David Gerard

Author: David Gerard

Springtime in the Econ Dept

Here you go, no waiting. Most of these courses have space. Professor Finkler’s urban economics class is speaking intensive. Most of the other courses are thinking intensive. Econ 391 requires a signature of the instructor.

See you on Briggs 2nd.

ECON 120 ● INTRODUCTION TO MACROECONOMICS 9:50-11:00 MTWF 9:50-11:00 Ms. Karagyozova

ECON 170 ● FINANCIAL ACCOUNTING 2:30-4:20 TR BRIG 422 ● Mr. Vaughan

ECON 225 ● GAME THEORY AND APPLICATIONS ● 11:10-12:20 MWF BRIG 223 ● Mr. Galambos

ECON 250 ● URBAN ECONOMICS (S) ● 3:10-04:20 MWF BRIG 223 ● Mr. Finkler

ECON 280 ● ENVIRONMENTAL ECONOMICS ● 9:00-10:50 TR BRIG 225 ● Mr. Gerard

ECON 300 ● MICROECONOMIC THEORY ● 1:50-3:00 MWRF BRIG 223 8:30-09:40 ● Mr. Galambos

ECON 320 ● MACROECONOMIC THEORY ● 9:50-11:00 MTWF 09:50-11:00 Mr. Finkler

ECON 391 ● KEYNES HAYEK BATTLE OF THE CENTURY AND OTHER DEAD ECONOMISTS ● TBA 3:30 R

● Mr. Galambos, Mr. Gerard

ECON 421 ● INVESTMENTS ● 12:30-1:40 MWF BRIG 217 ● Ms. Karagyozova

ECON 450 ● ECONOMICS OF THE FIRM ● 12:30-2:20 TR BRIG 223 ● Mr. Gerard

Click here for the full schedule.

Ramen Noodles, Bus Rides, and the World Series (?)

As you know (or should know), an “inferior” good is one where as my income increases, the demand for the good decreases. My in class examples of inferior goods are typically things like Ramen noodles, hot dogs, bus rides, and Irish potatoes back in the day.

In a stroke of WT-you-know-what, John Burger and Stephen Walters from Loyola University in Maryland add the World Series to the list.

You can’t be serious?

Indeed. And, here’s the abstract from their paper in Economic Letters:

World Series telecasts are now an inferior good. Income and the time cost of consumption interact so that a ten percent income increase reduces viewership by 1.8 million households. Increased availability of substitutes reduces ratings but increased drama improves them.

Now why would that be? Is it because the proliferation of substitutes over the years (more cable television options in November).

Look for this in Econ 300 next year.

Ben Bernanke: The Hero or the Villian?

Just in time for your Spring break, Roger Lowenstein (of When Genius Failed fame) gives us an exhaustive profile of Fed chair Ben Bernanke in this month’s Atlantic Monthly.

I am in the middle of big stacks of papers here, so I haven’t had time to plow through the 8,000+ word article, but I like the teaser:

The left hates him. The right hates him even more. But Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times.

Lowenstein appears to cover a lot of ground, including the Krugman v. Rogoff debate. Here’s a summary and discussion at The Money Illusion blog.

Keynes, Cowen & Capitalism — Related Items

I checked my RSS feeds today and saw two interesting items, spot on in terms of our class discussion. First up, an important technological breakthrough in medicine? Here’s Walter Russell Mead:

The medical world may be on the verge of a major breakthrough on par with the discovery of penicillin. As profiled in this NYT piece, a number of Silicon Valley companies and entrepreneurs are looking to lower the price of genome sequencing to the point that it will be within reach of the average consumer (below $1,000)—a development which could lead to the biggest revolution in drugs and medical treatments in years.

On par with penicillin? That’s a lot of value.

Now for something completely different, Derek Lowe suggests that maybe, just maybe, we don’t need more scientists after all. Hmm. I’m not sure I agree with that whole bit. Nonetheless, it’s thought provoking.

As a bonus, he cites a fantastically titled piece by Virginia Postrel, “How Art History Majors Power the U.S. Economy.” Postrel seems to agree with his point:

The argument that public policy should herd students into [Science, Technology, Engineering & Mathematics] is as wrong-headed as the notion that industrial policy should drive investment into manufacturing or “green” industries. It’s just the old technocratic central planning impulse in a new guise. It misses the complexity and diversity of occupations in a modern economy, forgets the dispersed knowledge of aptitudes, preferences and job requirements that makes labor markets work, and ignores the profound uncertainty about what skills will be valuable not just next year but decades in the future.

