May 2012

Month: May 2012

Economic Organization of Lawrence University

Oliver's Army

On Monday night students in the Economics of the Firm class (Econ 450) will be showing off their work on the economic organization of Lawrence University.  You can check this out in Briggs 223 on Monday at 6 p.m.  I am impressed with the quality of the students in this course, and I am confident that they will put on a good show.  If you aren’t careful you might even learn something about LU. Indeed, this should be of interest just for the descriptive statistics.

‘Selling’ Yourself Short?  The Promise and Pitfalls of Income-Contingent Loans:  With graduation just a few days away for the Lawrence University class of 2012, the time has come to embrace a looming reality: college loans.  Most of us have them and they need to paid back.  According to FinAid.org, more than 65 percent of four-year undergraduate students in America take on debt in the form of government and/or private loans to finance their education.  Loans are generally issued by institutions or individuals with available money in return for a premium in the form of a fixed interest rate.  An alternative option exists, however, whereby students instead offer investors a share of their future earnings, similar to the capital-raising efforts employed by firms.  The idea is by no means new; in fact, Milton Friedman advocated the use of income contingent loans in 1955.  Our project explores the benefits and concerns associated with issuing equity to finance education and analyzes whether this alternative option is viable for Lawrence University.  We will discuss the adoption of an income contingent loan program at Yale University in the 1970s to provide an experiential understanding of this practice. (David Caprile, Oscar Koberling, Rana Marks, Stuart Smith).

Are Excess Endowments a Problem? Monitoring and Agency Problems among the Associated Colleges of the Midwest   Economic discourse on the theory of the firm developed while trying to understand the for-profit firm; however, the last few decades have witnessed an increase in research on the not-for-profit  firm.  There is considerable variability among the two categories, for-profit and non-profit.  One intriguing non-profit is the university.  Unlike most non-profits and all for-profits, universities keep large cash surpluses.  The reason for these large endowments has remained a puzzle (Hansmann 1990)  One proposed explanation for large endowments is agency problems.  We draw on data from a pool of small private liberal arts colleges to examine the relationship between “excess endowments” and high monitoring and agency costs. (Molly Ingram, Regina Hammond, James Maverick).

Why Does Lawrence University Have So Many International Students? Lawrence University has the highest percentage of international students of any college in the Associated Colleges of the Midwest.  Indeed, the percentage of Chinese students on campus is higher than the percentage of all international students at several ACM schools.  The “awkward” economics of higher education suggests that “colleges can buy important inputs to their production only from the customers who buy their products; colleges  buy important inputs to their production only from the customers.” Lawrence procures these inputs by providing generous financial aid,  lower initial deposits, and through other avenues.  In turn, international students help provide language instruction, promote campus diversity, and contribute significantly to campus cultural activities.  Our regression results are consistent with our contention that LU has an unusually high percentage of  international students. (Linlin Liang, Yue Jia, and Zhan Guo).

Food catering services: Dine in or dine out? This project looks at data collected from 100 top liberal arts colleges ranked by U.S. News and World Report to determine factors that contribute to college’s food services make- or-buy decision.  Consistent with the empirical work on make or buy decisions (e.g., Monteverde & Teece 1982; Joskow 1987, Anderson & Schmittlein 1984), we examine potential conventional microeconomic as well as transaction-cost theories for Lawrence’s recent outsourcing of food services.  We provide logistic regression on outsourcing as a function of based on endowment size, campus acreage, size of the student body, location relative to urban areas.  (Max Randolph, A.S. Darling, Andrew Kraemer, Brian Zindler).

Econ Dept Picnic, Wednesday at 4:30

Take the SuperChill Challenge

The Department Picnic is an annual ritual at Lawrence, but one where we in the Economics Department haven’t quite mastered.  This is partly because many of the faculty are relatively new, and partly because we just aren’t that into rituals.

That said, we will be communing as a Department this Wednesday, May 30, from 4:30 to 6:00 on and around the Hiett first floor patio (Location subject to change).

If you plan to attend, please indicate your intention here.

Your affirmation on the Doodle poll will allow us to procure appropriate levels of pizza and SuperChill® (the empirically validated cola choice of the Economics Department), and will also help us to ration in the event that supplies run short.

We  look forward to seeing you there.

Treehouses, Thursday at 7:30

An important note from Eli Hungerford:

Pete Nelson will be on campus Thursday to talk about his experiences with sustainable and small structure construction and tree houses. Pete owns Treehouse Workshop and Nelson Treehouse and Supply, both based right outside of Seattle. Through these companies he runs workshops to teach people how to safely build their own treehouses and designs and builds treehouses for clients. His talk will cover issues of small living spaces and how this can be a problem with building codes and regulations and how these laws affect building in trees in general. It will also include some design aspects and sustainability considerations such as choosing an appropriate site, salvaged building materials and the impact of the place on the structure and vice versa.

