Lawrence Economics Blog

Creative Instruction

The Triumph of the City

The above title is not just the title of Edward Glaeser’s book, which Econ 250 (Urban Economics) students will discuss later this term.  It’s also the theme of New York mayor Michael Bloomberg in a commentary in yesterday’s Financial Times.  Bloomberg argues that more than half of the world’s population presently lives in cities and that people in these places generate roughly 80% of global GDP.  As a result, he claims that “cities cannot afford to cede their futures to national governments.”  They must think about what makes them  competitive – a topic that is at the center of Econ 250.

Bloomberg goes on to argue that “for cities to have sustained success, they must compete for the grand prize: intellectual capital and talent.”  This theme echoes Glaeser’s focus on the skilled city.  Why is this important?  Glaeser shares Bloomberg’s view “that talent attracts capital far more effectively and consistently than capital attracts talent.”  Glaeser points out that cities should give priority to spending money on building human capital and fostering innovation and entrepreneurship rather than on new structures and transportation technology.

Bloomberg goes on to discuss what continues to make New York attractive and, at least according to one study, “the most competitive city in the world.”  He concludes “cities must be cool, creative, and in control.”

Special Econ Tea Talk

George Georgiou from the University of California at Santa Cruz will be on campus Friday to give a talk, “An Introduction to Law & Economics.”  Mr. Georgiou is completing his Ph.D. in international economics, with a specialization in applied micro and law & economics.  His work focuses on whether post-incarceration supervision levels affect recidivism.

Mr. Georgiou will give the talk in Briggs 223 at 1:50.

The usual delicious Econ Tea accouterments should be available.

Keynes Hayek: Fight of the Century

Really?

For this term’s community read, we follow up on last term’s Keynes, Cowen, & Capitalism with two books.  The main course will be Nicholas Wapshott’s Keynes Hayek: The Clash that Defined Modern Economics, featuring the co-evolution of the legacies of John Maynard Keynes and F. A. Hayek.  Indeed, frequent readers of this blog or the economics blogospher generally are likely familiar with what I like to call “The Citizen Kane of macro battle rap videos.”

Here’s an excerpt of Tyler Cowen’s review.

Here’s Wapshott talking about his book with co-creator of the Keynes v. Hayek videos, Russ Roberts.

We will also read sections of Todd Buchholz’s now classic, New Ideas from Dead Economists, which should help us put some of this history in context.

As per usual, the course is one unit and requires you to read and to discuss. Please stop by and sign up this week with Professor Galambos or Professor Gerard.  We need to get a head count and set a meeting time.

UPDATE: 391 DS — Keynes, Hayek and Other Dead Economists.  Sign up sheets pinned on our bulletin boards.

We will meet Thursdays at 3:25.

 

 

Springtime in the Econ Dept

Here you go, no waiting.  Most of these courses have space.  Professor Finkler’s urban economics class is speaking intensive.  Most of the other courses are thinking intensive.  Econ 391 requires a signature of the instructor.

See you on Briggs 2nd.

ECON 120 ● INTRODUCTION TO MACROECONOMICS  9:50-11:00 MTWF 9:50-11:00 Ms. Karagyozova

