General Interest

Category: General Interest

Blackout is Another Word for “Shortage”

No doubt you have heard (okay, perhaps I have some doubts) about the blackouts rolling across Texas this past week.  Blackouts occur, of course, because the quantity of power demanded at a point in time exceeds the quantity of power supplied, leaving some folks literally in the dark.   And out in the cold.

So, the key question is why power supply was insufficient.  Michael Gilberson of Texas A&M provides a preliminary analysis of why Texas power producers failed to meet demand.   The first reason is that it was very cold, so the demand for power increased.  The cold also caused the power to decrease (!) as power plants themselves suffered outages due to frozen pipes at large coal-fired plants (didn’t their mothers ever tell them to leave the water dripping?).

Actually, that isn’t really the first reason.  The real reason is likely Texas’ famous electricity isolationism; that is, the state deliberately lacks to infrastructure to export or to import electricity.  Why would they pursue such a policy?  To avoid federal (i.e., inter-state) regulation.

Here’s another explanation along the same line.

That electricity markets tend to be very complicated to understand, but supply and demand fundamentals are not.

Local Sports Team in Contest of Interest

Steely McBeam

The pride of the Fox Valley, the Green Bay Packers, will be mixing it up with my former hometown heroes, the Pittsburgh Steelers, at the Super Bowl.  The game will take place, weather permitting, this Sunday in balmy Dallas, Texas.

Although the contest itself is predominantly of interest to denizens of northeastern Wisconsin and southwestern Pennsylvania, many from across the nation and around the world will tune in for antics of the mascots (pictured), the often-irreverent commercials, the many wagering opportunities, or simply as an excuse to feast on some tasty snacks (despite some unexpected side effects).  Yum.

This year, we are also treated to some added intrigue by a number of touching personal-interest stories.  Or if you aren’t into Olympics-coverage style tearjerkers, perhaps you’d like to see how some famous movie directors have portrayed the Big Game.

Econ majors might be interested in some of the simple economics of the Super Bowl (summary here), such as secondary-market ticket prices (more than you think) and estimated economic impacts (less than you think).  You might also be interested to know that Green Bay punter Tim Masthay abandoned a lucrative career as an economics tutor at the University of Kentucky, where “he picked up anywhere from three to six hours a day as a tutor, helping student athletes … with economics and finance courses. That paid $10 an hour.”

$10 an hour?  Not bad.

I'll just have the salad

My allegiances here are more with the black-and-gold than the green-and-gold.  Indeed, earlier this year communications director Rick Peterson introduced me as “a big Steelers fan,” so there you have it.  I also made a friendly wager with Professor John Brandenberger on the outcome of the game (even spotting him the three points that the Packers were favored by at the time of the bet).   I have a feeling I’m going to be buying over at Lombardi’s.

Though my heart is with the Steelers, I’m guessing that the general spirit of the community and quality of the celebratory culinary fare will be better with a Packers win.

Update: World Still Not Flat (at least not income distribution)

The New York Times reviews The Haves and the Have-Nots, what appears to be a fascinating new book from World Bank economist,  Branko Milanovic.   In addition to the review, the Economix blog features this extraordinary representation of world income distribution by country:

Milanovic has broken income (adjusted for purchasing power) by country down into twenty “ventiles.”  So the lowest five percent of income earners are in the first ventile and the richest five percent are in the top ventile.  What this piece shows is that the poorest of the poor in America are in the 70th percentile of world income.  Compared with India — the average American in that first ventile has as much income (adjusted for purchasing power) as the richest Indian ventile.

I find that astonishing.

I also note with interest that there is a very steep ascent of the American distribution, indicating the poor here are really, really poor in relative terms, but the rest of the country is in pretty good shape.  The median income in the US in comfortably in the top 10% of world income.

But are we any happier?

Well, I’m pretty happy, but maybe that’s just me.

America Unhappier, Death and Divorce Make People Sad

Professor Gerard recently wrote about the views of Schumpeter and Stigler on Intellectuals. In the paper he cites, Stigler wonders why Intellectuals hate economics, and considers the possibility that our extremely technical field and extremely poor communication style might have something to do with it:

Less than a century ago a treatise on economics began with a sentence such as, “Economics is a study of mankind in the ordinary business of life.” Today it will often begin: “This un- avoidably lengthy treatise is devoted to an examination of an economy in which the sec- ond derivatives of the utility function possess a finite number of discontinuities. To keep the problem manageable, I assume that each individual consumes only two goods, and dies after one Robertsonian week. Only elementary mathematical tools such as topology will be employed, incessantly.” (Stigler: The Intellectual and the Market Place)

