Detroit

I have said it before in this blog, but why can't the federal government offer a line of credit as a part of a Chapter 11 bankruptcy plan? I am not a lawyer, so don't understand the issues that well, but I do understand that we have this mechanism which is set up to specifically deal with Detroit's situation. The benefit of Chapter 11 is the restructuring of all of the obligations the companies have. The drawback in this case is the worry over the companies ability to raise capital in this credit crunch. So, why don't the feds just act as that type of lender and let the bankruptcy court do its thing (and do away with the micro-managing by the government, especially the odious "Car Czar" idea).

There must be something wrong with this line of thought because it is so obvious and yet not being talked about.

What am I missing?

Uh Oh...

...Powell's is hurting.

New Poll: Oregon's Unemployment Rate

For all you dismal scientists out there, how more dismal can you get than a poll on unemployment? Register your pessimism in the new poll by the end of the year.

The last poll ended up at 68% in favor of allowing self-service gas to 31% opposed. But I suppose now is not the time to talk about allowing gas stations to cut their staffs...

By the way, I only went up to 12%, did I allow enough room for the uber-pessimists out there?

Beeronomics: Krugman, the Nobel Prize and Beervana

So this blog post has been brewing in my head for a while now (rim-shot please), but now that Paul Krugman is in Sweden to collect his much-deserved Nobel, let's think about how his ideas explain Beervana.

[From Paul's NY Times page: The marquee for his talk at the Bagdad - Paul , Beer, Oregon - get it?]

Paul's most influential insights came from the idea that there may be increasing returns in trade. When applied to trade this insight helped explain why we see two-way trade in things like cars and was the principle reason he won the Nobel. But this insight quickly spilled over into other areas as well - for example, why is Silicon Valley still the center for high tech industry given that it is perhaps the most expensive place on earth to do business? Paul's answer has a lot to do with heads starts and learning curves: It may be cheaper to move Silicon Valley to Bangalore if you could do it overnight, but you can't - it takes time to build up the knowledge base and skilled work force and while that is happening, Silicon Valley can compete the nascent Bangalore away. This helps explain that while Bangalore has been able to chip away a little bit at Silicon Valley's dominance it hasn't done that much. This story is half trade and half economic geography. Economic geography talks about increasing returns that come from concentration: part of why Silicon Valley is so successful is because of the close connection inventors, entrepreneurs and venture capitalists have by virtue of being neighbors and part is the concentration of skilled workers to populate the firms.

So what does this have to do with Beervana - Portland (and Oregon's) disproportionate number of breweries and beer drinking? Well the same stories about Silicon Valley can be told here: brewing and beer drinking are both learning processes and ones that benefit from concentration. Brewing takes skill and practice and a there are a lot of knowledge spill-overs that comes from brewers talking and sampling each others products. Beer drinkers have to learn about the ingredients, how they taste and develop a palate and taste for the more robustly flavored beers. So the punchline is you tend to have concentration rather than dispersion and that places that get early starts tend to hold onto that advantage - familiar themes from Paul's work.

So really, beer drinkers of Oregon, this Nobel's all about you! Let's toast to that...

By the way, just to complete the circle - Beervana blogger Jeff Alworth left a comment on the same Krugman blog page that includes the picture above.

Crisis-o-nomics: Gold, Inflation and the US Dollar

While I was in Brazil, a former student sent me an e-mail with this question (sorry for taking so long to answer it):

"I'm curious what your opinion or knowledge is of currency commodities like gold and silver in inflationary or deflationary periods. Does gold or silver really hedge against the risk of inflation by giving similar purchasing power over time while a paper currency is losing purchasing power over time? I've been thinking over some issues revolving around these ideas a lot in light of our current economic situation. It seems as if there is a possibility for some high inflation in the near future. Will the infusion of capital into the market through different means such as the economic bailouts cause inflation? Also, as consumer confidence lowers and international confidence in the dollar is lost - the desire to hold something other than dollars would flood the supply and cause inflation of the dollar, right?"

This is a great and timely question, in fact, Bloomberg just today has an article about the surge in gold prices.

First let's address the question of gold as a hedge against inflation. Before I start with this, let me just say that right now, I am more worried about deflation than inflation. While it is true that loose monetary policy (and it is as loose as we can make it at the moment) could ignite inflation, we generally look at wages as the key channel, and with unemployment going berserk I am not expecting wages to be going up any time soon.

