Beeronomics and Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

Word that Roots Brewing was in trouble has been passed around for quite some time now, and recently John Foyston reported on the fact that Roots was up for sale, but it was still a bit of a shock (and quite sad) to get the word that Roots was closed for good.

But while the beer enthusiast in me is saddened, the economist in me sees this as (curiously perhaps) a sign of a very healthy beer economy in Portland.  A few weeks ago I attended Greenlight Greater Portland's annual Economic Summit and, while talking to Joe Cortright, Rich Read of The Oregonian came up and we were talking about the economy and small businesses. I was quoted as saying that it doesn't bother me to see many start-ups fail and what I meant by that is that in a healthy competitive economy many new ideas will be tried, will try to find markets and will not succeed because of other better ideas or more well-run businesses. The key is that new businesses are tried - and in a healthy marketplace only the best ones will survive.  Survival of the fittest if you will, but in economics we call this process of new and better ideas and businesses taking the place of established ones as 'creative destruction' and we view it as a good thing. [The term was popularized, though not coined, by Joseph Schumpeter] In Portland it is quite shocking to get bad food or bad service in a restaurant because there are so many great ones out there that if you don't do it very well, you won't last.  This is a good thing.  What would be bad is if we didn't see this dynamic and mediocre businesses succeeded.

Let me say straight out that Roots problems were not with the beer itself, which was fantastic, but with other aspects of the business.  My own history with Roots is troubled: the only two times I went to the pub with the intent to get a meal at lunch, I found the pub closed when it was supposed to be open.  I have bought their beer in the bottle many times, but I was one of the customers that got a bottle that shouldn't have been on the shelf, it was, quite simply, bad.  Complaints of bad service at the brewpub abound and with so many great choices for brewpubs around town, it is not hard to see why Roots quickly found itself in trouble. The point is it probably wouldn't have been in trouble in an economy in which there was not much brewing going on, so what the closure of Roots symbolizes is that, regardless of how wonderful the beer was, there is so much other wonderful beer being produced and served in Portland.  Long live Beervana, indeed.

The other thing that Roots' demise made me think of is the example of short-run and long-run shut down conditions that we typically talk about in a variety of economics classes, especially intermediate micro.  In econo-speak the short-run is any amount of time in which there are fixed costs.  Take for example a lease on a building in SE Portland: if you sign a one-year lease and you are on the hook for the lease payment regardless if your business is open or not.  In this case, it may make sense to keep the business running even if you are loosing money.  Why? Well, if you are able to cover your variable costs (labor, electricity, inputs, etc.) and part of your fixed costs (maybe one-half of your lease payment) it is better than shutting down and having to pay your entire fixed cost without any revenue.  In the long-run (a time period in which there are no fixed costs) you would shut down, because you would not renew the lease and so negative profits are a sufficient shut-down condition.

It would be great to see Roots rise again, perhaps as a commercial brewery only, but with the rapidly evolving dynamic of the local beer scene, it is hard to see Roots capturing the attention of the local beer crowd again.  Just like a chef who closes a restaurant, it may be time for Craig Nicholls to re-invent himself and his beer company.  And I think Roots will be far from the last brewery to close locally, with so many new places opening up, the forces of creative destruction will be pretty fierce.  Even though craft beer continues to whittle away at the market share of the macro-brewers, it is likely that the struggles to find shelf-space, tap handles and pub crowds will become more and more intense.  But just like the wonderful and creative food scene that has arisen in Portland, this dynamic is likely to create better and better beers and pubs.  So embrace it, I say.

Oregon June Unemployment: 10.5%

Oregon's unemployment situation remained stuck in a rut last month with a dismal jobs performance of 3,600 jobs lost on a seasonally adjusted basis.  Not much time to expound on this today, but it kind of speaks for itself.  Depressing

Beeronomics: Beer Pints Per Mile

A comment on my post about how to choose airline travel for maximum efficiency directed me to the AirScape Engineers Blog wherein I found this wonderful little chart (more on the specifics of the calculations can be found there):

Mode	kW-h/km	kcal/mile	Miles/gallon	kW-h/mile	beer-pints/mile
Bicycle	0.0361	50	629	0.058	0.23
747	0.2521	350	90	0.407	1.59
Electric Car	0.1550	215	146	0.250	0.98
SUV	1.5128	2098	15	2.440	9.54
Train	0.0820	114	277	0.132	0.52

Now, why "Beer Pints Per Mile" isn't the metric of choice in the field is beyond me - it is brilliant!  Here is how I figure it: distance from my house to the Pilsner Room, Deschutes Portland Pub, Rogue is about 6 miles, or 12 miles round trip.  Thus by riding my bike, which I always try and do, burns about 3 pints.  It is rare that I even make it to three pints unless I am lounging for many hours, so essentially my beer consumption is entirely guilt free!  HUB is only about 3 miles, so a round-trip is only 1.5 pints, but then they serve their beer in crazy 13-point-something ounce glasses so I am good for about two.  It would be interesting to know how walking fares in this comparison.

