Lefties

From Doug Mills of the New York Times comes this picture, clearly showing that President Obama is a lefty. This had escaped my attention until I saw him signing on inauguration day. Thank goodness, as we all know that left-handedness is a key determinant of intelligence, leadership, humor, insight and good looks. Well, we lefties know this at least...

[OK, this post may disprove the humor part but the rest is still valid!]

Think Out Loud: The Oregon Economy

I will be on OPB's Think Out Loud show tomorrow (Friday) for a show on the Oregon economy. Should be upbeat!

In honor of this occasion, I have created a newly updated unemployment poll. I have left lots of room for the gloomiest among us, I hope. What do you think now?

Education, Part 3: Education and Economic Growth

I am trying to find the time to give this outstanding book its due: "The Race Between Education and Technology" by Harvard economists Claudia Goldin and Larry Katz. Unfortunately, I am not done with it and the library (or more accurately Eastern Washington University's library) wants it back. So I have finally decided to spend the money and order it. As I await the arrival of my own copy, I can talk about the parts that I have read carefully. I did one snippet a couple of days ago and here is another one.

Above is a key table that speaks to the relationship between education and growth (is this acceptable fair use - can someone tell me?). This is a growth accounting that looks at increases in educational attainment and their effect on employment and productivity.

How to interpret this table? Well, column one is the measure of productivity growth (output per hour) and column two is the change in educational productivity. For column three, I'll let the authors say the punch line: "Thus, education directly contributed an average of 0.34 percentage points a year to to economic growth...[emphasis theirs]" They go on the say that between 1960 and 1980 the contribution of educational advancement to labor productivity growth was 0.59 percent per year but then sharply declined to 0.37 per year. This matches the general observation that there was great advancement in the educational attainment of Americans post WWII, but a steep fall off in the eighties and nineties (as can be seen in column 4).

So, are these numbers big or small? Well, when average growth rates of high income countries are a little above 2%, a bump of 0.34 percentage points is a 17% increase in growth. So these numbers are pretty huge.

What I really want to discuss here at length is their treatment of the future of education and technology and how a state like Oregon should view education as a part of its economic (as opposed to social) strategy. Soon - the taxpayers of Oregon are paying part of my salary not to blog but to teach research and assist in the operation of OSU, and the tuition paying students of OSU are always my top priority. So blogging has to take a back seat.

Beeronomics: Bailout Bitter

By way of the Calculated Risk blog I learn of this beer: Bailout Bitter from Howe Sound Brewery in British Columbia.



Tim Geithner could probably use a few of these today...

Poverty and Opportunity

One of the main areas of my research is in child labor.  When I present my work, I often talk about the potential for negative impacts of bans on child labor for families that are so poor they rely on the income from a child's work to survive.  I am often met with skepticism and I wonder if the well meaning people who would like to see bans on child labor understand the nature of poverty in the developing world.  Well, I think New York Times columnist (and Oregonian) Nick Kristof does a good job of illustrating the devil's choice of child labor and poverty.  It is also why I am quick to defend companies like Nike that while we may wish to strive to always do better by its workers we must also realize that they are providing opportunities that are improving peoples' lives.

Education: General Skills and Mobility

In my upcoming post on education I will focus on an in-depth discussion of the new book by Claudia Goldin and Larry Katz "The Race Between Education and Technology." But as I have been reading through the book and thinking about the myriad of issues raised therein I happened upon a blog post by Stanley Fish (or Morris Zapp in his fictional form).  In this post, Fish wonders whether the ideal of learning for learnings sake is dying out as universities face the decline in state support and are under more pressure to become more directly vocationally based.   

In Goldin and Katz, they examine the nature of the US higher education system and its emphasis on general knowledge as opposed to, and quite distinct from, Europe in the twentieth century which was largely focused on specific vocational training.  They argue convincingly that this emphasis on general knowledge was beneficial to the US because of its high degree of occupational and and locational mobility (again quite different from Europe).  Citizens with skills and knowledge are more flexible and able to deal with changing technologies, a changing economy and workplace disruption.