Okay, so there is some truth to the idea that gold has some 'intrinsic' value: it is awfully pretty and malleable so works well for jewelery, it is a good conductor and doesn't corrode, so good for electronics, etc. And there is only so much of it in the world and mining adds to the total stock of gold about 2% a year (from one estimate I have read) so it does not, in general, keep up with average growth. That is to say, there is a fundamental demand for it more than just because it is pretty and there is a limited supply which means that there is a sense in which its value is secure. But one must be careful with this logic, for the demand for gold can fluctuate wildly for many reasons, one of them being investors trying to hedge against inflation. Below is the 30 year dollar gold price graph. Notice that during the high inflationary period of the late seventies gold prices skyrocketed, but they collapsed almost as quickly after Volcker put the clamps on the money supply.
So if you got it just right and bought gold in Jan 77 and sold in Jan 80, you did really well, but if you bought in 80 and sold later, you did not. Another thing to keep in mind is that we have learned many lessons from the late seventies loose monetary policies, and should not ever expect a repeat of that again. Monetary policy for the last 25 years is almost always first and foremost used to keep inflation low and predictable. By the way, notice that gold has risen quite a lot in the last few years, partly because of the huge pools of money looking for outlets, partly because of high industrial and consumer demand and partly because of the relatively weak dollar. So buying now (while the price is already high) does not to me seem like a very good bet. As soon as the panic subsides, people will be looking for investment opportunities and pulling out of gold.

The next question is whether the bailout plans could ignite inflation. Well, in theory yes, but the economic situation is so terrible right now, even though we are talking about potentially billions of dollars being spent, it is still unlikely to do much more then staunch the bleeding. There will come a time, however, when the recovery begins, lots of hiring happens along with lots of new investment and this will be the crucial time for the Fed to keep money loose enough to allow this to happen robustly, but not too loose as to cause high inflation (higher than 3%).

The third question is about whether loss of confidence in the US and in the Dollar will lead to Dollar depreciation. Yes, we should see a loss in the Dollar in general when the US economy goes south, interest rates in the US are near zero so there are better returns elsewhere, etc. But, up until just recently we have actually seen an appreciation in the Dollar. This is coming from the fact that, one, the credit crisis is so terrible, people are hoarding their cash and putting it in the safest place on earth: US Treasuries which are Dollar denominated. And two, that this economic downturn is global, so while the US economy is tanking, so are most of the rest of the major economies in the world. So there really isn't a lot of competition for the Dollar right now.

So, I don't recommend investing in gold if you are worried about inflation and trying to protect yourself from a high inflationary episode. If you want to do this, there are extremely effective ways that come straight from the US government: Treasury Inflation-Protected Securities (TIPS). But, in general I would not be worried about inflation at the moment - I would be (as I am) deeply distressed about the potential for a deflationary episode. I believe we need fiscal stimulus big time and right away.

Economist's Notebook: Public Goods and the White Stag Sign

I am not really sure what the purview of the Historic Landmarks Commission is in the kerfuffle over the University of Oregon's attempt to rewrite the White Stag Sign to read "University of Oregon." From what I understand they are charged with preserving the historic and architectural heritage of Portland - so I guess this qualifies? I am pretty sure they don't think too much about the economics of this type of decision, so I'll try.

This falls squarely in the 'public goods' realm of economics (what luck - exactly what I am obsessed by). Clearly there is a private goods aspect, U of O would like to advertise both the institution as a whole and their Portland campus. This benefits the U of O. But this is one of the most prominent signs in all of Portland and thus is reflects the city as well - and this is the public goods aspect of the sign. The sign benefits the city and its citizens as well. In allowing the U of O to use the sign for their own purpose it represents both a tacit endorsement of the university and influences how the city is perceived.

To the extent that the fate of the city and the fate of Portland State University are intertwined (and I believe they are), allowing the U of O to use the sign damages both the image of PSU as the city's university and the city itself. There are other institutions of higher ed in Portland as well: Reed, L&C (my alma mater), U of Portland, etc., allowing this aspect of the 'public square' to be co-opted by one (yes, still, out-of-town institution) is a bad idea and violates the spirit under which the sign was preserved and made part of the public goods of the City of Portland.

