General Interest

Category: General Interest

Freaky Thursday

For those of you too lazy busy to read the primary research, too lazy busy to read the book, the Freakonomics movie is here. Incentives matter seems to be the theme — schoolteachers correcting their student’s lousy tests to improve their scores, sumo wrasslers fixing their matches, real estate agents selling too soon at too low of a price due to a misaligned agency problem, it’s all here.

Of course, there is nothing particularly “freaky” about Freakonomics.  Levitt has a theory, gathers evidence, and evaluates his hypotheses.  His greatness stems on the one hand from identifying interesting problems and using data in ways no one has thought of before.  In my own experience, his work on traffic safety and drunk driving are two sterling examples where he was able to exploit a data set that many, many people had been using for years in very novel and important ways.

Perhaps we can preview this during Schumptoberfest.™

Windy Wednesday

Robert Bryce gets on his soapbox and Slate.com and takes his shots at wind energy.   He argues that wind is unreliable, and that the opportunity costs of installing wind generation displace other infrastructure investments.  He cites the situation in the Lone Star State, which has been at the fore of installing wind power:

On Aug. 4, at about 5 p.m., electricity demand in Texas hit a record: 63,594 megawatts. But according to the state’s grid operator, the Electric Reliability Council of Texas, the state’s wind turbines provided only about 500 megawatts of power when demand was peaking and the value of electricity was at its highest.

Put another way, only about 5 percent of the state’s installed wind capacity was available when Texans needed it most. Texans may brag about the size of their wind sector, but for all of that hot air, the wind business could only provide about 0.8 percent of the state’s electricity needs when demand was peaking.

Certainly, because wind power only works when the wind blows, building wind capacity doesn’t reduce the need for other base load capacity.

And the wind capacity isn’t cheap, either.  Professor Michael Giberson over at Knowledge Problem has tracked the incidence of negative prices paid for wind.

Negative prices? Wha? Isn’t that the definition of cheap?

Not exactly. I’ll let him tell you:

This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid. These prices are a big anti-conservation incentive. You could, as a correspondent put it to me, build a giant toaster in West Texas and be paid by generators to operate it.

The giant toaster metaphor will be with me for a long time.

The logic is at the margin, of course.  If I pay (subsidize) a farmer $10 for every bushel he sells, we would expect him to be willing to pay, say, $5 to take it off his hands — a that is, he takes a price of -$5.  In 2008 in Texas, power prices were negative 20% of the time, indicating the power of prices to motivate behavior.  Indeed, producers were willing to pay up to about $3.50 per megawatt hour before shutting down.

But all hope isn’t lost.  This morning on NPR they talk about dealing with the “intermittency” problem (that is, the wind doesn’t necessarily blow when we need the power) with battery storage.  That is crucial.  If the wind blows a lot in March, but we use the energy in August, then it would be nice to be able to store what we have and use it when we need it.  An important question, then, is should we install this wind capacity before we crack the storage problem? Right now, the talk is of storing power for a couple of hours, not a couple of days or weeks, so, as we have seen in Texas, the baseload problem will remain acute even as renewable capacity rises.

I imagine this blog post will be recycled as more solar and wind generation come online.

Free Market Monday

The air temperature here in Wisconsin has settled down to humane levels, signaling the school year is nigh. So, to kick off our Free Market Monday, let’s check in with Guy Sorman at the City Journal on the origin of our current financial crisis.

Sorman interviews many of the heavyweights — Calomiris, Fama, Zingales, Cochrane, Taylor, and a host of others (including James Hamilton at EconBrowser, who I’ve never thought of as a “free marketeer”). If you recognize some of those names, it is clear that the emphasis here is mainly on the role of the financial sector.

Some interesting thoughts, including this coda:

Every economist I interviewed agreed that ballooning American and European debt poses a huge threat to long-term prosperity. The debt will be paid either through inflation, which would make everyone poorer, or—a far better scenario—through economic growth that would increase both individual and government revenues. Unfortunately, by increasing taxes and imposing the wrong regulations, Western governments are hindering entrepreneurship and hence growth, Cochrane says.

Ah, entrepreneurship and growth.  It’s all coming back to me now.

Is BP on the Big Bounce?

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

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

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

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

No Laffing Matter

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

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

Bend, Baby, Bend
Bend, Baby, Bend

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

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

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

Here are a couple of pithy responses:

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

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

Short run, long run, deadweight losses.

Good stuff!

Weekend Audio

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

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

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

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

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

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

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

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

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

Which Planet Are We On? Indeed!

