General Interest

Category: General Interest

Reading Break

As per usual when winter break hits week three, my phone is ringing off the hook* from students asking me for my reading suggestions.   So, here you go:

Charlie Calomiris and Steven Haber in Foreign Affairs, “Why Banking Systems Succeed — And Fail.”   It’s worth it for this gem alone: 

As George Bernard Shaw wrote, “The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” Meaningful banking reform in a democracy depends on informed and stubborn unreasonableness.

Mike Veseth “Deconstructing and Disentangling the Disintermediation of the Wine Business.”  Professor Finkler turned me on to this nice piece on cutting out the middleman from The Wine Economist himself.   I should really read Wine Wars, which looks rather fascinating.   My grossly under-informed musings on the coming “wine shortage” here.

I just received William Nordhaus’ The Climate Casino: Risk, Uncertainty, and Economics for a Warming World in the mail and it seems like I should take a look at (though the audience seems to be the informed general audience rather than for academic economists).   It seems probable that I will adopt chunks of this for ECON 280 this Spring.  Nordhaus is the incoming president of the American Economics Association (!), so he has plenty of street cred among economics types.  Among the environmental crowd he is famous for his DICE and RICE models, and is certainly one of the most influential economists working  on matters of thinking about global climate change.  Paul Krugman was Nordhaus’ RA back in the day!  There is a high probability that I will offer this as a reading group option next term.

Speaking of Reading Groups, don’t sleep on The Great Leap Forward: 1930s Depression and US Economic Growth, the principal source material for this year’s Senior Experience read.    

And, last for this installment, I finally started making my way through Science Mart: Privatizing American Science.  Wow, this is an experience. If this looks good to you, let me know and we can talk.

*Well, maybe not “off the hook,” but I did get one email.

A College President Rates the New College Rating System

President of Randolph College, Brad Bateman, is an economist and a long-time champion of the liberal arts, and is someone with a great perspective on the current landscape in higher education.  So, I was both pleased and not-so-pleased to see his op-ed in Wednesday’s New York Times on the new Department of Education project to develop a new “value based” college rating system. President Bateman says this could have the paradoxical effect of making colleges that “already have the most experience with helping low-income students may end up looking like a poor choice.”  

Why would that be? 

As a good economist, Bateman walks through the incentives such a system sets up and argues that (like with the US News rankings) it will likely fall victim to what we economists call the good old multi-task principal-agent problem. That is, if you get rewarded for having high graduation rates, make sure that you only accept students with a high probability of graduating.  Colleges that currently work with higher-risk students may well “improve” their rating by simply not letting these kids in.  I think we have an endogeneity issue.  

I will put him down in the “not a fan” category:

There is no way to accurately reduce the complex issues in higher-education quality — graduation rates, loan debt, percentage of Pell grant recipients, lifetime income — to a single rating number.

I am persuaded by his argument and I also agree with his solution:

The White House could make all the data it thinks is important available on a searchable website. Rather than attempt to reduce the information to one number, or to rate schools against one another in an arbitrary way, the administration should make many types of data easily available and let people rate schools for themselves.

Those of you who have been around for a while may recognize President Bateman from his visits to the LU campus.  He was our first Senior Experience speaker with his talk on Keynes and the Crisis of the Welfare State, and he returned to Lawrence last year to give a TEDx talk on undergraduate advising.

So, I am pleased to see President Bateman with an op-ed in the Times, but not-so-pleased that he had to write it in the first place.

Back Off, Man, I’m a Scientist

Political Science
Say it aint so…

I picked up a recent New Yorker and was astonished to find a lengthy review article on the social science work measuring the polarization of American politics.

The piece features work by Keith Poole and Howard Rosenthal, who (along with co-author Nolan McCarty) have created a cottage industry by using roll-call votes to map politician preferences (see the very cool VoteView page for many of the gory details).

I have been following this work since I read their chapter in Goldin & Libecap’s edited volume, The Regulated Economy: A Historical Approach to Political Economy, back in grad school, and I have Political Bubbles in the queue on my “to read” shelf.  Yum.

