David Gerard

Author: David Gerard

Can You Think of a Radical Idea to End Poverty?

Guess Again
Think Again

What’s the best idea out there to reduce poverty and improve urban life? Well, Paul Romer thinks a big part of the answer is his charter city idea.  What’s the charter city idea, you ask?  I’m not sure, actually. Professor Finkler has been on me to read about it, and I may finally take him up on it, as the new issue of The Atlantic has a feature piece, “The Politically Incorrect Guide to Ending Poverty.”

How’s that for a provocative title?

The article of course profiles Romer, who is by any account a fascinating character.

In the 1990s, Paul Romer revolutionized economics. In the aughts, he became rich as a software entrepreneur. Now he’s trying to help the poorest countries grow rich—by convincing them to establish foreign-run “charter cities” within their borders. Romer’s idea is unconventional, even neo-colonial—the best analogy is Britain’s historic lease of Hong Kong. And against all odds, he just might make it happen.

We’ll see.

In addition to charter cities and making Aplia happen, Romer is also the hero of David Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery.  The first half of the book is a short course in the history of economic thought; the second is an accounting of Romer’s role in launching endogenous growth theory. Both halfs are well worth reading.

Eyes on the Demise

James Hamilton at Econbrowser has a post, similar to one here, about difficulties regulating amidst rapid innovation. The cases of note were the disastrous Gulf spill on the one hand, and the disastrous financial meltdown on the other.

With the help of modern technology, we can now keep an eye on both.

As I’m sure you’ve seen, BP has a live feed up to its gusher, providing a continuous video feed from a mile under the sea.

Where did they get that idea, I wonder?

Perhaps from NPR Planet Money’s round-the-clock coverage of their own “toxic asset” via Toxie Cam.  Here’s just a taste of some screenshots from their thrilling live feed:

And here’s the back story:

We bought Toxie for $1,000 earlier this year. Every month, we get a check. It’s a small piece of the payments people are making on their mortgages. And every month, more houses get foreclosed on and sold off by the bank. When enough houses get sold off by the bank, Toxie will be dead.

She’s not dead yet — but things are looking grim.

Last month, we got $72.41; so far, we’ve received a total of $449.

This month, our payment was zero dollars and zero cents. We could still get another payment next month — maybe.

So, it looks like the toxic asset really was toxic, with a payout of less than 50 cents on the dollar. On the other hand, that seems to be about what my 401K has been doing.

At any rate, video technology is clearly making the world a better place.

Joga Bonito

It’s June again, and that means it’s time to figure out exactly who you are going to pick to win this year’s FIFSA World Cup.  What’s that? You’re busy with finals? With packing up and leaving campus? With finding a job and shopping for Ramen noodles? Who has time to research the top teams?

analystWhy, the investment banks, of course.

According to the Financial Times, Danske Bank, JP Morgan, UBS, Evolution, Goldman Sachs, have all put their top personnel on the matter and made their predictions.  Well, Goldman only picked the semi-finalists because, you know, they don’t want to take any unnecessary risks.

It looks like la Brasilia is the big favorite this year, with a JP Morgan giving a hat tip to the English.

How do they do it?, you ask. Here’s one case:

Danske are using six factors (income level, population size, football history and tradition, current form of national team, presence of ‘superstars,’ and home field advantage) to gauge the teams relative strength… Then they simulate the Cup schedule.

That’s right, linear regression. OLS.  What can’t it do?

For those of you US football fans out there, the yanks are better than even odds to advance past the group play, and about 90:1 to win it all right now.   Spain is actually the gambling favorite to win it all right now at 4:1, with the Brazilians just behind at 9:2.

The New Republic has a blog. 

Interested in a Political Career — How Tall Are You?

Slate has an amusing piece on what political coverage would look like if political scientists wrote it. Here’s just a taste:

Democrats hope that passing health care and financial regulatory reform will give them enough momentum to win in November. Unfortunately, there’s little relationship between legislative victories and electoral victories. Also, what the hell is “momentum”?

