General Interest

Category: General Interest

Thursday at the Supreme Court

As you may have heard, the Supreme Court of the United States (SCOTUS) has upheld the constitutionality of the recent health care legislation.  I won’t attempt to delve into the legal issues on which the opinion pivoted (see here maybe), though I will tell you that Chief Justice John Roberts in writing for the majority seems to have sent a Bronx cheer in the direction of the economics profession.

Congress already enjoys vast power to regulate much of what we do. Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.

To an economist, perhaps, there is no difference between activity and inactivity; both have measurable economic effects on commerce. But the distinction between doing something and doing nothing would not have been lost on the Framers, who were “practical statesmen,” not metaphysical philosophers.

Funny, I’ve always placed myself in the practical statesman camp.  I’ll have to think about that one.

Tuesday Quiz

On the heels of the wildly successful Monday Quiz, it’s time for the big Tuesday Quiz. As you know, or should know, most people in the real world do not write as if they are texting their BFF, so keeping track of subject-verb agreement, it’s v. its, and the like could prove to be important in your future career trajectory.  In that spirit, there was a nice piece in the Wall Street Journal this past week bemoaning the poor grammar and language skills of the workforce, including this nice interactive feature.

Now should the tag be “get off my lawn” or “get off of my lawn”?

And should that be in italics instead of quotations?

And should that question mark be inside or outside of the quotation mark?

And can I start a sentence using and? 

UPDATE:  Zing!  See much more here.

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.

Elinor Ostrom, R.I.P.

2009 Nobel Prize in Economic Science winner and political scientist Elinor Ostrom passed away this week.  Her contributions to solving common pool resource problems generated praise from both economists and political scientists.  In today’s The New York Times Economix blog, Catherine Rampell provides numerous links to help people understand her valuable contributions.

In particular, I encourage you to read Edward Glaeser’s review of the contributions of both economics prize winners in 2009:  Elinor Ostrom and Oliver Williamson.

 

 

Is it 1931 in Germany Again?

The article described below was published yesterday in Spiegel, a well known German periodical.

Economic historian Niall Ferguson (who typically takes a long term view of economic forces) and economist Nouriel Roubini (who some know as Dr. Doom for his prognostication in 2005 of the housing bust and subsequent financial crisis) have gotten together to argue that the  toxic mix of contemporary economic and political forces could generate both economic and political chaos for Europe.  They suggest a variety of steps that they believe could both resolve the unstable conflicts presently in existence and be palatable to all stakeholders, if they desire to sustain (or expand) the integration of Europe.   In brief there recommendations are as follows:

1.  Banks should be recapitalized by direct (rather than indirect) means  – similar to the TARP program in the U.S.

2.  A deposit insurance program should be constructed – similar to the FDIC program in the US

3.  Funding of 1 and 2 should be through means that minimize moral hazard burdens for tax-payers and avoid the creation of “too-big-to-fail” institutions.

4.  Fiscal austerity should be built into a long run plan but should not be implemented in the current economic context.

5.  Economic growth needs to be the number one priority.

6.  Public policy should employ all available tools – monetary, fiscal, barrier reducing, and infrastructure increasing – to boost income and consumption.

The article begins as below.  For the full piece, follow the link at the bottom of this posting.

The Perils of Ignoring History: This Time, Europe Really Is on the Brink
—————————————————————–

The European Union was created to avoid repeating the disasters of the 1930s, but Germany, of all countries, has failed to learn from history.  As the euro crisis escalates, Berlin should remember how the banking crisis of 1931 contributed to the breakdown of democracy across Europe. Action is urgently needed to stop history from repeating itself.

A Commentary by Niall Ferguson and Nouriel Roubini

Incentives Matter!

As many of have heard on numerous occasions, Steven Landsburg has argued that economics can be characterized by just two words: “Incentives Matter.”

Today’s Carpe Diem blog (provided by Mark Perry) provides some rich examples.

Some great examples of unintended consequences from the Wikipedia listing for “Perverse Incentives”:
1. In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats.

2. 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that the peasants dug up the bones and then smashed them into many pieces,greatly reducing their scientific value, to maximize their payments.

3. Opponents of the Endangered Species Act in the US argue that it may encourage preemptive habitat destruction by landowners who fear losing the use of their land because of the presence of an endangered species, known as “shoot, shovel, and shut up.”

4. In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass produced. Not surprisingly, most plants produced sheet glass so thick that one could hardly see through it. The rules were changed so that the managers were rewarded according to the square meters of glass produced. The results were predictable. Under the new rules, Soviet firms produced glass so thin that it was easily broken.

5. Private companies were paid to transport convicts/prisoners from the U.K. to Australia during the late 1700s and the early 1800s.  The first payment schedule was based on the number of prisoners who boarded ships in the U.K. As you might imagine, there was no incentive to deliver living prisoners to Australia, and many of them died during the trip, due to overcrowding, lack of food and water, unsanitary and unsafe conditions, untreated diseases, etc. The payment schedule later changed, and was subsequently based on the number of living prisoners delivered to Australia. Result?  Fewer prisoners died during transport.

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.

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.

How Would Keynes Solve the Eurozone Crisis?

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

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

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

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

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.

Film Fest: Latest Financial Crisis

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

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

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

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

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

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

What Should Central Bankers Do?

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

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

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

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

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

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

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

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

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

 

A Third Industrial Revolution: Innovation in Manufacturing

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

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

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

 

The Marketplace CAFE

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

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

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

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

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

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

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

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

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

Life in 2100

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

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

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

Deidre McCloskey on Keynesian Pessimism

Quotation of the Day…  from Cafe Hayek

Posted: 29 Apr 2012 05:01 AM PDT

… is from page 134 of Deirdre McCloskey’s 2010 Bourgeois Dignity:

During the 1930s and early 1940s the prospect of diminishing returns deeply alarmed economists such as the British economist John Maynard Keynes and the American follower of Keynes at Minnesota and Harvard, Alvin Hansen.  They believed that the technology of electricity and the automobile were exhausted, and that sharply diminishing returns to capital were at hand, especially in view of declining birthrates.  People would save more than could be profitably invested, the “stagnationists” believed, and the advanced economies would fall into chronic unemployment.  In line with the usual if doubtful claim that spending on the war had temporarily saved the nonbombed part of the world’s economy, they believed that 1946 would see a renewal of the Great Depression.

But it didn’t.  Stagnationism proved false.