General Interest

Category: General Interest

Summer Reading Opportunity

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

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

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

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

Continue reading Summer Reading Opportunity

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

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

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

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

OCS BCA

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

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

Chicago Management Consultant Firm Offers Summer Internship

Productive Strategies, a marketing and sales consulting firm in Chicago, seeks a summer intern. The firm works with small, private companies as well as large, publicly held companies – in a wide range of industries. The firm features a small group, about 12 in total, with 3-4 members located in one office in Winnetka/Northfield, Illinois about 15 miles north of downtown Chicago. It is looking for someone to assist in the Winnetka/Northfield office with marketing and sales efforts, as well as to participate in occasional client assignments. The internship offers an opportunity to attend classes that they teach on developing relationship and selling skills (for free). Interns should have good computer and data entry skills. The volume of expected work probably will not require 40 hours a week – but more like 25-30 a week – week to week the workload could vary. Our website (ProductiveStrategies.com) provides additional background information on what the firm does.

The firm prefers someone from the Chicago area, as it cannot provide housing. It would pay a modest stipend at the end of summer based on the amount worked and contributions made and is very flexible on when someone would start and stop, as well as on time away from work. Finally, Productive Strategies would like to emphasize that its work environment is very low key.

Those interested should contact Terry Franke, Lawrence alum.

Terry Franke

Productive Strategies

Two Northfield Plaza #365

Northfield, IL 60093

tfranke@productivestrategies.com

847-778-7015 direct

847-446-0008 x7 office

ProductiveStrategies.com

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

Use back of page to answer if necessary.

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

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

And it doesn’t stop there at all.

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

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

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

Rogoff’s column is here.

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

Take Stock in BP?

Here’s a provocative thought:

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

There are a couple of things going on here.

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

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

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

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

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

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

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

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

Coming to an HBS Case Near You

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

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

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

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

The Capitalist & The Entrepreneur

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

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

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

Where?

On the internets, of course.

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

Costs of the Administrative State

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

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

Regulation Costs

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

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

Liability for Harm Versus Regulation of Safety

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

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

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

Point, Cowen.

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

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

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

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

Continue reading Liability for Harm Versus Regulation of Safety

Our Readers Respond

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

Captured?

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

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

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

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

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

Imagine that.

My heart’s on fire, OIRA

What could be more exciting than a full New York Times expose, complete with action photos, on the new OIRA director, Cass Sunstein?

Well, how about a blistering response from University of California professor, Brad DeLong?

Here we have yet another example of why law professors should simply not be allowed to practice law and economics or moral philosophy without a license–and of how Cass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics.

Both pieces are interesting reads alongside our work in Econ 280 this week on The Stern Review and William Nordhaus’s critique of it.

Wait, what’s that? You don’t know what OIRA is? Well, it’s the Office of Information and Regulatory Affairs, housed in the White House’s Office of Management and Budget. These are the folks who review agency regulations twice (!) during the federal rulemaking process. The OIRA is charge, among other things, with helping agencies to work through benefit-cost analysis — the source of Professor DeLong’s ire in this case.

So if administrative regulation piques your interest, this is your lucky day.

A Gallon of Prevention…

… is certainly worth a barrel of cure. Instead of having these guys with big yellow boots (I thought only 4-year old boys ran around in public in galoshes out of season), perhaps it would pay to have more egghead types crunching data on safety risk. That was the message I gave in both my classes this week, as we sat down to read Shultz and Fischbeck’s “Workplace Accident and Compliance Monitoring: The Case of Offshore Platform Inspections,” from RFF’s Improving Regulation. In that paper, they identify a set of factors (using factor analysis and a logistic regression model) that does a pretty good job of identifying the high-risk platforms. Pretty good compared to what? Well, certainly much better than random chance, and also better than the Minerals Management Service inspectors who were extensively interviewed for the project.

Neither Shultz nor Fischbeck have been in the press too much, but yesterday we finally did hear from one of them here:

Data problems date back at least a decade. According to John Shultz, who as a graduate student in the late 1990s studied MMS’ inspection program in depth for his dissertation, the agency’s data infrastructure was severely limited. “The thing I regret most is that, to my knowledge, MMS has not fixed the data management problem they have,” said Shultz, who now works in the Department of Energy’s nuclear program. “If you have the data you need, the analysis becomes fairly straightforward. Without the data, you’re simply stuck with conjectures.”

