David Gerard

Author: David Gerard

Windy Wednesday

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.

Textbook Tuesday

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.

Free Market Monday

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.

A Welcome Prospective

Friday is a prospective student day and I will be giving a brief overview of the economics department in Briggs 217 at 2:10. I will be talking up our very solid curricular and co-curricular activities, including the Lawrence Scholars in Business program (video here), our Innovation and Entrepreneurship initiative(s), and the spectacular successes of many of our recent graduates.

And, of course, the Investment Club!

See you there.

Is BP on the Big Bounce?

When last we visited BP on June 3rd, it’s stock was down from $62 to$36 and appeared to be heading further south.  Indeed, by the end of the month it had bottomed out at $27.05 and it was dark days both on the water and in the markets (unless you had shorted it, of course).

Well, six weeks later and things are looking up.  The stock has risen back to $38, and even peeked its head about $40 recently.  And, there are more and more stories, especially on the financial pages, that the magnitude of the environmental damages simply aren’t going to be as grotesque as anticipated.  (Of course, this is not a consensus opinion).

So where does that leave the company’s fortunes?  There are still momentous uncertainties about the environmental damages and liabilities, which could add to the stock’s volatility.  But on the other hand, if the worst-case scenarios were internalized in the price, and those scenarios haven’t materialized,… this is why I buy index funds.

UPDATE: Evidently, the Financial Times is thinking about this, too.

No Laffing Matter

If a firm wants to increase its revenues, should it raise its prices? The answer, of course, depends on the elasticity of demand for its product. If consumers are very responsive to price changes, a price increase could lead to lower revenues.  Ack!

Now, if a government wants to increase it revenues, should it raise or lower tax rates?  In this case, the answer depends on (among other things) how sensitive workers are to marginal tax rates.  Arthur Laffer famously pointed out that it’s possible that taxes are so high that reducing them could induce people to work so much that lower tax rates could increase tax revenue.

Bend, Baby, Bend
Bend, Baby, Bend

The Laffer Curve rests on a simple conjecture — if tax rates are zero, then no tax revenue is generated.  Well, that’s not a conjecture, that’s true.  The conjecture is that if tax rates are 100%, then no one would bother to work because all wages would be absorbed into the government coffers. Because nobody would work, tax revenue would be zero.

Hence, we know two points of the Laffer curve — at tax rates of 0 and 100%.  A key empirical question, then, is where does the Laffer Curve bend? The figure shows tax rates increasing along the horizontal axis leading to various levels of tax revenues on the vertical axis.  The nice stylized version is symmetric with a nice revenue-maximizing peak, but there is no reason to believe the curve is symmetric (or even single peaked, really… at least I don’t think so).  However, it is critical to know what the curve looks like so as to understand the likely implications of a tax increase or decrease.  If we are to the right of C, an increase in tax rates will actually reduce tax revenues. Ack!

So where does it bend?  The ever-energetic Ezra Klein surveys some of the giants of economics and policy folks in the know (the policy folks are mostly right of center) to get some answers. For those who are willing to proffer a number, that number is generally much higher than our highest marginal tax bracket.  Tax guru Joel Slemrod, for example, is thinking its north of 60%.

Here are a couple of pithy responses:

Greg Mankiw: My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate…. I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer.

Martin Feldstein: Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

Short run, long run, deadweight losses.

Good stuff!

Weekend Audio

Some interesting interviews for those of you out cleaning the garage this weekend.

The first is Raghu Rajan, a favorite of Professor Finkler (I’m guessing from this link), in a Vox interview, “Fault lines: how hidden fractures still threaten the world economy.” From the abstract:

Raghuram Rajan of the University of Chicago talks to Romesh Vaitilingam about his new book Fault Lines, in which he outlines the deep systemic problems in the world economy that threaten further financial crises – high US inequality, patched over by easy credit; excessive stimulus to sustain job creation in times of downturn; and the choices of Germany, Japan, and China to focus on export-led growth rather than domestic consumption. The interview was recorded in London in July 2010.

The second is a favorite of mine, Political Scientist David Brady, over at EconTalk.

