve yet.”

Energy derived from ocean tides and waves has been eagerly pursued for years by dozens of companies, mostly in Europe and the United States, but it has been stymied by technological setbacks and limited funding. No large scale commercial operation yet exists.

Benj Sykes, who helps develop renewable energy technology at the Carbon Trust, a group funded by the British government, said he sees “significant potential” for wave and tidal energy. But he added that the technology is expensive to develop because testing must be done in the ocean rather than on land, unlike with wind turbines.

This is interesting as it has the potential, it seems to me, of being a more reliable form of energy generation than wind or wave.

Wednesday, January 6, 2010

Economist's Notebook: Notes From Atlanta

I have written many times on the labeling of glassware for beer, but here is a new one - clearly marked wine glasses! Well done.

I also wrote on the curious tip guide on the bottom of my receipt at Kenny & Zukes. Well at Legal Seafood in Atlanta they go one better. They bring the card reader to your table, European Style (though we still are in the dark ages of magnetic strips), and then this screen appears. You have the option of entering your own percentage or amount, or you can choose one of the three convenient options: 15, 18 or 20%. (Note to K&Zs: even at a fancy Atlanta restaurant, they are not bold enough to go to 25% and they can pay the wait staff less than minimum wage) I got out of the waitress that she doesn't have to use the machine and for her regulars who give her good tips, she goes the old manual way because that induces more generous tips, but for irregulars, so to speak, the machine yields better results.

Tuesday, January 5, 2010

Best Trick Play in the History of the Word

For your viewing pleasure (and because I am too busy to give anything else but eye candy). I guess you can't really beat 'the play' - the Cal v. Stanford craziness - but this has got to be number two. Alas it is forgotten to all but young men who were living in Wisconsin at the time. Perhaps had they won...

The good view of the play in slow-mo starts at about 2:40.

Monday, January 4, 2010

In Atlanta...

...attending the annual meeting of economists. Atlanta is cold -I don't think it even got above freezing today - what is up with that? In my mind there was only one good thing about going to Atlanta and that is warmth (though my opinion of the city has gone up).

Anyway who cares about the meetings themselves (and anyway I am stuck in a hotel room all day interviewing newly minted PhDs), so let's talk about beer.

So far two local ones: Atlanta Brewing's complicatedly titled Red Brick Peachtree Pale Ale and Sweetwater Brewing's 420 Extra Pale Ale (why 420, who knows?). I was unimpressed with the Sweetwater Pale (not bad, just ordinary), but I liked the RBPPA quite a lot. Very nicely hopped with Crystal and Cascade hops (just the combination I am trying to perfect in my kitchen) and well balanced. It is really more of a Northwest pale in that it is a little bigger than a typical pale. I should say that I had the RBPPA on tap and the 420 in a bottle, so the hope might have been brighter in the RBPPA partly because of that.

What interests me most is that these were the only two local offerings I have found (suggesting their popularity among the brewers' lines) and they are pretty close to the Northwest style chart.