Given the information in the statement, I would call it a “Capital Loss” special.  Nothing has been said about what happened to the general level of prices or about the purchasing power of the asset.  Without such information, one can say nothing very interesting about the change in the price of one specific asset.  It’s certainly possible that the price of an asset (call it shares of Lehman or Enron stock) can  fall with or without inflation or deflation.  I can’t tell what the purpose of the example is; hence, as Professor Gerard points out, Planet Money needs help.

They may need as much help as the US Senate who rejected Fed Board of Governor’s nominee Peter Diamond because he allegedly was not a macroeconomist.

Ah, those discerning folks who man our legislature.

Which Planet Are You On?

Fill in the blank:

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

Okay, what’s your answer?

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

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

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

Must be that solar eruption.

Incentives Matter. All Else Is Commentary Or Is It?

Economist Steven Landsburg recently argued that economics can be summarized in two words “incentives matter.”  He further noted that “all else is commentary.”  Tim Harford, author of The Undercover Economist, argues in today’s Financial Times that he accepts the notion that incentives matter, but “the devil is in the details.”  He chides himself and other economists (as well as bankers and policy makers) for not understanding the painful relevance of such detail.  In short, forewarned should mean forearmed.

The Wall Street Saga as Shakespeare Might Have Told It

In today’s Financial Times, John Kay crafts a Shakespearean characterization of recent life on Wall Street.  See if you recognize all of the characters.  If you want the details, read (or listen to) Andrew Ross Sorkin’s Too Big to Fail.  This one definitely falls in the “tragedy” category.

Wall Street play for which we pay

By John Kay

Published: August 3 2010 23:20 | Last updated: August 3 2010 23:20

King Sandy: a little known tragedy, comedy and history in five acts, by William Shakesdown. Based on ‘King of Capital: Sandy Weill and the Making of Citigroup’, a story by Amey Stone and Mike Brewster

Act I. Brooklyn. A dead tree stands to the right of a tumbledown brownstone house. The Brooklyn Bridge and the skyscrapers of Wall Street are in the background. Three witches greet the young boy standing on the front steps.

John Kay, columist

EDITOR’S CHOICE

“All hail to thee, that shall be boss of Shearson,” says one.

“All hail to thee, that shall be leader of Travelers,” says another.

“All hail to thee, that shall be King of Wall Street, thereafter,” says the third.

Young Sandy, shaken, ponders the implications as the curtain falls.

Act II. Manhattan. Sandy, his belongings in a bundle on a stick, crosses the Brooklyn Bridge to seek his fortune. He starts as a shoe-shine boy but his talent is quickly recognised and he becomes chief counsellor to the land of Shearson. He forges an alliance with the duchy of Amex, ruled by the patrician John Robinson. But the Duke resents the clever, uncultured, grasping Sandy and sends him into exile. “There is a world elsewhere,” Sandy proclaims.

Act III. Baltimore. Sandy and his brilliant lieutenant, Jamie, plot their comeback. Building a band of faithful Travelers, Sandy and Jamie move step by step towards Wall Street, finally storming the bastions of Salomon and Smith Barney.

Act IV. Washington and Manhattan. The triumphant Sandy is in a tent outside Washington. The omnipotent King John, Lord of the Citi, enters. Sandy and John agree to unite their kingdoms. Back in Manhattan, Sandy exiles the now too powerful Jamie, assassinates King John, and is proclaimed King of Wall Street.

In the final scene, the fool Grubman is seen playing his fife all the way up Manhattan from Wall Street. Followed by an admiring crowd, he distributes parcels of fool’s gold and internet magic.

Act V. Manhattan and Washington. The fool is exposed: his parcels are empty. He is banished. King Sandy, his reputation tarnished, is deposed. Under the regency of the Chuck Prince, the Citi is riven by competing baronies. The land of Lehman is pillaged by its own citizens. Barons mob the Court, shouting: “Where are our bonuses?”

The situation is calmed by the arrival of Barack the Great, newly elected emperor. His counsellors, Bernanke and Geithner, are at the head of a long train bearing all the treasures of the Americas. The barons break open the chests and rush off with the treasure. Jamie, returned from exile in Chicago, is crowned new King of Wall Street.

***

At the medieval courts Shakespeare described, the exercise of power was not a means to an end, it was itself the end. Kings and barons sought principally to extend their territory. If they occasionally claimed that the purpose was to bring the benefits of their wise rule to a wider public, the assertion was little more than a smokescreen for personal ambition. The rulers aimed to be exalted as rulers of wider domains and to levy taxes on ever more peasants. The political and economic environment has been transformed. But human nature has not, and the factors that drive powerful men today are little different from those that drove them five centuries ago.

