For this piece, I refer you directly to Rosalind Resnick’s guest column in today’s Wall Street Journal. For those of you who have taken an entrepreneurship course, I’ll highlight numbers 9 and 10.
9. Not having a business plan
10. Over-thinking your business plan
As far as I know, the climate is still changing, so nothing to update there. According to economists Matthew Kahn and Matthew Kotchen, however, we don’t seem to care as much about it (if “googling” is a good proxy for “caring”, that is). Ed Glaeser discusses this and some more of Kahn’s research in today’s NYT Economix blog post. One of the provocative points is the claim that climate change is a done deal, and that the big coming challenge is to adapt.
One person swimming against the apathy tide is the self-proclaimed skeptical environmentalist, Bjørn Lomborg. For years, Lomborg has been publishing pieces questioning the scale and scope of environmental problems. He has now reversed course and is calling for massive investments to tackle the problem. From my quick read, the tackling seems to be on the emissions side, as opposed to adaptation.
Anyone who has sat through my carbon capture and sequestration talk certainly knows I’m with the adaptation folks on this one. I simply am not convinced that the world can cut emissions enough to stabilize atmospheric concentrations, even under the most wildly-optimistic scenarios.
For a bit more meat on the climate change discussion, check out a recent symposium in the Journal of Economic Perspectives. Here’s a table of estimated net benefits across 13 studies.
Notice the overall impacts in terms of GDP per year seem to be on the order of -1% per year, though the estimate from the review author’s article (Richard Tol) shows net gains. You might also take note as to which countries are likely to win and lose in these estimates, and take that into account next time countries sit down to hammer out an agreement.
Should be an interesting century.
Two days ago, I posted James Hamilton’s blog entry on Friday’s GDP numbers and suggested that the 1.6% growth in GDP was not as depressing as it might seem. Primarily, I noted that inventory growth had slowed and imports had risen. The latter might be viewed as demonstrating renewed economic strength whether the imports reflect increased household consumption and household income (which they do) or increased business purchases of intermediate inputs (which they also do.)
In today’s Financial Times, economists Carmen and Vincent Reinhart summarize their address given last week at the Kansas City Feds’ annual symposium which features central bankers from all over the world. The Reinharts warn us that financial crises of the sort we are emerging from do not generate robust rebounds.
Such optimism, however, may be premature. We have analysed data on numerous severe economic dislocations over the past three-quarters of a century; a record of misfortune including 15 severe post-second world war crises, the Great Depression and the 1973-74 oil shock. The result is a bracing warning that the future is likely to bring only hard choices.
But if we continue as others have before, the need to deleverage will dampen employment and growth for some time to come.
Although aggressive use of fiscal and monetary policies may be necessary to avoid the risks of economic depression, they are no substitute for changes in expectations and economic structure required to find a stable long term economic growth path. Attempts to avoid such “creative destructive” will only deepen the cost of the inevitable adjustment that must take place.
The Wall Street Journal profiles one of the standard bearers of Austrian economics, Pete Boettke of George Mason University, who blogs at Coordination Problem. The title of the piece is is “Spreading Hayek, Spurning Keynes,” so you know where he’s coming from. This, of course, is a topic we have touched on before.
The blog wasn’t always called Coordination Problem, either.
The resurgence of Austrian economics does have its hazards, Mr. Boettke says. The antigovernment fervor on cable-television shows and the Internet may have popularized its theories, but it also “reinforces the idea to critics that these are crackpot ideas,” he said. He has tried to distance himself from conspiracy theorists and even dropped “Austrian” from the name of his blog. But he hasn’t yet thought of a better term.
If you are unfamiliar with the Austrians, here’s Bottke’s description of Austrian economics at The Library of Economics and Liberty. We also have Israel Kirzner’s take from the New Palgrave Dictionary of Economics, available from campus IP addresses (thanks to the good folks over at The Mudd).
Kirzner is an especially important thinker about entrepreneurship, so those of you interested might take a peek at what he has to say. You might also check out Peter Klein’s The Capitalist and the Entrepreneur, which is some of the most mature work fusing the Austrian school with transaction cost economics.