ECON 170 ● FINANCIAL ACCOUNTING  2:30-4:20 TR BRIG 422 ●  Mr. Vaughan

ECON 225 ● GAME THEORY AND APPLICATIONS ● 11:10-12:20 MWF BRIG 223 ● Mr. Galambos

ECON 250 ● URBAN ECONOMICS (S) ● 3:10-04:20 MWF BRIG 223 ● Mr. Finkler

ECON 280 ● ENVIRONMENTAL ECONOMICS ● 9:00-10:50 TR BRIG 225 ● Mr. Gerard

ECON 300 ● MICROECONOMIC THEORY ● 1:50-3:00 MWRF BRIG 223 8:30-09:40 ● Mr. Galambos

ECON 320 ● MACROECONOMIC THEORY ● 9:50-11:00 MTWF 09:50-11:00 Mr. Finkler

ECON 391 ● KEYNES  HAYEK BATTLE OF THE CENTURY AND OTHER DEAD ECONOMISTS  ● TBA 3:30 R

● Mr. Galambos, Mr. Gerard

ECON 421 ● INVESTMENTS ● 12:30-1:40 MWF BRIG 217 ● Ms. Karagyozova

ECON 450 ● ECONOMICS OF THE FIRM ● 12:30-2:20 TR BRIG 223 ● Mr. Gerard

Click here for the full schedule.

Ramen Noodles, Bus Rides, and the World Series (?)

As you know (or should know), an “inferior” good is one where as my income increases, the demand for the good decreases. My in class examples of inferior goods are typically things like Ramen noodles, hot dogs, bus rides, and Irish potatoes back in the day.

In a stroke of WT-you-know-what, John Burger and Stephen Walters from Loyola University in Maryland add the World Series to the list.

You can’t be serious?

Indeed. And, here’s the abstract from their paper in Economic Letters:

World Series telecasts are now an inferior good. Income and the time cost of consumption interact so that a ten percent income increase reduces viewership by 1.8 million households. Increased availability of substitutes reduces ratings but increased drama improves them.

Now why would that be? Is it because the proliferation of substitutes over the years (more cable television options in November).

Look for this in Econ 300 next year.

Ben Bernanke: The Hero or the Villian?

Just in time for your Spring break, Roger Lowenstein (of When Genius Failed fame) gives us an exhaustive profile of Fed chair Ben Bernanke in this month’s Atlantic Monthly.

I am in the middle of big stacks of papers here, so I haven’t had time to plow through the 8,000+ word article, but I like the teaser:

The left hates him. The right hates him even more. But Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times.

Lowenstein appears to cover a lot of ground, including the Krugman v. Rogoff debate.  Here’s a summary and discussion at The Money Illusion blog.

 

Abundance, not Stagnation, Characterizes the Future

If you believe that Tyler Cowen has appropriately declared the end of serious economic growth in the so-called “developed world,” check out the work of Peter Diamandis.  If you fervently disagree with Cowen’s view, also check out Diamondis.  In Abundance, the Future is Better than You Think, Diamondis (with co-author Steven Kotler) calls upon human ingenuity and innovation as the drivers of future abundance.  No Peak Oil here.  He reminds me of Julian Simon (the Ultimate Resource ) who challenged Paul Ehrlich (The Population Bomb) in a famous 1980 bet on the price of various metals and natural resources.  Spare the 16 minutes it takes to watch Diamandis give a Ted talk.

Keynes, Cowen & Capitalism — Related Items

I checked my RSS feeds today and saw two interesting items, spot on in terms of our class discussion.  First up, an important technological breakthrough in medicine?  Here’s Walter Russell Mead:

The medical world may be on the verge of a major breakthrough on par with the discovery of penicillin. As profiled in this NYT piece, a number of Silicon Valley companies and entrepreneurs are looking to lower the price of genome sequencing to the point that it will be within reach of the average consumer (below $1,000)—a development which could lead to the biggest revolution in drugs and medical treatments in years.

On par with penicillin? That’s a lot of value.

Now for something completely different, Derek Lowe suggests that maybe, just maybe, we don’t need more scientists after all. Hmm. I’m not sure I agree with that whole bit. Nonetheless, it’s thought provoking.

As a bonus, he cites a fantastically titled piece by Virginia Postrel, “How Art History Majors Power the U.S. Economy.” Postrel seems to agree with his point:

The argument that public policy should herd students into [Science, Technology, Engineering & Mathematics] is as wrong-headed as the notion that industrial policy should drive investment into manufacturing or “green” industries. It’s just the old technocratic central planning impulse in a new guise. It misses the complexity and diversity of occupations in a modern economy, forgets the dispersed knowledge of aptitudes, preferences and job requirements that makes labor markets work, and ignores the profound uncertainty about what skills will be valuable not just next year but decades in the future.

