General Interest

Category: General Interest

The BP Spill Revisited

You may recall the Deepwater Horizon spill, that sent some five million barrels of oil into the Gulf of Mexico between April and July of 2010.  At the time, we posted about it extensively, and linked up an  Econbrowser post that estimated that within two weeks the stock market had already dinged BP to the tune of $20 billion:

The adjusted closing price of BP on May 4, 2010 was $51.20 whereas had the oil spill not happened I’ve estimated the price would have been $58.11. This amounts to a net loss of $6.91 per share. BP has 3.13 billion shares outstanding amounting to a net loss in $21.62 billion.

That estimate turned out to be almost exactly what BP seems to have committed to its oil spill trust fund:

BP, in agreement with the US government, set up a $20-billion trust to provide confidence that funds would be available. The trust fund was established to satisfy claims adjudicated by the Gulf Coast Claims Facility (GCCF), final judgments in litigation and litigation settlements, state and local response costs and claims, and natural resource damages and related costs.

In 2011, BP contributed a total of $10.1 billion to the fund, including our second year commitment of $5 billion to the trust and the cash settlements received from MOEX USA Corporation (MOEX), Weatherford US., LP (Weatherford), and Anadarko Petroleum Company (Anadarko). This brings the total amount contributed to the trust to $15.1 billion. The remaining committed contributions totalling $4.9 billion are scheduled to be made in 2012 which includes the $250 million settlement with Cameron. The trust disbursed $3.7 billion in 2011 and the total paid out since its establishment amounted to $6.7 billion by the end of 2011.

However, the stock price did not stop at $50, but continued a free fall down to about $35, a price so low that there was speculation that BP stock was undervalued and ripe for takeover. Continue reading The BP Spill Revisited

Another Solid ENST Talk

Via Prof. Brozek for those of you interested in knitting &/or ice.

_______

Science, Journalism and Knitting on Ice: My Six-week Adventure in the Bering Sea

Helen Fields

Steitz 202, Thursday

April 26, 4:30-5:30 p.m.

Helen Fields has written for Smithsonian, National Geographic, Science, and other publications. In 2009, she spent a month and a half aboard a U.S. Coast Guard icebreaker off Alaska, following scientists around while they did research on the ecosystem of the Bering Sea as part of a massive multi-year collaborative project. Her essay about the experience, along with Chris Linder’s photography, was recently published in Linder’s new book, Science on Ice: Four Polar Expeditions (University of Chicago Press, 2011).

 

A New Fracking Rule

Just in time for Earth Day, the Environmental Protection Agency (EPA)  issued a final rule on hydraulic fracturing (a.k.a. “fracking”) this past week.  Remarkably, it looks like the rule passes a benefit-cost assessment without even quantifying any benefits.  Why is that?

On the one hand, it isn’t clear what the benefits are.

While we expect that these avoided emissions will result in improvements in air quality and reductions in health effects associated with HAP, ozone and particulate matter (PM), as well as climate effects associated with methane,we have determined that quantification of those benefits and co-benefits cannot be accomplished for this rule in a defensible way. This is not to imply that there are no benefits or co-benefits of the rules; rather, it is a reflection of the difficulties in modeling the direct and indirect impacts of the reductions in emissions for this industrial sector with the data currently available.

The more remarkable result is that the costs are negative.  That is, the agency projects the industry will save millions of dollars by complying with the regulations. And, why is that?

The engineering compliance costs are annualized using a 7-percent discount rate. The negative cost for the final NSPS reflects the inclusion of revenues from additional natural gas and hydrocarbon condensate recovery that are estimated as a result of the NSPS. Possible explanations for why there appear to be negative cost control technologies are discussed in the engineering costs analysis section in the Regulatory Impact Analysis (RIA).

Notice they are discounted at a (real) 7 percent rate.

Here’s the table: Continue reading A New Fracking Rule

1.4 Billion Reasons, Tuesday April 24 at 6:30

A note from Patrick Pylvainen:

                                         

Students Engaged in Global Aid (SEGA), together with GlobeMed, is bringing a speaking event to campus called 1.4 Billion Reasons. This presentation is put on by the Global Poverty Project, and is a traveling speaking event that goes to universities, churches, and other meeting places to bring the issue of global poverty to the forefront. The goal is to engage and inspire audiences to understand and get involved in the movement to end extreme poverty.

The presentation is built around five sections:

  • What is extreme poverty?
  • Can we do anything about it?
  • What are the barriers to ending extreme poverty?
  • Why should we care?
  • What can I do?

