Lawrence Economics Blog

Creative Instruction

The Good Ol Summit Time

As summer marches on, the financial situation in Europe remains unresolved, some economists are arguing that a devaluation and subsequent inflation of the Euro is in order (see Kenneth Griffin and Anil Kashy here and Martin Feldstein here). The Grumpy Economist, University of Chicago’s  John Cochrane, is skeptical and provides a helpful analogy:

Imagine that  your brother in law had been drinking too much for 40 years, perpetually on and off the sauce, never really able to give it up. He went  through a painful 12 step program and rehab, and finally quits the sauce for 10 years. He threw away all the liquor in the house. Then he loses his job. Is “one more big night out to soothe the pain, and then I’ll really really never do it again”  at all a credible plan?  That’s exactly what my normally sensible colleagues (see above) are advocating.

My guess is that most of our readership does not have brother-in-laws who have been drinking too much for 40 years, so I will give you something closer to home.

Summit EUphoria

Back when I was in college I had a friend who tended to fall behind a bit in his classes, something like accumulating large piles of debt.  At some point, of course, the debt would mount and he would reach a crisis situation, forcing him to face some unpleasant facts.  He would then of course have to develop a plan to “restructure” the debt — for instance, does this sound familiar?, getting an extension on a paper, strategically dropping a class, deciding which course he could get by without studying, etc…  And, remarkably, once the plan was in place, he would have some sort of celebration even prior to completing any of the work he had to do.

To my knowledge, he had no way of credibly committing to putting the plan in place. What I mean by that, of course, is that he generally didn’t put the plan in place.

I’m not sure whether he ever graduated, but I do know that he has been a very successful entrepreneur.  I’m not sure exactly what that does for our analogy.

On a not entirely unrelated note, Kevin “Angus” Grier at the Kids Prefer Cheese blog provides some visual insight in the salubrious effects of European summits on financial markets.

It’s summit time!

Jobs, Jobs, Jobs and Health Care

Given that it’s election season (again), the twin topics of jobs and health care will be upon us ad nauseum.  Employmnet in health care fields has grown rapidly since the passage of Medicare in 1965 (see the chart in the article cited below.)  Is this a good thing?  If the health care industry is terrific at creating jobs, why don’t we just spend continuously more on health care (as we in the U.S. have done steadily for at least the past 60 years)?

In the current issue of that most famous of medical journals, The New England Journal of Medicine, Katherine Baicker and Amitabh Chandra explain why such a policy is a terrible way to increase the economic welfare of Americans.  The argument is pretty straight forward for any student of economics, though not necessarily for the political cognoscenti.

But this focus on health care jobs is misguided. The goal of improving health and economic well-being does not go hand in hand with rising employment in health care. It is tempting to think that rising health care employment is a boon, but if the same outcomes can be achieved with lower employment and fewer resources, that leaves extra money to devote to other important public and private priorities such as education, infrastructure, food, shelter, and retirement savings.

They provide two graphs to illustrate the strong correlation between employment growth and cost per year of life expectancy gained (not easily transported to this blogpost).  Now, clearly, correlation does not imply causation, and there certainly are health outcomes of interest in addition to life expectancy, but careful studies of such relationships suggest strong diminishing returns to devoting a larger and larger share of our workforce to health care services.

Keynes argued that we could increase employment and spending by hiring one group of people to dig holes in the ground and another to fill the holes back up.  Although this might increase expenditures and employment in the short run, without productivity increases to generate income, such workers would have to be paid out of existing production, and thus, such income generation would not yield sustainable improvements.  Baicker and Chandra make a similar point.

The bottom line is that employment in the health care sector should be neither a policy goal nor a metric of success. The key policy goals should be to achieve better health outcomes and increase overall economic productivity, so that we can all live healthier and wealthier lives. Our ability to ensure access to expensive but beneficial treatment is hampered whenever health care policy is evaluated on the basis of jobs. Treating the health care system like a (wildly inefficient) jobs program conflicts directly with the goal of ensuring that all Americans have access to care at an affordable price.