Good Time to Sneak in a Gas Tax Hike?

The downside to lower gas prices: people are driving more. Which is why I always say that if you really want to tackle the environmental consequences of automobile gas consumption and emissions, the ONLY way is through higher gas prices. A tax is appropriate in the Pigouvian sense, and is more palatable right now than when gas was $4 a gallon. It will be $4 a gallon again in a year or two, so let's get the tax in now while we can. Go Ted go!

Public Finance: MLS and Convention Centers

I guess I'll admit at the outset that this post doesn't really have a single, solid point, just musings about two Portland public finance issues in the news in the last day or so.

First there is the convention center hotel project. Now I understand the basics: to attract big out-of-town conventions, it is necessary (it is argued) to have a adjacent big hotel to house conventioneers and potentially have additional banquet and lecture space. Building such a hotel privately is more expensive because private debt is more expensive than public debt, so the idea is to have the city finance the construction and then contract with a major hotel chain to manage the property.

I have lived through just such a project in Denver where they undertook a major expansion/renovation of the convention center and built an 1100 room hotel across the street with public money. Apparently, it has all gone very well: bookings have doubled and the hotel not only pays for the servicing of the debt but actually returns money to the city from excess revenue. I found a Dallas News article claiming that many cities have had considerable success doing these projects.

But does it make sense for Portland? I don't know but there seem to be some major challenges. First, the Oregon Convention Center is small. Really small. Denver enlarged their convention center by 50% before the hotel to assure their ability to attract large conventions. [The American Economic Association's annual conference - a gigantic affair - is going to Denver for the first time in 2011] Second, the competition for conferences is pretty fierce and while Portland in the Summer is a lovely place to visit, it is going to be hard to compete against places like Phoenix (and even Denver) for bookings in the other times of the year. Third, the bond market at the moment has gone haywire and the cost of municipal bonds may be far too high if they can even find buyers. Finally, the convention market may be hit hard by the economic downturn, though I think this will be a couple of years at the most, so by the time the hotel comes on-line, we should be getting back to OK times again.

So the moral here is it CAN make a lot of sense and be a huge boon for the city, both financial and in terns of redevelopment. The area around the convention center in Denver was awful but the renovating of the center and the new hotel rejuvenated the area and attracted new private investment as well. Of course, this was in the downtown core so it was a bit of an easier sell than in Portland. But it is by no means certain that it WILL make a lot of sense.

The second public finance issue in Portland is Merritt Paulson's proposal to remake PGE park for an MLS team and build a new baseball stadium for the (Portland) Beavers.

I have blogged about this in the past. I have two points. One, the view that there will be net positive investment in the city from this does not reveal itself in the data, though it can be an effective way to focus investment (as is the idea for the Lents location for the baseball stadium). Two, the benefits for Portland may not all be pecuniary and there may, in fact, be long-term pecuniary benefits that we don't see in studies of the impact of stadium investment. The non-pecuniary stuff is the exposure, the civic pride and involvement, the utility Portlanders get from having an MLS team. This could be negligible, but it may not. I was surprised in Brazil, the cradle of soccer civilization (sorry England), to see MLS shirts on young hipsters. This may lead to long-term pecuniary benefits just the same way we think of arts and cultural assets in a city. You create a place creative and energetic people want to live and work, you attract businesses and even tourists. I admit, MLS is a very small star in the sports universe of the USA, but I believe it will become huge and worldwide within my lifetime. Merritt Paulson, a smart guy, is betting $40 million on the same thing.

[I do have one HUGE concern: it used to be that MLS had a no-artificial turf policy, but they have abandoned this unfortunately. I hope Paulson is not planning on turf for PGE park, because I, for one, will not pay to see pinball soccer played on turf. It is painful to watch.]

The challenges for this project are similar to the hotel: uncertain economic times ahead, a bad bond market, and questions about the net revenue projections.

I often think that electoral cycles make the government too myopic and this leads to too little investment in the medium and long term economic health of the cities and states that they serve. So I am pre-disposed to think that taking some risks for future investments is a good thing, and I am here as well. I personally hope that Portland can find a way to do both.

Economic Woes Hit Economists Too

The job market for newly minted PhDs in economics is nicely coordinated by the American Economic Association (AEA) which publishes a virtually all-encompassing job openings listing for institutions that have positions to fill.

