2010

Year: 2010

US v. Ghana at Cinema, Saturday 1 p.m.

The Intrepid Professor Finkler has secured the Cinema in the Warch Campus Center to watch today’s US footballers take an Africa’s final hope, Ghana. The winner will move on to play Uruguay.

I have been puzzled as to why this year’s World Cup has had such a somnambulous effect on me. Is it the heavy prescription narcotics? Is it the gentle buzz of the vuvuzlas? Or perhaps it’s that the teams just aren’t putting the ball in the net?

It does seem that goals this year are even tougher to come by than usual, though that does not (necessarily) mean the games are more boring. It might mean tighter games down the stretch and even more exultation when the ball does go in the net.

Whatever the reason, we hope to see you in the Cinema for popcorn and football and possibly an impromptu game theoretic discussion of goalie strategy versus a penalty kick.

Carrots or Sticks?

Are You A Motivated Self-Starter?
Looking for a motivated self-starter

I’ve seen this video from RSA Animate making the rounds at some of my favorite blog sites.  It’s from Dan Pink, and it gives an 11-minute, Johnny-on-the-spot animated primer on what motivates us.  It’s not actually animation, more like watching someone pretend to animate something, with real cartoon-like pictures being the result. Watching it is quite mesmerizing, and it’s probably more interesting than whatever you’d otherwise be doing for the next few minutes.

The big take home message is that higher-powered incentives don’t necessarily translate into better performance, specifically when “big brain” tasks are involved. Research indicates that people like autonomy in what they are doing and gain non-pecuniary satisfaction from a sense of accomplishment.   Open source success stories like Linux and Wikipedia seem to bear this out.  On the other hand, there seems to be a fundamental tension between an organization’s objective function and individual autonomy.  If they aren’t aligned well, then we wouldn’t expect much innovation that benefits the firm.

So, let’s think about this some more, and meanwhile, enjoy the cool cartoons.  Here is the full collection.

Free or Best Offer

The last time I had a yard sale, the point was more to get rid of the stuff in my basement than to raise revenues.  After a couple of hours of slow moving, I changed my price policy to “Free or Best Offer.”  Although a rational choice model probably wouldn’t see this as doing very well financially, several people dropped wads of cash on us as they hauled away bags full of stuff from children clothes to mismatched coffee mugs to old VHS tapes.  Now why would they pay anything, I wondered?  Guilt?  Soon after, a friend of mine involved in community theater told me of a similar “pay what you think it’s worth” pricing scheme that they often run, which is basically “free or best offer.”

It occurred to me that it might not be a bad way to low marginal cost items with low or highly-uncertain demand where the idea is to make a sale.  Obviously, this isn’t an original insight, as there are many cases where firms bolster revenues through some sort of two-part tariff scheme. In the theater case, they were going to do the production, so, ceteris paribus, I would think they would prefer to have some crowd rather than no crowd (especially if they have concessions). In my yard sale case, my costs increased if I didn’t get rid of the stuff.

That's Not Tyler Cowen

Now, there seem to be a number of restaurants implementing this sort of pricing logic, yet this pricing logic doesn’t seem to work for restaurants, does it? If the reasons aren’t obvious, check out this interview with economics pop star, Tyler Cowen, over at Salon.com.

Meanwhile, I recommend you get out there and take advantage while these places are still in business.  Consumers often benefit tremendously from competition like this — many of my favorite restaurants weren’t in business very long at all.  While they were in business, I sure enjoyed eating there.  In this case, however, even if you pay them what you think it’s worth, I don’t think they are going to be around for long.

Regulatory Wishful Thinking or Long Live Pigou

Professor Gerard has posted numerous articles on regulatory policy,  some of which rest on the theme that regulators will be captured by the industries they are assigned to regulate.  Simon Johnson, in today’s   Economix  blog, focuses on both oil and financial regulation.  He argues that living wills, that is strategies businesses might design to deal with their own failures, are not the solution for either industry.  He notes that oil companies other than BP had similar plans for managing the risks of a major oil spill in the Gulf of Mexico.  In fact, many had hired the same consultant to write their plans.  Such plans demonstrated limited knowledge of the Gulf as well as limited preparedness.  Stated differently, they had very little incentive to write constructive plans.

If we want private companies to respond to potential catastrophes or even continuous negative externalities, we need public policy that encourages them to do just that.  Of course,  such public action requires that our legislators and the Executive branch need to both address the societal tradeoffs our nation must face and face-down the lobbyists who seek to postpone such action.  Perhaps our policy makers should be tested to see if they support the manifesto for the  Pigou Club or a bit smaller challenge, if they know Pigou’s contribution to welfare economics.