The talk will take place at 7:30 pm on Thursday, May 31st in the Cinema in the Warch Campus Center.

Science Hall Colloquium, Thursday at 11:10

Using Statistics and Mathematics to Model the way in which Interest Rates Evolve over Time

Andrew F. Siegel

Department of Statistics and Foster School of Business

University of Washington at Seattle

 

Mathematical modeling is all about choosing the simplest equations that act like reality. Models of the evolution of interest rates over time are surprisingly deep because simpler models are full of inconsistencies (called “arbitrage opportunities”) that do not reflect market efficiency. Sophisticated traders would exploit these opportunities, systematically changing interest rates, instantly rendering the model invalid. At any given moment there are many interest rates: one for each investment term (which can range from days to years), and a consistent model must prevent arbitrage opportunities within the vast linear space of combinations (portfolios) of investments with different terms. Many aspects of mathematics and statistics are involved in the creation of consistent arbitrage-free models. My research involves a change in focus: Building a linear system for market prices instead of for interest rates, which reduces model complexity while increasing model flexibility. The technical parts of this talk will be described conceptually in an intuitive way, and anyone with an interest in mathematics and its applications is welcome to attend!

 

Thursday, May 24

Steitz Hall 102

11:10am

How Would Keynes Solve the Eurozone Crisis?

In honor of Brad Bateman’s visit tomorrow, today’s opinion piece in the Financial Times poses an answer to the question above from two other Keynesian scholars, Robert Skidelsky and Marcus Miller.  You may or not be able to access this piece directly from the Financial Times.  First try here and if that doesn’t work, try here.

For those of you who want “to cut to the chase,” the short answer is as follows:

Eurozone countries must be allowed to grow again. For a country in such desperate straits as Greece, however, orderly exit from the euro to regain competitiveness looks to be the best option. But it is in the interest of both Greece and its creditors that the resulting devaluation be controlled. We must not add currency wars to our present pile of problems.

I will have more to say about this in future postings.

Keynes and the Crisis of the Welfare State — May 17 at 4:30 p.m.

John Maynard Keynes is the father of modern macroeconomics, and Keynesian economics and the welfare state have been inextricably linked in the public mind since the postwar era. Indeed, he is widely believed to have provided the analytical, economic underpinnings for the welfare state. Bradley Bateman, a recognized scholar of Keynsian thought, examines Keynes’s contributions with the backdrop of the recent financial calamities and the widespread fiscal crises of state and national governments.

Please join us for Professor Bateman’s talk, which is part of the Lawrence Senior Experience in the Department of Economics.

Wriston Auditorium
Thursday, May 17
4:30 p.m.

Bradley W. Bateman is the Provost and a Professor of Economics at Denison University. He is the author of Keynes’s Uncertain Revolution and co-author of Capitalist Revolutionary: John Maynard Keynes.

 

More at the Lawrence homepage.

Anglo-Dutch Auctions 300 years ago

On May 22nd at 4:30 in Steitz 102, Dan Quint will speak on the subject in the title, closing this year’s inaugural Economics Colloquium series with a bang. He is Assistant Professor of Economics at the University of Wisconsin – Madison. His work on auctions and bargaining has appeared in leading economic theory journals.His undergraduate degree is from Harvard University (Mathematics), and he received his PhD in Economics from Stanford University. Professor Quint will present his work on an interesting auction format used in eighteenth-century Amsterdam. He will focus both on the historical facts and the auction theoretic analysis. Abstract for his paper is below the fold.   Continue reading Anglo-Dutch Auctions 300 years ago

Interview with Ronald Coase

Nobel Laureate Ronald Coase is foundational in both of my courses this term.  His 1937 paper, “The Nature of the Firm,” addressed the canonical question for organizational economics, and a mere 23 years later in 1960 he altered the trajectory of social science research with “The Problem of Social Cost.”  As Coase puts it:

Transaction costs were used in one case to show that if they were not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (p. 62).

Now he’s back pounding the pavement in support of his new book, How China Went Capitalist.  We spoke of his op-ed in the WSJ, and now here is an interview with him on NPR.

The interview is mostly a review of his career, including the famous lighthouse debate.

