Lawrence Economics Blog

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Higher Math Scores or Better Rhetoric?

George Schultz and Eric Hanushek write in the Wall Street Journal that the poor performance of US students in mathematics, as evidenced by the OECD’s Programme for International Student Assessment (PISA), is undermining economic growth.

If we accept this level of performance, we will surely find ourselves on a low-growth path.

The chart on the right shows average GDP growth from 1960-2000 on the Y-axis and the PISA score on the X-axis, along with a lovely line fit that appears to show a nice, tight correlation between math and GDP growth.  Indeed, by pulling out Canada and the US the authors conclude:

Imagine a school improvement program that made us competitive with Canada in math performance (which means scoring approximately 40 points higher on PISA tests) over the next 20 years. As these Canadian-skill-level students entered the labor force, they would produce a faster-growing economy.

How much faster? The results are stunning. The improvement in GDP over the next 80 years would exceed a present value of $70 trillion. That’s equivalent to an average 20% boost in income for every U.S. worker each year over his or her entire career. This would generate enough revenue to solve easily the U.S. debt problem that is the object of so much current debate.

What’s remarkable about this conclusion, aside from the dubious causality of average test scores and the heroic extrapolations, is that the figure shows that the USA actually has higher GDP growth than Canada.  So, if GDP growth is the end goal, I wonder what Canada is doing to become more like us?

Maybe they need a good banking crisis.

Via the Cheesiest.

Deidre McCloskey on Keynesian Pessimism

Quotation of the Day…  from Cafe Hayek

Posted: 29 Apr 2012 05:01 AM PDT

… is from page 134 of Deirdre McCloskey’s 2010 Bourgeois Dignity:

During the 1930s and early 1940s the prospect of diminishing returns deeply alarmed economists such as the British economist John Maynard Keynes and the American follower of Keynes at Minnesota and Harvard, Alvin Hansen.  They believed that the technology of electricity and the automobile were exhausted, and that sharply diminishing returns to capital were at hand, especially in view of declining birthrates.  People would save more than could be profitably invested, the “stagnationists” believed, and the advanced economies would fall into chronic unemployment.  In line with the usual if doubtful claim that spending on the war had temporarily saved the nonbombed part of the world’s economy, they believed that 1946 would see a renewal of the Great Depression.

But it didn’t.  Stagnationism proved false.

I&E courses in 2012-13

If you are looking for I&E courses in 2012-13, you might know that you can already enroll in the Pursuit of Innovation (Fall), Entrepreneurship and Finance (Spring), and Financial Accounting and Entrepreneurial Ventures (Winter, Spring)  courses. In addition, two more courses might soon be available: Dean Pertl in the Conservatory is planning The Entrepreneurial Musician, and the Economics Department is probably going to offer Economics of Innovation and Entrepreneurship again next year. Stay tuned for updates!

The BP Spill Revisited

You may recall the Deepwater Horizon spill, that sent some five million barrels of oil into the Gulf of Mexico between April and July of 2010.  At the time, we posted about it extensively, and linked up an  Econbrowser post that estimated that within two weeks the stock market had already dinged BP to the tune of $20 billion:

The adjusted closing price of BP on May 4, 2010 was $51.20 whereas had the oil spill not happened I’ve estimated the price would have been $58.11. This amounts to a net loss of $6.91 per share. BP has 3.13 billion shares outstanding amounting to a net loss in $21.62 billion.

That estimate turned out to be almost exactly what BP seems to have committed to its oil spill trust fund:

BP, in agreement with the US government, set up a $20-billion trust to provide confidence that funds would be available. The trust fund was established to satisfy claims adjudicated by the Gulf Coast Claims Facility (GCCF), final judgments in litigation and litigation settlements, state and local response costs and claims, and natural resource damages and related costs.

In 2011, BP contributed a total of $10.1 billion to the fund, including our second year commitment of $5 billion to the trust and the cash settlements received from MOEX USA Corporation (MOEX), Weatherford US., LP (Weatherford), and Anadarko Petroleum Company (Anadarko). This brings the total amount contributed to the trust to $15.1 billion. The remaining committed contributions totalling $4.9 billion are scheduled to be made in 2012 which includes the $250 million settlement with Cameron. The trust disbursed $3.7 billion in 2011 and the total paid out since its establishment amounted to $6.7 billion by the end of 2011.

However, the stock price did not stop at $50, but continued a free fall down to about $35, a price so low that there was speculation that BP stock was undervalued and ripe for takeover. Continue reading The BP Spill Revisited

Another Solid ENST Talk

Via Prof. Brozek for those of you interested in knitting &/or ice.