Anyway, time for a biking-themed shirt that says "powered by pints"!

And, by the way, AirScape is an Ashland (or Medford?) based company that sells house fans to use natural ventilation to cool houses.  Cool.

Mankiw on Exchange Rate Policy

A nice piece on exchange rate policy by Greg Mankiw appeared in The New York Times over the weekend.

Here is an excerpt:

What is the trilemma in international finance? It stems from the fact that, in most nations, economic policy makers would like to achieve these three goals:

•

Make the country’s economy open to international flows of capital. Capital mobility lets a nation’s citizens diversify their holdings by investing abroad. It also encourages foreign investors to bring their resources and expertise into the country.

•

Use monetary policy as a tool to help stabilize the economy. The central bank can then increase the money supply and reduce interest rates when the economy is depressed, and reduce money growth and raise interest rates when it is overheated.

•

Maintain stability in the currency exchange rate. A volatile exchange rate, at times driven by speculation, can be a source of broader economic volatility. Moreover, a stable rate makes it easier for households and businesses to engage in the world economy and plan for the future.

But here’s the rub: You can’t get all three. If you pick two of these goals, the inexorable logic of economics forces you to forgo the third.

In the United States, we have picked the first two. Any American can easily invest abroad, simply by sending cash to an international mutual fund, and foreigners are free to buy stocks and bonds on domestic exchanges. Moreover, the Federal Reserve sets monetary policy to try to maintain full employment and price stability. But a result of this decision is volatility in the value of the dollar in foreign exchange markets.

By contrast, China has chosen a different response to the trilemma. Its central bank conducts monetary policy and maintains tight control over the exchange value of its currency. But to accomplish these two goals, it has to restrict the international flow of capital, including the ability of Chinese citizens to move their wealth abroad. Without such restrictions, money would flow into and out of the country, forcing the domestic interest rate to match those set by foreign central banks.

Most of Europe’s nations have chosen the third way. By using the euro to replace the French franc, the German mark, the Italian lira, the Greek drachma and other currencies, these countries have eliminated all exchange-rate movements within their zone. In addition, capital is free to move among nations. Yet the cost of making these choices has been to give up the possibility of national monetary policy.

The European Central Bank sets interest rates for Europe as a whole. But if the situation in one country — Greece, for example — differs from that in the rest of Europe, that country no longer has its own monetary policy to address national problems.

Is there a best way to deal with this trilemma? Perhaps not surprisingly, many American economists argue for the American system of floating exchange rates determined by market forces. This preference underlies much of the criticism of China’s financial policy. It also led to skepticism when Europe started down the path toward a common currency in the early 1990s. Today, those euro skeptics feel vindicated by the problems in Greece.

To this I would only add that the US doesn't have such a hard choice, as the Dollar is an international 'hard' currency we don't have to worry os much about exchange rate fluctuations as most contracts our businesses write with international counter-parties are in dollars.  True, those counter-parties will agree to terms that take exchange rate risk into account, but it is a small issue relative to a small country where exchange rate volatility can be devastating.  

Beeronomics: Taxes Again

Now the Beer Stimulus Bill is hitting the national media: this time the Wall Street Journal, under the tag "can beer stimulus hop up the economy?"  Ha, I like it when the WSJ gets clever.

Can microbreweries revive the economy? That’s the hope of Sen. John Kerry (D., Mass.) and a bipartisan group of senators who are pushing a plan to cut taxes on the nation’s legion of small brewers in hopes of stimulating hiring among craft brewers.

The plan, which was introduced by Sen. Kerry, would lower the per-barrel excise taxes on small breweries’ first two million barrels of beer per year (that’s 62 million gallons) and would triple the size of what the government classifies as a small brewer — to breweries that produce six million barrels a year from two million currently. Some co-sponsors include Sens. Olympia Snowe (R., Maine) and Ron Wyden (D., Ore.), whose states, not surprisingly, rank high on the list of states with the most breweries per capita (see chart below).