So what does this have to do with yesterday’s Supreme Court ruling?  Who knows?  It all depends upon how the legislation is implemented and how people respond to incentives provided.

Friday Supernova

Who says the liberal arts are in peril?

As you probably know, back about 1300 years ago, in the year 724, there was a mysterious spike in Carbon 14 levels detected in the rings of Japanese cedar trees.  What you probably don’t know is that this spike coincided with an eerie “red crucifix” reported in the skies after sunset.

Well, undergraduate Jonathan Allen knew that and he put two-and-two together and posits that maybe the “red crucifix” may have been a supernova.

See here for the tree-warming story.

Thursday at the Supreme Court

As you may have heard, the Supreme Court of the United States (SCOTUS) has upheld the constitutionality of the recent health care legislation.  I won’t attempt to delve into the legal issues on which the opinion pivoted (see here maybe), though I will tell you that Chief Justice John Roberts in writing for the majority seems to have sent a Bronx cheer in the direction of the economics profession.

Congress already enjoys vast power to regulate much of what we do. Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government.

To an economist, perhaps, there is no difference between activity and inactivity; both have measurable economic effects on commerce. But the distinction between doing something and doing nothing would not have been lost on the Framers, who were “practical statesmen,” not metaphysical philosophers.

Funny, I’ve always placed myself in the practical statesman camp.  I’ll have to think about that one.

Wednesday Warning

Good old rock, nothing beats that

We occasionally will warn you of the many mysteries and potential dangers of robot nation.

Today we consider a simple battle of wits in a game of rock, paper, scissors with a robot opponent.

Back in the day, you could get a fair shake.

But today I refer you to the ever-awesome Kottke website, where we observe a much different outcome.

Here it goes: Rock, paper, scissors,…. shoot, I lost again.

 

Tuesday Quiz

On the heels of the wildly successful Monday Quiz, it’s time for the big Tuesday Quiz. As you know, or should know, most people in the real world do not write as if they are texting their BFF, so keeping track of subject-verb agreement, it’s v. its, and the like could prove to be important in your future career trajectory.  In that spirit, there was a nice piece in the Wall Street Journal this past week bemoaning the poor grammar and language skills of the workforce, including this nice interactive feature.

Now should the tag be “get off my lawn” or “get off of my lawn”?

And should that be in italics instead of quotations?

And should that question mark be inside or outside of the quotation mark?

And can I start a sentence using and? 

UPDATE:  Zing!  See much more here.

Paul Krugman – The Economist Pushes Through

For most of his editorial postings, Paul Krugman’s opinions are political in character and offer limited if any economic analysis.  In today’s posting in The Conscience of a Liberal , Krugman demonstrates why his insights are worthy of a Nobel laureate in economics.  In particular, he discusses what the literature on optimal currency unions has to contribute to discussion of the Eurozone.  He draws insights from economists of various stripes regarding the necessary criteria for a successful currency union and how the Euro falls well short of what’s needed.

In summary, optimum currency area theory suggested two big things to look at – labor mobility and fiscal integration. And on both counts it was obvious that Europe fell far short of the U.S. example, with limited labor mobility and virtually no fiscal integration. This should have given European leaders pause – but they had their hearts set on the single currency.

He notes that most economists forecast that the Eurozone would have problems holding together given the above criteria.

So optimum currency area theory was right to assert that creating a single currency would bring significant costs, which in turn meant that Europe’s lack of mitigating factors in the form of high labor mobility and/or fiscal integration became a very significant issue. In this sense, the story of the euro is one of a crisis foretold.

Krugman does provide some options for Europeans to consider but isn’t optimistic that this political project will succeed.  In short political will or perhaps wishing thinking is not enough.  The economic fundamentals can’t be ignored.

The creation of the euro involved, in effect, a decision to ignore everything economists had said about optimum currency areas. Unfortunately, it turned out that optimum currency area theory was essentially right, erring only in understating the problems with a shared currency. And now that theory is taking its revenge.