The State of Federal Regulation

With the financial meltdown and the increasingly-disturbing oil spill, the efficacy of federal regulation is very much in question.  The New Yorker‘s James Surowiecki sees it as a “good government gone bad” problem.

These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

I’m pretty sure he uses the word “deregulation” incorrectly here, at least in a conventional sense. His argument is more along the lines that enforcement of (some) regulations has become more relaxed. Of course, economists of the public choice stripe would probably point to the coziness between regulators and the regulated as a predictable result of the political process.

Drawing partly on Daniel Carpenter’s epic new book, Surowiecki points to the FDA as an example of a “consistently effective.” Of course, many economists have pointed at FDA as an example of an agency that exercises too much caution.

Whether that is accurate or not, Megan McArdle has an interesting article in the most recent Atlantic Monthly discussing why the number of drugs coming to market has been going down.  The McArdle piece is especially discouraging with the backdrop of a New York Times piece on the failure of the human genome project to reveal breakthroughs in treatment.

And then there’s this just in.

Out with the Old, In with the Older

Here are a few links for you as we bid farewell to the 2010 Lawrence economics graduates and brace ourselves for the alumni revelers descending upon campus for Reunion Weekend. As Neil Young might say, economics never sleeps.*

As you have probably noticed, we have more than a passing interest in the oil spill around here.  One of the interests has to do with the liability versus regulation question, and on that front, Resources for the Future (RFF) has background information on oil spill liability law. Mark Cohen at RFF did some of the seminal work on the enforcement of environmental laws, focusing on oil spills, so this is definitely a good place to look.

Another piece has to do with the long-term corporate viability of BP itself – is this spill just a speed bump on the route to long-run profitability? Or will the company be taken over? Or will it go into bankruptcy and attempt to expunge its environmental liability? Or maybe it will agree to a takeover and then go into bankruptcy and expunge its liability and then be taken over (Can they do that? See above).  New York Times writer Andrew Sorkin explores these issues. The current stock price is down to $31 from a 52-week high of $63.  That means that more than half of the company’s “worth” has been wiped out. Ouch.

So, things aren’t going that well over in the old economy.  How about the new economy? If there is anyone with a worse public image than BP right now, it might just be a mysterious cabal that is putting the architecture in place to unleash a malicious computer virus on the world’s computers. Well, we really don’t know who is behind it or why. Mark Bowden at The Atlantic has a fascinating article on the Conficker virus. This case may well fit into William Baumol’s famous definition of entrepreneurship (cited here) that includes “destructive entrepreneurship.” I guess we’ll have to wait and find out.

On a happier innovation front, the most recent EconTalk discusses the fashion industry, where “there is limited protection for innovative designs and as a result, copying is rampant. Despite the ease of copying, innovation is quite strong in the industry and there is a great deal of competition.” Schumpeter was a famously natty fellow.  I wonder what the fashion world thinks of creative destruction?

I imagine without class in session, the summer blogging will slow to a crawl. If you come across anything interesting, feel free to send it my way.

*Then again, probably not.

What’s with the Funny Hat?

The flowing robes, the grace... striking
The flowing robes, the grace... striking

In our continuing attempt to understand the world around us, today we will talk about the tradition of wearing cap & gowns for graduation ceremonies.

Well, the first thing you need to know is that this dates back nearly 1000 years, and the academy is a notoriously conservative place. In the words of F.M. Conrford, in his advice to young academics, “Nothing should ever be done for the first time.”* The corollary is that once we get started on something, it’s tough getting us to stop.

With that in mind, Slate.com tackles the regalia question for us:

Standard fashion around 1100 and 1200 A.D. dictated long, flowing robes and hoods for warmth; the greater a person’s wealth, the higher the quality of the fabrics. This attire went out of style around the Renaissance. But sumptuary laws, often designed to prevent people from dressing above their class, kept academics (who were relatively low in the social hierarchy) in simple, unostentatious robes through the 16th century. Thereafter, academics and students at many universities wore robes for tradition’s sake. At Oxford, robes were de rigueur until the 1960s and are still required at graduation and during exams.

And, of course, the Americans played along:

When American universities sprang up in the 17th and 18th centuries, they adopted many Oxbridge academic traditions, including robe-wearing…

Continue reading What’s with the Funny Hat?

Can You Think of a Radical Idea to End Poverty?