_______

Science, Journalism and Knitting on Ice: My Six-week Adventure in the Bering Sea

Helen Fields

Steitz 202, Thursday

April 26, 4:30-5:30 p.m.

Helen Fields has written for Smithsonian, National Geographic, Science, and other publications. In 2009, she spent a month and a half aboard a U.S. Coast Guard icebreaker off Alaska, following scientists around while they did research on the ecosystem of the Bering Sea as part of a massive multi-year collaborative project. Her essay about the experience, along with Chris Linder’s photography, was recently published in Linder’s new book, Science on Ice: Four Polar Expeditions (University of Chicago Press, 2011).

 

Price controls don’t work

Here is the latest confirmation, from Venezuela. From the NYT article:

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

Long lines of the kind described in the article  were common in socialist countries. The decision making process of a consumer in an economy with chronic shortages  is very different from that of our “standard Max U.” As a consumer, you might choose your desired consumption bundle from those you can afford, only to find that some of the items in that consumption bundle are not available. Or you might find that they are not available where you thought they were, and finding out where they are available is tricky. Economist János Kornai wrote a book on the Economics of Shortage, but his book on The Socialist System has a couple of chapters on the phenomenon of shortage as well. For more on this, take next year’s Comparative Economic Systems course (here is the course outline from last year).

A New Fracking Rule

Just in time for Earth Day, the Environmental Protection Agency (EPA)  issued a final rule on hydraulic fracturing (a.k.a. “fracking”) this past week.  Remarkably, it looks like the rule passes a benefit-cost assessment without even quantifying any benefits.  Why is that?

On the one hand, it isn’t clear what the benefits are.

While we expect that these avoided emissions will result in improvements in air quality and reductions in health effects associated with HAP, ozone and particulate matter (PM), as well as climate effects associated with methane,we have determined that quantification of those benefits and co-benefits cannot be accomplished for this rule in a defensible way. This is not to imply that there are no benefits or co-benefits of the rules; rather, it is a reflection of the difficulties in modeling the direct and indirect impacts of the reductions in emissions for this industrial sector with the data currently available.

The more remarkable result is that the costs are negative.  That is, the agency projects the industry will save millions of dollars by complying with the regulations. And, why is that?

The engineering compliance costs are annualized using a 7-percent discount rate. The negative cost for the final NSPS reflects the inclusion of revenues from additional natural gas and hydrocarbon condensate recovery that are estimated as a result of the NSPS. Possible explanations for why there appear to be negative cost control technologies are discussed in the engineering costs analysis section in the Regulatory Impact Analysis (RIA).

Notice they are discounted at a (real) 7 percent rate.

Here’s the table: Continue reading A New Fracking Rule

1.4 Billion Reasons, Tuesday April 24 at 6:30

A note from Patrick Pylvainen:

                                         

Students Engaged in Global Aid (SEGA), together with GlobeMed, is bringing a speaking event to campus called 1.4 Billion Reasons. This presentation is put on by the Global Poverty Project, and is a traveling speaking event that goes to universities, churches, and other meeting places to bring the issue of global poverty to the forefront. The goal is to engage and inspire audiences to understand and get involved in the movement to end extreme poverty.

The presentation is built around five sections:

  • What is extreme poverty?
  • Can we do anything about it?
  • What are the barriers to ending extreme poverty?
  • Why should we care?
  • What can I do?

The event is Tuesday at 6:30 in the Wriston Auditorium.

Economics Colloquium, April 23 at 4:30

Dr. Kathleen Spees from The Brattle Group will be on campus Monday to deliver the third Economics Colloquium lecture this year, “Market Design from a Practitioner s Viewpoint:Wholesale Electric Market Design for Resource Adequacy.” 

The lecture is at 4:30 in Steitz 102.

Dr. Spees has broad expertise in technical and policy aspects of electricity markets, including reliability and pricing.  She earned  an MS in electrical and computer science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon.  She completed a BS in mechanical engineering and physics from Iowa State University.

She will also give a talk to the ENST 151 class at 11:10, “Introduction to the Electric Power Industry.”   Please see Professor Gerard if you are interested in attending.

The abstract for the Economic Colloquium is below the fold:

Continue reading Economics Colloquium, April 23 at 4:30

Economics Department Open House

The Economics Department Open House is Thursday at 4:30 on Briggs 2nd, probably clustering near 217.

The Open House is a chance for economics majors to get together, and also for students potentially interested in the major to meet the professors (!), talk about the curriculum, chart a future course, learn more about the upcoming LSB trip, take an important step towards self-actualization, and meet some fellow economics students.

My understanding is that there will be some short talks by some of our Senior Experiencers.  Oh, and delicious refreshments.

See you there.