A paper I looked at recently reminded me of another reason why many Intellectuals look askance at us economists: the long and solid tradition of “economic imperialism.” That is, the tendency of a number of economists to think that our economist’s toolbox can be (and should be!) used to explain just about anything that reasonably falls under the heading “social science.” The paper I referred to is Well-Being Over Time in Britain and the USA by David Blanchflower, and the abstract includes this:

Money buys happiness. People care also about relative income. Wellbeing is U-shaped in age. The paper estimates the dollar values of events like unemployment and divorce. They are large. A lasting marriage (compared to widow-hood as a ‘natural’ experiment), for example, is estimated to be worth $100,000 a year.

I agree that research on happiness is very much relevant to economics, but I can just see a psychologist or a sociologist or a humanist read that and not know whether to laugh or to cry. (And what’s up with talking like Tarzan?) Blanchflower looks at survey data (essentially asking people whether they are happy or not) over the past few decades and then runs a bunch of regressions. There is nothing wrong with that, except for a dozen issues that cast doubt on the conclusions and that have probably been the subjects of extensive research in psychology, sociology, history, and maybe even economics. Without passing judgment on Blanchflower (about whom I know nothing), I am pretty confident in saying that a number of papers in economists have been guilty of applying economic tools to broader problems without bothering to understand the broader literature (you know, what those “soft” social scientists write).

Pro-Market v. Pro-Business

George Mason economist, and letter-to-the-editor writer extraordinaire, Don Boudreaux, has an opinion-editorial in the Christian Science Monitor explaining his distinction between public policies that are pro-business and those that are pro-market.

Economists (especially the free-market variety) – concerned always to keep outputs of goods and services as high as possible – typically defend business against counter-productive government interference. We economists do so, however, not because we have special fondness for business. We do so because we understand that government interference in business often results in fewer goods and services for ordinary men and women – as consumers – to enjoy.

In short, an economy’s success is best measured by how well it pleases consumers, not by how well it pleases businesses…

“Competition” sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition…

The irony is that such policies – which really should be labeled “crony capitalist” – are often labeled “competitiveness” policies. Because these policies increase the profits of some domestic businesses, they are mistakenly believed to make the domestic economy more “competitive” when, in fact, they make it less so.

This seems to me to be an important distinction.  I try to convey to you all that no one hates competition more than business does.  If you set up a profitable business, say, selling hot dogs on a street corner, the absolute last thing you want is a competitor to park her cart next to yours.

And, while we’re on the subject, don’t forget to join us for tea at 4:21 for Econ TeaBA.

Bilateral Trade Numbers Are Misleading At Best

On January 13, 2011, The Bureau of Economic Analysis in the the U.S. Department of Commerce reported that as of November 2010, the U.S.  trade deficit with China for 2010 amounted to $252  billion.  This number tells very little about the character of trade between the two countries.  It just captures the difference in final sales value of exports minus imports.   Pascal Lamy, director-general of the World Trade Organization, argues in today’s Financial Times that manufacturing products developed through a global supply chain of steps should be labeled “made globally.”  His comments include the notion that the Apple iPhone contributed $1.9 billion to the recorded US trade deficit with China, but that the value added in China from this product would come to only $73 million.  Other analysts have shown that the value added in China comes to less than half of the trade balance number published.

Furthermore, the Bureau of Economic Analysis published a report indicating that 55% of our imports are used in the U.S. to produce domestic goods and services.  Stated differently, these imports enable our companies and workers to be both productive and profitable.

Discussion of trade deficits without these detailed clarifications at best misinforms the public as to the economics of globalization; at worst, it encourages us to close our borders to (some) imports which would lead to both higher domestic prices and lower domestic output.  The effects on employment would be complicated but not positive in the aggregate.

The Principals are Your Pals

I’m a bit behind on both my reading and on updating this blog, so I wanted to point to a series of fascinating articles at David Warsh’s Economic Principals blog.  The first resulted from his trip to Denver for the American Economic Association meetings in early January, where he sensed a possible resurgence of interest in the history of economic ideas.  This possibly rings true for those of us plodding through Capitalism, Socialism, and Democracy this term.

Warsh followed up this dispatch from the AEA meetings with a most interesting piece on how the big brains of the profession are thinking about technological innovation and climate change. The piece starts with another dispatch from Denver, and traces its way back through the cold war to the RAND Corporation (and one of my heroes, Armen Alchian) and beyond.  The piece touches on the contributions of Kenneth Arrow and Richard Nelson, now are both familiar names to anyone interested in the economics of innovation.

