Opportunity Cost, CBA and the CRC

Opportunity cost is one of the most important concepts in economics.  It is the measure of the next best alternative that could be done with the time/money/resources dedicated to a given activity. It is part of what economists think of as the true cost of any activity and its essence is its ability to focus attention on forgone opportunities whenever one action is taken.

People use the concept naturally all the time, but there are also many situations in which opportunity costs are forgotten.  A good example of opportunity cost as used by average people is with frequent flier programs.  You may have accrued enough miles to qualify for a 'free' ticket on an airline.  You may also know that you have to go to Seattle in a couple of weeks and consider whether you should use the miles and fly 'free' and save yourself the three hour drive.  But you know intuitively that it is not 'free' in the sense that if you use it for a trip to Seattle you will not be able to use the tickets for a trip to NYC or Miami or wherever and that the cost of such a ticket is probably a lot more than buying a ticket for Seattle.

This is opportunity cost in a nutshell, by using the ticket for a trip to Seattle, you are foregoing the use of the miles on a ticket to another destination you might like to visit.  Thus the 'cost' of the Seattle ticket is the forgone ticket to Miami.

Perhaps no where is the concept of opportunity cost more important to focus on than in Cost-Benefit Analysis (CBA).  I tell my students, who are often frustrated at their inability to come up with good numbers, that the very act of identifying the relevant costs (accounting and opportunity) is incredibly valuable exercise in its own right.  It is valuable because the relevant question on public works projects is never "do we have enough money to build it and does the benefit of the project justify the amount we are going to spend?"  Rather it is "is this the best use of the resources we need to devote to the project?"  Answering this second question is built into CBA because a good CBA accounts for opportunity cost as well.

Which is all to say that we need to take a good look at what critics of the Columbia River Crossing (CRC) project, like Joe Cortright, are saying about the true costs and benefits of the project and how divergent they are from the CRCs own CBA.

I have not studied the topic in any great detail (and, in fact, can find no evidence of the CRCs actual CBA on their website) but there some very compelling points that Cortright makes about the project's CBA that raise serious questions about the quality of the CBA and the assumptions contained therein.

One of the first things that worries me is the obvious and fundamental error in counting the benefits of the project: the double counting of the benefits from reduced travel times.  Though I cannot find the CBA itself, there are tables from it reproduced in this document.  Here are two:

Oops.  This is such a fundamental error, I used it as an example in my own class.  In fact, this is precisely the double counting mistake that Gruber uses as a hypothetical in his public economics text.  The expected increase in property values in Clark county are due to the decreased drive times.  So the travel time savings and the property value increase are measuring the same thing.  The increase in market values of homes are the market outcome of the fact that the travel time savings make potential buyers willing to pay more.  If this kind of mistake can be in the CBA, what else in it is suspect?

In fact, I have seen testimony by the author of the CBA who was asked about this and his response was that he understood that there was some controversy about including both benefits in CBAs but his personal belief was that both should be included.  But this is simply wrong and disingenuous, there is no controversy at all and the only reason both are in there is to seriously, and wrongly, inflate the benefits of the project.

Now I don't claim to be any sort of arbiter about projections, but given this, I begin to wonder about other things pointed out by Cortright in this document.  [Keep in mind that this is an analysis being funded by an opponent of the project, but equally, I suppose it is fair to mention that Cortright's concerns predate this commission]

Here are two striking graphs that raise concerns about the forecasts for traffic levels (and thus the necessity for a new bigger bridge):

Now, part of this decline may be due to the recession, but note that the peak and subsequent decline started prior to the recession.  Perhaps it is due to gas prices then? And in fact gas prices did rise preceding the recession (this is a chart of DOE national retail gas prices for regular grade gas):

They did move up to the 2 to 3 dollar range in 2005 but didn't peak to $4 until 2008 and gas is notoriously price inelastic, meaning people do not adjust to much to increases in gas prices (at least not in the short run).  Besides, $4 gas is probably the new reality not a temporary spike give the huge increases in demand from the rapidly developing middle income countries.

In addition, Cortright also shows the overall peak and decline of vehicle miles traveled in Oregon which clearly precedes and seems unrelated to the current recession:  

ODOT responded to the Cortright report and a fair hearing includes both their response (here) and Cortright's response to their response (here).