McDougal Lecture in Mathematics: “A Combinatorial Book of Colors”

Professor Richard Brualdi from University of Wisconsin is on campus this coming Tuesday, April 17, to give the inaugural McDougal Lecture in Mathematics.  The talk is at 4:30 in Steitz Hall 102.

Professor Brualdi’s talk is “A Combinatorial Book of Colors,”  and I’ve been assured that this is accessible to a more general audience.  (Of course, I was assured by a mathematician).  Here’s more on Professor Brualdi.

The McDougal Lecture promises to be an exciting addition to the intellectual climate here, and here’s some background information from our friends in the math department:

Professor Kevin F. McDougal earned a Bachelor of Arts degree in  mathematics from Lawrence University in 1979.  He wrote his Ph.D.  dissertation, Some Combinatorial Properties of (0, 1) Matrices, under the direction of Prof. Richard Brualdi and received his Ph.D. from the University of Wisconsin, Madison in 1989.  Kevin was a Professor of Mathematics at the University of Wisconsin, Oshkosh and had nine publications in combinatorics and a nearly completed book in combinatorics when he unexpectedly died in 2004 from a rare heart condition while training in Green Bay.  The McDougal family sponsors this lecture series to celebrate Kevin’s intellectual curiosity and passion for mathematics.

See you there.

Don’t miss that famous Chicago trip

The LSB program sponsors an educational trip to Chicago every year.  The purpose of the trip is to provide students an “immersion experience” in one of the country’s financial and entrepreneurial hubs.  The trip will take place during reading period, on May 3rd and 4th.  We will leave at 6:00 a.m. on Thursday, May 3, and return in the evening on Friday.

We will have a full schedule, visiting the following organizations: Chicago Mercantile Exchange, Madison Dearborn Partners, The Northern Trust Company, Deloitte, LBC Credit Partners, Industrial Council of Nearwest Chicago, Ennis Knupp + Associates, and the Chicagoland Entrepreneurial Center.

The costs of the trip are covered by the LSB program. The trip is open to all students. This trip is a great opportunity to learn about the business world up-close, in a way that you couldn’t do on your own. If you would like to join, register through LUworks.  Deadline to register and pay $20 refundable deposit is April 25.

Taking Care of Business OR Bad Company?

I was just going through some work on the economics of higher education, and I came across this remarkable piece of scholarship* estimating the effect of studying on grades.  What a concept!

Of course, one would expect (or would hope to expect) that more studying results in higher grades, but how much studying and how much better? Can studying really make up for a lack of high school preparation or a deficit of intellect? Can smart kids really skate through?

Using data from Berea College, Ralph and Todd Stinebrickner provide a very, very nice framing reference for the relationship between incremental study time and the endowment of “book smarts” (measured by ACT scores):

[H]uman capital accumulation may be far from predetermined at the time of college entrance. For example, using results from our full sample, an increase in study-effort of one hour per day…is estimated to have the same effect on grades as a 5.21 point increase in ACT scores.

So while on the one hand hitting the books is certainly a plus, danger lurks around every video console:

In addition, the reduced form effect of being assigned a roommate with a video game is estimated to have the same effect on grades as a 3.88 point decrease in ACT scores.

Ouch.

For those looking for good examples of empirical work, this is a very high-quality example.  This seems to have “Senior Experience” written all over it.

 

* Ralph Stinebrickner & Todd Stinebrickner, 2008. “The Causal Effect of Studying on Academic Performance,” Frontiers in Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1)

Coase Goes to China… Literally

Back in 1937 Ronald Coase asked a question fundamental to the economics of organizations — why are there firms?  Then in 1960 he pointed out that externalities stem from the reciprocity of the relationship between harmer and harmee, and that the failure to negotiate and enforce contracts is fundamental to the persistence of “externalities.”  As he says in his essay in “The Nature of the Firm: Influence“:

Transaction costs were used in the one case to show that if they are not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (62). 

For these seminal contributions he picked up the Nobel Prize in Economics in 1991 and shortly thereafter helped found — along with Douglass North — the International Society for the New Institutional Economics.

Now, in 2011, he asks the questions, how and why did China go capitalist?  And here comes the book later this month.

China’s road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a “modern, powerful socialist country.” The other, more important, one was the gross product of what we like to call “marginal revolutions.” It involved a concatenation of grass-roots movements and local initiatives.

Here’s some more.

There’s a lot of New Institutional Economics work on China, by some very heavy hitters.

 

Keynes Hayek: Questions for Thursday’s Read

Alright, I still don’t have an accounting of our numbers (and I’m not even listed as an instructor), but it’s time to start talking about Wapshott’s Keynes Hayek book.

First up, roll call.  Who are Edgeworth? Marshall? Mises? Menger? Robinson? Kahn?