So-called craft brewers are one of the few industries to thrive through the recession. The segment grew from 7.2% by volume last year and 5.9% in 2008. The segment has even become a haven for budding entrepreneurs that have been let go from corporate jobs. “There’s not that many success stories in American manufacturing today and craft beer is one of them,” says Jim Koch, founder of The Boston Beer Co. which makes the various Samuel Adams beers. Mr. Koch — whose company is in Mr. Kerry’s home state — has been leading the charge for a lowering of the excise tax on small brewers.

Mr. Kerry’s office estimates that the tax decreases would free-up some $44 million — small potatoes in a $14 trillion economy — that the senator (presumably) hopes would be redirected toward new brewing tanks or hiring new workers. Sam Calagione, founder of Dogfish Head Craft Brewery in Delaware, says lower excise taxes would half his $750,000 federal tax bill. “It could be employees or capital equipment, but it would all go toward growing the company,” he says.

We do have one quibble. Mr. Kerry’s press release states that “Massachusetts started the small craft beer revolution,” but many other historians say that the current craft brew renaissance has its origins in Northern California, where San Francisco’s Anchor Brewing and the short-lived New Albion Co. kickstarted the movement in the ’60s and ’70s.

My main quibble is why is the assumption that any extra revenue would be reinvested and not taken as profit?  The idea that a tax break means more workers hired is silly.  The number of workers are the result of the optimal number needed to produce the beer demanded by the market.  I made this same argument when Measures 66 & 67 were being debated. In any case  here is the cool interactive chart:

Number of Brewers, by State

State	Total Brewers	State Residents per Brewer
Alabama	5	932,380
Alaska	14	49,021
Arizona	26	250,007
Arkansas	4	713,848
California	221	166,320
Colorado	103	47,956
Connecticut	16	218,828
Delaware	7	84,548
Florida	39	469,957
Georgia	16	605,359
Hawaii	8	161,025
Idaho	16	95,239
Illinois	41	314,672
Indiana	28	227,743
Iowa	18	166,809
Kansas	17	164,831
Kentucky	7	609,892
Louisiana	4	1,102,699
Maine	31	42,466
Maryland	21	268,267
Massachusetts	38	170,999
Michigan	70	142,906
Minnesota	22	237,291
Mississippi	1	2,938,618
Missouri	29	203,848
Montana	27	35,831
Nebraska	15	118,895
Nevada	16	162,510
New Hampshire	15	87,721
New Jersey	18	482,370
New Mexico	16	124,022
New York	56	348,041
North Carolina	33	279,467
North Dakota	1	641,481
Ohio	42	273,474
Oklahoma	7	520,337
Oregon	93	40,753
Pennsylvania	75	165,977
Rhode Island	5	210,158
South Carolina	14	319,986
South Dakota	5	160,839
Tennessee	14	443,921
Texas	36	675,749
Utah	14	195,459
Vermont	19	32,698
Virginia	32	242,784
Washington	100	65,492
Washington DC	3	291,031
West Virginia	6	302,411
Wisconsin	66	85,272
Wyoming	10	53,267

Beeronomics: OLCC

Astoria is where I am at for a quick break and a nice respite from the heat, but I have a moment to chime on on this little debate: doing away with the OLCC.

To me the OLCC has always been a bit of an anachronism: an unnecessary bureaucracy and regulation of a market that surely has externalities but is easy to regulate at arms length like most states do.  [Kinda like the prohibition on self-serve gas...]  I don't really see the point of the OLCC other than to provide liquor licenses.  Taxes on alcohol can correct the inefficiency in the market created by externalities.

Anyway, since I am in Astoria, I might as well try the local beer.  Astoria Brewing at the Wet Dog has some pretty tasty beer, but the food and the deck last night on the river was even better...and 70 degrees.  Nice.  Ft. George is next.

Beeronomics: Where it all Began

I missed this one.  In 1985 when the law was changed to allow people who made beer to sell it directly to the consumer two dudes named McMenamin opened the first Oregon brewpub, the Hillsdale Public House. Here is John Foyston:

Beervana was born in Captain Neon's Fermentation Chamber in Oregon's first brewpub, McMenamins Hillsdale Pub, where they started brewing after a 1985 law made brewpubs legal. This photo was taken in October of 1985 and shows Mike (from left) and Brian McMenamin with their first brewer, Ron Wolf, in the brewery.