Of course, aside from the New Yorker piece, these are a bit heady for holiday reading, so perhaps just consult SMBC for your political economy needs.

The FOMC (Federal Reserve Open Market Committee) Meets at Lawrence

No, this is not April Fool’s Day.  Tomorrow’s Money and Monetary Policy class  will host Lawrence alum and Federal Reserve

Jim Lyon

Bank of Minneapolis’ First Vice President Jim Lyon (9 – 10:50, Briggs 217).  During the first hour, Lyon will discuss the Dodd-Frank Financial Reform Act passed in 2010.  He will detail how far along the implementation process is as well as what we can expect to happen.

During the second hour, Lyon will put on his “Ben Bernanke hat” and chair a shadow meeting of the FOMC. Students in the class will present the views of the other members of the Board of Governors of the Fed as well as those of the bank presidents of the 12 regional Federal Reserve banks.

You are welcome to attend these awesome proceedings.

Sour Grapes Make the Best W ine

Future shortages will continue to plague the world in the minds of the pundit class, with the latest being The Atlantic story on the great on-coming  wine “shortage.”

Citing Morgan-Stanley research they find:

Data suggests there may be insufficient supply to meet demand in coming years, as current vintages are released.

Now here’s the punchline: the piece features four graphics showing production and consumption data and zero containing price data.

My favorite is below.  It appears that they left out the “h” in wine.

global whine
The Grapes of Wrath?

I am going to go out on a professional limb here and predict that two years from now I will be able to stroll into a Wallgreens confident that I will be able to pick up a bottle of wine on the way to dinner.

The caveat, of course, is that it might be a bit pricier.

How much pricier, you ask?

A quick eyeball on this graph suggests that the production shortfall is about 10-15% lower relative to 2010, when production and consumption were somewhat equal.  So, of the few hundred wine elasticity estimates available, let’s assume a price elasticity of demand for wine in the -0.5 and -1 range.  This implies that a$10 bottle of wine will be going for $11-$13 when the “shortage” hits.

Of course, the higher prices are likely to induce either entry or expanded production, so I somehow doubt either the shortfall or the price increases will be long lived.  And, two years from now the wine shelf will look pretty much like it looks today.

What’s somewhat discouraging is that it took me about a minute to convince myself that there is no shortage in any true sense of the term looming.  Yet, pretty much every major news outlet has picked up the story and run with it.

Well, consider this another clear arbitrage opportunity!

Advising at Lawrence

It is customary during Fall Reading Period for freshman and other new students to meet advisees.  But why?  What is the role of advising at Lawrence specifically and in the liberal arts more generally?

I give you Professor Galambos’ Guide to Advising posted and hosted on the Economics website (and endorsed by the economics department).

Last Spring Bradley W. Bateman addressed the topic directly in a TEDx talk right here at Lawrence.  Bateman is the President of Randolph College and formerly a Professor of Economics at Grinnell College, where he was my undergraduate advisor (!).

Nobel Prize Committee Covers Its Assets

The Nobel Prize in Economics goes to Eugene Fama, Robert Shillier, and Lars Peter Hansen for their work on asset pricing.   Fama is well-known for his empirical work on the Efficient Market Hypothesis, as well as work corporate finance (or any organizational finance, really).  He has a half dozen articles with north of 10,000 citations.  Zoinks.   Shiller is a well-known behavioral guy who writes about market volatility and asset bubbles (are those inconsistent with the EMH?).  You might know him from the Case-Shiller housing price index we’re always reading about.  I don’t know much about Hansen, beyond the generalized method of moments business.

I’m sure there’s no dearth of news reports on these guys.  Marginal Revolution has a thousand words on each today. 

Once again, there was no winner in the Pick the Nobel contest, meaning the fabulous prize package will roll over to next year.

The 3rd or 4th Predict the Nobel Prize in Economics Competition

Nobel
Any News?