On Friday, the second report on 2nd quarter GDP was released; it displayed GDP growth at 1.6% instead of 2.4%. The decline came from a downward revision in inventory buildup and an upward revision in imports. James Hamilton in his Econobrowser posting argues that the report suggests that the economy is still moving upwards though at a modest pace. It does not suggest a double dip recession. Hamilton provides some nice charts and tables to tell the tale. Check it out.
The Denver Post has some way cool photos back from the early days of color photography. From potato pickers in Caribou, Maine to fishing in the swamp in Belzoni, Mississippi to homesteaders in Pie Town, New Mexico, these shots are generally fascinating.
For those of you who think passion is reserved for the humanities, check out this NOVA documentary on mathematician Andrew Wiles’ quest to solve Fermat’s last theorem. Wiles literally breaks down crying when thinking back to the moment when he thought he had it.
Fermat himself had said of the proposition, “I have a truly wonderful proof of this fact…. This margin is too small to contain it.” Though he probably didn’t, what his claim unleashed is extraordinary, with the Wiles’ proof being the last chapter.
Perhaps not.
Professor Sanerlib regularly shows this to his Math 300 class, but why should they have all the fun?
Absolutely awesome.
UPDATE: Alex Tabarrok at Marginal Revolution also spotted this and offers this:
The plainspoken Goro Shimura talking of his friend Yutaka Taniyama, “he was not a very careful person as a mathematician, he made a lot of mistakes but he made mistakes in a good direction.” “I tried to imitate him,” he says sadly, “but I found out that it is very difficult to make good mistakes.” Shimura continues to be troubled by his friend’s suicide in 1958.
John Kruk famously said, “I ain’t an athlete, lady, I’m a baseball player.”
For those of you who don’t know the (possibly apocryphal) tale, John Kruk was a rather fat man with a mullet, who could hit a baseball better than most people in the world. Kruk’s view was that it wasn’t any “athletic” gifts, per se, that allowed him to hit so well, but rather his crazy hand-eye coordination and phenomenal reflexes.
After a game, a woman spotted him smoking a cigarette and she started to give him the business about how an athlete shouldn’t smoke, his body is a temple, to think about the kids, and on and on.
His infamous response is the title of his autobiography.
So, what does this have to do with Friday Food for Though?. Well, when people find out that I’m an economist, they will typically say things like, “Oh, this must be a really interesting time for you.”
Why is that?
“Oh, you know, because of all the things going on in the stock market and the economy and stuff like that.”
Lady, I don’t know about that sort of thing — I’m an economist.
Or perhaps that’s what we economists are supposed to do — study the economy. Well, I guess that’s one answer, but I don’t think it’s my answer. I mean, I know something about what’s going on with the fiscal stimulus and the multiplier effect, but as Robert Barro points out, that it certainly not what I do.
Continue reading Friday Food for Thought: “I’m an Economist”
Obviously, to answer this question begs another: What’s a PLOG? or perhaps: Should we view central bankers as plumbers? PLOG, a term coined by IMF economist Andre Meier, refers to Persistently Large Output Gap or positive deviation between potential GDP and measured GDP. The big concern raised by the LEX column in today’s Financial Times regards whether central bankers should worry about a deflationary double dip recession. As Lex puts it:
“The supposed PLOG-effect creates a dilemma: the Scylla of deflation or the Charybdis of extraordinarily easy monetary policy.”
Based on Meier’s study of 25 episodes in advanced economies, Lex argues that recessions slowly reduce inflation rates and generally stop prior to serious deflation. Therefore, central bankers should not become preoccupied with such a threat. Indeed, attempts to further stimulate economies such as ours with monetary policy is likely to be ineffective (or to use the proverbial idea: it’s like pushing on a string.)
I find the final sentence of the opinion piece particularly instructive.
“And while a PLOG may not create deflation, it can only amplify the grim economic effects of over-indebtedness, whatever policies central bankers adopt.”
For a limited time (I think), the American Economics Association is providing complimentary access to articles in The Journal of Economic Perspectives. Each issue of the journal provides a series of short papers on one or more topics of common interest as well as other articles of interest to those who want access to the state-of-the-art economic thinking without needing to wade through the sophisticated mathematics or economic arguments that require graduate level training. The Summer 2010 issue, for example, devotes one set of articles to approaches to economic development and a second set to President Bush’s “No Child Left Behind” program. Sample early; sample often.