This year, for the first time (as least that I know about), the AEA is posting a special bulletin of cancelled job postings. It is already long, but is missing many others that I have heard about through the grapevine.

You have got to love the first cancelled job search (as of the time of this post): Senior Risk Modeler - Home Equity Risk, for Bank of America. You CAN'T make this stuff up!

Things are bad all over...

By the way, if you are in the market for an economist, this year should be a buyer's market!

Econ 101: Game Theory and Car Dealers

The Oregonian reports today on the Oregon Automobile Dealers Association request to lawmakers that they prohibit the sale of cars on Sundays. Huh? Why on earth would dealers want lawmakers to limit how they operate? Isn't this the antithesis of allowing free markets to produce efficient outcomes?

Actually, in economics, game theory provides some useful insight into situations in which, when strategic interactions exist, the free market might lead to inefficient outcomes.

Let's try and see how auto dealers might be in just such a situation using the canonical example of the prisoner's dilemma game. Even though the title of the game refers to a particular story told with it, the canonical nature of the game is actually in the payoffs and outcomes. Here goes:

Suppose, for simplicity, that there are only two auto dealers. I shall describe their interaction with a payoff matrix (shown below). The two dealers are Honest Moe's and Crazy Larry's. Their strategies are either to stay closed on Sunday or to be open on Sunday. Honest Moe's payoffs from each of the four possible outcomes is the first number written (let's call it weekly profits) and Crazy Larry's is the second. Thus if both Honest Moe and Crazy Larry close on Sunday they will both get 120 and so on.



So what will happen if they are both left to their own devices? Well if Honest Moe knows Larry will close on Sunday, Moe will stay open because he can get 140 instead of the 120 he would get if he stayed closed. If Moe knows Larry will be open on Sunday, then Moe will open on Sunday because 100 is better than 80. The exactly same calculations apply for Larry. So, no matter what the other does, it is always better for each individual dealer to stay open on Sunday. Thus the outcome of the game is that both will be open Sunday and they both will get 100.

But is this the best outcome for the two dealers? No, they would both be better off if they both stayed closed on Sunday. This would give both of them payoffs of 120. This is the essence of the prisoner's dilemma: individual incentives lead this market into a sub-optimal outcome and thus the efficiency of the free market breaks down.

Just agreeing to stay closed on Sunday won't work, because each has an individual incentive to cheat and open up and get 20 more at 140 than at 120. In other words, the very best individual outcome is the be the only one open on Sunday.  So they need the option of opening up in Sunday removed from their choices and then they can both be made better off.

Whether consumers are better off is another story...

Income Tax and the Current Economic Crisis

A while back I engaged in a whole series of blogs that tried to investigate the question: should Oregon have a sales tax? I learned a lot from that exercise. But due the particular quirks of the current economic crisis it just may be that we are very lucky to have what we have.

I have heard it stated, by no less than Oregon's Chief Economist Tom Potiowsky, that currently Oregon's revenues are in good shape relative to other states thanks to our reliance on income taxes. Contrast this with Washington which relies on sales taxes and is resorting to fairly draconian measures to deal with their budget crisis.

The basic theory is this: right now consumers are retrenching and consumption spending has dropped dramatically, aided in part by falling home values. Unemployment is rising, but not by nearly as much as consumption is falling. So, this time at least, we are fortunate to rely on income taxes and not sales taxes.

Is this theory supported by the facts? Perhaps. The BEAs national figures seems to support it - personal income is stagnating but consumption is plunging.

Of course, new data out today show Oregon's unemployment surging to 7.3% so this trend might not last for long. I don't think state personal income figures are out yet, so we'll have to wait and see.

Of course time can change everything as well, as we recover from this recession it may be that consumption spending picks up faster than incomes. But given the nature of the bubble that burst, it is hard to say. Also, if federal stimulus includes lots of job creation, Oregon might again be well positioned.

Food for thought. Comments?

Oregon Unemployment: 7.3%

From the Bureau of Labor Statistics, Oregon Unemployment Rate:Ouch. This is .6 percentage points higher than the national rate. This represents almost 20,000 newly unemployed in Oregon from September to October.

Note: These numbers are preliminary and are subject to revision.