Second up, what do we know about the personalities of Keynes and Hayek?  Do they remind you of anybody?  Do you think the recent rap videos are accurate characterizations? (see, for example, p. 48).

Third up, let’s revisit some basics — what is meant by “capitalism” and “socialism”?

A continuing question: What is Keynes view of government?  As you answer this question, think of (1) his reaction to the war reparations and his characterization of the likes of David Lloyd George and Woodrow Wilson; (2) the Bank of England’s decision to raise lending rates in 1923 (p. 32); (3) Britain’s decision to return to the gold standard (pp. 39-40).  In each case the government made what Keynes considered to be disastrous decisions, yet at the same time he believed the “he maintains the belief that the government or the Bank of England should manage the economy. Does Keynes believe that the British government as an institution is fundamentally sound, but that they just need better economic advice?  The second point above, evidently, was the beginning of the Keynesian Revolution (p. 32; read footnote 3).  Does that surprise you?

Another continuing questions: what is meant by “laissez faire”?  The simple answer would seem to be that there is “limited” government intervention.  Yet, the Bank of England sets interest rates, the government must make fundamental decisions about the currency — whether or not to adopt a “gold” standard, whether to have a central bank, whether to have a national currency, whether or not to tie that currency to precious metals (e.g., a gold standard or a “bimetallic” standard).  What would constitute laissez faire in these contexts?

As a follow up to this question, on page 43 Wapshott argues that the battle lines are drawn: Keynes believes in using the government as a means to help the disadvantaged, Hayek sees intervention as futile. Again, given what’s going on in these previous two paragraphs, is this characterization too simplistic?

To what extent does Keynes’ advocacy (ideology?) affect his analysis?  Consider his discussion of sticky wages and unemployment on p. 60.

What is the effect of fixing the price of currency to gold on the general price level and on the exchange rate? (see, for instance, pp. 38-9).

What is the “natural rate of interest”? (see, for instance, p. 43).

That should get us through the first hour.  See you at 3:25 in Steitz.

For those of you with some extra spare time, reviews from  Tyler Cowen, Peter Lewin (UT Dallas), and Brian Doherty (Reason magazine), and here’sNicholas Wapshott talkign with Russ Roberts (including beau coup resources at EconTalk).

 

 

Keynes, Hayek, and Other Dead Economists

This term’s economics read, DS 391 Keynes Hayek and Other Dead Economists, triumphantly kicks off this Thursday at 3:25 in Steitz 230.

You should pick up Wapshott and read the first six chapters (pp. 1- 94).  We will circulate discussion questions Wednesday.

Next week we will continue down the Keynes Hayek track, and also begin with the Buchholtz chapter on Keynes.

It’s not too late to join, and you can pick up sign up sheets from Professor Galambos or Gerard.

Here’s some deep background from EconStories.tv.

 

The New EPA Carbon Rule and New Coal-Fired Power Plants

This past week the EPA finally proposed a rule that would limit carbon emissions from new electricity generation.  The rule is the second of a double whammy for coal producers, who are already under intense competitive pressures from the rapid expansion and steep price decreases from domestic natural gas.

According the the Washington Post:

The proposed rule … will require any new power plant to emit no more than 1,000 pounds of carbon dioxide per megawatt hour of electricity produced. The average U.S. natural gas plant, which emits 800 to 850 pounds of CO2 per megawatt hour, meets that standard; coal plants emit an average of 1,768 pounds of carbon dioxide per megawatt hour.

What this effectively means is that any new coal plant construction would have to be built with carbon capture and sequestration technology, or CCS, (see here for details), making it extremely unlikely that the private sector will finance new coal-fired electricity production any time soon.

What will be the effect of this policy on new plant construction? I recently co-authored a paper* that looked at the new electricity plant construction decision as a function of natural gas and carbon prices, including an analysis of what would happen if there was a requirement that new coal plants have carbon capture technology, and we conclude that building CCS plants with private money is very unlikely.  Here is some background of our analysis from our abstract:

Our objective is to assess the commercial viability of CCS given pervasive future uncertainties, particularly uncertainties about future natural gas and CO2 prices. Using data from the Integrated Environmental Control Model (IECM), we develop an interactive Excel-based spreadsheet tool to compare levelized-average costs of four different new-construction 500 MW power plants: natural gas combined cycle (NGCC) with CCS, NCGG without CCS, supercritical coal with CCS, and supercritical coal without CCS. With low natural gas prices, the NGCC without the sequestration option is the dominant technology. Overall, CCS projects for either natural gas or coal projects are unlikely to be the lowest-cost option for CO2 prices less than $50 per ton.

Continue reading The New EPA Carbon Rule and New Coal-Fired Power Plants