I entered nearby Lewis & Clark College in the fall of 1986 and by 1989 was able to take my custom to the nearby pub and from whence my romance with craft beer began. Ahh Terminator...

Eco-nomics: When Power Comes From Weather

The New York Times' Green blog has an interesting story about the BPA and how it dealt with all of that dang rain we got this Spring. All of a sudden they were faced with much more water than they expected.  Just spill it, you say?  Well, apparently that is no good for the fish.  So they have to scramble to curtail as much energy production as possible.  Now, here is the thing, just because a fossil fuel plant or a nuclear plant is not making as much energy, it is not clear to me that they are burning that much less fuel. I would be interested to know what you all out there know, but I was under the impression that you can't just flip the switch on a coal fired plant - it has to stay hot.  I am sure it has some marginal impact though.
Anyway here is the post:

Engineers say that if the power grid becomes more reliant on renewable energy, a lot of new transmission lines will have to be built at some point or there will be unhappy consequences. Mostly this problem has been predicted rather than experienced. But the future may have arrived last month, when the Bonneville Power Administration, a federal agency that oversees power transmission in the Pacific Northwest, had more energy than it could comfortably use.

The BPA is accustomed to a surplus of hydroelectric power in the spring, as the winter snow pack melts. Last winter there was only about 60 percent as much snow as usual, according to energy experts. But in the late spring heavy rain arrived. Unlike snow melt, which can be predicted by temperature, rainwater gives little warning. And suddenly there was a surplus.

“This year was a little more severe and a little more unexpected,’’ said Michael C. Milstein, a spokesman for the power administration.

In a normal spring, the BPA first shuts down its fossil-powered plants, then exports as much as it can so its neighbors can do the same. This year, he said, “we were essentially asking other utilities to shut down their thermal plants, and most of the coal and gas plants in the region were shut down. They were taking low or no-cost power from us.’’

When it runs out of neighbors that can take the power, the BPA can also let the extra water run down the dams’ spillways, bypassing the power-producing turbines. But that turns out to pose an environmental problem. Water that goes down the spillway gets frothy, and the excess air bubbles can kill salmon and steelheads, an endangered species in the upper Columbia River. So the BPA solved the problem by running all the water through the turbines, making power it didn’t need, Mr. Milstein said.

But beginning around June 8, the rainwater arrived along with an excess of wind power coming from the same storms that brought the rain. Pushing all the power it could to its neighbors, BPA had to turn to the only nuclear plant in the neighborhood, the Columbia Generating Station, and ask the operators to scale back.

This is unusual: nuclear plants are designed to run at 100 percent power and have trouble changing their power settings. “It turns out 100 percent till you shut it down to refuel,’’ said Rochelle Olson, a spokeswoman for the plant.

Columbia is accustomed to reducing power to 85 percent and sometimes 60 percent. In the following days, however, BPA asked the plant operators to go down to just 22 percent. “This year was extraordinary because it all came so heavy and so fast,’’ Mr. Milstein said.

Nuclear operators dislike running at partial power for several reasons. In some cases it makes for less efficient use of the uranium fuel. And one way that they justify their high construction cost is by running as many hours of the year as possible. Some new plant designs are intended to run at partial power at times, but existing plants are not made that way.

The problem seems poised to get worse. BPA is rapidly adding wind power, mostly to meet the renewable portfolio standard in California. But when more spring wind combines with spring runoff, there will be surpluses that cannot be exported over existing power lines, industry officials say.

The BPA is preparing a major report on the event, which lasted until June 13, and will look for solutions. “Maybe transmission lines are where to go next, or the smart grid,’’ Ms. Olson said.

In fact, Mr. Milstein said discussions were under way about beefing up connections to California. Another possibility is asking thousands of homeowners to let their electric companies take control of their electric water heaters, he added. When surplus power exists, the water heaters could heat the water hotter than normal, in effect turning them into storage batteries.

But for now, he said, “we happen to have all these renewable resources, and sometimes they don’t work exactly like we’d want them to.’’

Now I hadn't heard of that one before - taking control of water heaters, what a cool idea. But they can't be that efficient of a storage device. I wonder what else? I always thought of storage solutions to this problem being ones of massive scale, but perhaps if we all had rechargeable batteries attached to our houses that drew in extra energy at low periods and discharged during peak times and had capacity to take extra energy during peak generation times.  I am sure I am not the first to think of this, but it seems like it could work, I wonder what the problems are?