Wither Saab?

It seems more than likely. GM has not been able to make it viable for the US market. I think the likely scenarios are that some european buyer will take it and will pull out of the US, or that it will just be folded into Opel and assets and the brand will die. Either way, as a Saab owner and enthusiast, I will be sad. What will the professoriate drive?

But the question remains, why on earth continue to focus on Buick and GMC. Buick's audience is dying and serious luxury buyers will look to Cadillac, which GM resuccitated nicely, and GMC is just rebadged Chevy trucks, no? Chevy and Cadillac are the the core of the GM empire (with Opel in Europe), who needs anything else?

Newspapers and Public Goods

On Monday, I received my Oregonian with the notice that, starting with that edition, the Metro section would be cease to exist and would become part of the A section. On Blue Oregon, Paul Gronke see it as a sign that it is time to abandon the paper. This is just another indication of the sad trend of dying dailies. Some see this as the inevitable result of market realities and we should let the market decide how and where people get their news. This is wrong.

Markets only 'decide' efficiently if they are complete and this means, among other things, that all costs and benefits of a product are private. But there are clear public goods aspects to newspapers: they provide oversight of government (the 4th estate); they inform the population which, especially in a democracy, leads to better policy; and they enhance community through their coverage of local events.

So why then don't we offer public funding for such a public good just as we do things like parks and schools? I fear for a state that has virtually no professional reporters covering the government, the community, etc. For such a vital role that we assign newspapers we should be much less indifferent to their decline. And, no, blogs are not a good substitute. Nor are the electronic versions of the papers, because without reporters, the web-sites won't have much news.

It is hard to imagine public subsidies to newspapers given the long tradition of leaving it to private market forces (and vast fortunes were once made in the newspaper business when there were few other ways to advertise widely), but I am beginning to worry that the health of our democracy will suffer if we don't start thinking creatively about how to preserve the papers. Look what cable news has done to public discourse and our democracy...

Perhaps we need an on-line national public newspaper similar to NPR. Partly funded by taxpayers, this would ensure that 'print' journalism would continue and could include, as a big part of its mission statement, local state-by-state coverage. I don't know the answer, but I am worried.

Econ 101: Cost Disease

This provocative picture from the New York Times show just how quickly college costs are outpacing inflation. [Though it is important to note that this is the sticker price, many students get some form of financial aid which reduces their cost considerably]

This type of data is not new and always begs the question, are colleges and universities to blame for not being able to keep costs under control?

Perhaps not. In economics we talk about something called cost disease. Cost disease refers to industries that do not see productivity gains over time similar to other industries. Take a simple example (and the classic example of Baumol who coined the term): A string quartet takes the same amount of time and the same amount of people to perform a piece today as it did 100, 200 or even 300 years ago. Compare that with, say, the amount of time it takes to produce a knit sweater - a fraction of the time on a big mechanical loom than it did 200 years ago. Thus the string quartet has become relatively more expensive over time - in the same amount of time it takes to perform the piece we could now knit 100 sweaters, rather than 1/2 of one we could have knit 200 years ago. So what we would experience over time is the cost of performing by this quartet would vastly outpace inflation. Why? Well, inflation, or the CPI, is a measure of AVERAGE price increases. So industries that have below average productivity gains, like string quartets, will see their prices rice faster than average, or outpace the CPI.

To restate this more generally, over time most industries see productivity gains, some faster than others. How cheap or expensive a product becomes in relative terms is largely a function of this productivity gain. And this works both ways as well. For example, personal computers today are a much smaller purchase as a part of a budget then they were 10 or 20 years ago. If I were to draw a graph like the one above with computing power per dollar versus the CPI, the CPI would be going up but computing per per dollar would be going down sharply.

Universities have economized in many ways (for example the use of computers in registration) but the essential function of teaching and learning is still relatively the same as it was 100 years ago. Sure we have bigger lecture halls aided by microphones and video screens, this helps a little but, but the process of teaching and learning is not conducive to huge productivity gains over time. Since most of a college or university's budget is tied up in professors, there is not a lot of economizing that can be done.

Which is to say that it is natural for university costs to increase faster than the CPI. 30 years ago, an Apple IIE might cost the same as one semester's tuition. Now, you can buy about about 10 desktop computers that are about 100,000 times more powerful than that Apple for the price of one semester's tuition.