Guess Again
Think Again

What’s the best idea out there to reduce poverty and improve urban life? Well, Paul Romer thinks a big part of the answer is his charter city idea.  What’s the charter city idea, you ask?  I’m not sure, actually. Professor Finkler has been on me to read about it, and I may finally take him up on it, as the new issue of The Atlantic has a feature piece, “The Politically Incorrect Guide to Ending Poverty.”

How’s that for a provocative title?

The article of course profiles Romer, who is by any account a fascinating character.

In the 1990s, Paul Romer revolutionized economics. In the aughts, he became rich as a software entrepreneur. Now he’s trying to help the poorest countries grow rich—by convincing them to establish foreign-run “charter cities” within their borders. Romer’s idea is unconventional, even neo-colonial—the best analogy is Britain’s historic lease of Hong Kong. And against all odds, he just might make it happen.

We’ll see.

In addition to charter cities and making Aplia happen, Romer is also the hero of David Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery.  The first half of the book is a short course in the history of economic thought; the second is an accounting of Romer’s role in launching endogenous growth theory. Both halfs are well worth reading.

Eyes on the Demise

James Hamilton at Econbrowser has a post, similar to one here, about difficulties regulating amidst rapid innovation. The cases of note were the disastrous Gulf spill on the one hand, and the disastrous financial meltdown on the other.

With the help of modern technology, we can now keep an eye on both.

As I’m sure you’ve seen, BP has a live feed up to its gusher, providing a continuous video feed from a mile under the sea.

Where did they get that idea, I wonder?

Perhaps from NPR Planet Money’s round-the-clock coverage of their own “toxic asset” via Toxie Cam.  Here’s just a taste of some screenshots from their thrilling live feed:

And here’s the back story:

We bought Toxie for $1,000 earlier this year. Every month, we get a check. It’s a small piece of the payments people are making on their mortgages. And every month, more houses get foreclosed on and sold off by the bank. When enough houses get sold off by the bank, Toxie will be dead.

She’s not dead yet — but things are looking grim.

Last month, we got $72.41; so far, we’ve received a total of $449.

This month, our payment was zero dollars and zero cents. We could still get another payment next month — maybe.

So, it looks like the toxic asset really was toxic, with a payout of less than 50 cents on the dollar. On the other hand, that seems to be about what my 401K has been doing.

At any rate, video technology is clearly making the world a better place.

Joga Bonito

It’s June again, and that means it’s time to figure out exactly who you are going to pick to win this year’s FIFSA World Cup.  What’s that? You’re busy with finals? With packing up and leaving campus? With finding a job and shopping for Ramen noodles? Who has time to research the top teams?

analystWhy, the investment banks, of course.

According to the Financial Times, Danske Bank, JP Morgan, UBS, Evolution, Goldman Sachs, have all put their top personnel on the matter and made their predictions.  Well, Goldman only picked the semi-finalists because, you know, they don’t want to take any unnecessary risks.

It looks like la Brasilia is the big favorite this year, with a JP Morgan giving a hat tip to the English.

How do they do it?, you ask. Here’s one case:

Danske are using six factors (income level, population size, football history and tradition, current form of national team, presence of ‘superstars,’ and home field advantage) to gauge the teams relative strength… Then they simulate the Cup schedule.

That’s right, linear regression. OLS.  What can’t it do?

For those of you US football fans out there, the yanks are better than even odds to advance past the group play, and about 90:1 to win it all right now.   Spain is actually the gambling favorite to win it all right now at 4:1, with the Brazilians just behind at 9:2.

The New Republic has a blog. 

Interested in a Political Career — How Tall Are You?

Slate has an amusing piece on what political coverage would look like if political scientists wrote it. Here’s just a taste:

Democrats hope that passing health care and financial regulatory reform will give them enough momentum to win in November. Unfortunately, there’s little relationship between legislative victories and electoral victories. Also, what the hell is “momentum”?

Prospects for an energy bill, meanwhile, are looking grim, since Obama has spent all his political capital. He used to have a lot. Now it’s gone. Why winning legislative battles builds momentum but saps political capital, I have no idea. Just go with it.

In related news, things are heating up in Oshkosh.

Summer Reading Opportunity

With the previous post, Professor Galambos has kicked off this year’s LU Economics Summer Reading Fun, or something like that.  Any student (or colleague, or alum) interested in reviewing a book related to economics or LU economics is welcome to submit a book review that we will post right here on the blog.

Here are some suggestions that I am very interested in learning about, but likely won’t read myself:

Brad DeLong and Stephen Cohen, The End of Influence: What Happens When Other Countries Have the Money?

When you have the money–and “you” are a big, economically and culturally vital nation–you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly–though, hopefully, in quiet, nonconfrontational ways. An you lose influence–the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don’t. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time.