Eco-nomics: Flying Greener

My step-father, who is a United Airlines pilot, is one of the greenest dudes I know.  He drives a converted plug-in Prius, has solar panels on his roof, a very efficient european heating and hot water system, and a very efficient drip irrigation system in his veggie garden.  He is also well versed in the environmental consequences of air travel.  So I thought I'd ask him about making environmentally conscious air travel decisions.  What he told me confirms what I thought I already knew but here it is anyway.

The newest planes are the most efficient, and, in general, bigger is usually more efficient on a seat-miles per gallon basis. The data is filed with the DOT using "Form 41" and is available to the public. There are various places that break the data down into usable info, such as ALPA's Economic and Financial Analysis department, Aviation Week, and MITs Airline Data Project. I'm biased, but ALPA's E&FA is the best of the bunch, staffed by a group of excellent economists and other analysts.

He had to run to go and fly a 777 from San Francisco to Frankfurt (he'll be in Germany for the German team's World Cup semi-final, cool!) but he did leave me with some tantalizing data:

Here's some fuel burns for a few of yesterday's flights. I don't have time to look up seating capacities or mileage because I'm just about to leave to fly SFO-FRA, but I think you can find out this info for yourself.

Flight     Route             A/C      fuel burn (gallons)
900         SFO-FRA     747       34,000
926         SFO-FRA     777       22,400
914         SFO-IAD      767       7,460
120         SFO-IAD      A320    4,180

In general United has fewer seats per aircraft than most other airlines, because of Economy Plus and because of the number of first and business class seats.

So united gets a knock for having fewer seats on planes. Southwest and low-cost air carriers get a bonus for that but they fly smaller planes, so how does it work out for this one set of observations?

Well SFO to FRA is about 5700 miles and SFO to IAD is about 2450. United's 747 has about 374 seats, the 777 has about 258 for international travel, the 767 about 244 and the A320 about 144.  So assuming all seats are filled, which is not accurate, but these days a pretty good approximation the seal miles per gallon for the actual flights from yesterday are as follows:

900 SFO-FRA 747 34,000: Seat miles per gallon = 62.7

926 SFO-FRA 777 22,400: Seat miles per gallon = 65.7

914 SFO-IAD 767 7,460: Seat miles per gallon = 80.1

120 SFO-IAD A320 4,180: Seat miles per gallon = 84.4

Oops, contrary to the conventional wisdom shared above, the smallest aircraft, the A320, did the best.  Followed by the next smallest and so on.  So here smaller is better (though don't take this too far, little commuter jets are terribly inefficient).  Actual loads, weather, winds, delays, etc. could all effect the fuel burn.  The 747 for example, is supposed to do closer to 90 seat miles per gallon.

Note that flying beats driving almost surely (unless you have a relatively fuel efficient car with many passengers), especially when you consider how many extra miles you have to drive relative to flying. [And for you smart-alecs out there, yes, I am referring only to the SF - DC flights]

Maybe I'll get him to give me some more burns when he gets back so I can look into other types of flights.

In the future, I'll try and flush this out a bit more and see if I can generalize about companies, aircraft, etc. Because, you know, what else do I have to do?

Beeronomics: Taxes

This was brought to my attention (with the comment "must be an election year"):

Beer-brewing in Oregon generates more than $2.3-billion every year. Senator Ron Wyden proposes a federal tax cut for small breweries in hopes of expanding the industry even more.

...

"The fact of the matter is...Oregon makes beer, and beer makes good paying jobs for our people," explains Oregon Senator Ron Wyden.

Senator Wyden is proposing a major break for small breweries: taxes on the first 60,000 barrels would be cut in half. Ninkasi expects to produce 32,000 barrels this year, so this tax cut would save them more than $100,000.

"We started with a very small pool of resources to build a brewery, so to reduce the amount of federal tax by half would be a third of that bottling line cost or three full-waged employees a year," says Jamie Floyd, Ninkasi Owner. "Those are pretty big significant additions to the brewery."

Oakshire Brewing doubled their production this year to 4,000 barrels and, as a fairly new business, could definitely use the tax break.

...

Ninkasi and Oakshire are 2 of 78 brewing companies around the state generating more than $2 billion a year. Senator Wyden says he sees the potential for the industry's future growth and more job opportunies as well.