The point is that there is nothing necessarily sinister about this increase, and, more importantly, it will NEVER go away. What we must do is accept it, while being ever vigilant to get as much efficiency improvement as possible, and start coming up with better policy solutions for it.

In the end it is all a matter of perspective. For $300 I bought an iPhone that is more stocked with technology than I could have even imagined 20 years ago - that is the payoff to living in the 21st century - I get to pay much less for this stuff. The other side of this coin is that classroom based learning is pretty much the same as always and so I have to pay more for that. The hard part is that what is by far most important in the 21st century is the hard stuff - the education - and not the iPhone.

Credit and the US Auto Industry

We all know how badly managed the US auto industry has been, willfully oblivious to the obvious: that huge demand for big trucks and SUVs were not going to last forever and that fuel efficiency was not the the enemy. If they had spend half the time, energy and money into design, R&D and engineering that they devoted to ensuring protection from Washington they would probably not be in this mess (or at least not nearly as bad off).

We also know that they represent a pretty significant part of the manufacturing base in the US, especially with all of the links to suppliers. This makes a pretty compelling case for the government coming to their aid.

But is their trouble all their own fault? It can be argued that the credit crisis hurts their industry much more than most because of the fact that most auto purchases rely heavily on credit. Since traditional consumer credit sources have dried up (including home equity lines of credit), it is possible for them to argue that they are in a special position as sufferers from the credit crisis that the government allowed to happen.

I don't know how much water this argument holds, but I have been interested that this point is not being made much. One thing is for certain, the US auto market has cratered. Above, from Econbrowser, is a chart of US domestic car sales. Look at how far off are current year sales to previous years. Ouch.

India

I have a particular connection to, and affection for, India, having spent a good deal of time their particularly as a college junior living and studying there. So it was with great horror that I witnessed the terrorist attacks on Bombay and their aftermath. [Yes, I said Bombay, ignoring the Hindu-nationalist inspired name change] I have dined at Leopold's restaurant, I have sat at the India gate gazing at the Taj Hotel, and I have traveled through Victoria Terminus - the train station that was attacked - so this really struck me.

I have to admit, I have never had any faith in the emergency services in India and many times while there have I thought "please don't let anything happen where I would need assistance" because I was quite convinced in the futility of such a need. The police seem hopelessly incompetent and vaguely violent (occasionally resorting to thrashing a beggar with their canes without provocation), the firefighters nonexistent and in general the government seems obsessed with bureaucracy and hierarchy and uninterested in competence. I have stories upon stories of trying to get things accomplished only to be completely stymied by layers upon layers of bureaucratic machinations and endless middlemen.

It came as no surprise to me as a development economist, then, that when there was finally some liberalizing of the commercial bureaucracy the economy skyrocketed. Unfortunately this has not translated yet to other parts of the government. Perhaps this unfortunate event will do the same. India, an ancient civilization steeped in caste and class, is not eager to see this eternal protection of the upper castes place in society disappear - at least not among those upper castes who still control the country. But a new culture of competence must arise. India cannot long sustain its economic progress without addressing its lacuna in governance in other areas. The central government must work to create new mechanisms through which talent and performance is rewarded - regardless of position or caste. I am not optimistic that this will happen quickly though. But I hope it happens quickly enough, because to sustain this society, more economic progress is needed.

I also worry about the success of these terrorist attacks. These will surely test the fragile fabric of what is a magnificent achievement: a diverse, democratic, pluralistic, secular country of over one billion people. It is in all of our interests to assure the success of this grand experiment in democracy. As the new home minister, Palaniappan Chidambaram, said so eloquently to reporters on Monday:

“This is the threat to the very idea of India, the very soul of India, the India that we know, the India that we love — namely a secular, plural, tolerant and open society, I have no doubt in my mind that ultimately the idea of India will triumph.”

I hope and believe it will, but it will take much hard work - and some help.

Bravo!

Good news about Oregon's budgetary priorities in this time of scarce resources. Governor Kulongoski is absolutely right to protect education, something I have blogged about twice in the recent past (here and here) and not just K-12 education - university education and research are critical to success in the 21st century. I would only add that just protecting budgets is not enough, but giving more money for scholarships is a good idea for fiscal stimulus and long term economic growth.