Prospects for an energy bill, meanwhile, are looking grim, since Obama has spent all his political capital. He used to have a lot. Now it’s gone. Why winning legislative battles builds momentum but saps political capital, I have no idea. Just go with it.

In related news, things are heating up in Oshkosh.

Summer Reading Opportunity

With the previous post, Professor Galambos has kicked off this year’s LU Economics Summer Reading Fun, or something like that.  Any student (or colleague, or alum) interested in reviewing a book related to economics or LU economics is welcome to submit a book review that we will post right here on the blog.

Here are some suggestions that I am very interested in learning about, but likely won’t read myself:

Brad DeLong and Stephen Cohen, The End of Influence: What Happens When Other Countries Have the Money?

When you have the money–and “you” are a big, economically and culturally vital nation–you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly–though, hopefully, in quiet, nonconfrontational ways. An you lose influence–the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others. As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don’t. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country. For America, this will be a shock: American has not been a normal country for a long, long time.

Continue reading Summer Reading Opportunity

An Extended Post on the Benefits and Costs of Oil and Gas Drilling

If there is any upside to the epic oil spill down in the Gulf (and heading this way), it is that it provided a learning opportunity for my courses in Political Economy of Regulation (Econ 240) and Environmental Economics (Econ 280).  I’ll start with the benefit-cost analysis (I actually started this yesterday and have touched on it here and here), and I will try to get to the regulations next week.

The Environmental Economics class looked at the benefit-cost analysis of offshore drilling described in the Draft Proposed Outer Continental Shelf (OCS) Oil and Gas Leasing Program 2010–2015. The document covered areas in Alaska, California, and the Gulf. The students looked at the benefits and costs of expanding offshore production, including the quantification of the environmental (external) costs.

The results deviated little from the extant program from 2007-2012 (see table), where the quantified benefits were far higher than production and external costs. Most of the benefits manifest themselves in the difference between oil and gas prices and the production costs (net economic value in the table). The producers take a chunk of profit and the federal government takes a 12.5% gross production royalty that it redistributes to the states.

OCS BCA

The net benefits calculation is the consumer surplus and producer profits less the environmental costs. As can be seen in the table, the values are dominated by producer profits (roughly equivalent to “net economic value”). The analysis assumes $46/b oil prices, $7 / McF natural gas prices, and a 7% real discount rate.

Continue reading An Extended Post on the Benefits and Costs of Oil and Gas Drilling

Q: How do we regulate in the face of rapid, complex technological innovation?

Use back of page to answer if necessary.

The question for today is what do the recent spill and the financial crash have in common? Kenneth Rogoff has an opinion piece about the difficulty of regulation amid rapid technological advance.

The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency…  Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures.

And it doesn’t stop there at all.

The basic problem of complexity, technology, and regulation extends to many other areas of modern life. Nanotechnology and innovation in developing artificial organisms offer a huge potential boon to mankind, promising development of new materials, medicines, and treatment techniques. Yet, with all of these exciting technologies, it is extremely difficult to strike a balance between managing “tail risk” – a very small risk of a very large disaster – and supporting innovation.

So in a world of rapid technological advance, what is the role in public policy in capturing the benefits while also mitigating the risks? Is “the market” best left to its own devices? Certainly, we have addressed this question in other forms.

I don’t have any answers, and you aren’t likely to find any either. But the point of a lot of what we do on Briggs 2nd is to try to frame and analyze problems, understand what the issues are, the potential winners and losers, and have a discussion about how to proceed.  I hope this helps.

Rogoff’s column is here.

He is also the author of This Time Is Different: Eight Centuries of Financial Folly. You can find a paper version here and the book here.

Take Stock in BP?

Here’s a provocative thought:

BP_wilts_smBP’s stock, which traded at a 52-week high of $62.38 on Jan. 19, 2010, closed on June 1 at $36.52 a share, down 15% on the day. The post-spill sell-off has wiped out some $68 billion of BP’s market value, knocking it down to $114 billion. With the stock now in the cellar, some speculation even has it that BP may attract a buyer.

There are a couple of things going on here.

