Lawrence Economics Blog

Creative Instruction

Business, Entrepreneurship, and Society Program

Last Friday and Saturday, I participated in a variety of activities related to the Chicago ACM program on Business, Entrepreneurship, and Society.  Two current seniors, Alex Chee and Cuong Nguyen, are enrolled in the program and have fascinating internships that they will tell us about when they return in January.

We visited the Industrial Council of Nearwest Chicago (ICNC), which has been serving business start-ups for 40 years.  The above building houses over 120 tenants that are in the early stages of business development.  ICNC owns and manages this 410,000 square foot space and supports the resident entrepreneurs with a variety of services including counseling and technical assistance, advocacy, recruitment, funding, and employee training.  We met with one firm (Souldier) that recycles automobile seatbelts into guitar straps (for famous and not so famous bands) and another (Aloft) that teaches how to do aerial acrobatics on silk ribbons hung from the rafters – an awe inspiring vision.

If you fancy yourself as an entrepreneur, seriously consider enrolling in this program.  You will find out whether such a lifestyle is a perfect fit for you.  If you have questions or seek more information about the program, come see me.

Access to Capital

When I conceived of the “free market Monday” tag, this recent Reuven Brenner article in Forbes is what I had in mind.  Brenner is one of the great champions of the idea that access to capital and fluid capital markets are prime drivers of capitalist economies. In this piece, he talks about the importance of risk capital in revitalizing the North American economic outlook.

I also recommend Brenner’s Force of Finance for anyone looking for a modern day capitalist manifesto.  You can get a good taste of Brenner in his review of Invention of Enterprise.

Grand Challenges in Economics Research

The National Science Foundation solicited the views of a number of leading (?) economists on what the grand challenges of economic science are for the next decade. Some of the responses are available here–you may not understand much of what these white papers are about without serious background in economics, but I still encourage you to take a look and see where the hottest stuff in economics might be when you are in grad school, if you choose that route. After a quick glance, it does seem to me that many of these white papers are about the authors advancing their agendas rather than visionary perspectives that live up to the “grand” in the challenge. These are certainly no Hilbert’s ten problems for economics. Another thing that occurred to me: of the fifty or so authors of these white papers, only three or four are women. Therein lies another grand challenge for economics, I think.

[HT to Noam Nisan at the Algorithmic Game Theory Blog]

The New JEPs are Here!

Things are going to start happening to me now!

Just in time for the end of term, the new Journal of Economic Perspectives is here, the new Journal of Economic Perspectives is here.  And this quarter’s issue is chock full o’ articles* about the state of macroeconomics after the financial crisis, so that should be fun to peruse.

The new JEP also has an article titled “Activist Fiscal Policy” by Alan Auerbach and colleagues, which has been a continuing source of consternation inside and outside of the profession (see here for our previous post on this topic).  Here’s the abstract:

During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

It’s interesting to look through the article, if for no other reason to look at the variances in estimated multiplier effects for different policy levers.  For example, direct government purchases have a range of 1.0 to 2.5, whereas the extension of the homebuyer credit seems to be self-defeating, ranging from 0.2 to 1.0.  Federal transfers to state and local governments vary depending on whether the spending targets infrastructure, and transfers to individuals range from 0.8 to 2.2.

Wow, we really don’t have a very good idea about how this works.

*Yes, Chock Full O’ Nuts is really a coffee brand.  As we saw in class, it has a lower price elasticity than brands such as Folgers and Maxwell House.

A Serious Deficit Reduction Plan, At Last

President Obama created a deficit reduction commission that has been asked to propose ways for the United States to bring down the (annual) deficit to GDP ratio from above 8% presently to 3% by 2015.  The two committee chairs,  Alan Simpson – former Republic Senator from Wyoming – and Erskine Bowles – former Clinton administration chief of state – have published a list of contentious ideas they believe necessary to achieve the intended target.  They have not avoided controversial programs such as Social Security, Medicare, mortgage interest rate deductions, and defense spending since they recognize that serious plans require serious discussion.

Their report must be made public by December 1st, and if it garners the votes of 14 of the 18 commission members, it must face an up-down vote in each house of Congress.  I find this effort the most interesting one related to politics since the Greenspan Commission to modify the Social Security program presented its report in 1983.  I wish them good luck.  They (and we) will need if we are to make serious progress and reducing future economic instability.

“It’s like a United Nations of tobacco victims…”

File this one under truth is stranger than, well, it’s pretty strange.  The United States Food and Drug Administration (FDA), the agency responsible for regulating cigarettes — yes, you read that correctly — has proposed some innovative mandates on cigarette packaging, intended to reduce tobacco consumption.

And, here they are:

There is a whole tortured history of how the agency responsible for approving new drugs is also the agency responsible for regulating the “safety” of cigarettes, but that’s probably for another day.  For today commentary, the wise guys over at The Awl sum it up pretty nicely.

They’re all here: hole-in-the-throat guy, child at risk, toe-tag dude, skeletal cancer man, preemie, zipper-chest fella, weepy lady… it’s like a United Nations of tobacco victims.

Another place to file this is under “Health and Human Services” and its proposed tobacco strategy.

More on My Favorites

I was perusing Kottke.org — a “weblog about the liberal arts 2.0” — last night and noticed how much great stuff he has on innovation & entrepreneurship.