And, by the way, others have jumped on my education bandwagon.

Bravo!

Economist's Notebook: Random Thoughts from Brazil

Some random thoughts I never had a chance or the will to turn in to full posts:

1. GM has a HUGE presence in Brazil, all under the Chevy brand, though almost all the cars they sell are European designed Opels (the German car company which is owned by GM). Unlike most of the crap sold as Chevys here (and mostly fleet sales and to rental car agencies it seems), these cars are relatively stylish and well engineered. One wonders why US auto makers are so content to make great cars for Europe but bound and determined that US consumers won't like them and instead sell their crap to us. GM has awoken to this and has now transformed Saturn into basically Opel USA to widespread acclaim in the auto press. It is time for these companies to consolidate and start leveraging their European designs. But the Latin American presence of Chevy is a very good thing for the future of GM (if there is to be one). Time to jettison all of the other brands in the US and just be Chevy.

2. VW has the biggest presence in Brazil dating back to the days of the Bug and the Combi (which is still made and very common in Brazil - making me wistful for my old bus). Fiat is relatively new, I'm told but now huge as well and the french companies are pretty big. But Japanese and Korean cars are not - they are just now trying to break in. This is curious given the fact that the largest Japanese ethnic community outside of Japan is in Brazil.

3. Brazil is a huge and amazingly diverse country and the three places I have spent time, Salvador, Sao Paulo and Rio are as diverse as California, New York City and Florida (in that order). You just can;t generalize too much about the county from a visit to any one place, and there is still the huge interior agricultural and ranching regions and the Amazon - it is a truly wonderful and wonderfully diverse country.

4. I was told by residents of Rio that though one often takes the admonitions to tourists to be careful in Rio lightly (must be an overabundance of caution one is apt to think), on the contrary, Rio is VERY dangerous and you have to be VERY careful. Hard to imagine living that way and one wonders why it is so hard to fix. A big clue lies in the fact that Brazil is a fairly rich country but one of the most unequal on earth.

5. Sao Paulo has got to be on par with NYC, Paris and London as world class dining spots. Yes, I said London - been there recently?

6. What do you do when land is enormously expensive but labor is relatively cheap? Well in one trendy Sao Paulo neighborhood, a new supermarket decided not to build a parking lot, but offer free delivery to your home.

7. A draft beer is called a "Chopp" and good luck finding anything but pilsners. I did try a Brazilian wine, but Brazil has a long way to go to catch up to the Argentinians and, especially, the Chileans.

Econ 101: External Economies of Scale

Note: I am back in the Oregon after a long trip home from Brazil. Much now to catch up on, but will try and keep the blogging active as much as possible because there is so much to talk about. Please be patient.

The New York Time's website this morning has a lead story with a fascinating headline: "Ford Says It Can Get By if Rivals Survive" Huh? Isn't being having bigger market share the goal of all auto manufacturers? If so, why not hope for your two domestic rivals to go away? Turns out, Ford is worried about something economist's call external economies of scale.

Scale economies are most often talked about as internal to the firm. As firms get bigger they can specialize workers tasks more more (a la Henry Ford) and make them more productive, they can get volume discounts on inputs, they can economize on warehousing and shipping costs, and productivity improving technology has a bigger payoff for bigger firms so they are willing to invest more in developing and utilizing such technologies (welding robots for example), and so on.

But there are also external economies of scale - efficiencies that occur when the entire industry is large. As the auto industry grows, suppliers of parts can also get bigger and exploit their own internal economies. So can the suppliers of raw materials for many of the same reasons listed above. Iron ore miners, steel manufacturers, stamping businesses can all become more efficient with greater scale that a large auto industry and the resulting large demand can provide. Also manufacturers of technologies like welding robots will have an increased incentive to come up with the next iteration of productivity improving technology because the payoff is bigger when there is a larger potential demand. Storage and shipping economies can also depend on the size of the industry.

So it is interesting that Ford believes that these economies will suffer if GM and Chrysler go under given the presence of many other manufacturers in the US (which would surely increase if GM and/or Chrysler went away). Ford also believes that the loss of these economies are more severe than the potential gain arising from market share - probably because the foreign competition is already fierce enough that it doesn't matter if GM and Chrysler are around.

Interesting times...