In today’s Economix Blog, Edward Glaeser reminds us of a paradox that William Stanley Jevons posed in the 1800s. When public policy makes something more efficient (such as automobiles or electrical appliances), people may respond by expanded their use of the underlying product (gasoline or electricity). For example, CAFE standards, which seek to increase the gasoline efficiency of automobiles by requiring a higher miles per gallon standard for cars, may actually induce us to drive more. It all depends upon how much cheaper it is to drive, and the price elasticity of demand. We need to be sure that the adopted policy serves its ultimate objective, for example, to reduce an externality such as congestion or carbon emissions. As Glaeser puts it,
“Well-designed policies, like a congestion tax or carbon tax, can reduce social problems by getting the right sort of behavioral response; interventions that create an offsetting behavioral response can push the world in the wrong direction….The real lesson is that a change in the effective price of a commodity leads to a behavioral response, and, in some cases, that response can be so strong that it reverses the desired effect. As America considers new policies in public health, environmentalism and financial regulation, Jevons is as relevant as ever.”
The good folks at Organizations & Markets ask why economists haven’t paid closer attention to the economics of free speech. The classic piece on this is Ronald Coase’s “The Market for Goods and the Market for Ideas” (available from campus IP addresses). Coase asks why the rationale for goods’ market regulation doesn’t carry over into the realm of the market for ideas. Here is how he characterizes the prevailing attitudes:
In the market for goods, the government is commonly regarded as competent to regulate and properly motivated. Consumers lack the ability to make the appropriate choices. Producers often exercise monopolistic power and, in any case, without some form of government intervention, would not act in a way which promotes the public interest.
Fair enough. But then,
In the market for ideas, the position is very different. The government, if it attempted to regulate, would be inefficient and its motives would, in general, be bad, so that, even if it were successful in achieving what it wanted to accomplish, the results would be undesirable. Consumers, on the other hand, if left free, exercise a fine discrimination in choosing between the alternative views placed before them, while producers, whether economically powerful or weak, who are found to be so unscrupulous in their behavior in other markets, can be trusted to act in the public interest, whether they publish or work for the New York Times, the Chicago Tribune or the Columbia Broadcasting System.
Coase wrote the piece in the early 1970s, partly in response to federal regulation of commercial advertising, wondering whether there is a difference between firms schlepping products via commercial advertisements in the goods market is really any different than an article or an editorial in the New York Times.
Improbably, Time Magazine carried an article on Coase’s article and summarized his position nicely:
Coase challenged two assumptions that, he says, have created the distinction in public policy: 1) that consumers are able to distinguish good ideas from bad on their own, though they need help in choosing among competing goods; and 2) that publishers and broadcasters deserve laissez-faire treatment while other entrepreneurs do not.
It might be tempting for us to dismiss Coase’s argument as glib posturing, or as an example of economists being too clever for our own good. But how we define and constrain free speech is a central element of our political system. President Obama, in fact, spent his weekly radio address admonishing the recent Supreme Court decision that removed many legislative controls of corporate campaign financing. One would suspect that Coase was arguing to relax regulation of the goods market, not extend regulation to the ideas market, but the proliferation of the internet and other news sources has perhaps muddied the waters so much that the distinction is unrecognizable.
So, more to come, I suspect.
In today’s New York Times Economix Blog, Uwe Reinhardt poses the central question: “Is ‘More Efficient” Always Better?” In answer to the question he provides the basic definitions one would confront in an introductory economics course – including appropriate references to Pareto – and proceeds to point out that some efficient points, such as R and U, are not necessarily better than some inefficient ones (any in the region bounded by X, Y, and Z).
He then proceeds to link efficiency with optimality, which becomes his point of contention.
“One suspects that the term optimal came into widespread use among economists as a marketing device to promote their normative propositions based on efficiency. But as Professor Arrow warns his colleagues on this point:
A definition is just a definition, but when the definiendum is a word already in common use with highly favorable connotations, it is clear that we are really trying to be persuasive; we are implicitly recommending the achievement of optimal states.
Alas, it gets worse. Astute readers will have figured out by now that literally every point falling on the entire solid curve in the graph must be “Pareto optimal” by the economist’s definition of that term, not only those falling on line segment Y-Z. That circumstance makes the economist’s use of the word optimal even more dubious.”