And if that’s not enough, this week’s column looks at Paul Samuelson and hedge funds, another hat tip to the history of thought that includes David Ricardo’s Waterloo.  If nothing else, the blog seems to get its principals right.

I also continue to recommend Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery — an excellent pick for the summer reading list.

The Messy Path to Creating New Jobs

Carl Schramm, in a current blog entry in Forbes magazine, argues that job growth comes from the creation of new firms. Schramm is the president of the Kauffman Foundation and a strong advocate for the education of as well as the creation of an economy that encourages entrepreneurs.  We have many politicians arguing for job creation but few who understand where jobs come from.

Via the Faculty & Grants Newsletter

Brandenberger and Galambos strike again.  This via the Faculty & Grants Fellowships Newsletter:

This summer, the In Pursuit of Innovation course — co-taught by Professors John Brandenberger (Physics) and Adam Galambos (Economics) — received a two-year $23,000 grant from the National Collegiate Inventors and Innovators Alliance substantially to enhance the support for student projects and to fund guest speakers. Team projects play a central role in the course, and the NCIIA grant will allow students to dream bigger and to go further in pursuing their chosen innovations. It is expected that some teams will go beyond producing a prototype and will bring their idea close to being commercialized. The Innovation course, to be offered for the third time in Winter 2011, is one of the core courses of the Innovation & Entrepreneurship program, which is Lawrence University‘s model for integrating innovation and entrepreneurship into liberal arts education.

The program currently features three core courses that are to be complemented by additional topical courses dealing with environmental issues, politics, economic development, and other subjects that reflect interests of participating faculty. As a result of the program, several courses in economics as well as several courses in the arts will have newly added entrepreneurial components for the first time this year.

Invited experts also play critical roles in the program‘s core courses, including Innovation. These experts also help the program grow, expanding opportunities for students to engage in real-world entrepreneurship and innovation, through structured practical opportunities to take their course-based projects to commercialization, or internships in businesses or nonprofits that foster entrepreneurship or innovation. The NCIIA grant will help pay for travel expenses of several highly regarded experts who will contribute to the next offering of the Innovation course. The expectation is that students who take I&E courses will gain knowledge and cognitive skills that will equip them to be “change agents.” Combined with LU‘s emphasis on critical thought and information synthesis, the conceptual and practical knowledge gained through these courses will prepare students to undertake imaginative and ambitious innovative and entrepreneurial activities.

Some Interest in Inequality

Although we economists tend to be a “size of the pie” crowd, the subject of the causes and consequences of income and wealth inequality does not completely escape our notice.  Certainly, this has large political and policy implications, especially as inequality and political polarization seem to be proceeding in lockstep.

With that said, I’ve been sitting on these links for a while, waiting to read and digest them so I can say something pithy about them.  But, alas, with Capitalism, Socialism, & Democracy in my lap and Where Good Ideas Come From next in my queue, I don’t see that happening anytime soon.

So, here it goes:

Cowen presents a very provocative thesis, one that we should perhaps discuss over tea?

My favorite political science blog, The Monkey Cage, had an interesting symposium on Larry Bartel’s Unequal Democracy.  Worth a look if this is something that interests you.

Father of Deregulation Movement, Alfred Kahn

The deregulation of network industries in the 1970s is a puzzle for many political economists, as consumers generally benefited at the expense of entrenched, well-connected producers.  How did that happen?

One widely acknowledged answer is that economist Alfred Kahn, head of the Civil Aeronautics Board, played an influential role. Professor Kahn died this past week, and Thomas Hazlett has a brilliant piece in the Financial Times on Kahn’s influential role.

Those interested a more formal look at the benefits of deregulation might check out Clifford Winston’s 1993 JEL piece that scopes out the movement nicely.

And Kahn’s Ph.D. advisor was none other than Joseph Schumpeter.  How do you like that?

Class Struggle is Intensifying

I have finally started reading Capitalism, Socialism, and Democracy by Joseph Schumpeter. And now I simply can’t put it down. This has not happened to me with an economics book since I read The Road to Serfdom by Hayek. Schumpeter’s work is pure gold, prescient, wise, analytically crystal clear, and beautifully written (yes, every so often one must reread a paragraph-long sentence). I can’t wait to discuss the details in our CS&D reading groups.