If you are interested in the average salaries and unemployment rates for different college major choices, Postrel cites this report out of Georgetown University that has some very illuminating figures.

Keynes, Cowen & Capitalism Coda

And, so we wind down another term, and I wonder what exactly is on your mind. So, for starters, let’s start with Backhouse & Bateman’s characterization of Keynes. What does Keynes see as capitalism’s defect? What does it “Say” about how his thinking diverges from the status quo at the time?

Now, once we have the defect, is that defect the same type of difficulties that Tyler Cowen and Erik Brynjolfsson and Andrew McAfee are talking about? Or, put this another way, do Cowen and Byrnjolfsson & McAfee identify the same fundamental defect in the capitalist system that Keynes did?

Once we establish that, let’s get at how Keynes proposed to deal with capitalism’s basic defect. What was his stance in The General Theory? (Digression: How did Keynes view of this change over time? What is the basic thesis proffered up by Bateman and Backhouse?). Next, is this way of addressing that defect likely to be of use in addressing the types of problems that worry these other authors?

On that note, if you haven’t done so already, I suggest that you read one of Paul Krugman’s greatest columns ever, “The Accidental Theorist.” I love this column and use it often. I wish I would have suggested it when we read Brynjolfsson and McAfee. What does this article imply about the troubles that Cowen and Byrnjolfsson talk about? What does it suggest about Keynesian economics?

Looking for Sasquatch?

It’s time for the Environmental Studies Fest, this Thursday, March 8^th at 4:15 pm in the Atrium between Youngchild and Steitz Halls.

Come see what ENST students have been up to……and get Snacks!

Here’s what’s on tap:

Transpiration source water and geomorphological potential of root growth in the Boulder Creek CZO, Colorado (Brenna Skeets)
The effects of climate change on plant traits and fruiting phenology of Delphinium nuttallianum (Kari Spiegelhalter)
Environmental Sustainability Meets Economic Security: China Can Grow Green (Devin Burri)
Sea Turtles in French Polynesia (Devin Burri)*
Acoustic Monitoring of Local Bats (Ronan Christman)
Looking for Sasquatch: Explorations as a Wilderness Ranger in the Siskyou National Forest (Will Meadows)
Effect of land use on flooding events in the Apple Creek basin (Elissa Tikalsky)*
Unique Aspects of Urban Planning in Hong Kong (Elissa Tikalsky)
What role does Palm Oil play in Sierra Leone economically, environmentally and culturally? (Amanda Dwyer)*
Environmental and Economic Effects of the Reuse of Pint-Sized Plastic Bottles in the Palm Oil Market of Freetown, Sierra Leone (Amanda Dwyer)
Modeling the effects of insulation and air exchangers on indoor temperature, humidity and particulate matter (Eli Hungerford)*

*ENST 650 Capstone projects

I&E in the News

For those of you without access to the many thousands of copies of The Lawrentian around campus, this week’s cover story features none other than the good work of the champions of the Innovation & Entrepreneurship program.

According to Professor John Brandenberger (and, no, his first name is not “Emeritus”) “There is no better time than the present… to teach liberal arts students who are developing the creative skills to be innovators over their four years at Lawrence, to be aggressive in their entrepreneurship.”

Well put.

President Beck also weighs in:

“In the arts, professors are interested in theater internships, print-making workshops and other ventures that enable students to connect their major to a business orientation. There are many examples of student interest so far, such as The Rabbit Gallery and Baroque Music and Dance Ensemble. [In addition], alumni are offering more and more internships to students, to help students put their thoughts into action, sometimes for the first time.”

The cover photo of The Lawrentian includes I&E stalwarts Professor Adam Galambos and Professor Gary Vaughn, along with a nice profile shot of budding entrepreneur, Ranga Wimalasuriya

Man Bites Dog Reading Book

It is well known that author’s clamor for Oprah’s endorsement because the book sales go bonkers, and sales of the author’s other books also go bonkers. The conventional wisdom is that publishers love Oprah because she pumps up book sales.

On the other side of Chicago, however, Northwestern’s Craig Garthwaite has another tale to tell: Oprah’s endorsements reduce overall book sales:

In the publishing sector, endorsements from the Oprah Winfrey Book Club are found to be a business stealing form of advertising that raises title level sales without increasing the market size. The endorsements decrease aggregate adult fiction sales; likely as a result of the endorsed books being more difficult than those that otherwise would have been purchased.