Continue reading Summer Reading Opportunity

Summer reading

My summer reading list will definitely include The Devil in the White City, by Erik Larson. It is the story of two men, one who headed the design and the construction of the 1893 World’s Columbian Exhibition, famed Chicago architect Daniel Burnham, and one who

murdered a dozen or so of the visitors to that once-in-a-century sensation. The book is completely fact-based, and paints a vivid picture of end-of-century Chicago. The exhibition was Columbian because it commemorated the 400th anniversary of Columbus’s “discovery” of America. It had to be better than the 1889 world fair in France, which gave them the Eiffel tower. Of course, little did they know that the 1896 World Fair in Budapest would trump them all. (That was to commemorate the 1000th anniversary of the Magyar hordes invading the Carpathian basin. Though important to Hungarians, it was not  even in the same ballpark as Chicago’s.)

An Extended Post on the Benefits and Costs of Oil and Gas Drilling

If there is any upside to the epic oil spill down in the Gulf (and heading this way), it is that it provided a learning opportunity for my courses in Political Economy of Regulation (Econ 240) and Environmental Economics (Econ 280).  I’ll start with the benefit-cost analysis (I actually started this yesterday and have touched on it here and here), and I will try to get to the regulations next week.

The Environmental Economics class looked at the benefit-cost analysis of offshore drilling described in the Draft Proposed Outer Continental Shelf (OCS) Oil and Gas Leasing Program 2010–2015. The document covered areas in Alaska, California, and the Gulf. The students looked at the benefits and costs of expanding offshore production, including the quantification of the environmental (external) costs.

The results deviated little from the extant program from 2007-2012 (see table), where the quantified benefits were far higher than production and external costs. Most of the benefits manifest themselves in the difference between oil and gas prices and the production costs (net economic value in the table). The producers take a chunk of profit and the federal government takes a 12.5% gross production royalty that it redistributes to the states.

OCS BCA

The net benefits calculation is the consumer surplus and producer profits less the environmental costs. As can be seen in the table, the values are dominated by producer profits (roughly equivalent to “net economic value”). The analysis assumes $46/b oil prices, $7 / McF natural gas prices, and a 7% real discount rate.

Continue reading An Extended Post on the Benefits and Costs of Oil and Gas Drilling

Chicago Management Consultant Firm Offers Summer Internship

Productive Strategies, a marketing and sales consulting firm in Chicago, seeks a summer intern. The firm works with small, private companies as well as large, publicly held companies – in a wide range of industries. The firm features a small group, about 12 in total, with 3-4 members located in one office in Winnetka/Northfield, Illinois about 15 miles north of downtown Chicago. It is looking for someone to assist in the Winnetka/Northfield office with marketing and sales efforts, as well as to participate in occasional client assignments. The internship offers an opportunity to attend classes that they teach on developing relationship and selling skills (for free). Interns should have good computer and data entry skills. The volume of expected work probably will not require 40 hours a week – but more like 25-30 a week – week to week the workload could vary. Our website (ProductiveStrategies.com) provides additional background information on what the firm does.

The firm prefers someone from the Chicago area, as it cannot provide housing. It would pay a modest stipend at the end of summer based on the amount worked and contributions made and is very flexible on when someone would start and stop, as well as on time away from work. Finally, Productive Strategies would like to emphasize that its work environment is very low key.

Those interested should contact Terry Franke, Lawrence alum.

Terry Franke

Productive Strategies

Two Northfield Plaza #365

Northfield, IL 60093

tfranke@productivestrategies.com

847-778-7015 direct

847-446-0008 x7 office

ProductiveStrategies.com

Q: How do we regulate in the face of rapid, complex technological innovation?

Use back of page to answer if necessary.

The question for today is what do the recent spill and the financial crash have in common? Kenneth Rogoff has an opinion piece about the difficulty of regulation amid rapid technological advance.

The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency…  Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures.

And it doesn’t stop there at all.

The basic problem of complexity, technology, and regulation extends to many other areas of modern life. Nanotechnology and innovation in developing artificial organisms offer a huge potential boon to mankind, promising development of new materials, medicines, and treatment techniques. Yet, with all of these exciting technologies, it is extremely difficult to strike a balance between managing “tail risk” – a very small risk of a very large disaster – and supporting innovation.

So in a world of rapid technological advance, what is the role in public policy in capturing the benefits while also mitigating the risks? Is “the market” best left to its own devices? Certainly, we have addressed this question in other forms.

I don’t have any answers, and you aren’t likely to find any either. But the point of a lot of what we do on Briggs 2nd is to try to frame and analyze problems, understand what the issues are, the potential winners and losers, and have a discussion about how to proceed.  I hope this helps.

