Lawrence Economics Blog

Creative Instruction

Is China’s Capacity Too Big Not to Fail?

I was having a discussion with one of my colleagues about Chinese economic growth prospects, and I invoked this Nouriel Roubini (a.k.a., Dr. Doom) piece, “China’s Bad Growth Bet.”  The basic argument is that China is overcapitalized and this will lead to problems:

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Continue reading Is China’s Capacity Too Big Not to Fail?

Streaming Profitability

The Atlantic Monthly pauses from its Ideas Report to try to explain why Netflix is so successful. Here’s the gist:

An Oldie but Goodie

In fact, the dirty little secret of the media industry is that content aggregators, not content creators, have long been the overwhelming source of value creation…

The economic structure of the media business is not fundamentally different from that of business in general. The most-prevalent sources of industrial strength are the mutually reinforcing competitive advantages of scale and customer captivity. Content creation simply does not lend itself to either, while aggregation is amenable to both.

I’m not sure what to make of this piece.  It reads something like a five-forces analysis, and argues not only that Netflix is the real deal, but that there are significant barriers to entry in the streaming content business.  It will be interesting to send this balloon up in next year’s IO class and see if anyone cares to shoot it down.

Thoughts on The Big Short

I finished up Michael Lewis‘s The Big Short and I think I found it worthwhile and poignant.   It’s a character-driven piece that follows some of the players — as the title suggests — who shorted the housing market and went to the bank.  To Lewis’s credit, he seems to do a pretty good job of explaining the crazy financial instruments created and deployed to bet against subprime mortgages.  To my debit (?), I still don’t understand what was going on with all of this.

The big villains of the story are certainly the ratings agencies, who could have stopped much of this chicanery in its tracks by rating garbage as garbage rather than as AAA investment-grade bonds.  But, perhaps a pithier point comes in the book’s denouement and is worth quoting at some length:

The people on the short side of the subprime mortage market had gambled with odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with odss against them. Up to this point, the story could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich… Continue reading Thoughts on The Big Short

The Great Portland Flush

In our continuing series of thorny policy issues, here’s one from the great northwest.  The city of Portland flushed millions of gallons of treated drinking water because a man urinated in it.  Does that seem reasonable? Or is it a wee bit crazy?

Here’s the abbreviated story from the NYT.

Portland is disposing of eight million gallons of drinking water because a man was caught on camera urinating in a reservoir. Water from the city’s five open-air reservoirs goes directly to customers. A city official said he did not want to serve water with urine in it.

Critics call that an overreaction, saying animals routinely defecate and urinate in the reservoirs and sometimes die in them. Health officials say that urine is sterile in healthy people and that the urine was so diluted it posed little health risk.

Officials say it will cost the system’s customers less than $8,000 to treat it as sewage. The 21-year-old man caught on camera has not been charged.

I will spend the next year trying to figure out how to make this into a final exam question.

Old School Essay and Book Recommendation (Summer Reading, Part 3)

In a piece dear to the hearts of all my Econ 300 students, Master of rhetoric Deidre McCloskey lays out the case for teaching old school, Chicago economics.  Although I certainly beat the maximize! drum, the central intuition is certainly that profits drive economic activity in the long run. McCloskey traces the historical context back to Adam Smith:

The core of Smithian economics, further, is not Max U. It is entry and exit, and is Smith’s distinctive contribution to social science… He was the first to ask what happens in the long run when people respond to desired opportunities. Smith for example argues in detail that wage-plus-conditions will equalize among occupations, in the long run, by entry and exit. At any rate they will equalize unless schemes such as the English Laws of Settlement, or excessive apprenticeships, intervene. Capital, too, will find its own level, and its returns will be thereby equalized, he said at length, unless imperial protections intervene.

The essay is interesting throughout, and I certainly approve of her message on this point.

If you like the rhetoric of this piece, you might consider checking out some of McCloskey’s  other works, as she is indeed a prolific writer.  One recent add to my summer reading list is her update of The Rhetoric of Economics. In it, she argues that “economics is literary,” and that making a persuasive case is “done by human arguments, not godlike Proof.”

This is one of McCloskey’s continuing projects. This one began with her work in the 1980s, and continues to be discussed today. The preface to the second edition, in fact, begins with a discussion of why more people didn’t read past chapter 3 in the first edition.