Old Ideas from Live Economists

Todd Buchholz has an op-ed in today’s WSJ, recommending that the U.S. government string out its long-term debt.

[T]he world is willing to lend us 10-year money at rates substantially below 2%.

So why not give our kids a break by issuing 50- or 100-year bonds, locking in today’s puny rates? Corporations do it. In 1993, Disney issued $300 million in “Sleeping Beauty” bonds, and the market scooped them up. Last year, Norfolk Southern sold $400 million in 100-year bonds despite the obvious uncertainty: Will railroads be spaceships in 100 years?

Other governments are issuing long-term bonds, too. In 2011, buyers grabbed Mexico’s 100-year bonds, despite that country’s pockmarked history of devaluations and defaults. The average maturity of U.K. debt is three times longer than ours.

Instead of following these examples, the U.S. Treasury recklessly borrows short-term funds that must be rolled over.

A good question for anyone at this point.  I was worried when my adjustable-rate mortgage (ARM) was about to adjust, and it went down almost 200 basis points.  Woo hoo!

Chicago’s John Cochrane, the Grumpy Economist, also endorses locking in low rates.

Buchholz claims this is a political maneuver designed to make the short-term budget deficit look better.  Cochrane isn’t so sure.  See the respective posts for the dirty details.

Whoever is correct, here’s hoping  for the sake of fiscal sanity that the Treasury gets on board.

The Ethics and Economics of “Free” Music

Speaking of things that are “free,” David Lowery, indie rocker and now instructor at the University of Georgia, takes the current generation of music lovers to task for downloading songs on share sites, hence bilking the artists.  Here is his rather extensive post on the subject.

Here’s a taste:

The existential questions that your generation gets to answer are these:

Why do we value the network and hardware that delivers music but not the music itself?

Why are we willing to pay for computers, iPods, smartphones, data plans, and high speed internet access but not the music itself?

Why do we gladly give our money to some of the largest richest corporations in the world but not the companies and individuals who create and sell music?

This is a bit of hyperbole to emphasize the point. But it’s as if:

Networks: Giant mega corporations. Cool! have some money!

Hardware: Giant mega corporations. Cool! have some money!

Artists: 99.9% lower middle class. Screw you, you greedy bastards!

Congratulations, your generation is the first generation in history to rebel by unsticking it to the man and instead sticking it to the weirdo freak musicians!

I am genuinely stunned by this. Since you appear to love first generation Indie Rock, and as a founding member of a first generation Indie Rock band I am now legally obligated to issue this order: kids, lawn, vacate.

Lowery is an interesting guy, that’s for sure. Here is a previous post where he describes his role in Groupon.  And here are some of his musings on his forthcoming (?) book, “Highly Volatile: How Your Lame Band Taught You Everything You Need to Know about Economics and Finance.”

Well, let’s hope it didn’t teach you everything.

For more formal treatment of the economics of file sharing, you might head to the link at Stan Liebowitz’s homepage (of Liebowitz and Margolis fame).

Professor Liebowitz reviews the literature, which generally shows the significant hit file sharing has delivered too the industry. For some careful details, see “File Sharing: Creative Destruction, or Just Plain Destruction?” in the Journal of Law and Economics.

Elinor Ostrom, R.I.P.

2009 Nobel Prize in Economic Science winner and political scientist Elinor Ostrom passed away this week.  Her contributions to solving common pool resource problems generated praise from both economists and political scientists.  In today’s The New York Times Economix blog, Catherine Rampell provides numerous links to help people understand her valuable contributions.

In particular, I encourage you to read Edward Glaeser’s review of the contributions of both economics prize winners in 2009:  Elinor Ostrom and Oliver Williamson.

 

 

Is it 1931 in Germany Again?

The article described below was published yesterday in Spiegel, a well known German periodical.