So what does the twenty first century look like to you?  A era where you want to see kids invest in very specific skills ready to remain in one profession for the entirety of their lives, or an era where you want to see kids instilled with the knowledge and aptitudes that make them adaptable and able to change with a changing economy?  

I prefer the latter.  

President Obama

This cover was from before the election and now seems a bit foreboding (as in "it's time to walk the walk").  President Obama is about to confront immense challenges to the prosperity, health and safety of our country and quite soon we will know how deftly he can maneuver through the political landscape and deliver the critically necessary fiscal stimulus bill and then follow up with a comprehensive health care plan, an environmental sustainability strategy and on and on and on. 

Back home in Oregon, the landscape is turning bleaker by the minute and we are staring down the real possibility of sacrificing our future to meet immediate budgetary challenges.

Needless to say there is a lot of very hard work ahead both for Obama and Kulongoski and national and state legislators, but this too shall pass and with a clear focus on the future and a commitment to protect the most vulnerable in society we shall weather this moment and emerge stronger.  But it will take time.

Good luck and godspeed President Obama.

[Note: Tomorrow or Thursday, I shall post the last of my three part education series of posts with an overview of what we know about education and the future of prosperity in America]

Oregon Unemployment Hits 9%

The latest jobs report for December has been released by the Oregon Employment Department and the news is predictably grim.  9% unemployment rate, up a full percentage point from November and representing 9,700 jobs lost in December, up from 8,400 in November.  

Grim grim grim.

Beeronomics: In Hard Times, Doing it Yourself

It has been years since I brewed my own beer, but recently my son asked me the question I have been waiting a long time to hear: "how do you make beer?" "Well son," says I, "I'll show you." So off we set to FH Steinbart to load up on supplies.

[I had in mind something modeled on Ninkasi's Total Domination, which without a doubt is the best beer brewed in Oregon and possibly the country. On this I am sure there will be no debate. And by the way has Ninkasi, in a short time, become the best Oregon brewery? I think it might. Kudos to Jamie Floyd.]

Anyway Steinbarts on Saturday was absolutely crammed with people buying supplies. Unfortunately I was after Centennial, Cascade and Chinook hops to make a classic 'Three C' IPA but the Chinooks were gone. Thoughts of substituting Willamette, Newport and Zeus were also dashed, so I decided to pitch a curveball: up the hops (to compensate for the lost alpha acids) and use Mt. Ranier instead. I'll let you know how it turns out. But the point is that this economic naturalist started to wonder whether, as incomes get strained, people start to make their won rather than buy it in the bottle. Does it make sense to do this in tight economic times? 

Let's do some back-0f-the-envelope calculations. To get all the ingredients for my beer, plus a few sacks for the grain and hops but basically nothing else (including bottles and caps) I spent about $65. Blame the hops which are not only scarce but expensive. I had some leftover ingredients and I have all the other equipment from before so we will consider it a sunk cost and ignore it. So let's say $60 for the ingredients. From this I make a five gallon batch and I will probably yield about 4.5 gallons after ditching the sediment - maybe less because I dry-hopped - and then some spillage due to inevitable personal blundering, so let's say 4 gallons at the end or about 7 six-packs or 23 22oz bottles.  

A six pack of good beer is about $7-$8 in my local supermarket.  So the retail cost of this beer is about $50.  If I manage something sublime perhaps I can compare to Total Domination which costs about $3.30 for a 22oz bottle, so my beer would retail for about $75.  

On a broad scale then, the cost of the ingredients are about equivalent to the retail price of the finished product.  Include the opportunity cost of my time, the certainty that my beer will fall far short of Ninkasi's and the extremely high probability that I will have managed to acquire an unwelcome bacteria that gives my beer an off flavor, and it seems clear that brewing your own is NOT a way to save money.  

The crowd at Steinbarts could still be an indication of a bad economy: many people with unwanted time on their hands might turn to brewing which is a nice hobby and also has the appealing aspect of providing a large amount of alcohol at the end.  