Why didn’t the fiscal stimulus have large effects on employment?

As noted previously,  cheap capital and expensive labor tend to lead to the substitution of capital for labor – after all capital is often called “labor saving devices” for a reason.  Now, we have solid evidence that the total cost (wages or salary and benefits) of labor has risen markedly while equipment and software costs have fallen since 2009.

For the rest of the story, see Catharine Rampall’s NY Times Economix blog last Friday entitled “Man vs. Machine.”   To put it most starkly, if your job can be replaced by an algorithm, it probably will be.  As those who took Econ 320 should know, if you attempt to implement  macroeconomic stabilization policy without understanding the microeconomics of labor markets, you may not be blessed with success.

Paul Romer Speaks on Charter Cities

Paul Romer has a vision of turning dystopias into engines of economic growth by establishing “Charter Cities” — new cities with a new set of rules.

How does this work?  Well, we’ve plowed this ground once.  But for those of you who didn’t wade through The Atlantic Monthly piece, “The Politically Correct Guide to Ending Poverty,” you can get condensed versions with Paul Romer’s TED talk or his interview at VoxEU.

Romer is an exceptional intellect and this is probably worth your 12 minutes.  Or 24 if you listen to both.

Why Go to College?

With reunion upon us, it is an excellent time to ask, “why go to college?”  Indeed.  To help us out with that question, Louis Menand has a provocative piece in a recent New Yorker examining the ins and outs of  this exact question.  As I got a few paragraphs into this one I started to wonder why this question gets discussed so rarely. It hardly seems self-evident, but I would guess it’s some combination of “expand your mindset,” “expand your skill set,” and “expand your wallet.”

Of course, Menand is a more eloquent writer than I am, and he posits two theories, with the first one going something like this:

College is, essentially, a four-year intelligence test. Students have to demonstrate intellectual ability over time and across a range of subjects. If they’re sloppy or inflexible or obnoxious—no matter how smart they might be in the I.Q. sense—those negatives will get picked up in their grades. As an added service, college also sorts people according to aptitude. It separates the math types from the poetry types. At the end of the process, graduates get a score, the G.P.A., that professional schools and employers can trust as a measure of intellectual capacity and productive potential. It’s important, therefore, that everyone is taking more or less the same test.

That seems like a riff on the “expand your wallet.”  The second has more to do with expanding horizons:

College exposes future citizens to material that enlightens and empowers them, whatever careers they end up choosing. In performing this function, college also socializes. It takes people with disparate backgrounds and beliefs and brings them into line with mainstream norms of reason and taste. Independence of mind is tolerated in college, and even honored, but students have to master the accepted ways of doing things before they are permitted to deviate. Ideally, we want everyone to go to college, because college gets everyone on the same page. It’s a way of producing a society of like-minded grownups.

At Lawrence, we recruit students based on our mission in the liberal arts, so I’m not sure if you could pigeonhole us into either of those categories.  But we certainly make the claim that we train people to think and communicate, which are not explicitly vocational skills, but do come in handy.

Menand is certainly sympathetic to our cause, here and elsewhere, and makes some interesting points about our students.  One is the results of the Collegiate Learning Assessment — a test designed to see if students learn anything in college:

The most interesting finding is that students majoring in liberal-arts fields—sciences, social sciences, and arts and humanities—do better on the C.L.A., and show greater improvement, than students majoring in non-liberal-arts fields such as business, education and social work, communications, engineering and computer science, and health.

Well, that’s reassuring.
Definitely worth a read if you are interested in higher education.

Trade Agreements and Transitional Costs for Workers

As with many aspects of economic policy, political leadership – such as it is – often snatches defeat from the jaws of victory.  Presently, the United States has the opportunity to sign trade agreements with Columbia, South Korea, and Panama that will provide great opportunities for U.S. exporters without having to offer special privileges or changes in domestic markets related to products from these countries.

Why might Columbia, South Korea, and Panama want to sign these apparently one-sided agreements?  One answer is their economies would benefit greatly from better access to goods from the U.S.  Why have we resisted signing these agreements?  Many advocates in these country believe that trade hurts domestic workers.   This certainly is true in the short run for workers whose jobs end because the products they produce no longer are competitive with imports.  It’s also true when capital investment, often spurred by low interest rates, encourages the substitution of capital for labor.  Neither of these concerns, however, are pertinent for the trade policy opportunities before us.