The second part of the book is on capitalism, and Schumpeter make some arguments that seem decidedly Marxian, resembling conclusions that Marx “reached.” Which is probably why Schumpeter found it important to start the book with a first part on Marx’s work. Schumpeter’s critique of Marx is balanced, even generous, but penetrating. I have read before that Schumpeter succeeded best by far in putting Marx’s work in perspective, and now I can see how. (Not that I have much expertise on Marx.)  Yes, Schumpeter says, I reach some similar conclusions, but make no mistake, dear reader: there is a world of difference between how Marx got there and how Schumpeter did. And there is a world of difference between the implications of Marx’s “analysis” and Schumpeter’s.

I particularly enjoyed Schumpeter’s analogy between Marxism and religion. I have read others who make the same point, but Schumpeter makes it so much better. Marxism is not just a theory of economic change, but a theory of the world. And so it gives followers a lens through which they can see and interpret everything. The Witness is a Hungarian cult movie from the sixties on the Soviet system. In one scene, the head of the state secret police says, “whether you eat baked potatoes or pork roast, the class struggle is intensifying!” People quoted this phrase for decades to come in an ironical voice in comments on the political and economic situation. Yes, it is possible to see everything as a manifestation of class struggle. And once you see everything that way, it is difficult to think outside that system. Though I grew up in the last stages of goulash communism, I was to some extent exposed to that world view, partly in a very personal way. My great-uncle was a true believer in Marxism well before it was fashionable in Hungary. In fact, his own father was in and out of jail in the 1920s for being a communist. (At that time, right-wing Hungary’s police stations had copies of a thick black book—a list of undesirable, suspicious people to watch out for. My great-uncle’s father was listed as guilty of being a Communist and a Jew.) My uncle, after he came back from Auschwitz, got to work in helping build the communist future. He taught Marxism in evening classes to those who needed to be “educated.” And even though he lived through the many failures of that system, he remained a believer to some extent till the end of his life. Yes, Marxism offers a theory of why things are bad, who’s to blame, and hope for inevitable salvation.

EconTea!

Yes, it’s back! After the long break, aren’t we all starved for cookie, coffee, tea, and conversation? Well, I know I am, so I am bringing the cookies. And in an effort to make the holiday season last till Valentine’s Day at least, I am bringing some genuine, imported German holiday cake (“Stollenkuchen” for those who know). Come join us on Monday, at 4:21, in Briggs 217!

Is Facebook worth $50 Billion?

William Cohan (author of House of Cards and other books on the financial industry)  in today’s “Opinionator” in the New York Times opines that Goldman Sachs’ management of an expected IPO for Facebook reflects how the financial system has not really changed despite the most recent crisis.  Boom and bust cycles fed by cheap credit and poor incentives still rule.  Check it out.

Chair in Economics

Transaction Costs

Speaking of property rights, what do “shovel-earned parking dibs and intellectual property law” have in common? One answer is that in each case the producer may not be able to capture the full value of its efforts.  Without some sort of protection (a chair, a patent) someone else can come along and “appropriate” the value of your efforts. As Professor Coase would say, the “externality” comes from the high transaction costs of enforcing property rights.

The Cheap Talk blog contemplates this issue and even poses this puzzler:

I wonder how many people who save parking spaces with chairs are also software/music pirates?

See also our post on Pittsburgh last year, where failure to observe the law of the chair met with met with swift justice.  Indeed, back in Pittsburgh, people tend to respect the chair whether one shoveled or just woke up early.

Julian Simon vs. Paul Ehrlich: The “Bet” Revisited

In today’s New York Times, John Tierney not only revisits the famous bet between Simon and Ehrlich in 1980 but discusses the results of a bet that Simon’s wife and he placed with Ehrlich’s followers.  The question is an age old one: What will happen to the price of natural resources when economies grow?  Ehrlich argued that finite stocks of such resources would lead to rapidly rising prices.  Simon argued that human ingenuity and substitutes would keep such prices from rising very rapidly.  Ehrlich’s followers bet that the price of oil would rise to $200 per barrel by January 1, 2011 from $65 per barrel in August 2005.  Obviously, Tierney and Simon bet against.  You probably can guess who will win, but you should read the story anyway.

Our Annual Scrooge Endorsement

From last year: an oldie, but goodie.:

Before The Accidental Theorist, before Freakonomics, there was The Armchair Economist, and that’s Steven Landsburg.

In this Slate piece, Landsburg makes the case that Scrooge wasn’t such a bad guy, and that savings, in fact, might just be more virtuous than spending. To wit:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

You will know you’ve arrived as an economist when you can annoy your brethren by expounding on the virtues of Scrooge over the holiday season. For more pithy advice from Landsburg, we’ll be using his text in Economics 300 next fall.

See you there.

You might also want to check out the links at the O&M blog, including the fabulous Santa on leadership.