First, the stock price reflects the value that “the market” places on a company.  One technique for evaluating the effect of some major event on a company’s value is to do an “event study.”  The idea is to try to use other factors (e.g., larger market trends, stock prices of other firms in the industry) to get at how important the event was. A spill like this could damage a company’s reputation, expose it to liability payouts, or make it susceptible to heavy fines.

Ben Fissel at Econbrowser put one of these together shortly after the spill.

When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill.

He finds big impacts.  The red line in the picture is his estimate of the time series of BP’s stock price without the spill, and the black line is the actual price.  Seems like a big effect.

At the time he did the study, the stock price had been between $50 and $60 for the previous three months.  As the AOL article shows, the price is now down closer to $35. Overall, the market’s valuation of BP has gone from more than $180 billion to about $114 billion.  Does that seem reasonable?

That is, in fact, the second point, that doesn’t seem all that reasonable, which is why BP’s stock is now so low that it might be attracting a buyer.  In other words, at current prices smart money might find BP stock such a bargain that it will swoop in and buy the company, liability exposure be damned. Does that seem reasonable?

I completely buy this logic.  Given that BP is the world’s largest oil producer, it is hard to believe that the long-term profitability of the company has really fallen 40% due to the oil spill. The linked article provides some reasons why a merger might be implausible, but on the fundamentals, this may well be an overreaction.

Further food for thought, what will happen to oil prices if there are significant steps taken to reduce offshore drilling and who stands to win and lose from those price changes?

Is College Right for You?

In a continuing series on why I love being an economist, here’s a piece from The New Yorker on the costs and benefits of college education.  In it, the author discusses the job prospects and salaries of various disciplines, including our own:

Economics majors aren’t doing badly, either: their starting salary averages about fifty thousand a year, rising to a mid-career median of a hundred and one thousand. Special note should be taken of the fact that if you have an economics degree you can, eventually, make a living proposing that other people shouldn’t bother going to college.

Well, of course we do that. Maybe college isn’t right for everyone.  In our burgeoning post-industrial, service economy, some jobs might require at least some college (“consultant,” CSI analyst, attorney, surgeon, computer game developer), others might not (burger flipper, garden hand, dog walker, Wal Mart greeter, professional athlete), and others might require non-traditional schooling (massage therapist, engine diagnostic tester, fire watcher, marauder).

Here at Lawrence, however, we believe that college is right for people who share our mission — “commitment to the development of intellect and talent, the pursuit of knowledge and understanding, the cultivation of sound judgment, and respect for the perspectives of others.” Not exactly a vocational bent, that’s the point.

But for assessment purposes, many view college as a training ground for future professionals.  Thus the question, should we evaluate the efficacy of college on the basis of the integrity of its graduates, or on whether graduates get jobs, whether they like their jobs, and how much money they make? Given that whether someone has a job or not tends to be easier to measure than the (change in) integrity of a person over the course of their college life, whether college is “worth it” or not is often framed as whether the monetary benefits outweigh the costs.

Well, anyway, hope the Lawrence Experience is right for you.

Coming to an HBS Case Near You

A few months ago I had a series of posts on the Amazon-Macmillian-Apple fracas, related to publishing and sale of e-books.  A recent New Yorker piece provides a very nice discussion of the role of technological innovation and competition in reordering the publishing business, with Apple, Amazon, and Google all playing major roles.  One of the more interesting aspects is the blurring of the lines as firms integrate, disintegrate, or just try to make money.  My favorite line in the piece is this:

In (Amazon’s Russ) Grandinetti’s view, book publishers—like executives in other media—are making the same mistake the railroad companies made more than a century ago: thinking they were in the train business rather than the transportation business.

I’m not sure I have much to add to the article at this point, except to say that I recommend it.  And that you will probably be reading some version of this story as a business school case if you happen down the MBA route.

In fact, you will probably be discussing this in an Industrial Organizations course if you aren’t careful.

Econ Picnic, Hiett Patio

Come Even if You Have a Boo Boo

As you have undoubtedly heard, the Economics Department Picnic will be Tuesday, June 1 at 6 p.m. on the Hiett Patio. I’m new here, so I don’t know where that is, but this can be a Hayekian moment for you. As the saying goes, don’t wait until the last minute, unless the marginal benefits of doing so exceed the marginal costs.