Passage of the aforementioned trade deals seems to be based on support for expanded trade assistance, a policy that provides specific benefits to some who can prove that they have lost jobs as a consequence of import competition.  Matthew Slaughter and Robert Lawrence in today’s Opinion Pages of the New York Times argue that both more trade and more aid make sense, but the aid should not be specifically focused on those who allegedly lost jobs as a result of imports.  They propose an innovative program that combines the existing trade adjustment policy with unemployment compensation benefits to create a new, more efficient safety net that, among other things,  helps workers retool for different jobs and provides funds for health insurance in the interim.

I hope, but am not too optimistic, that our Congressional leaders, will recognize the equity and efficiency improvements offered by both the trade deals and the Slaughter-Lawrence proposal, pass the trade agreements for the aforementioned countries, and craft a new, improved safety net designed to help with labor market and structural unemployment transitions.

Come to think of it, he does speak kind of softly

Professor Parks Sets the Tone

There was plenty of excitement this past Sunday at the Lawrence University Commencement, and the Appleton Post-Crescent seems to have captured much of it in this nice little photo layout.

Obviously, you can’t tell the players without a scorecard, so that on your left is the faculty Marshall, Professor of Mathematics Alan Parks, wielding the ceremonial (at least let’s hope so) faculty mace.

Below we have one of our graduating seniors, Karl Hailperin, who distinguished himself as an enthusiastic student, an avid reader, a stalwart at EconTea, and an all around good guy.  He will definitely be missed.

Enjoy the photos!

Karl gets his due. Congratulations!

Summer Reading, Part 2

I am not sure what I’ll be reading this summer, but I’m happy to share some of my candidates for summer reading. In any case, these might be worth considering for your summer reading list.

I have been interested in information theory for some time, and James Gleick’s The Information: A History, A Theory, A Flood looks like great summer reading. It is accessible and broad-ranging, as far as I can tell so far. If you are interested in the technical details, something like the Elements of Information Theory by Thomas Cover and Joy Thomas will help.

I heard Larry Robertson talk about entrepreneurship at a symposium this year, and I was very impressed by how he approached the topic. So, I am interested in learning more about his approach from his book, A Deliberate Pause: Entrepreneurship and Its Moment in Human Progress.

When countries are ranked according to how important a role entrepreneurship plays in their economies, Israel almost always comes out near the top. In their book Start-Up Nation: The Story of Israel’s Economic Miracle, Dan Senor and Saul Singer look at the possible reasons. I am half-way through the book, and I like how the authors try to offer as nuanced a view as they can. In searching for reasons, it is often tempting to run with a “simple” cultural explanation. While culture certainly must play a role,  there are many other important factors, sometimes interacting with culture. I am especially interested in how government policy has enabled the blossoming of entrepreneurial ventures.

Following my interest in entrepreneurship in the arts, I hope to get to Why Are Artists Poor? The Exceptional Economy of the Arts, by Hans Abbing. The author is both an artist and an economist, so I am hoping for some really well-informed and rigorous analysis.

Moving on to innovation, I can’t wait to read Inside Real Innovation by Fitzgerald, Wankerl and Schramm. Professor Brandenberger has built up my expectations quite a bit through his enthusiastic summary of some of the main arguments, including the emphasis on the non-linearity of the process of innovation.

Well, if you get to any of those, let me know what you think. I will definitely read something more literary as well, but I am really not sure what that will be. In addition, I hope I’ll have a chance to listen to some great live music every now and then, and I wish you the same.

Summer Reading, Part 1

Now that Commencement has passed, we can get on with our summers.  For me, that means I can try to take a bite out of the big, tasty stack of books I have been accumulating over the past 9 months.

These are my picks:

Michael Lewis, The Big Short.  Almost anything by Lewis is fun to read.  I was plussed* by the series he did for Vanity Fair, and recommend those highly. Last year we read his classic, Moneyball.

Peter Drucker, Innovation & Entrepreneurship.  This summer’s Reading Group pick.

Tim Harford, Adapt: Why Success Always Starts with Failure. Harford writes beautifully (well, for a guy on the economics beat) and his explanations are generally lucid, convincing, and theoretically sound.  More on Harford here.