The event is Tuesday at 6:30 in the Wriston Auditorium.

Taking Care of Business OR Bad Company?

I was just going through some work on the economics of higher education, and I came across this remarkable piece of scholarship* estimating the effect of studying on grades.  What a concept!

Of course, one would expect (or would hope to expect) that more studying results in higher grades, but how much studying and how much better? Can studying really make up for a lack of high school preparation or a deficit of intellect? Can smart kids really skate through?

Using data from Berea College, Ralph and Todd Stinebrickner provide a very, very nice framing reference for the relationship between incremental study time and the endowment of “book smarts” (measured by ACT scores):

[H]uman capital accumulation may be far from predetermined at the time of college entrance. For example, using results from our full sample, an increase in study-effort of one hour per day…is estimated to have the same effect on grades as a 5.21 point increase in ACT scores.

So while on the one hand hitting the books is certainly a plus, danger lurks around every video console:

In addition, the reduced form effect of being assigned a roommate with a video game is estimated to have the same effect on grades as a 3.88 point decrease in ACT scores.

Ouch.

For those looking for good examples of empirical work, this is a very high-quality example.  This seems to have “Senior Experience” written all over it.

 

* Ralph Stinebrickner & Todd Stinebrickner, 2008. “The Causal Effect of Studying on Academic Performance,” Frontiers in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1)

Coase Goes to China… Literally

Back in 1937 Ronald Coase asked a question fundamental to the economics of organizations — why are there firms?  Then in 1960 he pointed out that externalities stem from the reciprocity of the relationship between harmer and harmee, and that the failure to negotiate and enforce contracts is fundamental to the persistence of “externalities.”  As he says in his essay in “The Nature of the Firm: Influence“:

Transaction costs were used in the one case to show that if they are 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 (62). 

For these seminal contributions he picked up the Nobel Prize in Economics in 1991 and shortly thereafter helped found — along with Douglass North — the International Society for the New Institutional Economics.

Now, in 2011, he asks the questions, how and why did China go capitalist?  And here comes the book later this month.

China’s road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a “modern, powerful socialist country.” The other, more important, one was the gross product of what we like to call “marginal revolutions.” It involved a concatenation of grass-roots movements and local initiatives.

Here’s some more.

There’s a lot of New Institutional Economics work on China, by some very heavy hitters.

 

The Triumph of the City

The above title is not just the title of Edward Glaeser’s book, which Econ 250 (Urban Economics) students will discuss later this term.  It’s also the theme of New York mayor Michael Bloomberg in a commentary in yesterday’s Financial Times.  Bloomberg argues that more than half of the world’s population presently lives in cities and that people in these places generate roughly 80% of global GDP.  As a result, he claims that “cities cannot afford to cede their futures to national governments.”  They must think about what makes them  competitive – a topic that is at the center of Econ 250.

Bloomberg goes on to argue that “for cities to have sustained success, they must compete for the grand prize: intellectual capital and talent.”  This theme echoes Glaeser’s focus on the skilled city.  Why is this important?  Glaeser shares Bloomberg’s view “that talent attracts capital far more effectively and consistently than capital attracts talent.”  Glaeser points out that cities should give priority to spending money on building human capital and fostering innovation and entrepreneurship rather than on new structures and transportation technology.

Bloomberg goes on to discuss what continues to make New York attractive and, at least according to one study, “the most competitive city in the world.”  He concludes “cities must be cool, creative, and in control.”

Keynes Hayek: Fight of the Century

Really?

For this term’s community read, we follow up on last term’s Keynes, Cowen, & Capitalism with two books.  The main course will be Nicholas Wapshott’s Keynes Hayek: The Clash that Defined Modern Economics, featuring the co-evolution of the legacies of John Maynard Keynes and F. A. Hayek.  Indeed, frequent readers of this blog or the economics blogospher generally are likely familiar with what I like to call “The Citizen Kane of macro battle rap videos.”

Here’s an excerpt of Tyler Cowen’s review.

Here’s Wapshott talking about his book with co-creator of the Keynes v. Hayek videos, Russ Roberts.

We will also read sections of Todd Buchholz’s now classic, New Ideas from Dead Economists, which should help us put some of this history in context.

As per usual, the course is one unit and requires you to read and to discuss. Please stop by and sign up this week with Professor Galambos or Professor Gerard.  We need to get a head count and set a meeting time.

UPDATE: 391 DS — Keynes, Hayek and Other Dead Economists.  Sign up sheets pinned on our bulletin boards.

We will meet Thursdays at 3:25.

 

 

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.