This calculation is, by the way, why I have largely stopped brewing: for about as much money as brewing my own I can get super-fantastic beer in many varieties and I don't have to wait for it. 

Oregon's Revenue Woes

Uh-oh...

Local Stimulus: Some Quick Unemployment Math

In the same spirit as Paul Krugman, who in his New York Times Blog did a quick back-of-the-envelope calculation on the expected effects of the Obama federal stimulus plan on unemployment, let's take a look at Mayor Adams's plan to stimulate the local economy.  My question is: is the claim that 5000 new jobs will be created by this spending reasonable?

Estimates of the Okun's law coefficient, or the relationship between real GDP growth and declines in the unemployment rate are generally between 2 and 3 for the national economy.  Let's take the best-case scenario, 2, which stipulates that a 2% increase in GDP will lead to a 1 percentage point decrease in unemployment.  I think this is reasonable, though I am not sure how to think about leakages: presumably leakages are greater the more localized is the stimulus spending so perhaps 2 is too high, but I'll stick with it for the time being.  

The Adams administration proposes to spend $500 million on local stimulus.  The latest Bureau of Economic Analysis estimate of Portland metro area GDP is around $100 billion.  Thus the proposed stimulus amount represents about a half a percent of local GDP.  

How much will this increase local GDP?  For this we have to think about the multiplier effect we expect from the spending.  The multiplier refers to the fact that money that becomes income for one person is spent, at least in part, on other things and becomes income for someone else, and so on.  How big is this multiplier in reality?  Mark Zandi suggests slightly more than 1.5 is a reasonable estimate.  Let's be conservative and use 1.5, which means that a $500 million injection of government money would represent about a $750 million boost to local GDP, or about 0.75 percent.  

Using the Okun's Law coefficient of 2, this suggests about a 0.375 percentage point decrease in unemployment from what it otherwise would have been.  

Finally, the latest local jobs report from the Bureau of Labor Statistics shows the Portland metro area labor force at about 1.19 million, of which 85,700 are currently unemployed (for a rate of 7.2%).  Using the current rate as a baseline, the proposed stimulus could be expected to reduce unemployment to 6.825%.  This represents about 4,460 new jobs.  Slightly lower than the Mayor's claim, but well in the ballpark.  

However, if you use the more pessimistic Okun's Law coefficient of 3, you get a .25 percentage point decrease in the unemployment rate which would yield about 3,000 new jobs, which is considerably under the Mayor's projections.

So the conclusion seems to be that they are being optimistic, but not wildly so.  

What is interesting to think about now is the interaction between federal stimulus, state stimulus and local stimulus: will they be complements or will there be some type of crowding out?  Perhaps public finance-types have some insight...

Stimulus and Discrimination

As I was busy embarrassing myself on KGW's "Live @ 7" (yes the ampersand is part of the title) last night, the host, Stephanie Stricklen relayed a interesting question from a viewer who asked, in essence, "if infrastructure construction is traditionally male-dominated (think road crews), will federal fiscal stimulus that concentrates on such projects be gender biased?"

I tried my best to provide a quick answer to the question (video is above - but I am going by memory because I can't stand to watch), but thought I would take this opportunity to expound here.   There are two main reasons for the observation that construction tends to be male dominated: it could be because of discrimination, or it could be the result of self-selection.  

Discrimination means that employers hire men ahead of more-abled women because they simply have a preference for men and thus more men are in construction than women.  Self-selection means that the employers are picking the best workers among the people who apply, but as most applicants are men, most of the hires are men as well.  I don't claim to know which it is (though I suspect both).  Also there is probably some endogeneity involved, if there is discrimination, discouraged women will not bother to apply so it may look like self-selection when it is not.  

If there is discrimination in construction then the viewer is correct, fiscal stimulus dollars will end up going to firms that discriminate and there could be even more and the growth in employment will be gender-biased.   