Economic historian Niall Ferguson (who typically takes a long term view of economic forces) and economist Nouriel Roubini (who some know as Dr. Doom for his prognostication in 2005 of the housing bust and subsequent financial crisis) have gotten together to argue that the  toxic mix of contemporary economic and political forces could generate both economic and political chaos for Europe.  They suggest a variety of steps that they believe could both resolve the unstable conflicts presently in existence and be palatable to all stakeholders, if they desire to sustain (or expand) the integration of Europe.   In brief there recommendations are as follows:

1.  Banks should be recapitalized by direct (rather than indirect) means  – similar to the TARP program in the U.S.

2.  A deposit insurance program should be constructed – similar to the FDIC program in the US

3.  Funding of 1 and 2 should be through means that minimize moral hazard burdens for tax-payers and avoid the creation of “too-big-to-fail” institutions.

4.  Fiscal austerity should be built into a long run plan but should not be implemented in the current economic context.

5.  Economic growth needs to be the number one priority.

6.  Public policy should employ all available tools – monetary, fiscal, barrier reducing, and infrastructure increasing – to boost income and consumption.

The article begins as below.  For the full piece, follow the link at the bottom of this posting.

The Perils of Ignoring History: This Time, Europe Really Is on the Brink
—————————————————————–

The European Union was created to avoid repeating the disasters of the 1930s, but Germany, of all countries, has failed to learn from history.  As the euro crisis escalates, Berlin should remember how the banking crisis of 1931 contributed to the breakdown of democracy across Europe. Action is urgently needed to stop history from repeating itself.

A Commentary by Niall Ferguson and Nouriel Roubini

About those Gowns

And now for our annual explanation of those caps and gowns, we return to a post from 2010:

In our continuing attempt to understand the world around us, today we take a look at the traditional graduation cap & gown.

Well, the first thing you need to know is that this dates back nearly 1000 years, and the academy is a notoriously conservative place. In the words of F.M. Conrford, in his advice to young academics, “Nothing should ever be done for the first time.”* The corollary here is that once we get started on something, it’s tough getting us to stop.

With that in mind, Slate.com tackles the regalia question for us:

Standard fashion around 1100 and 1200 A.D. dictated long, flowing robes and hoods for warmth; the greater a person’s wealth, the higher the quality of the fabrics. This attire went out of style around the Renaissance. But sumptuary laws, often designed to prevent people from dressing above their class, kept academics (who were relatively low in the social hierarchy) in simple, unostentatious robes through the 16th century. Thereafter, academics and students at many universities wore robes for tradition’s sake. At Oxford, robes were de rigueur until the 1960s and are still required at graduation and during exams.

And, of course, the Americans played along:

Chicago: My Kind of Gown

When American universities sprang up in the 17th and 18th centuries, they adopted many Oxbridge academic traditions, including robe-wearing…

The use of academic robes in the United States waned at the beginning of the 19th century, and after around 1810, most American colleges and universities used them only at formal academic ceremonies, if at all…. The tradition seemed on the cusp of extinction, but in the second half of the 19th century, there was a—somewhat mysterious—renewed interest in academic regalia.

It’s one thing to ask why we wear them, but entirely another to figure out what to wear. It seems that the students look pretty similar, but the faculty is a mishmash of colors and patterns (see, for example, the University of Chicago regalia to your right). That’s why it’s so nice that the American Council on Education provides this handy dandy academic costume guide (costume!). From that we learn this:

Tassel. A long tassel is to be fastened to the middle point of the top of the cap only and to lie as it will thereon. The tassel should be black or the color appropriate to the subject, with the exception of the doctor’s cap that may have a tassel of gold.

It’s worth noting that the color for the music discipline is pink, which is the answer to one question I got at dinner tonight about why the Con students have pink tassels and the College students wear black.  Well, it doesn’t answer it completely because many disciplines within the college have their own colors (e.g., economics is copper, science is yellow), so I’m going to go with “transaction costs” for the reason why the College side has black tassels.

The guide also elaborates on the history of regalia generally, and the more you read, the more, um, traditional it really is.

See you on stage.

*Nicked from Louis Menand’s excellent The Marketplace of Ideas: Reform and Resistance in the American Academy. See also, here.