Anyone interested in taking a look at the Shultz and Fischbeck is welcome to contact me, for the paper or for a PowerPoint of their work. Anyone interested in doing research or an independent study related to transportation fuels regulation should also contact me.

There Will Be Tea

How about a milkshake? — Or perhaps a delicious milkshake?

After what is certain to be a grueling 240 exam, what better way to kick off a Monday night than a visit to the Economics TeaBA with economics faculty and students?

Remember, it’s TeaBA because, unlike other disciplines, we don’t want to lock ourselves into an inefficient technology in the event that relative prices change. In fact, given the warm weather, it might be a good time to switch to Iced TeaBA.

As always, the fun begins at 4:15 in Briggs 217.

OTC Genetic Tests Are Coming…

Well, that’s not quite accurate because over-the-counter genetic tests are already here. That is, if you consider that in the time it takes for me to type this post, I could, with an internet connection and a credit card, procure any number of genetic tests from www.23andme.com or a bunch of other companies.

Just don’t try to sell the kits at Walgreens.

Now obviously we’re not talking about your garden-variety paternity tests, which are available on pretty much any street corner these days for about thirty bucks, we’re talking the big test, the one that will tell you your predisposition for Alzheimer’s, obesity, or a physical attraction to Larry King.

Anyway, here’s the scoop:

Pathway Genomics announced Tuesday that its saliva swab would be on Walgreen’s shelves later this month, offering millions of Americans the chance peek into their genetic code for signs of inheritable diseases like Alzheimer’s.

But within 24 hours the company’s plan was met with stiff response from FDA regulators who said the products may run afoul of federal laws governing medical tests. On Wednesday, the FDA posted a letter to Pathways online, indicating the San Diego-based company never submitted its product for federal review, a requirement for medical devices.

I put my face in my hands at least three times while reading this article. We have a very curious regulatory state indeed.

The Grim Climate Change Arithmetic

Der Spiegel, a widely-read German publication, lays out the bad news this week with “How China and India Sabotaged the UN Climate Summit.” I’m not sure I agree with laying the blame at the feet of the developing world (I thought it was doomed form the get-go). Even so, the article quotes Chancellor Merkel, in a lucid moment, who puts things in perspective:

“Let us suppose 100 percent reduction, that is, no CO2 in the developed countries anymore. Even then, with the (target of) two degrees, you have to reduce carbon emissions in the developing countries. That is the truth.”

We talked about climate arithmetic a bit in class this morning in Econ 280. It’s very difficult to imagine a scenario where the US reduces its CO2 emissions enough even to stabilize “our share” of atmospheric concentrations. That is, reducing carbon emissions on the order of 50-80% of current levels. Of course, to stabilize global concentrations, the entire world would have to fall in line with such a strategy, and Der Speigel piece points out that this isn’t going to happen.

In other news…

Cap n Tax, Continental Style

A few weeks ago, Povolny Lecturer and funnyman Yoram Bauman stood up for the “cap and tax” proposal. He didn’t literally propose a tax, but emphasized that the higher price associated with the cap was the incentive to reduce energy consumption.

Capntax On the other side of the pond, there actually is a cap & trade system in place, and it is really all over the price. Carbon prices have ranged from €8 to €30, and the volatility can stymie long-term investments. In other words, there is likely to be an inverse relationship between carbon prices and the payoff to greener (or at least lower-carbon) energy sources. If investors don’t believe that carbon prices will be high, then green investments simply won’t be as attractive.

Enter the British Conservative Party, which has proposed a “Cap and Tax” of its own. The basic idea is that because of the tendency for carbon prices to bottom out, a carbon tax would kick in if permit prices went below a certain level. This would provide some stability to the market, as well as a potential revenue source.

That’s pretty clever.

Now, getting a government to make a credible commitment to a long-term tax is another story.

“HU-OOGE Paper Sellers Coming Through Here”

There seems to be some difference in the moment-to-moment intensity of an auction theory class and that of an actual auction. Especially when the S&P is amidst an epic tank.

As evidence of that proposition, here is the highly-recommended audio from an auction pit in Chicago. Sounds pretty exciting listening to a trillion dollars in wealth evaporate. So exciting, in fact, that I just set the “79s are trading” part as my ring tone.