If it is self-selection, however, then there maybe a larger pool of women applicants as other opportunities that they might prefer are not available (if the only hiring going on is in construction) then we should see more women in construction.  [With an important caveat: as there will likely be more men than women with experience and specific skills in construction, we could still see a disproportionate number of men being hired even without discrimination]  

Now you try saying all of that in 30 seconds.

And, by the way, in an act of shameless self-promotion, if you are interested in discrimination, see this paper that I wrote with a colleague where we use a unique data set and novel statistical test to reveal racial discrimination in the NFL. 

Education: Bravo

Ted Kulongoski, in yesterday's state of the state speech:

“Only by creating the best-trained, best-skilled, best-educated workforce in America will we be able to create the employment opportunities that are this state’s future. … The way to turn despair into hope, and uncertainty into prosperity, is to build a protective wall around funding for education.”

The Fiscal Stimulus Plan Analysis from the Obama Camp

An economic analysis of the Obama fiscal stimulus plan. Remarkable for its even handedness - the work of professional economists not political operatives (what a nice change).

Here is the picture that says it all:



What is scary about this picture is that with or without stimulus, unemployment is not predicted to return to under 6% until 2012.

I think the question is not is it too much, but is it enough? As an economist I would like to see a bit more, but as a realist, I realize that getting it done politically is a challenge and there is no time to waste.

Education, Part 2: Higher Ed

Finally, after many delays it is time to get off my duff and post the next installment of the education series that I have promised. Today I want to focus on Higher Ed and how the state should think about its investments in different types of higher ed. I am not suggesting there is a zero-sum game here (in fact the opposite is true, they are all strong complements), but there is often a debate about priorities in tight budget times, and it is useful them to think about objectives and how to effectively reach them.

This is a particularly good time to write about this as there have been a number of high profile pieces in the media about public higher ed in Oregon. Dave Sarasohn’s opinion piece in the Oregonian today is one, the OPB “Think Out Loud” two-part show with the presidents of EOU, OSU, PSU and UO is another (they don't seem to have a link to the second hour), and Tom Potiowsky’s address to the Portland City Club on Friday is a third.

So how should we think about higher ed and the growth of the state’s economy. Virtually no economist has thought about this more than Philipe Aghion of Harvard University. He started with theoretical work and has now moved into examining the theory with empirical evidence.

Like I did last time I am going to use one paper as a focal point. Aghion, et. al., "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth." (The link is to the shorter version of the paper). The title refers to the fact that since we expect growth and investment in higher education to be correlated, so it is hard to isolate causal the link between investment in higher education and subsequent growth caused by that investment.

The essential message from his work is this – you can be a innovator or an imitator. Innovators drive economic growth and imitators play catch up. Silicon Valley is full of innovators, the Silicon Forest, I would argue is full of imitators. What Aghion argues is that if you want to be innovators - which we very much want to be in terms of green technology - then you must invest heavily in higher education, but not just higher education, graduate research universities.

There is another side of course, if you are not going to be at the frontier (and you can do pretty well being an imitator), then it is potentially wasteful to spend too much on this type of higher ed and you would do better investing in undergraduate only universities and community colleges. Please keep in mind that the latter are not unimportant even if you are an innovator, it is really about the question: should a state prioritize investments in graduate research universities? If you are an imitator state, the most bang for the buck in terms of growth effects of education spending is two and four year undergraduate education, but if a state is on the technological frontier then the biggest bang for the buck is in graduate research institutions.

There is also a positive feedback effect in that if a state establishes itself on the technological frontier it will get the benefit of in-migration of highly skilled individuals (and thus reap the benefit of out of state investments in human capital). It also exacerbates the difference between leader and follower states. So if you can become an innovation state, you get into a self-reinforcing cycle. This helps explain the long dominance of Silicon Valley (and California in general) in high tech.

Arguably Oregon has made large strides to establish itself on a few frontiers: there is no doubt that the Portland areas has become a place of in-migration of highly artistic and creative types and the city has established itself as a center for design and advertising. The state has tried to establish itself on the frontier of computer technology (the Silicon Forest) but success here has been minimal and it seems pretty easy to argue that in high tech the state is still in the imitator category (and the link with this and the underinvestment in higher ed is pretty clear – you can’t depend entirely on in-migration, you have to create talented people at home as well).