One bone of contention which is a point on which reasonable people can disagree is how the CRC and the Rose Quarter bottleneck should be related.  The CRC says it is not within the scope of their project to include the Rose Quarter and Cortright contends that any benefit that comes form the CRC is only realized if the Rose Quarter bottleneck is fixed.  I imagine that most daily trips that originate in Clark county do not end before the Rose Quarter and it is hard for me to imagine that you will get significant travel time savings without fixing the Rose Quarter save for local travel times in Clark County.  If CRC benefits that are being counted are contingent on the solution to the Rose Quarter than I agree wholeheartedly with Cortright on the need to include the cost of fixing the Rose Quarter in the CBA.

In the end I do not wish to take sides, but I do wish that I could come to a conclusion about how worthwhile a project is the CRC and to do so requires good information and a good CBA.  I am convinced that we currently have neither.  

Which gets us back to the start of the post.  Is the CRC the best way to spend $3.6 (or $8 or $10) billion dollars in the region?  Sure some of it is federal money that would not come without the CRC, but a ton is local and we are currently dealing with a pathetic excuse for a public education system and a collapsing public service infrastructure.  I do believe that transportation and infrastructure are important to economic growth, but we do have a perfectly good bridge in place and congestion serves the purpose of increased density, reliance on transit and the like.

A good discussion then of the opportunity cost of the CRC project is a necessary first step before we divert billions of public dollars that is desperately needed elsewhere. I hope that the legislature will stop and attempt to have this discussion before committing to the project.

On the Provision of Public Goods: The New OSU Outdoor Recreation Complex

Public goods like parks, police and fire protection and roads, are under-provided by free markets thanks in large part to the free-rider problem.  If you can exclude non-payers from using them, people will opt to forego payment and yet use the good that others have paid for.  Witness Oregon Public Radio which, as I mentioned before, has only 10% of its listeners making voluntary contributions. This is why government is generally involved in the provision of such goods.  But even so it can be hard - witness the difficulty in getting local governments to pony up for the Sellwood Bridge - as there are always some who value the good more and others who value it less and wonder why they are being asked to share in the burden.

Which makes it remarkable that the students of Oregon State University voted to assess an extra fee on themselves in order to pay for the new outdoor recreation complex which I saw on my drive in this morning has been named "Student Legacy Field."  The fields are right in the center of campus and within easy reach of all of the dormitory buildings. I suspect part of the ability of the students to get the fee past has to do with the fact that current students are assessing a fee on future generations of students, but nevertheless I think it is a tremendously good investment.

Where once there was grass fields - beautiful yes, but totally unusable for a big chunk of the school year - there are now turf fields dedicated to student and intramural use that will help keep students active and fit year round.  I would be delighted as a student and this would be a big selling point as a prospective student.  It does this professors heart good to see soccer players out at 8am in the rain running around and getting exercise.

Throw in some volleyball courts, a renovated MacAlexander Fieldhouse and new tennis courts and you have a public good that is going to have huge social welfare benefits for the entire OSU community.

Well done students.

Credit Ratings and the US Debt

Yesterday Standard and Poor's, a credit rating agency, lowered its outlook on the prospect of the US political system making serious progress on dealing with the mounting debt.  There was no change in the actual rating they give to US treasuries and bonds which remain at AAA, but it hardly matters because no one cares what S&P has to say about US debt.

Why?  Well, the point of the rating agencies is to tell us something about bonds that we don't know. For example, how safe are the bonds of Kenosha, Wisconsin?

But everyone knows about the situation in the US and the bond market sets the price daily.  How risky is US debt?  Check the price on the bond market:

The bond market confirms what everyone knows, the US is not going to default on its debt obligations.  US debt has been a safe haven for money during the global recession.

S&P's announcement has not gone over well with some economists, here is a sampling from the NY Times' 'Room for Debate' feature:

Yves Smith

The Standard & Poor's rating firm should be embarrassed. If there is any political judgment at work here, it is S.&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.

Barry Ritholtz

First, I have stopped paying any attention to anything that S.&P. says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.

Barry Eichengreen

Standard & Poor's lowering the outlook for U.S. debt to negative is less the canary in the coal mine than it is another faint reverberation from a familiar echo chamber. The ratings agencies don’t know anything more than people who have read newspapers covering this issue.

They don’t influence market sentiment as much as they reflect it. In saying that U.S. policy makers may not be able to meet the country’s medium-term budgetary challenges by 2013, they are not telling us anything we don’t already know.