It is I who emphasized that startling finding. Here’s how Garthwaite describes it:

At the genre level, the post-endorsement period is marked by large sales declines in the romance, mystery, and action categories. These genres were popular prior to the endorsements in the geographic areas demonstrating the largest endorsement responses. Using quantitative measures of text readability, I show that endorsed titles require one additional year of education to read than is typical for romance, mystery and action books. Furthermore, the post-endorsement sales decline was largest following the endorsement of classic novels, which require nearly four more years of education to comprehend than typical romance, mystery, or action titles. Since the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent reading the text, the post-endorsement sales decline in publishing should be considered similar to endorsements in other sectors that shift consumers towards more expensive products.

I read through the paper this evening, and this will likely wind up on my Industrial Organization reading list for next year. We’ve seen a similar phenomenon in our analysis of the beer industry — advertising doesn’t increase overall sales so much as it redistributes sales within the sector. Indeed, we kick off that class with a simple advertising game model, where advertising expenditures are treated as a prisoner’s dilemma, and we learn why incumbents are often copacetic with an advertising ban. The analogy here, I guess, is that a beer producer that heavily advertises a new, difficult-to-drink product could cause an overall beer consumption to go down (possible ad line: New Bud Super Dark: It’s Like Drinking a Bagel ! ).

I wonder if the “light beer” revolution of the 1970s had the opposite effect?

Via the fellas at Marginal Revolution.

Please Do Not Try this at Home, Especially My Home

In our continuing series on moral hazard I ask you this: what is the opportunity cost &/or reservation price of your off hand?

Consider this:

Thirty-four-year-old Gerald B. Hardin faces six charges, including mail fraud for a 2008 incident in Sumter County where a man’s hand was cut off with a pole saw.

Federal indictments state that Hardin and another person used a saw to intentionally cut off the hand of a third person in an insurance fraud scheme. The indictment says the men submitted claims under a homeowner’s insurance policy and three accidental death and dismemberment polices.

It says the men received more than $670,000.

So the guy with the missing hand must have a reservation price pretty far south of $670,000, as the perpetrators split the ill-gotten booty three ways. You have to hand it to these guys, though, coming up with this sleight-of-hand to outwit their insurance providers.

Well, almost

I have to ad-mitt that the article doesn’t say that it was his off-hand. But, on the other hand, I bet the payout for the dominant hand is higher, but that is just an off-the-cuff conjecture.

Are Cracks Developing over Chinese Water Usage?

I’m not the resident expert on water usage in China, but there is something unsettling about recent reports out of Shanghai.

Here’s the story:

Slated to be the China’s tallest building upon completion, the 632-meter tall Shanghai Tower conveys stability, if not permanence.

The ground under it, however, is another story.

Spectators were intrigued in mid-February when a giant 8-meter long crack appeared in the asphalt near the tower. The crack was a reminder of Shanghai’s shifting and sinking ground, which scientists say makes the city vulnerable to rising sea levels.

And Shanghai is not alone. China’s Ministry of Land and Resources recently reported that the ground is sinking under more than 50 cities. The culprit is the overuse of groundwater, the ministry’s Geological Environment Department Deputy Director Tao Qingfa told Caixin.

When residents consume too much groundwater, water pressure underground depletes and causes the soil to shift and sink, Tao said. Beijing, Tianjin, Hangzhou and Xi’an are all sinking in certain places as a result, he said.

I saw this over at foreign policy scholar Walter Russell Mead’s blog. He seems to think the crack is a metaphor for fractures in China more generally, as rifts develop between rich and poor, urban and rural, local and national, authority and spontaneity. As Professor Mead puts it, “Sooner or later, something will give.”

Rapid industrialization doesn’t come easy.

Economics of Innovation in the New “Pamphlet” Era

This week seems to be innovation week for me, as I am reading two short books on the heels of The Great Stagnation. Reading these pieces, I can’t help but get the feeling that the economics profession is hurtling into a blog-soaked, pamphlet-era frenzy. First up for Econ 100 is Alex Tabarrok’s Launching the Innovation Renaissance (review here), where Tabarrok makes a case against patents, holds out promise for prizes, and makes a plea for broad educational reform in both primary and secondary education. For the Reading Group crowd we have Erik Brynjolfsson and Andrew McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, and with a subtitle like that, who needs a description?