"Obviously there is so much economic hurt in our state right now that I'm making my special focus those industries that we can really look at as having an opportunity to generate good paying positions and employment," concluded Wyden.

Senator Wyden says the tax cut proposal has bipartisan support. He hopes to pass the bill before the end of the year.

China: The Challenges of Growth

A nice article from The New York Times on some of the challenges China will face as they mature from developing to developed economy.  With decades long double-digit growth suddenly a host of issues are appearing: rising labor costs, currency appreciation, social and environmental problems like inequality and smog are all going to cause a transformation of the economy away from low-skilled manufacturing and into more and more value-added activities like engineering and design. But this takes human capital and China is still struggling a bit in this arena.  Anyway here are some excerpts from the article which uses the iPhone 4 as a jumping off point:

[M]anufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

At the end of June, a manager at Foxconn Technology — one of Apple’s major contract manufacturers — said the company planned to reduce costs by moving hundreds of thousands of workers to other parts of China, including the impoverished Henan Province.

While the labor involved in the final assembly of an iPhone accounts for a small part of the overall cost — about 7 percent by some estimates — analysts say most companies in Apple’s supply chain — the chip makers and battery suppliers and those making plastic moldings and printed circuit boards — depend on Chinese factories to hold down prices. And those factories now seem likely to pass along their cost increases.

“Electronics companies are trying to figure out how to deal with the higher costs,” says Jenny Lai, a technology analyst at CLSA, an investment bank based in Hong Kong. “They’re already squeezed, so squeezing more costs out of the system won’t be easy.”

...

When a company is operating on the slimmest of profit margins as contract manufacturers are, soaring labor costs pose a serious problem. Wages in China have risen by more than 50 percent since 2005, analysts say, and this year many factories, under pressure from local governments and workers who feel they have been underpaid for too long, have raised wages by an extra 20 to 30 percent.

China’s currency has also appreciated sharply against the United States dollar since 2005, and after a two-year pause by Beijing, economists expect the renminbi to rise about 3 to 5 percent a year for the next several years.

...

Contract manufacturers like Foxconn are now searching for ways to reduce costs. Foxconn is considering moving inland, where wages are 20 to 30 percent lower. The company is also spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material.

“We either outsource the components manufacturing to other suppliers, or we can research and manufacture our own components,” says Arthur Huang, a Foxconn spokesman. “We even have contracts with mines which are located near our factories.”

Many analysts are optimistic the big brands will find new innovations to improve profitability. But within the crowd, there is growing skepticism about China’s manufacturing model after years of pressing workers to toil six or seven days a week, 10 to 12 hours a day.

“We’ve concluded Hon Hai’s labor-intensive model is not sustainable,” says Mr. Wang at iSuppli Research. “Though it can keep hiring 800,000 to one million workers, the problem is these workers can’t keep working like screws in an inhuman system.”

This type of low-end assembly work is also no longer favored in China, analysts say, because it does not produce big returns for the companies or the country. “China doesn’t want to be the workshop of the world anymore,” says Pietra Rivoli, a professor of international business at Georgetown University and author of “The Travels of a T-Shirt in the Global Economy.”

“The value goes to where the knowledge is.”

Amen. And this is true globally and regionally. What the US and Oregon both would like is to be knowledge leaders - but this takes sustained investment in education, R&D and infrastructure. Not sexy topics for a politician, but no less important.

Soccernomics: Omnibus World Cup Post

Haven't written much for a while so a collection of thoughts:

My first thought about Uruguay's Luis Suarez batting what would have been Ghana's winning goal away with his hands in the last seconds of the extra-time period was that he was an astute student of game theory.  Not using his hands would have meant that Uruguay would have lost and he would have played his last game of the tournament.  Using his hands meant his team still had a very slight chance to win and he would have played his last game of the tournament.  It is a no-brainer - he had nothing to lose.  What it suggests is that there needs to be a more effective punishment for such horrendously cynical behavior - perhaps awarding a goal if it is clear it would have scored.

I was saddened by the USAs ouster, but happy that they escaped the humiliation of 1998 and 2006. Given their consistently terrible starts where they look tentative and tight - I am wondering whether the extremely cerebral and analytical approach of coach Bob Bradley causes them to be thinking too much at the beginning of the match and not just playing the game.  Either way, though Bob has done a great job it is time for a new approach, it is rare for a national team coach to last more than one World Cup and I think a new, perhaps European, perspective might be good for the team and for US Soccer.