Of course Smith and Ritholtz referring to the central role the credit rating agencies (who are paid by banks for their services) had in the mortgage market meltdown and subsequent recession.  These agencies gave AAA ratings to MBS and CDOs that their clients were selling, when in fact they were junk.

Which gets us back to what they agencies are supposed to do - tell less informed investors about the relative risk of investment that they have researched thoroughly. As many have pointed out, however, they make all their money from the very firms whose investment vehicles they are supposed to analyze subjectively. The basic economics of incentives suggests that this is not going to happen. And for these CDOs, it didn't - they rated stuff they didn't understand, and should have been suspicious of, AAA when in fact it was toxic.

Eichengreen is essentially making the same point that I am: S&P doesn't really tell us anything we don't know about the market for US debt and if you want to know how the insiders feel, just look at the market equilibrium prices where there is little sign of a risk premium being charged.

So in the end the S&P announcement got lots of press but was, to me, a complete non-event.

Thoughts on the First Two Timbers Games

In no particular order.

• It was nice to see Merritt Paulson getting love form the Timbers Army on opening night: they chanted 'Merritt Paulson' as he walked off the field.  For a guy to put so much of his own money on the line to revamp and create a real purpose for a city-owned asset, it is amazing to me how much flack he takes - mainly from the city's relatively small investment in its own building.
• I was surprised to see how much of the upper seats the Timbers had blocked off - a huge loss in revenue - but very glad: the concourse of the old stadium and the concessions and bathrooms can barely manage the crowd as it stands.  More would simply be too much.
• The entire operation has been very smooth, very professional and it has been great for all fans.
• The tradition of standing for the match seems to have been adopted by some other sections in addition to the TA sections, including mine.  I am of two minds: it is great to see the support, but I also see quite a few kids and some old folks who can't see anything for the entire match. 
• You gotta love John Spencer's enthusiasm (and the players clearly love the guy judging by how many go and hug him after a goal). When the Timbers conceded the second goal on Sunday, Spencer walked back to the bench enclosure and kicked in fury so loud the bang reverberated throughout the west stand.  
• Cooper is working really hard out there and is a beast to handle for a defender, but his touch around the goal is a bit off.  If he can get that going, watch out. Ditto for his understanding with Perlaza.
• There is a great mix of kids, young adults, middle agers, and oldsters at the stadium, it is really a community event and great to see.
• The Timbers Army has been fantastic: endless energy and enthusiasm but all in good taste.  
• The field is SMALL - there is a lot of congestion that the Timbers have dealt with better than other teams.  Can the Timbers make this a home advantage ala Arsenal at Highbury? (and that is the last I'll mention of Arsenal for a long, long time). 
• Civic Stadium has had a wonderful new rebirth and is incredibly cool - especially its downtown location.  And the number of people cruising the streets downtown in Timbers gear on match day is phenomenal.    

Trouble in Higher Ed

A lot that is in these two articles on problems in higher education published in the Chronicle of Higher Ed ring true to this professor. Read part 1 here and part 2 here.  Both are in response to the new book Academically Adrift which finds that student achievement has waned as universities have changed from places that challenges students to places that treat them as consumers and strive to accommodate them instead.  

Unforgettable

From start...

...to finish

An amazing night.

Opening Night

Photo from The Nerd is the Word Blog

The wait is over...

AWOL

I was AWOL yesterday for the Oregon jobs report.  The news is unsettling, losing jobs after five months of gains, but I think there is a good chance that this is a blip and not a new trend.  Still, oil price increases, in part due to trouble in the middle east but more fundamentally due to increased demand as the world economy resumes growing, the disaster in Japan and generally tepid recovery US growth are not helping.  

The reason I was AWOL yesterday was that it was the day Leverage took over my house.  I have to say, all joking aside, that I was pretty staggered at the scale of the endeavor.  There are a lot of people employed by the show: actors, directors and cinematographers sure, but also lots of painters, traffic control personnel, security, caterers and so on.  I don't know enough about the strategic environment to say if the tax breaks they get make sense, but I have revised my own impression of the size of the economic impact they have.

I will also say that while it was pretty much a whole-scale invasion of my property, it was a great experience and the entire cast and crew were incredibly gracious and accommodating to me and my family.  I am sure it is pounded into their heads to do so, but it was still great to hear everyone from the stars to the gophers thanking me for letting them use my property.