Economics Colloquium, May 15 at 11:10

Prospects for US Electricity Generation: Carbon Capture &/or Natural Gas

~~~~~~~~~~~~~~~~~~~~~~~

 David Gerard

Lawrence University

What will be the technology of the future for US electricity generation? Although  carbon capture and sequestration (CCS) has the potential for steep reductions in CO2 emissions, CCS faces many potential regulatory hurdles and public acceptance issues. Moreover, the technology is expensive – both in terms of additional capital costs and the additional fuel needed to capture, compress and transport the CO2.  I talk through some of my recently published work that assesses the decision to build new natural gas and coal-fired plants given future market and regulatory uncertainty, particularly uncertainty about future natural gas and carbon prices. I conclude that  CCS will not be commercially viable without beaucoup public financial support or outright mandates. I finish with some speculation on how the current fracking boom will affect energy and electricity markets. It appears that it will be natural gas all the way down as the principal source of new added generation capacity.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Tuesday, May 15

Steitz Hall 102

 11:10 a.m.

The talk will draw heavily on:

Fischbeck, P. S., Gerard, D. and McCoy, S. T. (2012), Sensitivity analysis of the build decision for carbon capture and sequestration projects. Greenhouse Gas Sci Technol, 2: 36–45. Available at  http://onlinelibrary.wiley.com/doi/10.1002/ghg.1270/full

Morgan et al., (2009) “Commercial Considerations,” Chapter 9 in Carbon Capture and Sequestration: Framing Issues for Regulation. An Interim Report of the CCSReg Project. Department of Engineering and Public Policy, Carnegie Mellon University. Available at: http://www.ccsreg.org/pdf/CCSReg_3_9.pdf

Gerard D., Wilson E.J. (2009) Environmental bonds and the challenge of long-term carbon sequestration, Journal of Environmental Management, 90(2):1097-1105. Available at https://www2.hhh.umn.edu/publications/2159/document.pdf

Film Fest: Latest Financial Crisis

Place: Warch Campus Center Cinema
Time: 6 p.m.
Dates/ Synopsis:

Too Big to Fail (2011): Friday, May 18th, 6 p.m

Based on the bestselling book by Andrew Ross Sorkin, ‘Too Big To Fail’ offers an intimate look at the epochal financial crisis of 2008 and the powerful men and women who decided the fate of the world’s economy in a matter of a few weeks. Centering on Treasury Secretary Henry Paulson, the film goes behind closed doors to examine the symbiotic relationship between Wall Street and Washington.“

Inside Job (2010): Friday, May 25th, 6 p.m.
“From Academy Award nominated filmmaker, Charles Ferguson (“No End In Sight”), comes INSIDE JOB, the first film to expose the shocking truth behind the economic crisis of 2008. The global financial meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs. Through extensive research and interviews with major financial insiders, politicians and journalists, INSIDE JOB traces the rise of a rogue industry and unveils the corrosive relationships which have corrupted politics, regulation and academia. Narrated by Academy Award winner Matt Damon.”

Wall Street: Money Never Sleeps (2010): Friday, June 1, 6 p.m.

“Following a lengthy prison term, Gordon Gekko (Michael Douglas) finds himself on the outside looking in at a world he once commanded. Hoping to repair his relationship with his daughter, Winnie (Carey Mulligan), Gekko forges an alliance with her fiancé, Jake (Shia LaBeouf). But Winnie and Jake learn the hard way that Gekko is still a master manipulator who will stop at nothing to reclaim his rightful place at the top of Wall Street.”

What Should Central Bankers Do?

No, this is not a question on the final exam  for Money and Monetary Policy; however, it has been.  It’s also a question that pervades contemporary political economy in the US and Europe.

Federal Reserve Chair, Ben Benanke continues to be criticized from both those who advocate aggressive monetary policy and those who argue that the Fed has been too aggressive.  For example, today’s Wall Street Journal features “Fed bashing” from the House Financial Services Committee.

The Fed’s easy-money policy and actions taken to boost economic growth have prevented lawmakers from taking responsibility for shoring up the economic recovery and reducing the deep federal budget deficit, some Republicans said Tuesday at a hearing of a panel of the House Financial Services Committee.

“As the Fed does more, Congress is doing less and in the long term that slows our recovery,” said Rep. Kevin Brady (R., Texas).

How are we to interpret this?  Mr. Bernanke, since you did your job appropriately, we won’t (can’t?) do ours??  Of course, many pundits, especially those who fear a tripling of the Fed’s balance sheet since 2008, believe that the world would be better without the Fed.  Anyone ever heard of Ron Paul?

At the other extreme, Paul Krugman, not to be outdone in the world of political rhetoric Earth to Bernanke, has accused Fed Chair Bernanke of not following the advice that Professor Bernanke gave the Japanese in a 2000 paper.  He and others such as Scott Sumner of the Modern Monetarist Movement argue that the Fed should target nominal GDP and make monetary policy as expansionary as needed to reach that target.’