Incentives Matter!

As many of have heard on numerous occasions, Steven Landsburg has argued that economics can be characterized by just two words: “Incentives Matter.”

Today’s Carpe Diem blog (provided by Mark Perry) provides some rich examples.

Some great examples of unintended consequences from the Wikipedia listing for “Perverse Incentives”:
1. In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats.

2. 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that the peasants dug up the bones and then smashed them into many pieces,greatly reducing their scientific value, to maximize their payments.

3. Opponents of the Endangered Species Act in the US argue that it may encourage preemptive habitat destruction by landowners who fear losing the use of their land because of the presence of an endangered species, known as “shoot, shovel, and shut up.”

4. In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass produced. Not surprisingly, most plants produced sheet glass so thick that one could hardly see through it. The rules were changed so that the managers were rewarded according to the square meters of glass produced. The results were predictable. Under the new rules, Soviet firms produced glass so thin that it was easily broken.

5. Private companies were paid to transport convicts/prisoners from the U.K. to Australia during the late 1700s and the early 1800s.  The first payment schedule was based on the number of prisoners who boarded ships in the U.K. As you might imagine, there was no incentive to deliver living prisoners to Australia, and many of them died during the trip, due to overcrowding, lack of food and water, unsanitary and unsafe conditions, untreated diseases, etc. The payment schedule later changed, and was subsequently based on the number of living prisoners delivered to Australia. Result?  Fewer prisoners died during transport.

Anton Valukas to Speak at Commencment

Last year the Lawrence Scholars in Law program was fortunate to feature alumnus Tony Valukas in one of the better alumni talks you are likely to see.  This year, Mr. Valukas is back as our commencement speaker.   So, those of you commencing are in for a treat.  Much of the rest of this post is from the LSL blog post from last year.

This is from his  biography:

Mr. Valukas has been a partner with Jenner & Block from 1976 through the present, with the exception of his tenure as the United States Attorney for the Northern District of Illinois from 1985 through 1989.  Prior to Jenner & Block, Mr. Valukas held several positions with the U.S. Department of Justice, including Assistant United States Attorney (1970-1974), Chief of the Special Prosecutions Division (1974), and First Assistant United States Attorney (1975-1976)…  Mr. Valukas was appointed in 1991 as Special Counsel to the City of Chicago to investigate and report on the City’s health care system.  He was selected Special Inspector General to the Chicago Transit Authority to investigate vendor fraud, and counsel to the Chicago Housing Authority to investigate vendor and pension fraud.  He has also served as chairman of the Governor’s Task Force on Crime and Corrections for the State of Illinois, a 2-year effort which led to the passage of major prison reform legislation in 1993.

Mr. Valukas is also a former member of the Lawrence Board of Trustees.

That seems like quite a lot, but it certainly doesn’t end there. Indeed, Mr. Valukas was appointed by federal court to determine the causes of the collapse of Lehman Brothers, the largest bankruptcy filing in US history. According to the Wall Street Journal:

This was no small undertaking. At the New York offices, the Lehman team commandeered half of a floor previously used as storage space. The heat sporadically cut off as the work continued overnight. “A lot of the associates looked like longshoreman wearing caps and hooded sweatshirts,” said Patrick Trostle, a Jenner & Block partner who worked on the case.

By the time the investigation was over, more than 200 attorneys had worked on the case, reviewing 34 million pages of documents. Investigators also conducted roughly 250 interviews, ranging from Warren Buffett to Ben Bernanke.

The result is nine-volume, 2200-page report known as “The Valukas Report.”

That must be some dry reading, eh?  Not from a Lawrence alum!   In fact, it comes highly recommended (from the WSJ blog):

It is long, but Judge James M. Peck of the U.S. Bankruptcy Court in Manhattan said the recently released report on the causes for the Lehman Brothers Holdings bankruptcy reads like a “best seller.”

If he can turn a 2200-page bankruptcy report sound like a best seller, I am certainly looking forward to hearing what he has to say.

See you there.