My boys were enraptured by the filming of the fight scene in our yard.  I am not supposed to blog about the show especially as it relates to plot, and I shall not, but now that I have seen the show (I watched a few episodes so I would understand what was going on) I don't think I am giving anything away to say that at least one fight occurs as fight scenes are a key component of every episode.

I am happy to report that, after watching a few episodes, the show itself is pretty good.  My sons are now big fans and my five year old is (in his mind) on a first name basis with the shows star fighter dude, Christian Kane.  He kept saying, "oh there is Christian" nonchalantly, every time he saw him later after the filming of his scenes was done. Pretty funny.

And lest you get the wrong impression, my house was, in the script, described as a 'modest house.'  Indeed.

Budgets and Health Care

I direct your attention to a nice post from the Wall Street Journal's economics blog on this report from the OECD on heath care spending across advanced nations.  You may know that the US does poorly in terms of the control of health care costs, but this points out just how poorly we do.  We spend 141% more than the OECD average on health care.

From the post:

A new report finds that the U.S. spends far more on health care than any of the other 29 OECD nations, and gets less health for its money. Annual public and private health-care spending in the U.S. stands at $7,538 per person, 2.41 times the OECD average and 51% more than the second-biggest spender, Norway. Meanwhile, average U.S. life expectancy is 77.9 years, less than the OECD average of 79.4.

Improving the health-care system could go a long way toward fixing the U.S. government’s finances. The OECD estimates that if the U.S. reached the efficiency level of the best-performing countries, the government could save the equivalent of 2.7% of economic output every year. That’s enough to solve about a third of the country’s budget-deficit problem.

The hard part is figuring out how to make the system work better. Here, the report attempts to derive some guidance from the experience of the most successful countries.

Interestingly, the type of system doesn’t seem to matter much. Countries with state-run systems do about as well on average as countries with private systems. Among the things that do matter: Consumers need to have some skin in the game, through mechanisms such as co-payments; care needs to be well-coordinated among doctors’ offices, hospitals and nursing homes; providers of care need incentives to do a better job, such as pay for performance; and the price and quality of services should be better monitored and easier to see.

Many of those features are included in the health-care law the U.S. passed last year, though much has yet to be implemented. Improvements are undoubtedly possible. Whatever we decide to do, it’s time we did something.

The health care reform act was a powerful step in the right direction and I think it behooves those opposed to it on budgetary grounds to explain how other reform, like health care vouchers would both guarantee access to basic health care and control costs.

Picture of the Day: Demand from China

As I have been saying, one very bright spot on the horizon for the Oregon economy is the rapid rise of demand from China.  This graph from the NY Times' Economix blog illustrates what I mean.  [Ack, the paywall has come down! - time to subscribe].

A Look at Oregon's Economy from the OEA

I have been very busy lately as you can see by the length of my posts.  But I have been quite remiss in not directing readers over to Josh Lehner's always excellent posts at the Oregon Office of Economic Analysis.

Here are three recent posts that are well worth a read:

First, it turns out he beat me to a post on the international GDP comparisons - his is much better. Not strictly an Oregon economic issue, but as Oregon is in the US it does correlate.

Second, there is this post and a follow-up on Oregon's relative performance on jobs.  In the graph below Oregon is red, Washington is blue and the US average is black.

Third, there is an update on the Oregon Index of Leading Indicators.

I'll be talking about some of this tonight on KGW's "Live @ 7" show.  

Rainy Day Fund Now!

Today the Governor and the State Treasurer testify in Salem in support of kicker reform for a permanent rainy day fund.  My stance is clear - fiscal volatility is damaging and costly and the state is simply shooting itself in the foot by not addressing it.  This is not a Republican v. Democrat issue, it is common sense.

Though I would prefer a slightly different version of the bill being discussed - particularly not dedicating funds to universities but to education in general and making the fund much bigger - I strongly support it compared to doing nothing at all.

How the Recovery in the US Compares

Pretty well, it turns out.  [HT: WSJ].  We'll never know the precise causal link, but I am inclined to believe that the relatively quick and aggressive fiscal stimulus, along with the very aggressive actions on the part of the Fed, have a lot to do with it.  This seems to be good fodder for the austerity vs. stimulus debate: at least according to these numbers stimulus is winning the short term battle, we'll wait and pass judgement on the longer-term struggle.

Here is the essential chart:

Soccernomics: Timbers as Economic Engine

Busy, so I'll I got is a suggestion to go and read this article at Oregon Business on the economic impact of the Timbers.  I have no idea whether the economic impact will be significant beyond the direct investment, but dang it will be fun!