In my view, Reinhardt stops in the wrong place. Rather than “dis” the term efficiency, he could differentiate between Pareto efficient (all points on the concave curve bounded by the two axes and called in this case the Happiness Possibility Frontier or HPF) and Pareto optimality (which employs Pareto’s notion that, at these points, to make someone better off, another person must be made worse off.) So what’s the point? Actually, there are two points to be made.
1. For any point (or allocation) below the HPF, that is any Pareto inefficient allocation, there exist Pareto improvement possibilities, and economists should encourage taking advantage of such.
2. Once on the HPF, Pareto optimal allocations depend upon social preferences, about which economists have no unique judgment to contribute; however, each such social choice judgment does yield consequences with opportunity costs (foregone choices) that can be identified. Stated differently, all Pareto efficient points are candidate points to be Pareto optimal under some set (of sometimes very curious) social preferences.
To conclude, the notion of efficiency is not a vague term, and it does reflect a value free standard. In my view, one can claim that for any Pareto inefficient allocation, Pareto improvements exist. Efficiency, however, says nothing about the optimal choice until preferences – in this case comparison of A’s vs. B’s happiness – is made. Furthermore, economists should encourage those making such social preferences to be transparent rather than hide them in 2000 pages of legislation.
I had seen some headlines earlier in the week about teachers unions being up-in-arms about an LA Times investigative series on teacher quality, but I hadn’t seen anything concrete until I saw Alex Tabarrok’s post at Marginal Revolution this morning.
All I can say is, wow!
The basic storyline is that the Times accessed data on changes in student performance from year-to-year and was able to match that up at the individual teacher level. The entire analysis isn’t published yet, but if you check out the snippet in the graphic below it is clear that the proverbial you-know-what is about to hit the you-know-where in the LA school system. And, yes, that is the real Miguel Aguilar and the real John Smith in there.
Ouch.
This is the sort of thing that might get Mr. Smith (and his union) to go to Washington (or Sacramento) — to quash this kind of information being revealed.
Tabarrok sums up his thoughts and I will simply repeat them because I have trouble disagreeing:
I don’t blame the unions for being up in arms and I feel for the teachers, for some of them this is going to be a shock and an embarrassment. We cannot simultaneously claim, however, that teachers are vitally important for the future of our children and also that their effectiveness should not be measured… Moreover, I see this as a turning point. Once parents have this kind of information who will allow their child to be in a class with a teacher in the bottom ranks of effectiveness? And if LA can do it why not Chicago and Fairfax?
Stay tuned on this one.
For those of you too lazy busy to read the primary research, too lazy busy to read the book, the Freakonomics movie is here. Incentives matter seems to be the theme — schoolteachers correcting their student’s lousy tests to improve their scores, sumo wrasslers fixing their matches, real estate agents selling too soon at too low of a price due to a misaligned agency problem, it’s all here.
Of course, there is nothing particularly “freaky” about Freakonomics. Levitt has a theory, gathers evidence, and evaluates his hypotheses. His greatness stems on the one hand from identifying interesting problems and using data in ways no one has thought of before. In my own experience, his work on traffic safety and drunk driving are two sterling examples where he was able to exploit a data set that many, many people had been using for years in very novel and important ways.
Perhaps we can preview this during Schumptoberfest.™
Robert Bryce gets on his soapbox and Slate.com and takes his shots at wind energy. He argues that wind is unreliable, and that the opportunity costs of installing wind generation displace other infrastructure investments. He cites the situation in the Lone Star State, which has been at the fore of installing wind power:
On Aug. 4, at about 5 p.m., electricity demand in Texas hit a record: 63,594 megawatts. But according to the state’s grid operator, the Electric Reliability Council of Texas, the state’s wind turbines provided only about 500 megawatts of power when demand was peaking and the value of electricity was at its highest.
Put another way, only about 5 percent of the state’s installed wind capacity was available when Texans needed it most. Texans may brag about the size of their wind sector, but for all of that hot air, the wind business could only provide about 0.8 percent of the state’s electricity needs when demand was peaking.
Certainly, because wind power only works when the wind blows, building wind capacity doesn’t reduce the need for other base load capacity.