It’s that time of year again, where I (sometimes) remember to post the Vegas odds on the Nobel Prize in Economics.  Here are the venerable Thomson Reuters predictions:

  • Joshua D. Angrist (MIT),  David Card (UC-Berkeley), and Alan Kreuger (Princeton) for their advancement of empirical microeconomics
  • Sir David F. Hendry (Oxford), M. Hashem Pesaran (Cambridge), Peter C.B. Phillips (Yale) for their contributions to economic time-series, including modeling, testing and forecasting
  • Sam Peltzman (Chicago) and Richard A. Posner (Chicago) for extending economic theories of regulation

 The Wall Street Journal fleshes out some of these predictions, and basically splashes a who’s who on the Large Guns in the profession.  Here is a taste: 

If the award is for work on financial crises, banks, liquidity and regulation,Douglas Diamond of the University of Chicago Booth School of Business andPhilip Dybvig, of the Olin School of Business at Washington University, St. Louis, are headliners. In 1983, the pair wrote a seminal paper spelling out why bank runs happen. The authors explained that deposit insurance could reassure customers and keep them from panicking and pulling their money out en masse.

Who knows?   I seriously doubt Peltzman and Posner would get it, though now that Posner has backed off some of his more severe positions, perhaps he’ll get a look.  Peltzman has been a very influential empirical economist, so it is conceivable that he would wind up in that first group.

Daron Acemoglu seems a bit young, though he is a clear future favorite, so I will go with the indomitable Philippe Aghion. 

Send me your picks or put them in the comments.

 

What Will Happen if the Treasury Runs Out of Cash as a Result of Reaching Its Borrowing Limit? The President Will Have to Break the Law. The Only Question is Which Law.

In  yesterday’s Economix blog, former Reagan and GHW Bush administrator Bruce Bartlett addressed the possible options.  Below is a crisp summary of the details.  Read his full post for more.

1. The debt limit is public law.

2. Appropriations (passed by the Congress) are also public law.

3. Entitlement programs (such as Social Security and Medicare) are public law.

4. The Prompt Payment Act, which requires that obligations be paid when they come due, is public law.

Result:  something has to give.

5. Treasury can’t easily determine which bills to pay or not pay. It does not have sufficient information to determine priorities.  Various departments and agencies would need to set such priorities.  This, however, would be difficult since it would take time to do so and many staff members required to provide input have been furloughed.

6. To enable prompt payment, Treasury has established processes “to make payments when they are due, whether the cash is there or not.”

7. As a result of point 6, obligations are likely to be paid in order of due date as cash becomes available.

8. If 7 holds, some bondholders will experience a delay in receipt of payment, but this means the security would be classified as “non-performing.”  As Bartlett puts it.

Treasury would now be in default, and defaulted securities cannot be traded, accepted by the Federal Reserve as collateral, or held by money market funds.  In a note published on Oct. 5, Goldman Sachs said money managers are forced to dump Treasury securities before October 17 to avoid being stuck with securities that could not be traded.

9. Section 4 of the 14th Amendment to the Constitution provides a rationale for the president to override debt limit legislation.

10. President Obama has said, on numerous occasions that he will not use the authority granted by the Constitution to get around the debt limit set by Congress.

Result:  At best, uncertainty predominates.  At worst, Treasuries are not accepted as collateral by many financial managers and organizations.  I’m not sure which game theory structure applies –  Help, Professor Galambos.  Some have characterized the situation as a  game of chicken – who will give in first.  My conclusion is that  it is a negative sum game in which the magnitude of the losses in the resultant payoff matrix swamps the few available positive results.

Conclusion:  This is a game that should be avoided.  Will it be avoided?  I hope so.

Non-Random Walks

Speaking of thinking strategically, I was explaining to my kids why I prefer to drive on “walk to school” day — if everyone else walks to school, think of the great parking spot we’ll get!  It’s hard to imagine a situation where I can arbitrage relative price changes more beautifully, as the price changes are announced in advance.