Rogoff’s column is here.

He is also the author of This Time Is Different: Eight Centuries of Financial Folly. You can find a paper version here and the book here.

Take Stock in BP?

Here’s a provocative thought:

BP_wilts_smBP’s stock, which traded at a 52-week high of $62.38 on Jan. 19, 2010, closed on June 1 at $36.52 a share, down 15% on the day. The post-spill sell-off has wiped out some $68 billion of BP’s market value, knocking it down to $114 billion. With the stock now in the cellar, some speculation even has it that BP may attract a buyer.

There are a couple of things going on here.

First, the stock price reflects the value that “the market” places on a company.  One technique for evaluating the effect of some major event on a company’s value is to do an “event study.”  The idea is to try to use other factors (e.g., larger market trends, stock prices of other firms in the industry) to get at how important the event was. A spill like this could damage a company’s reputation, expose it to liability payouts, or make it susceptible to heavy fines.

Ben Fissel at Econbrowser put one of these together shortly after the spill.

When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill.

He finds big impacts.  The red line in the picture is his estimate of the time series of BP’s stock price without the spill, and the black line is the actual price.  Seems like a big effect.

At the time he did the study, the stock price had been between $50 and $60 for the previous three months.  As the AOL article shows, the price is now down closer to $35. Overall, the market’s valuation of BP has gone from more than $180 billion to about $114 billion.  Does that seem reasonable?

That is, in fact, the second point, that doesn’t seem all that reasonable, which is why BP’s stock is now so low that it might be attracting a buyer.  In other words, at current prices smart money might find BP stock such a bargain that it will swoop in and buy the company, liability exposure be damned. Does that seem reasonable?

I completely buy this logic.  Given that BP is the world’s largest oil producer, it is hard to believe that the long-term profitability of the company has really fallen 40% due to the oil spill. The linked article provides some reasons why a merger might be implausible, but on the fundamentals, this may well be an overreaction.

Further food for thought, what will happen to oil prices if there are significant steps taken to reduce offshore drilling and who stands to win and lose from those price changes?

Is College Right for You?

In a continuing series on why I love being an economist, here’s a piece from The New Yorker on the costs and benefits of college education.  In it, the author discusses the job prospects and salaries of various disciplines, including our own:

Economics majors aren’t doing badly, either: their starting salary averages about fifty thousand a year, rising to a mid-career median of a hundred and one thousand. Special note should be taken of the fact that if you have an economics degree you can, eventually, make a living proposing that other people shouldn’t bother going to college.

Well, of course we do that. Maybe college isn’t right for everyone.  In our burgeoning post-industrial, service economy, some jobs might require at least some college (“consultant,” CSI analyst, attorney, surgeon, computer game developer), others might not (burger flipper, garden hand, dog walker, Wal Mart greeter, professional athlete), and others might require non-traditional schooling (massage therapist, engine diagnostic tester, fire watcher, marauder).

Here at Lawrence, however, we believe that college is right for people who share our mission — “commitment to the development of intellect and talent, the pursuit of knowledge and understanding, the cultivation of sound judgment, and respect for the perspectives of others.” Not exactly a vocational bent, that’s the point.

But for assessment purposes, many view college as a training ground for future professionals.  Thus the question, should we evaluate the efficacy of college on the basis of the integrity of its graduates, or on whether graduates get jobs, whether they like their jobs, and how much money they make? Given that whether someone has a job or not tends to be easier to measure than the (change in) integrity of a person over the course of their college life, whether college is “worth it” or not is often framed as whether the monetary benefits outweigh the costs.

Well, anyway, hope the Lawrence Experience is right for you.

Coming to an HBS Case Near You

A few months ago I had a series of posts on the Amazon-Macmillian-Apple fracas, related to publishing and sale of e-books.  A recent New Yorker piece provides a very nice discussion of the role of technological innovation and competition in reordering the publishing business, with Apple, Amazon, and Google all playing major roles.  One of the more interesting aspects is the blurring of the lines as firms integrate, disintegrate, or just try to make money.  My favorite line in the piece is this:

In (Amazon’s Russ) Grandinetti’s view, book publishers—like executives in other media—are making the same mistake the railroad companies made more than a century ago: thinking they were in the train business rather than the transportation business.

I’m not sure I have much to add to the article at this point, except to say that I recommend it.  And that you will probably be reading some version of this story as a business school case if you happen down the MBA route.

In fact, you will probably be discussing this in an Industrial Organizations course if you aren’t careful.