I’m told from a reliable source — student representative to the Econ Social Committee, Suzie Kraemer — that there will be pizza.

And economists.

No Holiday Econ TeaBA

Grill, Baby, Grill

We kick off the final week of classes with a holiday, perhaps an apt metaphor for where many of you have been mentally for the past week.  The holiday preempts the usual slot for the Economics TeaBA, paving the way an afternoon barbecue for the missus and me.

We get back to serious business in my courses Wednesday. In environmental economics (Econ 280), small groups will be reviewing the cost-benefit analysis of the Minerals and Management Services offshore leasing program. Then in the afternoon, the political economy of regulation course  (Econ 240) will be going through some of the administrative regulations governing offshore drilling, truly a look at how the sausage is made.  If you are interested, stop on in to see whether they’ve learned anything.

So, I’m headed over to the parade.  Hope to see you there.

“I often have tender, concerned feelings for people less fortunate than me”

Is that a Mike-n-Ike?

In another sure sign of the apocalypse, college students these days just don’t care that much about their fellow man.

Compared with college students of the late 1970s, current students are less likely to agree with statements such as “I sometimes try to understand my friends better by imagining how things look from their perspective,” and “I often have tender, concerned feelings for people less fortunate than me.”

The researchers put together a survey that elicits an “empathy” score (you can take the test yourself) and today’s kids scored 40% lower than generations of yore. That seems like a lot.  From this, the authors of the study conclude that people in my generation are more likely to donate a vital organ to a complete stranger, whereas today’s generation is more prone to knock over its grandmother for the last Mike-n-Ike’s.

Seriously, though, I wonder how much today’s lower score has to do with the language of the survey.  It seems a bit dated to me.  On the other hand, it’s hard to believe anyone ever talked that way.  I also wonder how such specious unpublished research winds up at the top of my RSS feed.

I just wanted to share that with you all.  I worry, you know.  Have a good weekend!

The Capitalist & The Entrepreneur

Professor Klein explaining the difference between "Austrians" and "Australians"

The Capitalist & The Entrepreneur is a new book that contains some of the collected works of Austrian economist and Oliver Williamson student, Peter Klein.  Professor Klein is the source of some of our juiciest material — define juiciest how you will — on the nature of the relationship between the entrepreneurship and the theory of the firm.

This could be your lucky summer if you happen to be a fan of Professor Klein, as he is teaching a course, Entrepreneurship in a Capitalist Economy. The course meets every Tuesday night beginning June 7 and running into September.

Where?

On the internets, of course.

For those of you with interest in the course or the book, both Professor Galambos and I have copies for your perusal.

Costs of the Administrative State

If you’ve ever scratched your head and wondered where I get all of that data on regulatory budgets and staffing, scratch no more — the new A Decade of Growth in the Regulators’ Budget: An Analysis of the U.S. Budget for Fiscal Years 2010 and 2011 is here!

Brought to us by former OIRA head, Susan Dudley, the brief combs the U.S. budget for all the summary statistics on agency appropriations and staffing.  (For those of you who can’t see the axes here, along the X axis is years, beginning in 1960 and ticked off in five-year increments.  Up the Y axis is billions of 2005$ in $10 billion increments).

Regulation Costs

A page turner, I know.  The brief reveals that outlays and staffing are at their all-time highs, which does not surprise me.  I do, however, marvel at the growth of Homeland Security.  In real terms (2005$), the Homeland Security budget has gone from $8.8 billion in 2000 to more than $20 billion today, accounting for more than 40% of U.S. regulatory spending and more than half the personnel as well.  Mind boggling.

As I hope will become a tradition here, feel free to play the “my favorite part of the regulatory budget report” game.  The winner will receive at least one sticker.

Liability for Harm Versus Regulation of Safety

That’s the classic question that Steven Shavell posed 25 years ago, and the debate over whether these two are potentially substitutes continues today.