Through innovative statistical analysis the authors of the current paper find that a thousand dollars per person in additional spending on research universities raises a frontier state’s per-employee annual growth rate by 0.269 percentage points but only 0.093 if that state is an imitator state. Conversely a thousand dollars per person in additional spending on undergraduate education in four year colleges raises imitator states annual growth rates by 0.198 percentage points but innovator states growth by only 0.053. They also find that migration accounts for about half the difference between the frontier and far from the frontier states. [And, by the way, lest these seem small, remember with national annual growth rates of about 2.5% over the last 50 years, something that increases growth by a quarter or half a percent is a ten to twenty percent increase in growth rates – pretty huge and it is hard to imagine another investment as effective at doing this] And though the argument may be made that in tight budget times it is necessary to focus on K-12, it is worthwhile to remember that with good economic growth come the resources for future investments in K-12.

The message for Oregon seems clear: if we are serious about being an innovator state in green technology or anything else, we need to invest in its research universities. Tax breaks and inspiring speeches are not enough.

Fiscal Stimulus and Oregon

In the opinion section of Sunday's Oregonian, Bill Conerly makes a number of inaccurate and misleading statements in his attempt to argue against fiscal stimulus. The most egregious example is the claim that most economists believe that the economy will turn around by the third quarter of 2009. Most economists believe that with a stimulus package the economy will turn around by the Fall of 2009. In fact, most economists believe that without stimulus the downturn will be significantly more severe and prolonged, perhaps not returning to positive growth until late 2010 or beyond. Furthermore, economists arguing for stimulus do not believe that there will be a multiplier of 4 or 5. In fact, most empirical evidence suggests we should see a multiplier of about 1.5. It is true that the positive effects of stimulus are temporary and, in fact, we should see a drag on growth in the future from having to service the debt incurred with stimulus. But the very idea of stimulus is to arrest the downward spiral of the economy and get it moving in a virtuous growth cycle again – a temporary jolt to the economy. Lags are a concern for all economists leading to the stressing of the need to avoid projects that would take time to roll-out, but the magnitude of this crisis is so great that even with significant lags, economists believe that fiscal stimulus would still do a lot of good.

Conerly’s description of how an economy self-corrects is also lacking: the current systematic collapse of credit markets has rendered standard Fed policy ineffective, even the multitude of non-standard programs have yet to get any real traction. Eventually Fed policy will gain some traction, yes, but how long are we willing to wait as our economy melts down? And the claim that consumers are not spending but eventually will is naïve: with unemployment rates skyrocketing to levels not seen in 30 years and still going up quickly, there is no reason to believe that consumer spending will rebound any time soon. Finally, leakages exist in all state spending, this is not new nor is it a reason to not spend – the multiplier estimates take these leakages into account. Money spent could be directed to programs that have the shortest time lags and the greatest local impact. Leakages overseas are minimal and leakages from Oregon to other states would be matched by leakages from other states to Oregon.

Conerly’s advice to essentially wait out the economic crisis is not particularly helpful to those 8.1% of Oregonians who cannot find a job. Add in the number of people who have given up searching and people involuntarily working at less than full-time and the number is likely to be well over 14%. These Oregonians cannot wait for two or three years for the economy to self-correct. There is always the risk that stimulus will not be as effective as we hope, but the risk of doing nothing is much worse.

The State of the State's Unemployment

Today the Bureau of Labor Statistics released the latest unemployment figures for the US for December, and they are predictably grim.  The US unemployment rate is now at 7.2%.  While the individual state figures for December won't be out for a few days, here is a look at some data released a few days ago: this is the unemployment rate for November in selected metro areas in Oregon.  Note that adjustments are still being made (and it looks like Oregon's November rate is now estimated at 7.9% rather than the 8.1% from earlier).  But here is a good look at which areas are faring better and which are faring worse. 