David Brady of Stanford University talks with EconTalk host Russ Roberts about the state of the electorate and what current and past political science have to say about the upcoming midterm elections. Drawing on his own survey work and that of others, Brady uses current opinion polls to predict a range of likely outcomes in the House and Senate in November. He then discusses the role of recent health care legislation in the upcoming election as well as Obama’s approval ratings. The conversation concludes with Brady’s assessment of how Congress might deal with the demographic challenge facing entitlement programs.

Brady has a good sense of politics and political history, in addition to being an excellent social scientist. In my policy making institutions course at Carnegie Mellon, I used Brady & Volden’s Revolving Gridlock as an introduction to a simple spatial model and an overview of the past 40 years of American politics (Just don’t tell Professor Hixon).

And, I buried the lead here.  Laurie Santos talks about monkey decision making over at TED.  Who knew monkeys were so irrational? She does some monkey experiments and finds that monkeys consistently make the types of “irrational” errors that humans make.

Laurie Santos looks for the roots of human irrationality by watching the way our primate relatives make decisions. A clever series of experiments in “monkeynomics” shows that some of the silly choices we make, monkeys make too.

I coined the tag “monkeynomics,” not realizing that there actually was monkeynomics.  Click on the tag for more monkey business.

Robot Traders

There’s a peculiar piece in The Atlantic about peculiar behavior of robot traders.

As usual, I have no idea what these robots are up to, but it probably isn’t about making me rich. The picture shows “an extreme closeup of just one second of trading of the stock SHG, the Shinhan Financial Group. This is 760 quotes from a total of 10,000 made in 12 seconds.”

RobotVictim
1000 quotes per second, baby

Now, why would a robot do that?  There’s no telling with these robot traders.

My suggestion is to take these pictures and ask Professor Azzi.

I bet he has an explanation.

Which Planet Are You On?

Fill in the blank:

ADAM DAVIDSON: Ladies and gentlemen, I have an amazing investment opportunity for you. Give me $100 – just a hundred – and in one year, I promise it will be worth 93 bucks. We call it the _______ special.

Okay, what’s your answer?

If you said “inflation,” congratulations, you’ve mastered one of the simplest concepts about the value of a currency.  As the general price level goes up, the purchasing power of the currency goes down.  In this case, the $100 you lent is worth only $93 when you get it back.  That’s why in times of inflation, people are reluctant to lend money.

If you said “deflation,” congratulations, you’re the co-host of NPR’s Planet Money.  And that bit of Econ 120 fail is from a “patented Planet Money explainer.” Yikes.  There was an entire story yesterday written around this bit of confusion.

Let me ask you a question — is that enough to knock that program off of your trusted sources list?  They ostensibly write about economic issues, yet neither the founder/writer nor any editor/producer was able to catch such a colossal blunder. If they are that confused about the easy stuff, how much do you trust them to explain credit default swaps or the toxic assets program?  (And, as regular readers know, we love the Toxie Cam).

Must be that solar eruption.

Late Summer Chocolate Fix

Craig Pirrong, the Streetwise Professor, believes cocoa prices are fixed.   Why does he believe this?  The data, of course.

Here’s the scoop:

The basic result is that the July, 2010 price rose about 6 percent more than one would have predicted, given the movements in the September, November, and July ICE prices…  This rise in the relative price of July cocoa is exactly what you would expect to observe during a corner, and given the typical co-movements of all these prices, are highly unlikely to have occurred by chance in a competitive market.

If you read his post, which I recommend you do, you can see he developed a fairly straightforward methodology for inferring some sort of market manipulation in an earlier paper on soybeans.

Of course, I learned about price fixing from the frozen orange juice pits in Trading Places.

Juice-y Empirical Analysis

Not terribly long ago we linked to an Art Devany article where he claimed that the steroid era had no statistically discernible effects on home run production. Eric Gould and Todd Kaplan look carefully at the numbers and determine that Jose Canseco had a big influence on his peers’ performance numbers.