So for those of you who have read one and need a primer on the other, here you go:

As a warm up to Renaissance, here is Tabarrok giving his TED lecture. Here’s a bit on education. (If you follow all the links at Marginal Revolution, you can pretty much read the whole book).

Here are Brynjolfsson and McAfee summarizing their argument in The Atlantic. See also Professor Finkler’s recent plug.

I’ve read both and recommend both. We’ll see what my Econ 100 students think. Thought provoking all around.

Keynes, Cowen, Brynjolfsson, McAfee & Capitalism

Here’s the update from the reading group.

On the subject of big, fat profits in the financial sector, you might consider visiting some of these pieces. On the subject of big, fat incomes in the financial world, Cowen offers up a simple theory on why so many smart young people go into finance, law, and consulting. Adding fuel to this fire, “Mr. D” sends me this helpful blog post from Ezra Klein, arguing that Ivy Leaguers head to the Street because that’s where they get their “real” education. Do you buy that? And, in a similar vein, “Mr. P” wants to know why Americans don’t elect scientists.

We left off yesterday with the open question of what the best-case scenario is for market economies moving forward. Where are the big productivity gains going to come from? What type of work is to be done? Is manufacturing dead or alive, or does it even matter? (See Professor Finkler’s previous post). Has John Stuart Mill’s concern about the inevitable decline in radical breakthrough inventions finally come home to roost?

And, this opens the door for next week’s book, Brynjolfsson and McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy. There are a couple of secondary sources on this, as well, including pieces from The Economist and The Wall Street Journal.

By all rights, this term’s 391 DS reading group should be titled Keynes, Cowen, Brynjolfsson, Backhouse, Bateman, McAfee, and Capitalism, but that doesn’t quite roll of the tongue, does it?

Nor would it fit on your transcript.

Keynes, Cowen & Capitalism Meets in Steitz 230

We have found a home for Econ 391, and it is in Steitz 230. We will see you over there at 3:25 on Thursday.

We began with Tyler Cowen’s The Great Stagnation, and in our first meeting we took a first cut at these questions:

1. What is the thesis of the book?

2.What does “the great stagnation” mean? What is stagnating? “Great” compared to what? Is the title a play on another “Great” episode do you suppose?

3. How is “stagnation” measured? Do you buy this means of measurement?

4. What does Cowen suggest is the cause of the great stagnation? How does he support his case? Can you think of alternate explanations?

5. What is Cowen’s remedy for the great stagnation, if any? Does it suggest a pro-market, get-out-of-the-way response? A more muscular federal policy response? New institutions? What?

6. Make a list of Cowen’s arguments that you buy and arguments that you don’t buy.

This week, we take on the “companion piece” from The American Interest, “The Inequality that Matters.” It’s hard to think about the future of capitalism without thinking a bit about what inequality is and why it is (and isn’t) important.

It seems an opportune time to point to the Financial Times’ recent in-depth debate, Capitalism in Crisis. There is some excellent material in there, and we will take a look at some of this when we get to the Backhouse and Bateman book.

Can’t Beet these Profit Margins

This past week in 100 we tackled the unusual welfare economics and the effects of price controls. For introductory economics courses, rent control and minimum wage policies generally serve as the dominant examples of controls that mean well, yet have perverse impacts. But I’ve always had a soft spot for the U.S. sugar program, which continues to surprise and astonish.

As you probably don’t know, but might suspect, the average U.S. citizen consumes about 140 lbs of sweeteners per year, about half coming in the form of sugar and the other half in the form of some sweet corn goodness.

Because of import restrictions, however, U.S. consumers pay a rather steep markup over world price. In class I cited a 2010 article where U.S. prices were about $0.35 per pound compared with $0.20 on the world market. If you take $0.15 per lb. times 70 lbs. times 300 million people, you’re starting to talk about real money.

But on a trip over to Mark Perry’s blog, I see that sugar prices have gone absolutely bonkers in the past two years. Perry has a nice figure that shows the markup is now more like $0.25 per pound, meaning that sugar producers are now really going to the bank. Perry estimates that with the markup, U.S. consumers pay about $3.5 billion more for sugar than they would absent the quota. Although that is certainly a tall number, on a per capita basis it only comes to about $10-$12 per person.