Brazil deserved to lose. The Netherlands, which looked ready to implode - yet again - on Robin Van Persie's petulant outburst, managed to overcome the usual Dutch tempest of egos and play hard for the entire game and find two goals, even if they were soft.  The most striking aspect of the game was how bad the Brazilians looked in the midfield - completely lacking creativity and flair save for the one beautiful counter that lead to their goal.  Such is the state of the team under Dunga, but perhaps it is also indicative of the fact that the best Brazilian players are going to Europe as youngsters and their are fewer and fewer with real flair and talent.  I am left wondering whether Ronaldinho would have made a difference.

I was impressed with Argentina under Maradona until the real competition started and the lack of tactics was painfully exposed.  The manager as cheerleader bit only goes so far.

Speaking of managers, Jurgen Klinsmann is, perhaps rightfully, taking a lot of the credit for Germany's success.  A master plan, implemented prior to the 2006 World Cup, appears to be paying dividends. 

Finally, Spain look good but at times the short-passing deliberative approach seems to stall and they are a bit at a loss.  Paraguay seemed to completely flummox the Spaniards for most of the game and I wonder if Germany will do the same.

If I had to pick right now, I'd pick the Germans - strange as that seems to me. I never gave them a second thought before the cup - too young and inexperienced.  But they are playing as a total team, working hard for each other and staying organized, and they are playing with confidence and verve.  I think they will miss Mueller tomorrow though.  If they win, they will be thoroughly deserving winners.

Stimulus or Austerity?

My little, but highly scientific, poll closed last night and 80% of you indicated that you favor more stimulus over austerity.  There has been a lot of debate in policy circles lately about what the appropriate policy should be right now, but it appears that the more stimulus side has the weight of evidence on their side at the moment.

This was highlighted today as the new US jobs report came out for June and it is dismal. Only 83,000 private sector jobs created isn't even enough to keep up with natural labor force growth let alone make any headway toward recovery.  The graph, taken from the New York Times' Economix Blog, shows the magnitude of this recession compared to other recent ones.

State budgets are also in tatters and a huge number of layoffs are looming unless the states receive some immediate help.  Home sales and home construction are tanking, consumer spending and confidence are waning.  I don't think we will do a double dip, for we haven't risen at all.

On the flip side of the coin, US debt is still very cheap, meaning markets have not yet begun to worry about the US deficit - something Krugman has been harping on for some time.  So his question is why should we worry if markets aren't.  Critics suggest that we need to take a longer view and markets will start to punish us if we wont soon show restraint.

The counter-argument that we are on an unsustainable debt path does not make sense to me - we are talking short-term here. Yes, the long term fiscal picture demands that actions be taken, but not in the depths of a recession.  The other argument that government stimulus is hard to do and wasteful has some merit in my opinion, but right now, the simplest thing to do, and the most effective, is to give block grants to the states.  That is easy, immediate and effective.

Some good federal news on that front is the effort to give $10 billion to the states for education, but that is now mired in a debate about reducing Race to the Top funds.  I think the Obama administration is wrong in their threat to veto the bill if such a reduction is included.  Just as stimulus spending is an extraordinary measure for extraordinary times, so too should they view their efforts are education reform.  The first-order problem is funding, worry about reform next year.  Ironic to note that this $10 billion of all of America's public schools is in a $80 billion war spending bill.  Another lesson in opportunity cost.

Soccernomics: The Future of Soccer as a Spectator Sport in the US?

The New York Times' Richard Sandomir has an article on what has so far been a World Cup ratings bonanza for ESPN.  This is striking because the time difference means that all the games are shown during the day in the US.  Here are some excerpts from the article:

For the ESPN empire and Univision, any questions about the return on their investment in the World Cup are being answered by viewers. On Saturday, the United States’ loss to Ghana was seen by 14.9 million on ABC — an American record for the tournament — and an additional 4.5 million on Univision.

That’s 19.4 million viewers for a Round of 16 game on a Saturday afternoon at 2:30 p.m. Eastern — the same number that Fox averaged over six prime-time games for last year’s World Series.

“That’s phenomenal,” said Stephen Master, the vice president for sports at the Nielsen Company. “If the U.S. had kept going, to the quarters and semifinal, you would have gotten really big numbers.”

...