If you are interested in the average salaries and unemployment rates for different college major choices, Postrel cites this report out of Georgetown University that has some very illuminating figures.

Keynes, Cowen & Capitalism Coda

And, so we wind down another term, and I wonder what exactly is on your mind.  So, for starters, let’s start with Backhouse & Bateman’s characterization of Keynes. What does Keynes see as capitalism’s defect?  What does it “Say” about how his thinking diverges from the status quo at the time?

Now, once we have the defect, is that defect the same type of difficulties that Tyler Cowen and Erik Brynjolfsson and Andrew McAfee are talking about?  Or, put this another way, do Cowen and Byrnjolfsson & McAfee identify the same fundamental defect in the capitalist system that Keynes did?

Once we establish that, let’s get at how Keynes proposed to deal with capitalism’s basic defect. What was his stance in The General Theory?  (Digression: How did Keynes view of this change over time?  What is the basic thesis proffered up by Bateman and Backhouse?). Next, is this way of addressing that defect likely to be of use in addressing the types of problems that worry these other authors?

On that note, if you haven’t done so already, I suggest that you read one of Paul Krugman’s greatest columns ever, “The Accidental Theorist.” I love this column and use it often.  I wish I would have suggested it when we read Brynjolfsson and McAfee.  What does this article imply about the troubles that Cowen and Byrnjolfsson talk about? What does it suggest about Keynesian economics?

What Did Larry Summer’s Say About Women’s Ability to Succeed in the Sciences?

Last Thursday at our weekly discussion of specific works in economics, we discussed Backhouse and Bateman’s book, Keynes: Capitalist Revolutionary. At one point in our discussion, Professor Gerard asked which economist today might be viewed as Keynes was in his heyday.  One reasonable answer was Larry Summers who, as noted here, has held numerous positions including the presidency at Harvard University.  Are there other reasonable answers?  I think so.  Paul Krugman might be a good candidate for a “contemporary” Keynes.

Despite interest in who might be today’s Keynes, this posting addresses remarks that Summers made January 14, 2005 at the NBER Conference on Diversifying the Science & Engineering Workforce.  Asked to be provocative, Summers did not disappoint.  What did he say? I strongly encourage you to read the full speech (go here) which contains carefully constructed cautions and references. He posits, in order of strength, three reasons why women are less prominent in scientific fields.

1. Differences between men and women in terms of their willingness to make the incredible time commitments of high powered jobs.

2. Differences between men and women in “availability of aptitude at the high end”

3. Differences between men and women in terms of socialization and patterns of discrimination.

The controversy focuses on the second reason which he states more fully as follows:

It does appear that on many, many different human attributes-height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability-there is relatively clear evidence that whatever the difference in means-which can be debated-there is a difference in the standard deviation, and variability of a male and a female population.

Stated differently, he presents some evidence for the claim that there are more males than females at both the high and low end of the distribution of mathematical and scientific ability.  This is a statement about variance, not about means. I believe, as does Claudia Goldin, “whose own research has examined the progress of women in academia and professional life” , that Summer’s arguments are constructive food for thought and deserve serious reflection.

My suspicion is that few people have read Summers’ remarks but have settled for the soundbites that have found their way into the popular media.  A liberal arts education should encourage you not to settle for these inflammatory simplifications.

 

 

 

Looking for Sasquatch?

 It’s time for the Environmental Studies Fest, this Thursday, March 8th at 4:15 pm in  the Atrium between Youngchild and Steitz Halls.

Come see what ENST students have been up to……and get Snacks!