Jobs Jobs Jobs

Another sobering graph from the NYTimes' Economix blog showing different rates of monthly job growth and how long it will take to return to pre-recession levels of employment.  And, of course the work force keeps growing in the interim.

But up is better than down...

Recovery is Solidly Underway but There Remains a Big Hill to Climb

The national unemployment picture is improving with over 200,000 jobs added in March. [Note: this is the last link to the NY Times I provide before the pay wall goes up - I'll try and take that into account in the future]  Yes, the rate didn't budge much and is still high at 8.8%, but this is expected as more and more job seekers return to the job market.    This is also happening at a time when state and local governments are shedding jobs at a brisk pace (15,000 jobs lost) which tempers the recovery but also signal that private sector job gains are good.  Still at this pace it'll be a number of years before we recover fully.  Truly good news would be to break the 300,000 mark for a number of months.  

The NY Times' Economix blog has a nice graph (reproduced above) that shows just how bad the unemployment situation got in historical perspective and how far we still have to climb.

The Wonderful Film and Television Tax Credit

You might think, given my previous questioning of targeted tax credits (like the BETC) that I would be rather skeptical of the film and television tax credit now under scrutiny in Salem.  Here is Chris Lehman of OPB:

The sun is setting on a series of tax credits in Oregon. In 2009 lawmakers voted to sunset nearly all of the state's tax credits on a rolling basis every six years. That would allow them to review each one and decide whether it's worthy of renewal.

The first batch is going under the microscope now and includes things like incentives for reforestation and hand-outs to the film and television industry.

One of the beneficiaries includes the TNT television series "Leverage" starring Timothy Hutton.

***

The setting may be fictional, but the place where it was filmed is the very real city of Portland.

"Leverage" is in the midst of taping its third season of shows in Oregon. But executive producer Dean Devlin says "Leverage" wouldn't be in Oregon at all if it weren't for the state's tax credit for film and television production.

Dean Devlin: "Without the incentives, we wouldn't be there. The incentives are essential."

You would be wrong.  I think this is the best tax credit ever! I mean we get to have real hollywood stars grace our streets, our fair state appears on screens around the globe...the benefits must be endless.

Okay, okay, perhaps it has more to do with the fact that I am a direct beneficiary: the good folks at Leverage are going to film a few scenes at my house and pay me a modest sum for my trouble.

Boy do I love that tax credit!

By the way, I have never actually seen Leverage, but I am totally confident that it is the best thing on TV.  Ever.

Disingenuous

This ridiculous op-ed by three PPS board members argues that seismic safety is a key component of the PPS facility bond measure.  This is an attempt to answer critics like me who wonder why we aren't spending the money retrofitting as many school buildings as possible.  But the op-ed is false and disingenuous.  The bond measure is about rebuilding and renovating schools - that they will be brought up to current seismic standards in the process is incidental.  Only one school - the Fernwood campus of Beverly Cleary - will have a seismic-specific retrofit.

Now, there is perhaps a good argument to be made that we should spend $548 million in the way PPS is proposing rather than preparing for a random event that may or may not happen in our lifetimes and when it does has only a 10% chance of happening during school hours (hooray for a short school year!). [This is, by the way, how I try and comfort myself given the knowledge that my son's school building will almost certainly collapse in a serious earthquake]  But you should make this argument and people like me who always think in terms of opportunity cost (what else you could do with the same money) can evaluate it on its merits.  What you should not do is deliberately obfuscate and try and pretend the bond measure is about seismic safety in any real way.

Note: I see that PPS has also prepared a press release linking the bond measure to seismic safety.

Portland Home Values Showing the Effect of a Long Spell of High Unemployment

The Case-Shiller Home Price Index for January is out and the dismal news for the Portland housing market continues.  This is not surprising as a couple of years of high unemployment is bound to have a serious impact, but depressing nonetheless.  

Here is a nice sortable table of the January numbers courtesy of the Wall Street Journal.  The headline numbers for Portland are a 7.8% decline since January of the year before and a 1.8% decline from december to January.

I do finally think that we are moving in the right direction in general, the jobs numbers have been good and overall US growth is pretty healthy, but it will take a while before we see these improvements make their way into property values.

Libya and the Economists

Absolutely fascinating story about Economists, Harvard and LSE and their connection to Libya in Economic Principals. [HT: Mark Thoma]