Where’s the center or at least some non-extreme view?  I suggest one look to Raghuram Rajan who yesterday posted “Central Bankers Under Siege” and for the current issue of Foreign Affairs wrote “True Lessons of the Recession.”  In these articles, Rajan argues that various versions of demand stimulus through credit creation will not address fundamental structural problems in the US economy.  He concludes the latter article as follows:

The industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities. For better or worse, the narrative that persuades these countries’ governments and publics will determine their futures — and that of the global economy.

So, what should Central Bankers do?  In my view, they should recognize that monetary policy has its limits and that using monetary policy as a means to generate sustained employment won’t work.  Longer term structural adjustments are required.  Such adjustments will be the subject of another blog posting.

 

A Third Industrial Revolution: Innovation in Manufacturing

The April 21, 2012 issue of The Economist features a special report on the revival of manufacturing in the so-called developed world.  But this won’t be my father’s or even your father’s world of manufacturing.  As with many areas of our economy, it will require skilled workers who know how to manipulate contemporary machines such as three dimensional printers to create new products and meet existent and new consumer needs.  Traditional laborers with tools such as those portrayed above won’t be featured.  Nor will outsourcing to countries with cheaper labor, the pattern over the past 20 years, be prominent.  The rewards will go to those who can innovate and use their entrepreneurial skills to best meet people’s needs.  I encourage you to read (or listen to) the entire report (accessible here ), sign up for courses in our Innovation and Entrepreneurship Program (posted here), or enroll in the ACM Chicago program on Business, Entrepreneurship and Society.

This transformation of manufacturing is well underway but opportunities abound as those of you who went on this year’s LSB Chicago trip saw and heard (thank you Professor Galambos).  As the Special report concludes:

Millions of small and medium-sized firms will benefit from new materials, cheaper robots, smarter software, and an abundance of online services and 3D printers.

 

Advanced Topics in Law and Economics

Professor Georgiou will be offering ECON 495, Advanced Topics in Law and Economics, this fall on Monday, Wednesday, Friday in the 3:10 to 4:20 time slot.  The prerequisite for the course is ECON 300 or consent of the instructor.  If you have had ECON 271 or ECON 280, this might be an extremely attractive follow on.

Here is the teaser:

Should a grandson that killed his grandfather be allowed to be his heir? Should theft be punishable by death? Why is blackmail illegal? Should smoking be allowed in bars? Should a bystander be punished for not rescuing a drowning person? What is the purpose of limited liability for shareholders? Why is polygamy not allowed?

These questions seem to touch very distinct areas of the law. But there is one and (maybe) only one way to go about answering all of them: Economic Analysis! In this class we will show that economic efficiency is what makes a good law and that laws that don’t make sense can be critiqued with economic arguments. Law and economics is a class that expands the scope of economics and limits the arbitrariness of the law.

Registration resumes in a couple of days, so please stand up and be counted.

The Marketplace CAFE

Yes, I made it to the national airwaves this past week, thanks for asking (and thanks to Adrienne Hill for the interview).

The topic was the Corporate Average Fuel Economy (CAFE) standards, which have been controversial for a variety of reasons since their inception in the 1970s. The basic idea is simple enough, though: if the federal government mandates greater fuel efficiency, people will use less gas.  Because the CAFE standards are politically viable and gasoline taxes are not, the CAFE standards have withstood the test of time, including a beefier rule promulgated by the Obama Administration in 2009.

This week’s issue arose because gasoline tax revenue is funneled back to fund highways and mass transit. Ergo, if we use less fuel, there will be less tax revenue for highways and mass transit.  That is the conclusion of a Congressional Budget Office report from last week:

An increase of about 5 cents per gallon in the gasoline tax would be required to make up the shortfall in revenue projected as a result of the proposed CAFE standards.

And, so, man bites dog and consuming less fuel could lead to an increase in gasoline taxes, and the net result could be higher prices at the pump (Of course, federal gas taxes last went up during the pre-industrial era.  A primary reason for CAFE standards is that Congress is unwilling to move the gas tax off its $0.186/gallon level).

The report generated a minor media buzz, including this very short report on National Public Radio’s Marketplace program where I provided some unsurprising insight.