And the wind capacity isn’t cheap, either. Professor Michael Giberson over at Knowledge Problem has tracked the incidence of negative prices paid for wind.
Negative prices? Wha? Isn’t that the definition of cheap?
Not exactly. I’ll let him tell you:
This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid. These prices are a big anti-conservation incentive. You could, as a correspondent put it to me, build a giant toaster in West Texas and be paid by generators to operate it.
The giant toaster metaphor will be with me for a long time.
The logic is at the margin, of course. If I pay (subsidize) a farmer $10 for every bushel he sells, we would expect him to be willing to pay, say, $5 to take it off his hands — a that is, he takes a price of -$5. In 2008 in Texas, power prices were negative 20% of the time, indicating the power of prices to motivate behavior. Indeed, producers were willing to pay up to about $3.50 per megawatt hour before shutting down.
But all hope isn’t lost. This morning on NPR they talk about dealing with the “intermittency” problem (that is, the wind doesn’t necessarily blow when we need the power) with battery storage. That is crucial. If the wind blows a lot in March, but we use the energy in August, then it would be nice to be able to store what we have and use it when we need it. An important question, then, is should we install this wind capacity before we crack the storage problem? Right now, the talk is of storing power for a couple of hours, not a couple of days or weeks, so, as we have seen in Texas, the baseload problem will remain acute even as renewable capacity rises.
I imagine this blog post will be recycled as more solar and wind generation come online.
Macroeconomists debate feverishly about the causes of a stagnant U.S. economy. Some such as Paul Krugman argue that demand deficiency (a Keynesian diagnosis) requires very aggressive monetary and fiscal policy until the economy reaches its potential. Others, such as Edmund Phelps in an August 6th opinion piece in the New York Times argue that our macroeconomic problems are structural and not related to deficient demand. He argues that
“The [aggregate demand] prescription will fail because the diagnosis is wrong.” He goes on to argue that our focus on reviving demand “lulls us into failing to think structural.” He cites such structural deficiencies as “short term” incentives employed by established businesses and financial managers, poor incentives for innovation, and a lack of inclusiveness in income gains that have arisen over the past two decades. Phelps suggests a number of policy actions that might be taken to put the US economy back on a dynamic path essential for prosperity and growth. In short, we need to move beyond short term demand stimulus to long term incentives to innovate. In his view, “the economy needs a bit of ingenuity.”
I’m a big fan of Steven Landsburg’s approach to micro theory, and hence I have adopted Price Theory and Applications the times I have taught the course (HT: Charles Steele). The 8th edition is about to come out, meaning that there is no viable used market to purchase the 8th edition. This also calls into question paying full price for a new version of the 7th edition (currently north of $160).
Since most Econ 300 students are majors (the ones that survive, at least), I am not worried about the resale market, because I think someone walking around calling themselves “an economist” should have a solid micro theory book on the shelf.
So, with all of that said, I recommend that you either pony up for the 8th edition (which I have yet to get a desk copy of), or start scouring your used options now. Amazon doesn’t seem to be much help, but a quick search of Valore Books and Big Words (< $40), eBay, and Chegg.com, indicates that you should be able to locate a copy at a pretty reasonable price.
Worth every penny. But there’s no sense squandering the surplus.
The air temperature here in Wisconsin has settled down to humane levels, signaling the school year is nigh. So, to kick off our Free Market Monday, let’s check in with Guy Sorman at the City Journal on the origin of our current financial crisis.
Sorman interviews many of the heavyweights — Calomiris, Fama, Zingales, Cochrane, Taylor, and a host of others (including James Hamilton at EconBrowser, who I’ve never thought of as a “free marketeer”). If you recognize some of those names, it is clear that the emphasis here is mainly on the role of the financial sector.
Some interesting thoughts, including this coda:
Every economist I interviewed agreed that ballooning American and European debt poses a huge threat to long-term prosperity. The debt will be paid either through inflation, which would make everyone poorer, or—a far better scenario—through economic growth that would increase both individual and government revenues. Unfortunately, by increasing taxes and imposing the wrong regulations, Western governments are hindering entrepreneurship and hence growth, Cochrane says.
Ah, entrepreneurship and growth. It’s all coming back to me now.
Plato is philosophy, and philosophy, Plato, — at once the glory and the shame of mankind…
–Ralph Waldo Emerson