 

Abundance, not Stagnation, Characterizes the Future

If you believe that Tyler Cowen has appropriately declared the end of serious economic growth in the so-called “developed world,” check out the work of Peter Diamandis.  If you fervently disagree with Cowen’s view, also check out Diamondis.  In Abundance, the Future is Better than You Think, Diamondis (with co-author Steven Kotler) calls upon human ingenuity and innovation as the drivers of future abundance.  No Peak Oil here.  He reminds me of Julian Simon (the Ultimate Resource ) who challenged Paul Ehrlich (The Population Bomb) in a famous 1980 bet on the price of various metals and natural resources.  Spare the 16 minutes it takes to watch Diamandis give a Ted talk.

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?

What Did Larry Summer’s Say About Women’s Ability to Succeed in the Sciences?

Last Thursday at our weekly discussion of specific works in economics, we discussed Backhouse and Bateman’s book, Keynes: Capitalist Revolutionary. At one point in our discussion, Professor Gerard asked which economist today might be viewed as Keynes was in his heyday.  One reasonable answer was Larry Summers who, as noted here, has held numerous positions including the presidency at Harvard University.  Are there other reasonable answers?  I think so.  Paul Krugman might be a good candidate for a “contemporary” Keynes.

Despite interest in who might be today’s Keynes, this posting addresses remarks that Summers made January 14, 2005 at the NBER Conference on Diversifying the Science & Engineering Workforce.  Asked to be provocative, Summers did not disappoint.  What did he say? I strongly encourage you to read the full speech (go here) which contains carefully constructed cautions and references. He posits, in order of strength, three reasons why women are less prominent in scientific fields.

1. Differences between men and women in terms of their willingness to make the incredible time commitments of high powered jobs.

2. Differences between men and women in “availability of aptitude at the high end”

3. Differences between men and women in terms of socialization and patterns of discrimination.

The controversy focuses on the second reason which he states more fully as follows:

It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability-there is relatively clear evidence that whatever the difference in means-which can be debated-there is a difference in the standard deviation, and variability of a male and a female population.

Stated differently, he presents some evidence for the claim that there are more males than females at both the high and low end of the distribution of mathematical and scientific ability.  This is a statement about variance, not about means. I believe, as does Claudia Goldin, “whose own research has examined the progress of women in academia and professional life” , that Summer’s arguments are constructive food for thought and deserve serious reflection.

My suspicion is that few people have read Summers’ remarks but have settled for the soundbites that have found their way into the popular media.  A liberal arts education should encourage you not to settle for these inflammatory simplifications.

 

 

 

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.

The Late, Great Bubba Smith

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.

Is 2013 a Ripe Time for Fundamental U.S. Tax Reform?

Yes, trumpets Lawrence Summers in today’s Financial Times. Presumably, anyone who pays any attention to the Washington scene knows Larry Summers.  Just in case you haven’t been paying any attention for the past 20 years, the bullet point version of Summers’ CV might read as follows:

  • Harvard Professor of Economics
  • Chief Economist of the World Bank
  • Secretary of Treasury under President Clinton
  • President of Harvard University
  • Chief Economic Adviser to President Obama

Few people – economists, policy analysts, or politicians – defend the current tax codes filled with huge inequities in both horizontal and vertical directions (as argued here.)  Tax “loopholes,” tax expenditures (CBO estimates), or societal preferences – if you care to be generous – reduce taxable income by at least $800 billion per year.  Stated differently, if all special provisions (i.e., everything but the personal exemption) of the U.S. tax code were eliminated, income tax revenue would rise to at least $2 trillion and cover about two-thirds of the estimated U.S. Federal deficit for 2012.

So what makes 2013 so special?  Summers gives a variety of intriguing answers including the following:

  • President Bush’s tax cuts expire
  • Congress faces its mandated sequester of $1.2 trillion spending for the next decade
  • Congress must again vote on the legally binding Federal borrowing limit
  • Fundamental reform can happen in the year after a Presidential election
  • The last serious tax reform took place in 1986 (when a Republican President reached agreement with a Democratic legislature)

As Summers argues,equity, efficiency, and budgetary reasons all dictate that we need to fundamentally reform the tax structure.  The longer we wait, the more difficult the choices will be. If (when?) the rest of the world decides it no longer has a voracious appetite for U.S. Treasuries, our choices will be much more painful.  He argues, and I agree, a good place to start would be the recommendations of the Simpson-Bowles Commission appointed by President Obama, which unfortunately in my view, he chose not to back vigorously.

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?

Whose side are you on?

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.