David Gerard

Author: David Gerard

Old Ideas from Live Economists

Todd Buchholz has an op-ed in today’s WSJ, recommending that the U.S. government string out its long-term debt.

[T]he world is willing to lend us 10-year money at rates substantially below 2%.

So why not give our kids a break by issuing 50- or 100-year bonds, locking in today’s puny rates? Corporations do it. In 1993, Disney issued $300 million in “Sleeping Beauty” bonds, and the market scooped them up. Last year, Norfolk Southern sold $400 million in 100-year bonds despite the obvious uncertainty: Will railroads be spaceships in 100 years?

Other governments are issuing long-term bonds, too. In 2011, buyers grabbed Mexico’s 100-year bonds, despite that country’s pockmarked history of devaluations and defaults. The average maturity of U.K. debt is three times longer than ours.

Instead of following these examples, the U.S. Treasury recklessly borrows short-term funds that must be rolled over.

A good question for anyone at this point.  I was worried when my adjustable-rate mortgage (ARM) was about to adjust, and it went down almost 200 basis points.  Woo hoo!

Chicago’s John Cochrane, the Grumpy Economist, also endorses locking in low rates.

Buchholz claims this is a political maneuver designed to make the short-term budget deficit look better.  Cochrane isn’t so sure.  See the respective posts for the dirty details.

Whoever is correct, here’s hoping  for the sake of fiscal sanity that the Treasury gets on board.

The Ethics and Economics of “Free” Music

Speaking of things that are “free,” David Lowery, indie rocker and now instructor at the University of Georgia, takes the current generation of music lovers to task for downloading songs on share sites, hence bilking the artists.  Here is his rather extensive post on the subject.

Here’s a taste:

The existential questions that your generation gets to answer are these:

Why do we value the network and hardware that delivers music but not the music itself?

Why are we willing to pay for computers, iPods, smartphones, data plans, and high speed internet access but not the music itself?

Why do we gladly give our money to some of the largest richest corporations in the world but not the companies and individuals who create and sell music?

This is a bit of hyperbole to emphasize the point. But it’s as if:

Networks: Giant mega corporations. Cool! have some money!

Hardware: Giant mega corporations. Cool! have some money!

Artists: 99.9% lower middle class. Screw you, you greedy bastards!

Congratulations, your generation is the first generation in history to rebel by unsticking it to the man and instead sticking it to the weirdo freak musicians!

I am genuinely stunned by this. Since you appear to love first generation Indie Rock, and as a founding member of a first generation Indie Rock band I am now legally obligated to issue this order: kids, lawn, vacate.

Lowery is an interesting guy, that’s for sure. Here is a previous post where he describes his role in Groupon.  And here are some of his musings on his forthcoming (?) book, “Highly Volatile: How Your Lame Band Taught You Everything You Need to Know about Economics and Finance.”

Well, let’s hope it didn’t teach you everything.

For more formal treatment of the economics of file sharing, you might head to the link at Stan Liebowitz’s homepage (of Liebowitz and Margolis fame).

Professor Liebowitz reviews the literature, which generally shows the significant hit file sharing has delivered too the industry. For some careful details, see “File Sharing: Creative Destruction, or Just Plain Destruction?” in the Journal of Law and Economics.

About those Gowns

And now for our annual explanation of those caps and gowns, we return to a post from 2010:

In our continuing attempt to understand the world around us, today we take a look at the traditional graduation cap & gown.

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 here 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:

Chicago: My Kind of Gown

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

The use of academic robes in the United States waned at the beginning of the 19th century, and after around 1810, most American colleges and universities used them only at formal academic ceremonies, if at all…. The tradition seemed on the cusp of extinction, but in the second half of the 19th century, there was a—somewhat mysterious—renewed interest in academic regalia.

It’s one thing to ask why we wear them, but entirely another to figure out what to wear. It seems that the students look pretty similar, but the faculty is a mishmash of colors and patterns (see, for example, the University of Chicago regalia to your right). That’s why it’s so nice that the American Council on Education provides this handy dandy academic costume guide (costume!). From that we learn this:

Tassel. A long tassel is to be fastened to the middle point of the top of the cap only and to lie as it will thereon. The tassel should be black or the color appropriate to the subject, with the exception of the doctor’s cap that may have a tassel of gold.

It’s worth noting that the color for the music discipline is pink, which is the answer to one question I got at dinner tonight about why the Con students have pink tassels and the College students wear black.  Well, it doesn’t answer it completely because many disciplines within the college have their own colors (e.g., economics is copper, science is yellow), so I’m going to go with “transaction costs” for the reason why the College side has black tassels.

The guide also elaborates on the history of regalia generally, and the more you read, the more, um, traditional it really is.

See you on stage.

*Nicked from Louis Menand’s excellent The Marketplace of Ideas: Reform and Resistance in the American Academy. See also, here.