Here’s what’s on tap:

  • Transpiration source water and geomorphological potential of root growth in the Boulder Creek CZO, Colorado (Brenna Skeets)
  • The effects of climate change on plant traits and fruiting phenology of Delphinium nuttallianum (Kari Spiegelhalter)
  • Environmental Sustainability Meets Economic Security: China Can Grow Green (Devin Burri)
  • Sea Turtles in French Polynesia (Devin Burri)*
  • Acoustic Monitoring of Local Bats (Ronan Christman)
  • Looking for Sasquatch: Explorations as a Wilderness Ranger in the Siskyou National Forest (Will Meadows)
  • Effect of land use on flooding events in the Apple Creek basin (Elissa Tikalsky)*
  • Unique Aspects of Urban Planning in Hong Kong (Elissa Tikalsky)
  • What role does Palm Oil play in Sierra Leone economically, environmentally and culturally? (Amanda Dwyer)*
  • Environmental and Economic Effects of the Reuse of Pint-Sized Plastic Bottles in the Palm Oil Market of Freetown, Sierra Leone (Amanda Dwyer)
  • Modeling the effects of insulation and air exchangers on indoor temperature, humidity and particulate matter (Eli Hungerford)*

*ENST 650 Capstone projects

I&E in the News

For those of you without access to the many thousands of copies of The Lawrentian around campus, this week’s cover story features none other than the good work of the champions of the Innovation & Entrepreneurship program.

According to Professor John Brandenberger (and, no, his first name is not “Emeritus”) “There is no better time than the present… to teach liberal arts students who are developing the creative skills to be innovators over their four years at Lawrence, to be aggressive in their entrepreneurship.”

Well put.

President Beck also weighs in:

“In the arts, professors are interested in theater internships, print-making workshops and other ventures that enable students to connect their major to a business orientation. There are many examples of student interest so far, such as The Rabbit Gallery and Baroque Music and Dance Ensemble. [In addition], alumni are offering more and more internships to students, to help students put their thoughts into action, sometimes for the first time.”

The cover photo of The Lawrentian includes I&E stalwarts Professor Adam Galambos and Professor Gary Vaughn, along with a nice profile shot of budding entrepreneur, Ranga Wimalasuriya

Man Bites Dog Reading Book

It is well known that author’s clamor for Oprah’s endorsement because the book sales go bonkers, and sales of the author’s other books also go bonkers.  The conventional wisdom is that publishers love Oprah because she pumps up book sales.

On the other side of Chicago, however, Northwestern’s Craig Garthwaite has another tale to tell:  Oprah’s endorsements reduce overall book sales:

In the publishing sector, endorsements from the Oprah Winfrey Book Club are found to be a business stealing form of advertising that raises title level sales without increasing the market size. The endorsements decrease aggregate adult fiction sales; likely as a result of the endorsed books being more difficult than those that otherwise would have been purchased.

It is I who emphasized that startling finding. Here’s how Garthwaite describes it:

At the genre level, the post-endorsement period is marked by large sales declines in the romance, mystery, and action categories. These genres were popular prior to the endorsements in the geographic areas demonstrating the largest endorsement responses. Using quantitative measures of text readability, I show that endorsed titles require one additional year of education to read than is typical for romance, mystery and action books. Furthermore, the post-endorsement sales decline was largest following the endorsement of classic novels, which require nearly four more years of education to comprehend than typical romance, mystery, or action titles. Since the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent reading the text, the post-endorsement sales decline in publishing should be considered similar to endorsements in other sectors that shift consumers towards more expensive products.

The Late, Great Bubba Smith

I read through the paper this evening, and this will likely wind up on my Industrial Organization reading list for next year. We’ve seen a similar phenomenon in our analysis of the beer industry — advertising doesn’t increase overall sales so much as it redistributes sales within the sector. Indeed, we kick off that class with a simple advertising game model, where advertising expenditures are treated as a prisoner’s dilemma, and we learn why incumbents are often copacetic with an advertising ban.  The analogy here, I guess, is that a beer producer that heavily advertises a new, difficult-to-drink product could cause an overall beer consumption to go down (possible ad line: New Bud Super Dark: It’s Like Drinking a Bagel ! ).