Of course, the schools seem to have thought of this, too, and have come up with strategies to combat these gross relative price changes.  One strategy is to provide a “celebrity” escort, such as Mayor Tim Hanna seen here strolling through City Park with my wife and son.

Walk to School 1

What a swell guy.  I’ve also got a nice shot of my boy with the school principal and Mayor Hanna that I’m sure will be of interest to posterity.

There are only so many celebrities to go around, of course, so another favorite strategy is the outright bribe with food, especially when handed out by these fine Lawrence Hockey captains.  The captains here include the department’s own “Mr. Z”, and are pictured with Mayor Hanna.

Walk to School 2

Clearly, there are some problems with the latter strategy, as the captains didn’t seem to be discriminating between those who walked and those who were dropped off.  Secondly, it appears that some of the Captains are actually munching on the would-be handouts.

Nonetheless, it was a good show to see these gentlemen out handing out apples at 8 in the morning.

Random Runs

Since I told my son that going to the grocery store during Packers games to avoid crowds may or may not be a good idea, depending on how many other people have the same thought, he claims that I am always doing game theory. (He also noticed that sometimes I switch lanes strategically.) But all of that is quite benign in comparison with Northwestern game theorist Jeff Ely’s innovative soccer coaching technique:

Just as I deliver the ball to the player in line the two girls simultaneously and randomly raise either one hand or two.  The player receiving the feed must add up the total number of hands raised and if that number is odd clear the ball to the player on my left and if it is even clear to the player on my right.

The two girls are jointly controlling a randomization device.  The parity of the number of hands is not under the control of either player.  And if each player knows that the other is choosing one or two hands with 50-50 probability, then each player knows that the parity of the total will be uniformly distributed no matter how that individual player decides to randomize her own hands.

I am still wondering whether this should have been cleared with some kind of institutional review board.

LU on the Brain

For those of you who follow sports, the controversies surrounding sports concussions came to another head this week with the publication of League of Denial, with coverage from ESPN and PBS.  Our own Rick Peterson points us to a Sports Illustrated piece that includes some heavy local interest:

If Hollywood talent scouts set out to create a reality series on the search for football-related brain damage, they would start with Ann McKee… McKee was not an athlete, but she grew up surrounded by them. Her father had played football at Grinnell (Iowa) College. Her older brother Chuck, whom she idolized, had been a three-sport athlete who turned down a scholarship at Wisconsin because he didn’t want Division I football to distract him from becoming a doctor. He played quarterback at Lawrence University, leading the Division III school to consecutive conference titles and earning All-America honors. Ann McKee had been a cheerleader at Appleton East High.

My emphasis.

Perhaps ironically, this week also brings us a piece by Evin Demirel over at SB Nation on the resurgence of Division III football.

UPDATE:  I shared this with our students, who alerted me that Dr. McKee is the university physician!  What an excellent end to this story. 

 

Health Insurance Exchanges: Something Both Liberals and Conservatives Could Love?

obamacare

 

In an opinion piece in the Harvard Business Review today, Henry Aaron (the well known economist, not the Hall of Fame baseball player) argues that conservatives and liberals should both support the health insurance exchanges that form the core of the Affordable Care Act (aka Obamacare.)  He notes that conservatives decry the tax and mandatory provisions of the act and that liberals prefer “Medicare for all”, but concludes that both groups fail to see that the core elements they desire are contained within the act.

For conservatives he posits the following:

Conservatives want people to be free to choose the insurance plan that best matches their preferences. They want insurers to compete with one another based on price and service. They are convinced that if individuals can shop freely for the plans they want and insurers must compete actively for their business, everyone will gain: customers will get coverage that matches their preferences, and insurers will become more cost- and quality-conscious than they now are. Conservatives also recognize that many people will need financial help if they are to afford health insurance, and they have embraced such aid.