From the abstract:

[W]e estimate whether Jose Canseco, one of the best baseball players in the last few decades, affected the performance of his teammates. In his autobiography, Canseco claims that he improved the productivity of his teammates by introducing them to steroids. Using panel data on baseball players, we show that a player’s performance increases significantly after they played with Jose Canseco. After checking 30 comparable players from the same era, we find that no other baseball player produced a similar effect.  Clearly, Jose Canseco had an unusual influence on the productivity of his peers.

If you are a baseball fan, this is a nice research paper to take a look at.  The problem identification is clear, the statistical analysis is straightforward, and the interpretation of the coefficients is central to the analysis. In other words, it isn’t enough to be statistically significant, it also must be “economically” meaningful.

Doink!

Here, the evidence shows that power hitters substantially boosted their home run production after playing with Canseco, to the tune of almost three dingers per yer.  That’s both statistically significant and has “baseball” meaning. (Similar results did not hold for fielding prowess). The more convincing piece is that there are no other sluggers where this result holds.  That is, if the Canseco result was some statistical fluke, you would expect a similar result in at least one other player.

Still, I am going to talk to Prof. Finkler, because I don’t think the numbers are quite consistent.

Here’s a nice summary at Slate.

And here’s Mr. Canseco’s tell-all, Juiced.  When this came out, it was scandalous and the denials were ubiquitous.  But, as time marches on, several allegations have come to pass, and few have been discarded.  By the way, that’s the famous “ball bouncing off Canseco’s head and over the fence for a home run” picture, run ad nauseum on sports bloopers back in the day.

Is Major League Baseball Competitive?

A couple of final words on the summer I&E Reading Group selection, Moneyball.   As was argued by Michael Lewis, Billy Beane capitalized by exploiting what appeared to be a market inefficiency.  Indeed, economists Jahn Hakes and Skip Sauer found empirical support for this proposition .

An interesting question, then, is why other teams didn’t innovate via these quantitative techniques sooner? In an archived EconTalk interview with Professor Sauer, Russ Roberts suggests that Major League Baseball may well not be a competitive industry. That is, owners are “playing a different game” and that the costs of having a bad team aren’t really that high.  In fact, Roberts argues (at about 28:00), the absence of competition would allow owners can indulge stupid management practices without a significant hit to the bottom line.  It would also allow teams to do things like discriminate on the basis of race, or simply not aggressively try to win, where the costs would not be that high. When is the last time a team went bankrupt? Or sold at a steep discount?

That’s an interesting point because a standard economics argument is that competitive markets are quick to punish firms that fail to adopt best practices. Firm that adopt racist or sexist hiring or compensatory practices will loses out to those that don’t.  And the larger point, of course, is that robust competition pushes firms to innovate, or at least to adopt practices once others have done so.  In the context of baseball this is transparent.  When there was a color line and African Americans were excluded, then teams didn’t suffer for their racist practices.  However, once teams started to sign the best African Americans players, then racist policies had a price; that is, teams that didn’t discriminate on the basis of race had access to the best African-American ballplayers — refusing to sign Willie Mays doesn’t help your chances of winning.

Sauer also addresses Steve Levitt’s criticisms (which I share) about the source of the A’s dominance was actually their dominant starting pitchers (at about 38:00).  Sauer responds that, regardless of the reason for the A’s success, the numbers seem to show an inefficiency on the offensive side.

You can also catch Roberts interviewing Michael Lewis on the topic of Moneyball.

Does Moneyball Apply to Kindergarten?

David Leonhardt has set the kindergarten teachers’ portion of the internet afire with his provocative New York Times piece, “The Case for $320,000 Kindergarten Teachers.”  He cites some recent research that finds unusual importance of the kindergarten year to adult outcomes, and in particular the importance of good teachers.

Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

Mr. Chetty and his colleagues estimate that a standout kindergarten teacher is worth about $320,000 a year. That’s the present value of the additional money that a full class of students can expect to earn over their careers. This estimate doesn’t take into account social gains, like better health and less crime..