Daniel Okrent, Last Call.  Tyler Cowen calls this history of U.S. prohibition “a masterpiece.” I am interested in the causes and consequences of criminalization of drugs and alcohol, and I am guessing excerpts of this will end up on my political economy reading list. Perhaps a course on the subject?

Ron Howard and Clint Korver, Ethics (for the real world): Creating a Personal Code to Guide Decisions in Work and Life.  Howard is considered the father of decision science by many (and founder of the purple balls!). Korver is a successful entrepreneur and fellow Grinnell alum! I like this quote on “ethical dilemmas,” which they say is often fundamentally misunderstood:

“When we pick up just about any newspaper, we read about people caught in ‘ethical dilemmas.’ But nine times out of ten, they are not dilemmas at all. They are conflicts between prudential gain and ethical action. They are issues of temptation.” (p. 38).

Yup.

Philip Mirowski, Science Mart: Privatizing American Science. This looks like a clear winner. A historian I sometimes fraternize with is excited about this one, and I hear that “Mirowski is a wild man.” Let’s hope so. Expect to see this in Econ 450.

F.A. Hayek, The Road to Serfdom.  Following the Schumpeter Roundtable and Discovering Kirzner, we are picking up Hayek this fall as our department reading pick.

Jonathan Franzen, Freedom. Well, I am going to be on the beach for a week.

*It’s possible that “plussed” isn’t a word.  Perhaps it should be.

Professor Corry Picks Up Some Hardware

Goofier than you might think...

Assistant Professor of Mathematics and charter member of the I&E Reading Group, Scott Corry, won the Young Teacher Award for — you guessed it — his teaching excellence.  Provost Burrows awarded Corry with the honor at the 2011 Lawrence University commencement ceremonies this past Sunday.

Professor Corry exhibits the characteristics of a prototypical liberal arts teacher-scholar. In addition to being a gifted mathematician, he is a man of varied intellectual pursuits — a champion of the Freshman Studies program, an avid community reader, and probably a lot of other things he doesn’t tell me about.

For us down on Briggs 2nd, he has established himself as a pillar of our  I&E Reading Group, having plowed through the likes of Schumpeter, Kirzner, and now Drucker. We look forward to reading and discussion with him for years to come.

So a warm congratulations from your friends in the economics department!

And they’re off… 2011 Commencement

The flowing robes, the grace... striking

We say farewell to our seniors with a repost from last year.

In our continuing attempt to understand the world around us, today we will talk about the tradition of wearing cap & gowns for graduation ceremonies.

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 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:

When American universities sprang up in the 17th and 18th centuries, they adopted many Oxbridge academic traditions, including robe-wearing… Continue reading And they’re off… 2011 Commencement

Are you smarter than an 8th grader (from Moscow)?

There is more...

You can find out by giving these problems a try. For comparison, here is an 8th grade contest from Math League, which I am not familiar with at all.It definitely wins in the cool pictures category. I suppose you wouldn’t want 8th graders to get bored while solving math problems in a competition. (There is a nontrivial risk of boredom, actually.) To be fair, one can find much better math competition problems in the US, like this one, called Abacus. By a remarkable coincidence, “[t]he program is based on a printed journal for gifted students, originating in Hungary over 100 years ago.”

“No more gorillas in hysterical herds”

Separated at Birth?

On Sunday, former Senator Russ Feingold will pick up an honorary degree and deliver our Commencement speech as our seniors prepare to march off in glory. Feingold was a notoriously independent voice, as evidenced by his lone vote against the PATRIOT Act. Illustrating the odd second dimension of American politics, this week Tea Party hero, Rand Paul, nearly derailed the reauthorization of the PATRIOT Act by fundamentally siding with Senator Feingold’s position on the encroachment of federal power.

Indeed, the libertarian press shed a tear for Feingold, even comparing him to the incomparable Wisconsin icon, Robert LaFollette.

As H.L. Mencken wrote of the original LaFollette:

There is no ring in his nose. Nobody owns him. Nobody bosses him. Nobody even advises him. Right or wrong, he has stood on his own bottom, firmly and resolutely, since the day he was first heard of in politics, battling for his ideas in good weather and bad, facing great odds gladly, going against his followers as well as with his followers, taking his own line always and sticking to it with superb courage and resolution.