On the other hand, the U.S. sugar producers pocket a healthy chunk of that $3.5 billion.

In one of the all-time great sound bites, Judy Sanchez from U.S. Sugar Corp. said sugar policy has “zero cost” to taxpayers and offered up this line:

Face it: Sugar is given away for free in restaurants, where they charge you for water, they charge you for an extra slice of cheese on your hamburger. The sugar is so affordable that it’s given away for free. That’s because American sugar policy works.

Do you suppose sugar would still be “given away for free” if the U.S. price was cut in half tomorrow?

UPDATE: For some background, here’s a Congressional Research Service report — usually readable, often helpful.

Could tiny organisms carried by house cats be creeping into our brains?

Crazy, awesome, completely plausible:

Jaroslav Flegr is no kook. And yet, for years, he suspected his mind had been taken over by parasites that had invaded his brain. So the prolific biologist took his science-fiction hunch into the lab. What he’s now discovering will startle you. Could tiny organisms carried by house cats be creeping into our brains, causing everything from car wrecks to schizophrenia? A biologist’s science- fiction hunch is gaining credence and shaping the emerging science of mind- controlling parasites.

In other words, Reading Period continues…

Winners, Losers, and Microsoft Update

Our Senior Readers have forged through Liebowitz and Margolis’s Winners, Losers, and Microsoft, so terms like “increasing returns,” “network effects,” “serial monopoly,” and “lock in” are now rolling off their tongues. I am very impressed with how the group has embraced the book and how fluid the discussions have been. I will count this one as a winner.

So, as a follow up, we have an absolutely remarkable data point from Business Insider (via Mark Perry) that the iPhone is now bigger than Microsoft. (See here for background to the big pies).

The iPhone.

Bigger than Microsoft.

That is remarkable.

Econ Tea this Tuesday

Keynes, Cowen, & Capitalism Update

The first session rolled along pretty well, I thought, with 14 students and four faculty participating. I was pleased that everyone had something to say, and I hope you will make an effort to talk about this outside of the group. Our next meeting is February 16 at 3:30, and I am still looking for a regular room to meet.

For next time we will continue our discussion of The Great Stagnation, and in particular we will talk about whether we believe the central thesis. One synopsis of the thesis is that there are three pieces of bad news: there are fewer innovations, the yield on innovations has declined, and innovations are not resulting in high-quality employment gains. We talked a little bit about this idea of raising the status of scientists and what that might look like. In that vein, we might take a look at one of Cowen’s recent blog posts: a simple theory of why so many smart young people end up in finance and law. I’m not sure how to square one with the other.

On this point, I might add, Schumpter was optimistic that norms could change:

the prestige motive, more than any other, can be molded by simple reconditioning: successful performers may conceivably be satisfied nearly as well with the privilege—if granted with judicious economy—of being allowed to stick a penny stamp on their trousers as they are by receiving a million a year (CS&D, p. 208).

The discussion of science inevitably got at the nature of American higher education, an area that moves at a glacial pace, but might be amidst a revolution (who are you going to believe?). On this topic, Larry Summers’ offers his take on the future of education. I have been thinking about this for a while in terms of how we can do better down here on Briggs 2nd, and am wondering what the take of our new president will be.

We will also forge ahead with Cowen’s “The Inequality that Matters,” from The American Interest. It’s hard to think about the future of capitalism without thinking a bit about what inequality is and why it is (and isn’t) important. We read this in Econ 275 last term and I think it went over quite well.

The Informant

Econ Movie Night — Seeds, Lysine, and Audiotape

The Economics Department proudly presents The Informant Tuesday night at 9:30 in the Warch Campus Center Cinema.

The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal. Lysine, as you probably know, is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.

Well, I’ll let deRoos (2006) characterize the market for us:

Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.

Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb. However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.

Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.

On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.

Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done. These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).

A truly remarkable episode all around.

Pop some corn and mix in three parts lysine. We’ll see you there.

For further reading:

John M .Connor (1997) “The Global Lysine Price-Fixing Conspiracy of 1992-1995,” Review of Agricultural Economics, 19 (Fall/Winter), 412-427.

Nicholas deRoos (2006) “Examining models of collusion: The market for lysine,” International Journal of Industrial Organization, 24(6): 1083-1107

Lawrence White (2001) “Lysine and Price Fixing: How Long? How Severe? Review of Industrial Organization,18 (1):23-31

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