Then, on Sunday, Argentina’s win over Mexico was seen by 9.4 million Univision viewers, a record for any program on Spanish-language television in the United States. An additional 5.5 million watched on ABC.

Also on Sunday, 7.9 million watched Germany beat England on ESPN and Univision.

Executives of both companies said that the tournament’s performance had exceeded their expectations — a considerable claim given ESPN’s assertion that its World Cup marketing campaign was the biggest one it had ever mounted for a single event (and that includes some of its self-congratulatory anniversaries).

“This is a good, sound financial proposition for us,” said John Skipper, ESPN’s executive vice president for content. “We have the 2014 rights in Brazil, at a favorable time that gives us a favorable financial opportunity.” Rio de Janeiro’s time zone is one hour later than New York’s, pushing games to prime time and ad rates higher.

...

Through 52 games, ESPN’s average viewership is up 58 percent to 2.86 million; Univision’s is 2.1 million, up nearly 9 percent. Figure, then, that about five million are watching the games, comparable to the N.B.A. playoffs, excluding the finals, and the Stanley Cup finals. And, as Master said, the games have all been shown in daytime in the United States.

“If you consider that, the World Cup numbers are fantastic,” Master said.

ESPN executives say there are various signposts of the South African World Cup’s success: a 28 percent increase from 2006 in ratings for games not including the United States team; a 38 percent jump in the rating for men 18 to 49; and a 29 percent increase in ratings in Hispanic households, which does not seem to have hurt Univision.

...

He added that ESPN’s investment in the World Cup was “an investment in the future.”

Enoch said, “There is a growing interest in soccer, and there’s certainly growth in the Hispanic population.” How much of the post-World Cup afterglow will be reflected in Major League Soccer attendance and viewership remains to be seen.

ESPN’s devotion to the World Cup may be serving as its audition for the Olympics. ESPN and NBC are the leading bidders for the rights to the 2014 and 2016 Winter and Summer Games, which will probably be auctioned next year. Skipper has vowed to carry everything live from the Olympics if ESPN wins, regardless of the time.

...

“I’m told median age for the World Cup viewers is 37, and the Olympics 52,” said Brad Adgate, the senior vice president for research at Horizon Media, an advertising agency, indicating that the network that could reach younger viewers had an advantage. “The Olympics are a remnant of the cold war, and the World Cup is part of the country’s ethnic diversity, the way this country is gradually moving.”

MLS ratings on ESPN still appear to be pretty awful, from Sports Media Watch:

Sunday's Sounders/Union MLS telecast drew a 0.2 U.S. rating and 331,000 viewers on ESPN2, down 5% in viewership from Dynamo/Galaxy in a later timeslot on the comparable date last year (350,000). To put that in perspective, the network averaged 193,000 viewers for its first seven MLS telecasts of the season (through May 7)

So the huge spectacle of the World Cup may be capturing American's attention, but our little professional league is not yet. It is not too surprising, the MLS may be the top league in the US and Canada, but it is still probably about a third-tier league worldwide and Americans aren't used to that.  Until the big money from TV comes in the league will not have big payrolls and thus few big imported stars.  So the future growth of the league will probably remain the same organic process - slowly improve the American player through involvement in player development and professionalism.  This will still take a few generations, but it is pretty remarkable we have come in less than 15 years.  I think soccer as a big time professional sport in the US is inevitable, but still a long way off.

Latin American Growth

The New York Times today has an interesting article on Latin America and their dominance at the World Cup their recent growth performances.

While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts.

Strong demand in Asia for commodities like iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth. The World Bank forecasts that the region’s economy will grow 4.5 percent this year.

Recent growth spurts around Latin America have surpassed the expectations of many governments themselves. Brazil, the region’s rising power, is leading the regional recovery from the downturn of 2009, growing 9 percent in the first quarter from the same period last year. Brazil’s central bank said Wednesday that growth for 2010 could reach 7.3 percent, the nation’s fastest expansion in 24 years.

After a sharp contraction last year, Mexico’s economy grew 4.3 percent in the first quarter and may reach 5 percent this year, the Mexican government has said, possibly outpacing the economy in the United States.

Smaller countries are also growing fast. Here in Peru, where memories are still raw of an economy in tatters from hyperinflation and a brutal, two-decade war against Maoist rebels that left almost 70,000 people dead, gross domestic product surged 9.3 percent in April from the same month of last year.

I think there is far too much generalization here, but I do believe that the implication of good macro management of the economies in the relatively good growth experiences is correct.