Suppose all Americans were like LaFollette? What a country it would be! No more depressing goose-stepping. No more gorillas in hysterical herds. No more trimming and trembling. Does it matter what his ideas are? Personally, I am against four-fifths of them, but what are the odds?…You may fancy them or you may dislike them, but you can’t get away from the fact that they are whooped by a man who, as politicians go among us, is almost miraculously frank, courageous, honest and first-rate.

So farewell to Feingold.

Indeed, I bet civil libertarians miss Senator Feingold on the floor, as he and Paul would have made for interesting bedfellow.  Here’s Lynne Kiesling at Knowledge Problem on some recent trends in security versus liberty tradeoffs.

On the Road with F. A. Hayek

This fall, Professor Galambos and I will be leading a group read of F.A. Hayek’s The Road to Serfdom. The course will be offered for one unit as DS 391 — On the Road with Hayek, and we will have a sign up and coordinate times at the beginning of fall term. I expect with this book we will probably meet eight of the ten weeks.

If you are the type that lets one-unit courses slide, you might consider picking up the book and giving it a once over this summer in preparation for fall term. I suggest you get the edition edited by historian of economic thought, Bruce Caldwell.

For those of you looking to kill an hour with a podcast, here’s Caldwell at EconTalk, talking about Hayek.

Here’s Hayek’s classic American Economic Review piece, “The Use of Knowledge in Society.”  And here.  And here’s Hayek’s Nobel lecture, “The Pretence of Knowledge.”

See you this fall.

UPDATE:  You can get an add course sheet outside of our offices.

Support Your Local Cyclists

Professor Finkler will join Provost Burrows and our new women’s basketball coach Carr to cycle the the Scenic Shore 150  a two-day 150-mile bike ride along the shore of Lake Michigan on July 23-24th.  This year’s goal is to raise $700,000 for the Wisconsin chapter of the Leukemia and Lymphoma Society to support research and to help patients with blood cancers live better, longer lives (http://www.lls.org/).

We invite you  to join our effort  this year. To contribute online, use the cumbersome link below and select any of the Mythical Beasts as the vehicle for your contribution.

(http://wi.llsevent.org/pledge/team_listing.cfm?415F22087C090E0405650147515B357A050A07760D72675E431557555F570D3D0807)  [or use http://wi.llsevent.org and follow DONATE]

If you would prefer to contribute by check, you can send a check, made payable to the Leukemia and Lymphoma Society, to any of the Mythical Beasts team members listed below.

Thanks for your support.

Mythical Beasts – 2011

Andy Boryczka

Dave Burrows

Tara Carr

Marty Finkler

Kathy Greene

Teresa Leopold

Brock Spencer

Pablo Toral

Ruth Vater

Sue Vater Olson

Math 300 Final Exam Help

Question: Prove that any sequence of the word “buffalo” of length n>1 is a valid English language sentence.

Proof (via Brad DeLong’s comments)

First, let n be odd. We start with n=3: “Buffalo buffalo buffalo”; that is, some buffalo do buffalo buffalo, i.e., some buffalo are buffaloed by buffalo. But of course the buffalo who are buffaloing may themselves be buffaloed by buffalo, so just as some cats that watch mice are chased by dogs, or as we say, cats dogs chase watch mice, buffalo that buffalo buffalo themselves buffalo buffalo, and we can say that buffalo buffalo buffalo buffalo buffalo. Anytime we have the noun buffalo, we can add the relative clause “who are buffaloed by buffalo”, or better, instead of the noun phrase “buffalo who are buffaloed by buffalo”, we may say simply “buffalo that buffalo buffalo”, then add the rest of the sentence, yielding “Buffalo that buffalo buffalo buffalo buffalo”, or even better, “Buffalo buffalo buffalo buffalo buffalo”. To a sentence consisting of n (odd) occurrences of the word, we can produce a sentence of n+2 occurrences.

Thus for any odd n, a sequence of n occurrences is a sentence.

But just as a dog that chases cats is a dog that chases, buffalo that buffalo some buffalo are buffalo that buffalo, so from one of our sequences of an odd number of occurrences, we can lop off the final direct object, producing a sequence of an even number of occurrences that is a grammatical sentence. For any n>1, odd or even, a sequence of n occurrences of “buffalo” is a grammatical English sentence!

Q.E.D.