The fine robes of Shakespeare’s princely characters were paid for by the work of the peasantry, the men and women who tilled the fields and garnered the crops. Their labours yielded revenues to support lifestyles entirely disconnected from their own experience, people who knew nothing of agriculture and cared less, and whose activities were sometimes disruptive to day-to-day economic activity but mostly irrelevant. Once there were sowers and reapers, now there are bank clients and factory workers; once there were palaces and carriages, now there are McMansions and private jets. Much has changed, yet much remains the same.

Juice-y Empirical Analysis

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

From the abstract:

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

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

Doink!

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

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

Here’s a nice summary at Slate.

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

Does Moneyball Apply to Kindergarten?

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

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

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

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

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

Also see The Economist‘s brief writeup.

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

Surprise! Paul Krugman Begs to Differ.

For those of you who wish to see a response to Rajan’s  (and my) argument posted earlier today, Paul Krugman in a NY Times blogpost makes the standard Keynesian case for full fledged stimulus.  He even criticizes our hero Schumpeter.  The battlelines are drawn between short term and long term thinking.

Ultra low interest rates: At what cost?

Macroeconomic stabilization policy seems to have only two primary levers: interest rates and budget deficits.  Many  economists believe that we have used these tools to the limit and have not faced the structural changes (read microeconomic) our economy requires.  A cheap credit policy has fueled much of the growth of the past 25 years and especially in the past decade.  Consequently, when income generation becomes insufficient to pay the related debt service, our fragile economy stumbles.  We cannot continue to revert to cheap credit as the way to stable growth.

Raghu Rajan, in both an opinion piece in today’s Financial Times and in his marvelous book, Fault Lines, argues that ultra low rates (in both nominal and real terms) encourage allocation of capital into housing and cars but do little to help sustain long term economic growth.  In Chapter One  of Fault Lines, entitled “Let Them Eat Credit”, Rajan claims that United States policy makers (of all stripes) have used cheap credit as a way to assist low and moderate income groups with consumption to mask the growing income gap between these groups and higher income groups.  Abundant savings from  Asia in particular, as a response to IMF conditionality in the financial crisis of the late 1990s, has enabled the US to pursue such a low rate policy.  If Asians follow our advice and dramatically increase domestic consumption, the low rate policy will not be sustainable and the weaknesses our economy will become more evident.

Energy Independence: At What Cost?

Don Boudreaux at Cafe Hayek argues persuasively that energy independence and comparative advantage are not likely to be compatible for the U.S.  If we wish to specialize in energy production, it will be more expensive in terms of economic welfare than importation; thus, we must either accept a lower standard of living or import something else.  What makes energy so special that we should not trade for it?  Should we instead import more food, pharmaceuticals, or technology, for example.  In short, the doctrine of comparative advantage suggests that we specialize in things that we are particularly adept at producing and trade for other goods and services.

In his classroom talk in April, Yoram Bauman posed two questions

1.  Are you fearful that we will run out of energy (especially from carbon based sources)?

2.  Are you fearful that we will not run out of energy from carbon-based sources?

Higher prices can ensure that the first won’t happen but not the second.  Concerns raised by positive answers to the second question won’t be addressed until we have a price for carbon-based energy that is higher than for clean fuels.  Certainly, energy independence (i.e., no importation of carbon-based fuels) will lead to higher prices, but it also would be a very expensive way to achieve the result as the domestic price would have to rise enough to clear the domestic market.  It’s not clear, however, that this would be a price that internalizes the greenhouse gas effect.

It’s a (Very Exclusive) Jungle Out There

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

Wow. I wonder what that means?

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

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

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

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

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

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

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

It’s probably more complicated than that, though.

The Price is Right? UPDATED, TWICE!

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

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

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

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

I think Yoram Bauman is right – choices are bad.

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

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

Going Mobile

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

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

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

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

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

Surely make you lose your mind…

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

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

What’s the down side?

Should the Government Target Specific Industries?

Since at least the era of Alexander Hamilton and Thomas Jefferson, economists and policy makers have debated about the appropriate role for industrial policy; that is, the use of subsidy, tax, and regulatory policy to allocate capital.  The alleged “success” of Japan’s Ministry of Industrial Trade and Industry in the 1950s and 1960s found many advocates for government directed allocation of capital and funding.  Most recently, Andy Grove, former CEO of Intel,  strongly advocated a targeted focus on manufacturing.  Many others, and the vast majority of economists, argue that  governments are not better than markets at allocating capital and that subsidies for some require higher taxes for others.  They also argue that entrepreneurial efforts are channeled at attracting politicians rather than producing new products and attracting customers.

The Economist recently completed an open debate on this subject.  I encourage all to read the two sides and see which you find most persuasive.