The BP catastrophe has certainly brought more than its share of discussion on the issue.  Paul Krugman weighs in on the side that the continuing spill is Exhibit A that liability is a failure the private sector needs a stern regulatory hand to guide it.  Tyler Cowen frames the argument and takes Krugman to task on one point:

There is in fact an agency regulating off-shore drilling and in the case under question it totally failed.

Point, Cowen.

Of course, not all regulation is as inept as the Minerals Management Service (MMS) seems to be in this case.  One problem is that MMS is charged both with regulating environmental and safety concerns AND is responsible for approving leases to the provide sector.

And, which do they choose? According to the Washington Post:

Minerals Management Service officials, who can receive cash bonuses in the thousands of dollars based in large part on meeting federal deadlines for leasing offshore oil and gas exploration, frequently changed documents and bypassed legal requirements aimed at protecting the marine environment, the documents show.

Emphasis is mine, though the point sort of jumps out at you, doesn’t it? But, it’s not like the appearance of financial impropriety is a new thing with the MMS.  On the heels of the spill, in fact, President Obama recommended bifurcating the agency to mitigate the clear incentive compatibility problem.

Continue reading Liability for Harm Versus Regulation of Safety

Are Patents the Engine of Growth?

Great post by Richard Langlois at the Organizations and Markets blog about the extent to which “James Watt’s steam-engine patents retarded innovation in steam technology and slowed the British industrial revolution.”

Typically, we teach that the patent is an imperfect solution to the “appopriability” or “positive externality” problem, where individuals and firms are reluctant to innovate because they cannot capture the full value of their efforts due to competitors copying the innovation.  The patent offers temporary monopoly power in exchange for the inventor disclosing technical information to the public. Watt certainly benefited from that protection.

In this case, however, some say the patents were so broad in scope that they allowed Watt to stifle competitors altogether.  There is an on-going discussion in the innovation world about this “strategic patenting,” and the Langlois piece is a nice introduction if you are interested.

Rumor has it that Professor Langlois’ book, The Dynamics of Industrial Capitalism, will be featured in this fall’s I&E Reading Group.  Watch this space.

Our Readers Respond

As you can imagine, a blog like this generates a lot of reader response.  From our post on the American Power Act, astute reader NS writes in:

Captured?

Pithy, yes.  He also sends along this piece on the flow of corporate money supporting the bill.  For those of you interested, the capture theory posits that firms often “capture” regulators, and consequently legislation &/or regulation is used as a means to redistribute resources from one group to another. I’d probably go with the Becker model on this one, but he gets an A for brevity and wit.

Also on the corporate interest front comes this great article from alert reader “Mr. O.” The “beverage lobby,” folks with a lot a stake in the soda (a.k.a. “pop”) tax, have dispensed with the niceties and are offering up cold hard cash to quash it:

Yet with the nation’s obesity burden and states and municipalities parched for new cash sources in this recession, the beverage lobby isn’t underestimating the tenacity of those who would impose taxes. So they’ve unveiled a new tact in Philadelphia: abandon the tax and the beverage industry will donate $10 million over two years to the Pew Charitable Trusts to fund health and wellness programs in this city, if Pew would accept the funds, reported BNET.com.

I kid you negative, Mr. O was laughing out loud (LOLZing, as the kids say) at the audacity of this proposal.

So, for any of you other readers out there that identify something of interest, please bring it to our attention. If it clears the bar, it might be you seeing your initials right here on the blog.

Imagine that.

Penultimate TeaBA

It’s time to get ready for the penultimate Economics TeaBA of the 2009-2010 season. As per usual, the fun starts at 4:15 Monday in Briggs 217.

The Economics TeaBA came pretty much out of nowhere and has become a centerpiece of the economics co-curricular activities at Lawrence. Dozens of students have been treated to hot beverages, high-calorie snacks, along with both casual and serious discussions with the economics faculty and other esteemed attendees. In the past few weeks, we’ve enjoyed the company of EPA Administrators, mathematics professors, professors emeriti (is that the plural of emeritus?), and visiting economists /standup comedians.

So, we never really know what the Economics TeaBA will hold. All I can say is that this week’s will be the penultimate experience.