That $320,000 figure is what has set the internets ablaze with kindergarten teacher good cheer, along with the usual trenchant observations about the pay disparity between teachers and, say, professional athletes. One would expect a economics blog post to go through the caveats of demand and supply setting wages, problems identifying good teachers and firing bad teachers, and these sorts of issues.

I was thinking along different lines. In the past two weeks, our Innovation & Entrepreneurship Reading Group has been thinking about the Moneyball Hypothesis and how it might apply to higher education.  For example, what sort of metrics might we incorporate to identify promising collegiate talent? Here’s a thought — rather than relying on SAT and ACT scores for admissions, why not require kindergarten transcripts?  This could easily be accomplished by simply asking for all school transcripts instead of relying on the high school transcript.  If Chetty and company are right, this could be just the route to go to identify some of those diamonds in the rough.

Also see The Economist‘s brief writeup.

UPDATE: It looks like graduate schools have beaten me to it.

It’s a (Very Exclusive) Jungle Out There

While we’re on the topic of the publishing industry, my insider contact has tipped me off to the latest delicious controversy.  Literary superagent Andrew Wylie is taking his clients’ backlist titles and selling the e-book rights directly and exclusively to Amazon.

Wow. I wonder what that means?

Let’s take a step back.  Suppose you are, say, John Updike, and Random House wants to publish your book.  The company gives you an advance and then pays you royalties based on sales and all things are right in the world.

But now, technology marches on and the next thing you know the Kindle and the iPad emerge, and all of a sudden there is a potentially new version of your product, the e-book.  What should we make of this? Does your contract with Random House extend to the right to publish the e-book? Or do they have exclusive rights to  Or do you maintain that right?

It wasn’t until the mid-1990s that Random House began explicitly covering e-books in its contracts, and Wylie seems to think that his clients maintain e-book rights.  The courts seem to agree.

It’s not clear from the article that that is the biggest problem.  According to the New York Times blurb:

John Sargent, chief executive of Macmillan, posted a response on his company’s Web site, criticizing Mr. Wylie for cutting an exclusive deal with Amazon for the 20 e-books, which in addition to Mr. Nabokov’s “Lolita” and Mr. Roth’s “Portnoy’s Complaint” include Ralph Ellison’s “Invisible Man” and John Updike’s “Rabbit” books.

“It is an extraordinarily bad deal for writers, illustrators, publishers, other booksellers and for anyone who believes that books should be as widely available as possible,” Mr. Sargent said.

Some of you may remember Mr. Sargent who locked horns with Amazon not too long ago over  rights to set prices for e-book prices.  The effect of that was for Macmilian and others to wrestle control from Amazon and raise consumer prices for many e-book titles.  Certainly, at least in terms of a partial equilibrium model, the higher prices aren’t consistent with “as widely available as possible.”

It’s probably more complicated than that, though.

The Price is Right? UPDATED, TWICE!

The Summer marches on, and that means it’s time for some more summer reading. My recommendation this week is from George Mason economist and Marginal Revolution blogger extraordinaire, Tyler Cowen.  His latest book is The Age of the Infovore.

So, I was poised to pick up a copy for my wife at Amazon for what seemed to be a bargain price of $10.88, but then noticed that the hardcover version, Create Your Own Economy, was selling for only $4.64.   It’s the same book, but the title changed when the paperback edition was released.

But then I thought, maybe she’d want the Kindle version instead.  But the Kindle edition of Create Your Own Economy is $12.99, whereas the Kindle for The Age of the Inforvore is $9.99.  Huh. So I’m paying a premium for a Kindle version of a hardcover version of the book, but I enjoy a steep discount if I actually purchase the hardcover.

Then I thought, well, maybe I’ll get her some perfume.

I think Yoram Bauman is right – choices are bad.

UPDATE: I sent this pricing info to Professor Cowen and he sent me a copy of his book with the inscription, “How is $0.00 for a price?”  Thanks!

UPDATE 2: While trolling the EconTalk archives, I came across an episode of Roberts and Cowen talking about the book.