I wonder if the “light beer” revolution of the 1970s had the opposite effect?

Via the fellas at Marginal Revolution.

Is 2013 a Ripe Time for Fundamental U.S. Tax Reform?

Yes, trumpets Lawrence Summers in today’s Financial Times. Presumably, anyone who pays any attention to the Washington scene knows Larry Summers.  Just in case you haven’t been paying any attention for the past 20 years, the bullet point version of Summers’ CV might read as follows:

  • Harvard Professor of Economics
  • Chief Economist of the World Bank
  • Secretary of Treasury under President Clinton
  • President of Harvard University
  • Chief Economic Adviser to President Obama

Few people – economists, policy analysts, or politicians – defend the current tax codes filled with huge inequities in both horizontal and vertical directions (as argued here.)  Tax “loopholes,” tax expenditures (CBO estimates), or societal preferences – if you care to be generous – reduce taxable income by at least $800 billion per year.  Stated differently, if all special provisions (i.e., everything but the personal exemption) of the U.S. tax code were eliminated, income tax revenue would rise to at least $2 trillion and cover about two-thirds of the estimated U.S. Federal deficit for 2012.

So what makes 2013 so special?  Summers gives a variety of intriguing answers including the following:

  • President Bush’s tax cuts expire
  • Congress faces its mandated sequester of $1.2 trillion spending for the next decade
  • Congress must again vote on the legally binding Federal borrowing limit
  • Fundamental reform can happen in the year after a Presidential election
  • The last serious tax reform took place in 1986 (when a Republican President reached agreement with a Democratic legislature)

As Summers argues,equity, efficiency, and budgetary reasons all dictate that we need to fundamentally reform the tax structure.  The longer we wait, the more difficult the choices will be. If (when?) the rest of the world decides it no longer has a voracious appetite for U.S. Treasuries, our choices will be much more painful.  He argues, and I agree, a good place to start would be the recommendations of the Simpson-Bowles Commission appointed by President Obama, which unfortunately in my view, he chose not to back vigorously.

Please Do Not Try this at Home, Especially My Home

In our continuing series on moral hazard I ask you this: what is the opportunity cost &/or reservation price of your off hand?

Consider this:

Thirty-four-year-old Gerald B. Hardin faces six charges, including mail fraud for a 2008 incident in Sumter County where a man’s hand was cut off with a pole saw.

Federal indictments state that Hardin and another person used a saw to intentionally cut off the hand of a third person in an insurance fraud scheme. The indictment says the men submitted claims under a homeowner’s insurance policy and three accidental death and dismemberment polices.

It says the men received more than $670,000.

So the guy with the missing hand must have a reservation price pretty far south of $670,000, as the perpetrators split the ill-gotten booty three ways. You have to hand it to these guys, though, coming up with this sleight-of-hand to outwit their insurance providers.

Well, almost

I have to ad-mitt that the article doesn’t say that it was his off-hand. But, on the other hand, I bet the payout for the dominant hand is higher, but that is just an off-the-cuff conjecture.

Are Cracks Developing over Chinese Water Usage?

Whose side are you on?

I’m not the resident expert on water usage in China, but there is something unsettling about recent reports out of Shanghai.

Here’s the story:

Slated to be the China’s tallest building upon completion, the 632-meter tall Shanghai Tower conveys stability, if not permanence.

The ground under it, however, is another story.

Spectators were intrigued in mid-February when a giant 8-meter long crack appeared in the asphalt near the tower. The crack was a reminder of Shanghai’s shifting and sinking ground, which scientists say makes the city vulnerable to rising sea levels.

And Shanghai is not alone. China’s Ministry of Land and Resources recently reported that the ground is sinking under more than 50 cities. The culprit is the overuse of groundwater, the ministry’s Geological Environment Department Deputy Director Tao Qingfa told Caixin.