Not surprisingly, the areas that experienced the biggest real estate bust, Bend and Medford, are doing much worse than the state average, but Eugene is worse than average as well - something I would not have guessed.  Corvallis is very healthy at 5.6% and Portland is a little below average but still at a depressingly high 7.2%. 

Beeronomics: Complements - Beer and Cigarettes

OK, so I had to find some excuse to post this picture which is all over the Oregon beer-o-sphere. It is Don Younger striking a familiar pose on the last day smoking in bars was allowed in Oregon. How will the ban affect Oregon's bars, pubs and breweries?

Matthew Engle in the Financial Times, writes that beer sales in Britain have declined 10% since the smoking ban was imposed there. Why should this be so? It is certainly true that the two, beer and cigarettes, are complements and so increase the cost of one [smoking is more costly because you have to go outside and do it] and the demand for the other falls.

Will this have as big an effect in Oregon as in Britain? I think it unlikely as most of the ever-so-popular pubs and brewpubs are generally non-smoking establishments anyway. But I do imagine that some small bars could find business down. I guess the bigger question is: given that there are many alternatives to patronizing and working in non-smoking establishments, is the ban necessary? The free market side of me suspects not. But the ban is no so much about this, I assume, as about public health and the cost of caring for smokers later in life. If this ban manages to reduce overall cigarette consumption, then it could easily save the state a lot of money down the road.

Mileage Tax Redux: Mankiw and Thompson

It turns out that Greg Mankiw has blogged about Oregon's mileage tax proposal and, lo and behold, frequent guest blogger and friend of the blog, Fred Thompson has chimed in with some clarification. The essence of which is that congestion pricing is indeed a major motivator of the whole GPS idea and (as Fred rightly notes) without such motivation, the GPS doesn't make much sense.

But I still wonder how you deal with the problem of non-residents. Since the bulk of the congestion problems in Oregon are in Portland, particularly the I-5 and I-205 crossings of the Columbia river, it is not clear how something tied to Oregon registered vehicles will work. A lot of the congestion in these areas is apparently coming from Washington residents that work in Oregon, which means that the GPS in Oregon cars won't be effective in dissuading these drivers.

London has famously instituted congestion pricing, but there the tax works based on photographs of license plates. So if you enter London you pay, regardless of where your vehicle is registered.

Given the cost, complexity and incompleteness of this system, I still cannot see why it trumps the simple and effective gas tax. It strikes me as a wonderful idea of you are an engineer (especially a traffic engineer) because you get to play with new toys and tools, but I remain unconvinced in my mental cost-benefit analysis of the idea.

Unemployment Poll

Just back from a quick trip to San Francisco (where it was delightfully sunny), the poor unsuspecting city that was just invaded by a plague of Economists [which I shall now coin as the official collective noun for economists - inspired by Louise Erdrich's "Plague of Doves"].

The fact that the new term starts today probably means slow blogging for this week, but I will try and get to part two of my little education series which will look at the wisdom of investments in higher ed.

However, there is one self-referential news item, which is the official poll results from my little on-line unemployment poll. And the news is that for the self-selected group of readers of this blog that bothered to vote, pessimism rules the day. A whopping 40% of you selected 12% and I suspect that there is some censoring going on - meaning that some of these voters would have gone higher if the choices were available. Wow. I thought 12% was a real extreme, and should we hit that, I will be breathing into a paper bag. I fear that we will indeed reach the 10% range in unemployment in Oregon (which was my vote), and hopefully we won't stay there too long. But then I was wrong about what the depth of the current crisis would be 6 months ago, so perhaps I still don't get it. There are some votes for 7% (which we had not reached when I fired up the poll), so some optimists were there at least in the beginning.

Though self-selected, it seems to reflect the overall pessimism of the populace these days and that is a problem. The Consumer Confidence Index is at a new low and without getting consumers a little more optimistic, it is hard to get businesses optimistic and banks optimistic about businesses, etc.

I hope congress can get its act together soon and get a stimulus bill for Obama to sign immediately, for I fear that without massive federal stimulus, the global economy is headed off a cliff.

Happy New Year!