I guess the LSB Chicago trip made it there a day late for this mayhem. I look forward to hearing all about it. Was there blood on the floor?

And, speaking of the Chicago trip, what is there to say about the level of awesomeness of the LSB program at this point? To quote Ben Lichtenstein from our audio clip, “Stop it, it’s got to hit a limit.”

(Picture taken from the Brokers with Hands on Their Faces blog).

Weber Grilled

A Ph.D. student at Harvard is taking on Max Weber (pronounced VAY – burr) over the whole Protestant work ethic thing. Davide Cantoni uses several hundred years worth of German data and finds no effects on economic growth. Here, I’ll let him tell it:

Many theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

So, for the econometrically challenged amongst you, that means he ran a lot of regressions a lot of different ways, and the religion variables don’t ever seem to matter.

Scratch that one off the Freshman Studies reading list.

Of course, we here at LU know a thing or two about the economics of religion. Just come by for TeaBA some time and we’ll tell you all about it.

“We deal with them by ignoring them until they happen, and then overreacting”

That’s the answer. The question is from a nice piece at Slate.com is: How do we deal with low probability, high consequence events? And the source of the quotation in this case is John Harrald from George Washington University.

The article is a pretty nice profile of what I would call risk regulation. I am pretty certain risk regulation is somehow different than regulating externalities, but I’m not sure exactly how and I’m not certain that there’s always a bright line. So, I’m asking my political economy class to figure this out for me.

One reason, of course, is that damages are determined in terms of expected values. Regulating low probability events with highly-uncertain outcomes and benefits is problematic indeed. Homeland security measures are notoriously difficult to even frame, let assign a “net benefit” to. How many incidents have our securities regulations discouraged or prevented? What bad things would have happened? What benefit would we have assigned to them? See, for example, this paper by Farrow and Shapiro on the analytical tractability of this problem.

So that gets us back to the original question, which is, should we think about the regulatory framework for the current oil spill fiasco in terms of regulating some sort of risk or internalizing an externality? And, does it make a difference which approach we take in terms of the types of regulations we would want?

All that said, I’m not sure we always wait until bad things happen and then overreact. In many cases, I would think there is excessive ex ante precaution that mitigates the intrepid adoption and diffusion of new technologies.

The good news is that these are exactly the sort of issues we grapple with in the Political Economy of Regulation course. The bad news is, I’m not sure how far we get with these problems.

Internship related to Sports Economics

The opportunity below must surely be one that you devotees of sports would salivate over. The WSDC seeks a student to do an economic impact study of the Badger State Summer Games to be held in the Fox Cities. If you are interested, please contact Jackie Jensen (no relation I assume to the former Boston Red Sox right fielder) and let me know.

Wisconsin Sports Development Corporation has an opportunity for a student or class to gain real-world experience in conducting an economic impact survey of the 2010 Badger State Summer Games held in the Fox Cities during the weekends of June 18-20 and June 25-27.

Wisconsin Sports Development Corporation (WSDC) is a nonprofit 501(c)(3) charitable organization devoted to fostering participation, competition and memorable experiences through our events and programs that promote health, active lifestyles and a sense of community. WSDC’s marquee event is the Badger State Games. The philosophy of the Badger State Games is that everyone plays regardless of age or ability. The Games embody the values of participation and good sportsmanship. BSG is Wisconsin’s only Olympic-style sports festival and is truly a grassroots organization that relies on the dedication of thousands of volunteers and the support of corporate partners.

WSDC wishes to ascertain the economic impact the Badger State Games has on the Fox Cities area. In order to do this the following steps will need to be accomplished (see attachments):

Review past processes, tools, timelines and reports
Revise, update or create new processes and tools
Create a timeline for implementation
Recruit and train volunteer staff as needed to implement the study
Collect and analyze appropriate data
Prepare reports and deliver presentations to various stakeholders – eg: BSG staff, board of directors, funding sources, and other constituents.

If you have a student or a group of students who would be interested in taking on this task, please contact Perron Nicholas at pnicholas@sportsinwisconsin.com or (608) 226-4780, ext. 238, for more information.

Jackie Jensen, SPHR

Director of Administration

Wis. Sports Development Corporation

(608) 226-4780, ext. 222

(608) 226-9550 – fax

Type here to search

Information For

Helpful Links