Going Mobile

During the recent oil price spike in 2008, one of my mates suggested that our generation will be the last to enjoy relative ease in air travel.  A large number of people, even those with decidedly middle class incomes, have the means to travel extensively and find their way to every nook and cranny the world has to offer. A sustained oil crunch, absent a viable fuel substitute, could indeed cripple the airline industry and leave globetrotting to the relatively affluent.

Taking it a step further, Brian Ladd extends the thought experiment to automotive travel.  I’m not sure I endorse his argument, but I certainly like the thought experiment.  One passage pertaining to industrial production caught my eye:

Economists who blithely assume that pre-2008 automobile sales are “normal,” because Americans “need” their cars, misunderstand the nature of the automobile market. Enormous cars, long commutes, and vast parking lots do have their advantages, but we could manage to live without them.

I am inclined to think that economists would be the last group to assume such a thing based on “need.” In fact, I would think that we would be in the opposite camp, arguing that price signals will lead to adjustments both on the demand side (fewer miles, more fuel-efficient vehicles, shorter commutes, maybe even public transportation) and the supply side (improved fuel efficiency, alternate fuel source).

For an excellent discussion, I recommend the classic James Hamilton blog post on “How to Talk to an Economist about Peak Oil.”  I’ll go through that in a future post.

Moneyball at The Academy

It’s the middle of the summer, and it’s time to check in with the I&E Reading Group. This summer, we have Michael Lewis’ Moneyball and Louis Menand’s Marketplace of Ideas. If you need a copy of either, I know we have them at The Mudd.

For our first book, Lewis provides us with a look at the world of baseball management. I would suggest that the money point of Moneyball has to do with the tension between quantitative tools and “experts” watching and assessing potential. In the context of evaluating talent, for example, should teams look at the numbers or listen to the scouts? But that isn’t quite right, either, because there is a long, entrenched history of listening to the scouts, so putting too much stock in the college on base percentage is anathema to the whole process.  The scouts don’t believe the numbers, and management trusts the scouts.  So the conventional wisdom is that the numbers lie.

It doesn’t end there, either.  The type of quantitative analysis used for player evaluation has been extended to on-the-field strategy, again exposing a tension between what the numbers guys say and what various experts (i.e., managers, sportswriters, fans) think. (For a similar example in the context of American football, see here).

Continue reading Moneyball at The Academy

Surely make you lose your mind…

Our first edition of the summer mailbag is here with a contribution from the always ebullient “Mr. O,” who says he sees economics everywhere these days.  The article in question has to do with a congesting pricing scheme in Chicago, and of particular interest to Mr. O is the methodology in which people’s time is valued.  As you may recall from, well, from all of my classes, a classic study by Deacon and Sonstelie that valued time by watching how long people were willing to wait to fill up their gasoline at price-controlled stations rather than paying market prices across the street.

In Chicago, as the saying goes, there are two seasons: winter and construction. And all that construction [isn’t] free. So the program would benefit those who are willing to pay for a faster commute (in the so-called “Lexis Lanes”) and raise bucketloads of cash for the metro area.

What’s the down side?

Bad Day for Environmental Economics, And the Environment

Almost unnoticed, this week marks a terrible week for advocates of market solutions to environmental problems, including various cap-and-trade systems. The Wall Street Journal reports that new federal air pollution rules have resulted in the tanking of the sulfur dioxide market, rendering extant permits worthless.

Often referred to as “the grand policy experiment,” (also here), the SO2 market was considered a success, and thought of as a model for potential global system to reduce greenhouse gases.  As with so many cases in economics, a credible commitment matters.  The Journal sums it up nicely:

The market’s collapse shows how vulnerable market-based approaches to reducing air pollution are to government actions. That could scare off investors, who won’t commit to a market where the rules can change at any minute.

Indeed.

One of the great benefits of using market instruments to address environmental problems is that they can substantial lower the costs.  The law of demand says that as price goes up, people buy less.  As a result of the collapses of this market, we will likely pay more to get less in terms of environmental quality.  This may well undermine efforts to implement market solutions elsewhere.  If investors are convinced the regulatory environment is unstable or uncertain, they are unlikely to make large capital investments, and are more likely to take stopgap measures.