Lawrence Economics Blog

Creative Instruction

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.

Annual Daylight ‘Savings’ Plea

Every year about this time I like to remind our students to be careful crossing the street.  Some back-of-the envelope calculations we did once upon a time suggest that the time change is a very dangerous time for walkers at dusk.  (It is also true that it is now safer in the morning, but I’m not sure I want to counsel you to be less safe in the morning).

This is a story from the Pittsburgh Post-Gazette:

“The change that’s going to occur on Sunday is going to have some pronounced effects on your risks of walking between 5 p.m. and 7 p.m.,” Dr. Gerard said last night. “Basically, these are the hours when it’s just getting dark. Next week at this time, it will be pitch black. But people walking and people driving won’t have adjusted. The baseline risk for getting killed is almost tripled.”

Their study of pedestrian fatalities from 1999-2005 shows that there is an average of 37 more U.S. pedestrian deaths around 6 p.m. in November compared to October. That amounts to an increase of 186 percent.

No such jump was seen for drivers or passengers in cars.

“It’s astonishing,” Dr. Gerard said of the data. “It’s particularly worse right at the switch date, [when the average increases] two people a day for the next couple weeks, until the adjustment is made.”

This is roughly the same story from the Associated Press.

Here’s some more self-promotion with a bit more discussion of Daylight Savings writ large from the Organizations and Markets blog.

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.

 

Pre-Registration for Winter and Spring

Advance registration for winter and spring terms will resume next Monday, October 14, and continue through the last day of classes for the term, Thursday, November 21.  Only degree-seeking, Waseda, and visiting/exchange students are eligible to advance register for classes.

Pre-registration for Winter and Spring resumes October 14, and I encourage you to sort your schedule out, especially so that the instructors can plan for classes appropriately.  We tend to do things differently in classes with enrollments of 25 than with 10, for example.  

Here is the full schedule.  Here are some of the highlights:

WINTER:

  • Finance (ECON 295) with Professor Vaughn.  This is a continuation of the financial accounting course (ECON 170), and it looks excellent.
  • We have opened a second section of Econometrics (ECON 380) in the winter.  We currently have 26 registered in one section and two in the other.  Professor Devkota is teaching both sections. 
  • Sports Economics (ECON 495)  with Professor Rhodes, MWF at 3:10.  The prerequisites are the intermediate micro and econometrics courses (ECON 300 and ECON 380). 
  • Both Senior Experience options are open.  Professor Finkler is in charge of the paper option (ECON 602) and you must clear the topic with him.
  • The Senior Experience reading option (ECON 601) will feature Alexander Field’s A Great Leap Forward: 1930s Depression and U.S. Economic Growth.  Tyler Cowen calls it a “masterpiece.”  Professor Field will be on the campus in the Spring to meet with students and give a public lecture.  For advanced sophomores and juniors (i.e., those who have had econometrics), I will offer a 2-3 unit directed study (a Junior Experience). 

SPRING:

  • Professor Devkota will offer Economic Development (ECON 200).   This is potentially a great second class for someone who has had ECON 100 or ECON 120 and wants to take a second course.   He is teaching it this term, so there is some information out there from someone other than me (it sounds like an excellent class).
  • We are also offering Decision Theory (ECON 225) and Environmental Economics (ECON 280).   If you are planning to major or minor, we strongly encourage you to take Decision Theory during your time here.
  • Professor Devkota will offer International Trade (ECON 460) for the major set.
  • Professor Rhodes will offer a 400-level math-econ course (ECON 495), available to anyone with calculus and ECON 300. 

If you have any questions, get in touch with Professor Finkler, Professor Galambos, or Professor Gerard in terms of how you might schedule a major or minor, or simply what courses make sense given your academic and extra-academic interests.  If you have questions about the particular courses, you can direct inquiries to the instructor.

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.

The Lysine Price-Fixing Conspiracy

Tuesday night, for about the fourth time in my tenure, the Economics Department will show The Informant as a complement to our oligopoly case study in Economics 400.  It should start at 9 p.m. in the Warch Campus Center Cinema.   A good chunk of this text is a repost from last year:

The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal.  Lysine is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.

Well, I’ll let deRoos (2006) characterize the market for us:

Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.

Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb.  However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.

Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.

On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.

Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done.  These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).  Connor is sort of the go-to guy on these issues and he was profiled in the Chronicle of Higher Education about three weeks ago.

A truly remarkable episode all around.

Pop some corn and mix in three parts lysine. We’ll see you there.

 

For further reading:

John M .Connor (1997) “The Global Lysine Price-Fixing Conspiracy of 1992-1995,” Review of Agricultural Economics, 19 (Fall/Winter), 412-427.

Nicholas deRoos (2006) “Examining models of collusion: The market for lysine,” International Journal of Industrial Organization, 24(6): 1083-1107

Lawrence White (2001) “Lysine and Price Fixing: How Long? How Severe? Review of Industrial Organization,18 (1):23-31

 

Fall Festival, October 5

The purple balls make their first appearance at Fall Fest this Saturday morning:

“I Like Your Chances: Quantifying Mortality Risks”

David Gerard, Associate Professor of Economics
Briggs Hall 119

Two things are certain in life – death and taxes. As Professor Gerard is a bit tired of talking about taxes, he will discuss work on quantifying mortality risks for use in regulatory policies. He describes these risks in terms of ‘micromorts’ (a one-in-a-million chance of dying) and characterizes mortality risks for demographic groups across the U.S. and Europe.

Given the subject matter, we might change that to Careful so that you don’t Fall Fest.

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.

 

Budget Negotiations Update

I realize the potential federal government shutdown this is more of a politics than economics question, but this is some dish from CNN insider, Dana Bash (via Slate):

I’ve not talked to anybody here who doesn’t think it’s a very, very big possibility, even Republicans, that the government won’t shut down—even for a short time.

I can’t say this with certainty, but I am unsure whether or not I can say that I don’t disagree with Ms. Bash’s observation.

Economics Colloquium in STEITZ 102 and Econ Tea, October 3 at 4:30

UPDATE: The talk is in Steitz 102.

The first Economics Colloquium of the year is our own Professor Marty Finkler talking about some of his recent work on the U.S. employment situation.     He will give a 30-40 minute talk, after which we will adjourn for Econ Tea in Briggs 217 at 5:15.

Please join us for Professor Finkler’s talk, and to meet our visiting faculty, Satis Devkota and M. Taylor Rhodes.

The abstract is below:

________________________________________________

Employment and Monetary Policy: The Role of Relative Price Distortions

Merton D. Finkler
Professor of Economics
Lawrence University

The economic recovery from the recession of December 2007 to June 2009 featured real GDP returning to its pre-recession level while employment continues to lag behind to its pre-recession level.  One possible reason is that employment patterns contain both cyclical and structural components.  In this paper, changes in the price of labor, unit labor costs, and the cost of equipment and software are studied as key structural components. Separate regressions with changes in employment as the dependent variable are performed for goods producing, service producing, and manufacturing sectors.  In each case, explanatory power is increased with the inclusion of a representation of the cost of labor; thus, macroeconomic policy that seeks to stimulate employment growth should consider the effects of the chosen policy on the relative cost of labor and not just on aggregate demand.

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