When residents consume too much groundwater, water pressure underground depletes and causes the soil to shift and sink, Tao said. Beijing, Tianjin, Hangzhou and Xi’an are all sinking in certain places as a result, he said.

I saw this over at foreign policy scholar Walter Russell Mead’s blog.  He seems to think the crack is a metaphor for fractures in China more generally, as rifts develop between rich and poor, urban and rural, local and national, authority and spontaneity. As Professor Mead puts it, “Sooner or later, something will give.”

Rapid industrialization doesn’t come easy.

Economics of Innovation in the New “Pamphlet” Era

This week seems to be innovation week for me, as I am reading two short books on the heels of The Great Stagnation. Reading these pieces, I can’t help but get the feeling that the economics profession is hurtling into a blog-soaked, pamphlet-era frenzy.  First up for Econ 100 is Alex Tabarrok’s Launching the Innovation Renaissance  (review here), where Tabarrok makes a case against patents, holds out promise for prizes, and makes a plea for broad educational reform in both primary and secondary education.  For the Reading Group crowd we have Erik Brynjolfsson and Andrew McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, and with a subtitle like that, who needs a description?

So for those of you who have read one and need a primer on the other, here you go:

As a warm up to Renaissance, here is Tabarrok giving his TED lecture. Here’s a bit on education. (If you follow all the links at Marginal Revolution, you can pretty much read the whole book).

Here are Brynjolfsson and McAfee summarizing their argument in The Atlantic.  See also Professor Finkler’s recent plug.

I’ve read both and recommend both.  We’ll see what my Econ 100 students think.  Thought provoking all around.

The Federal Income Tax is Both Horizontally and Vertically Inequitable

In today’s Economix blog, Bruce Bartlett argues that our Federal income tax burden violates two fundamental economic principles.  Although the tax system on average is progressive (in the sense that households in higher income groups pay on average proportionately higher tax rates than those in lower income groups), it violates both horizontal and vertical equity.  Horizontal equity requires that people with the same income and circumstances should pay the same tax rate.  Vertical equity usually is interpreted to mean that those with greater ability to pay (higher income and all else equal) should pay higher tax rates.  As the chart below, taken by Bartlett from the Annual Report of the Council of Economic Advisors Report for 2012, shows numerous inequities exist.

The chart should be read horizontally.  For those in the middle quintile (40-60% levels) of income, the average income tax rate ranges from 1.7% to 23.5%.  For those in the top 1% bracket, the range is from 8.7% to 34.6%.  Clearly horizontal inequity exists within each quintile and vertical inequity exists across quintiles, since many in higher quintiles pay a lower rate than many in lower quartiles.

These results arise because different incomes are taxed differently.  Those whose incomes are attributed to labor face higher rates than those whose income can be attributed to capital.  This is especially pertinent for investment fund managers who are paid in capital gains rather than salary.  Not only do they pay a lower income tax rate than those with the same level of income but they also avoid some payroll taxes assessed against wages and salary income.

Any serious attempt at tax reform should directly confront these inequities not only for “fairness” reasons but because the income tax system provides strong incentives that distort the allocation of labor and human capital toward favored categories, many of which benefited greatly over the past decade.

 

Man vs. the Machine. Man is Losing

This week many of you are reading Brynjolfsson and McAfee’s book Race Against the Machine.  The authors make reference to a September 28, 2011 Wall Street Journal article by Kathleen Madigan entitled “It’s Man vs. Machine and Man is Losing.”  Madigan provides the chart below to illustrate the relative growth of equipment and software in comparison with payroll employment since the trough of the recession in June 2009.

As I have previously argued here and here, Madigan notes how the relative price of labor compared to capital is consistent with the pattern shown in the above chart.  Again, job creation clearly is quite difficult if the incentives are perverse.