For liberals he argues:

Liberals want universal coverage. While they accept competition, they believe that regulations are also necessary to hold down the growth of health care spending and promote the adoption of improved modes of delivering care… By design, the exchanges will intensify competition by requiring insurers to offer the full range of plans to customers. By providing software and counseling, the exchanges will help consumers make informed comparisons among these offerings…To do a good job the exchanges have at hand a number of important regulatory powers along lines that liberals have long endorsed.

He concludes that if the exchanges become open to all and do a reasonable job of encouraging informed choice then

…most businesses may well be glad to rid themselves of administering a vexatious form of compensation that has nothing to do with their main business activities. If and when that happens, the exchanges will have become the instrument for realizing the conservative dream—free individual choice and tough, head-to-head competition among health insurers.

Yes, there are numerous “ifs” in the story, but what’s the alternative?  J.D. Kleinke put it best in his 2001 book Oxymorons: the Myth of a U.S. Health Care System:

There is no U.S. health care system.  what we call our health care system is, in daily practice, a hodgepodge of historic legacies, philosophical conflicts and competing economic schemes.  Health care in America combines the tortured politicized complexity of the U.S. tax code with a cacophony of intractable political, cultural, and religious debates about personal rights and responsibilities.  Every time policymakers, corporate health benefits purchasers, or entrepreneurs try to fix something in our health care system, they run smack into its central reality: the primary producers and consumers of medical care are uniquely, stubbornly self-serving as they chew through vast sums of other people’s money.

 

I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

I see that McDonalds employees from around the country have been walking off the job to protest low wages, even causing some restaurants to shut down temporarily.  What would happen, do you suppose, if McDonalds started paying its employees more?

Writing in Forbes, Tim Worstall makes the extraordinary claim that McDonalds could raise workers wages to $15 an hour and it would have no impact on the price of a Big Mac!  This is such an extraordinary claim that I will go ahead and quote it at length:

Hmm. Well, what else can we surmise about a rapacious capitalist organisation? In that ruthless pursuit of gelt and pilf for its shareholders it is going to gouge the customers for the absolute maximum that it can, yes? … What limits McDonald’s ability to entirely empty our wallets every time we want a hamburger is that there are other people who will also sell us one. Wendy’s, Jack in the Box, In and Out, there’s a multiplicity of places where we can go to fur our arteries. Which leads to our conclusion on pricing in a capitalist and free market economy. The capitalists charge the absolute maximum they can get away with, that ability being limited by the competition that comes from alternative suppliers.

Thus the price is not determined by the cost of production of an item. Which means that, if we raise McDonald’s production costs by increasing the wages of the workers, the price isn’t going to change. For it’s not production costs that determine prices: it’s competition that does. Another way to put this is that McDonald’s is already charging us the absolute maximum that it can for its current level of sales. Thus it cannot raise its prices if its production costs go up.

All of which means that the real change in the cost of a Big Mac, or the dollar menu, if McDonald’s workers were paid $15 an hour is: nothing. For production costs simply do not determine the prices that can be achieved in a competitive market.

I’m not sure I’ve ever heard anyone argue that costs don’t matter in determining prices:  Every text that I’ve taught out of walks through the logic of a firm’s profit maximizing decision — firms maximize profits by setting output where marginal revenue equals marginal cost.  So, costs do help to determine prices, at least the way I teach it. Continue reading I’m Lovin’ It. But if that Counter Guy Gets $15/hour, I’m Lovin’ Less of It

Please Don’t Fed the Bears

The graph shows the trajectory of today’s S&P 500 index (green) and the yield on the 30-year treasury bond (blue).

Reuters weighs in:

The U.S. Federal Reserve said on Wednesday that it would continue buying bonds at an $85 billion monthly pace for now, surprising financial markets that were braced for a reduction in the central bank’s economic stimulus.

Can you guess what time the Fed made the announcement?

Clearly, anyone betting on a Bear market took it in the teeth today (especially if it is just delaying the inevitable).  I guess we’ll have to wait and see.

Wednesday UD
Is Anyone Yellen for a New Chair?