Anton Valukas to Speak at Commencment

Last year the Lawrence Scholars in Law program was fortunate to feature alumnus Tony Valukas in one of the better alumni talks you are likely to see.  This year, Mr. Valukas is back as our commencement speaker.   So, those of you commencing are in for a treat.  Much of the rest of this post is from the LSL blog post from last year.

This is from his  biography:

Mr. Valukas has been a partner with Jenner & Block from 1976 through the present, with the exception of his tenure as the United States Attorney for the Northern District of Illinois from 1985 through 1989.  Prior to Jenner & Block, Mr. Valukas held several positions with the U.S. Department of Justice, including Assistant United States Attorney (1970-1974), Chief of the Special Prosecutions Division (1974), and First Assistant United States Attorney (1975-1976)…  Mr. Valukas was appointed in 1991 as Special Counsel to the City of Chicago to investigate and report on the City’s health care system.  He was selected Special Inspector General to the Chicago Transit Authority to investigate vendor fraud, and counsel to the Chicago Housing Authority to investigate vendor and pension fraud.  He has also served as chairman of the Governor’s Task Force on Crime and Corrections for the State of Illinois, a 2-year effort which led to the passage of major prison reform legislation in 1993.

Mr. Valukas is also a former member of the Lawrence Board of Trustees.

That seems like quite a lot, but it certainly doesn’t end there. Indeed, Mr. Valukas was appointed by federal court to determine the causes of the collapse of Lehman Brothers, the largest bankruptcy filing in US history. According to the Wall Street Journal:

This was no small undertaking. At the New York offices, the Lehman team commandeered half of a floor previously used as storage space. The heat sporadically cut off as the work continued overnight. “A lot of the associates looked like longshoreman wearing caps and hooded sweatshirts,” said Patrick Trostle, a Jenner & Block partner who worked on the case.

By the time the investigation was over, more than 200 attorneys had worked on the case, reviewing 34 million pages of documents. Investigators also conducted roughly 250 interviews, ranging from Warren Buffett to Ben Bernanke.

The result is nine-volume, 2200-page report known as “The Valukas Report.”

That must be some dry reading, eh?  Not from a Lawrence alum!   In fact, it comes highly recommended (from the WSJ blog):

It is long, but Judge James M. Peck of the U.S. Bankruptcy Court in Manhattan said the recently released report on the causes for the Lehman Brothers Holdings bankruptcy reads like a “best seller.”

If he can turn a 2200-page bankruptcy report sound like a best seller, I am certainly looking forward to hearing what he has to say.

See you there.

Is Walker a Slight or a Heavy Favorite to Win the Wisconsin Recall?

Who are you going to believe?

Case 1:  According to the latest polls, “Gov. Walker Holds Slim Lead in Wisconsin, But with only one day to go the recall election appears far from decided…. Two new polls, released Sunday, have the governor out in front by a handful of percentage points, although in both surveys his lead is within the margin of error.”

Case 2: According to the “prediction market,” InTrade: Wisconsin Gov. Scott Walker to win the 5 June 2012 recall election 93.2% CHANCE.

I’ll have much more to say about prediction markets later this summer as we head into the general election, but suffice it to say that these markets tend to be more accurate than pollsters at predicting elections.  From a Journal of Economic Perspectives piece by Justin Wolfers:

In the political domain, Berg, Forsythe, Nelson and Reitz (2001) summarize the evidence from the Iowa Electronic Markets, documenting that the market has both yielded very accurate predictions and also outperformed large scale polling organizations… (and) the accuracy of the market prediction improves as information is revealed and absorbed as the election draws closer.

That is taken a bit out of context and is comparing national polls to certain political markets, but if it was my money, I’d bet on the market.   That is, right now the polls are running between a coin toss (50-50) and a slight advantage for Walker, perhaps 3:2.  In contrast, the prediction market has Walker at about a 15:1 favorite at this point.  So, to put this in perspective, suppose someone is tossing a coin and you believe it to be a fair coin.  You can lay a $9 on heads to win $10 or $1 on tails to win $10. Which side would you bet?

In calling this one early, it would seem the credibility of prediction markets on Briggs 2nd is now riding in the balance.

Canine Therapy at The Mudd

An important message from Librarian Pete Gilbert:

Stressed out by finals and the end of the school year? Need a study break? Join us for Canine Therapy 2012! Monday, June 4, 2:00-3:00pm on the Library Plaza. You’ll feel better for it…

The econ department will be sponsoring a large, championship-quality dog.

This is Flickey

It looks like the In Pursuit of Innovation crowd is at it again, this time trotting out the revolutionary new Flickey app.  Check out the This is Lawrence video currently featured at the LU homepage for the transformative nature of some of these I&E projects.

And, if you happen to be the ambitious type, you might consider taking ECON 211 / PHYS 201 this fall — perhaps you will be next year’s feature from the thought to action crowd.

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

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.

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

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 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.

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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