My authority on the subject stems from a paper I co-authored back in the day, “The Economics of CAFE Reconsidered: A Response to CAFE Critics and A Case for Fuel Economy Standards,” where we make a case that the CAFE standards are a reasonable complement to stiffer gasoline taxes (we also argue for much stiffer gasoline taxes).  I also have talked to US News and the Financial Times, among others. And I will talk to you, too, if you ask me about it.

For a very nice recent treatment, you might check this recent paper, “Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives,” in the Review of Environmental Economics and Policy.

For some extremely tasty data, check out Environmental Protection Agency’s Light-Duty Automotive Technology and Fuel Economy Trends.  They’ve been doing this report for years, and I always learn something when I go through the new one.

Life in 2100

Those of you who visited Deloitte on the LSB Chicago trip heard Jonathan Bauer’s ringing endorsement of a book (“it’s great… based on the first five pages”).

The book is Physics of the Future, by Michio Kaku. If the New York Times review is to be believed, the book’s strength lies not in its style, but in the breadth of the information its author summarizes.

Mr. Bauer treated us to an hour of entertaining, informative, and memorable comments on the transition from Lawrence to a job, on the consulting world, and the life of a consultant.

Entrepreneurship in Chicago

Thirty of us returned last night from another very successful Lawrence Scholars in Business trip to Chicago. Most of yesterday was “entrepreneurship day.” Before lunch, we went to ICNC, an incubator hosting over a hundred start-ups. We got to visit two of them, Souldier and Element Bars. The latter was a winner on Shark Tank! Our gracious hosts at ICNC were Steve DeBretto and Tom Cassell. Tom teaches the Entrepreneurship Practicum at the ACM Chicago Entrepreneurship program. The deadline for Fall 2012 has been extended, so it’s not too late to think about making this part of your next year. If you liked the two-day immersion experience we got in Chicago, you’ll love the term-long immersion experience you’ll get in the ACM program. Consider taking advantage of this great opportunity. The ICNC is not just a space to practice whatever your craft is, but it is also a community of entrepreneurs, with a strong support network.

After lunch at the Berghoff, we went to the Merchandise Mart to visit the just-launched hot new tech-incubator 1871. If your start-up might need a truck to pull up to your space, ICNC is where you’d want to be. But if you are a software start-up, you’d want to be at 1871, the intersection where the explosion of ideas takes place. Dozens of start-ups, six venture capital firms, four universities, many prestigious sponsors, and a number of mentors come together in a space designed beautifully for creativity.

Registration Alert

Here are some course adds for the 2012-2013 campaign:

Fall Term

  • Introductory Macro (ECON 120)  MWF 12:30 – 1;40 and  Thursday 3:10 – 4:20  – Georgiou
  • Advanced Topics (in Law and Economics, ECON 495)   3:10 – 4:20  MWF  – Georgiou  (prerequisite Econ 300)

Winter Term

  • Public Economics (ECON 271)  MWF 3:10 – 4:20 – Georgiou

Spring term

  • Introductory Macroeconomics (ECON 120) – MWF 1:50 – 3:00 and Tuesday 3:10 – 4:20 Change of instructors – Georgiou
  • Law and Economics (ECON 245) – MWF 11:10 – 12:20. –Georgiou
  • Investments (ECON 421) – MWF 1:50 – 3:00 – Karagyozova

Higher Math Scores or Better Rhetoric?

George Schultz and Eric Hanushek write in the Wall Street Journal that the poor performance of US students in mathematics, as evidenced by the OECD’s Programme for International Student Assessment (PISA), is undermining economic growth.

If we accept this level of performance, we will surely find ourselves on a low-growth path.

The chart on the right shows average GDP growth from 1960-2000 on the Y-axis and the PISA score on the X-axis, along with a lovely line fit that appears to show a nice, tight correlation between math and GDP growth.  Indeed, by pulling out Canada and the US the authors conclude:

Imagine a school improvement program that made us competitive with Canada in math performance (which means scoring approximately 40 points higher on PISA tests) over the next 20 years. As these Canadian-skill-level students entered the labor force, they would produce a faster-growing economy.

How much faster? The results are stunning. The improvement in GDP over the next 80 years would exceed a present value of $70 trillion. That’s equivalent to an average 20% boost in income for every U.S. worker each year over his or her entire career. This would generate enough revenue to solve easily the U.S. debt problem that is the object of so much current debate.

What’s remarkable about this conclusion, aside from the dubious causality of average test scores and the heroic extrapolations, is that the figure shows that the USA actually has higher GDP growth than Canada.  So, if GDP growth is the end goal, I wonder what Canada is doing to become more like us?

Maybe they need a good banking crisis.

Via the Cheesiest.