He gives us a taste of an upcoming movie about Linotype:

Linotype: The Film is a feature-length documentary film centered around the Linotype typecasting machine invented by Ottmar Mergenthaler. Called the “Eighth Wonder of the World” by Thomas Edison, the Linotype revolutionized printing and society, but very few people know about the inventor or his fascinating machine…. The Linotype completely transformed the communication of information similarly to how the internet is now changing it all again.

He also has a piece on how the U.S. Navy is developing antennae made of seawater. And he’s got a piece on the Hadron Collider generating a mini big bang:

The collisions obtained were able to generate the highest temperatures and densities ever produced in an experiment. “This process took place in a safe, controlled environment, generating incredibly hot and dense sub-atomic fireballs with temperatures of over ten trillion degrees, a million times hotter than the centre of the Sun.

That’s pretty hot.

EntrepreneurTheArts

Another very interesting person I heard at the CEO conference on Friday was Lisa Canning. Well-known for Entrepreneurthearts.com, Lisa Canning is a prominent face of arts entrepreneurship these days.

Lisa Canning with her baby at CEO

She founded the Institute for Arts Entrepreneurship, which has a two-year post-graduate certificate program that could be of interest to many Lawrentians. Their mission: “The IAE is committed to helping our students discover meaningful solutions to one essential question: As a person committed to the arts, how do I develop the knowledge and skills to create a successful, meaningful and sustainable life in today’s world?” Ms. Canning has started six highly successful ventures in the past twenty-some years. She sold all of them to start the Institute for Arts Entrepreneurship, except one: the one that is about her “baby,” the instrument she has played since her childhood, the clarinet. Lisa’s Clarinet Shop is still helping musicians of all levels find the perfect clarinet. Even when she was running those earlier businesses, Lisa hired artists and helped them build on their artistic skills and develop entrepreneurial skills. Artists can use their empathy and ability to connect with people to become successful entrepreneurs. Rather than pitching the “what” to a customer, it is much more important to make a human connection around the “why” and the “how.” This is good advice to anyone–Gary Vaughan was telling me on the way home that in any business, people buy from you because they like you. As Lisa said, she never has to talk about price, because it becomes a secondary issue to the customer. She is certainly a very kind and very emotional person, and I believe that she can teach a lot to artists about “entrepreneuring their art.” I hope we can get her to Lawrence in the not-so-distant future.

Collegiate Entrepreneurs’ Organization conference

Gary Vaughan and I spent the last two days at the Collegiate Entrepreneurs’ Organization (CEO) conference in Chicago. The conference is largely sponsored by the Coleman Foundation, who also made our Entrepreneurship in the Arts course possible through a grant, and who continue to fund some of our arts entrepreneurship initiatives. Our own Alex Chee and Cuong D. Nguyen are still at the conference.

This three-day event features a number of entrepreneurs who share their experiences with about 1500 students from all over the country. We heard, among others, Jimmy John talk about his story. (His father lent him $25K to start a hot-dog stand, and said that if he makes it, Jimmy gets 52% of the company, father gets 48%; if he fails, he agrees to enlist. The threat of boot camp pushed Jimmy to succeed and buy out his father. How did he sell his first sandwiches? Well, he didn’t. After he opened his shop and not a soul showed up by 2pm, he grabbed a few sandwiches and went to the neighboring businesses to hand them out as samples.) Another interesting person I heard was Phillip Leslie. Formerly a Microsoft software engineer (mobiles apps division), Mr. Leslie just couldn’t help getting into the iPhone app gold rush when he was an MBA student at Chicago’s Booth School of Business. So he launched ProOnGo, a mobile expense reporting app. In the middle ages, when you went on a business trip, you came home with a pocketful of receipts, which you then meticulously recorded and submitted. With ProOnGo, when you get that receipt, you take a pic of it with your iPhone, or Blackberry, or whatever, and in a few seconds you are done. At the end of the trip, you click to submit your expenses in excel or pdf format. Huge hit. Mr. Leslie gave very good advice indeed on how to make it with an app. For example, do you know the three ways to make money with an app? Through ads, one-time sales, or subscription service. Sounds obvious, but, actually, he is one of the pioneers of the last of these: it was believed that subscription service just wouldn’t be viable for iPhone apps. And how much do you get per impression if you advertise on your free app? Well, between a tenth of a penny and a penny. He also encouraged students with economics and social science-type skills to pair up with computer science majors to produce an app. But be clear about one thing: is this a hobby (which will cost you money), or a business (which should make you money)?


This is LUCEM

In a follow up to our “Reeding Period post,” this week’s This is Lawrence video features the Lawrence University Collective of Early Music (LUCEM) “petting zoo” from a couple of weeks back.  The petting zoo allowed anyone to come in and check out, fondle, and even play these instruments from our James Smith Rudolph Collection of Early Winds.

Our own Katelin Richter is featured prominently, both in explaining what is going on and in her “oboe d’amore” performance.

We’ll chalk this up partly to the Entrepreneurship in the Arts and Society effort. I’m sorry I missed this one.

This Side of The Atlantic

I Roomed with Zonker in College

Though the publishing industry is on the rocks, I’ve been getting The Atlantic Monthly for more than 20 years.  It’s a great general interest publication that has contained some of my all-time favorites, like “Why McDonalds French Fries Taste So Good,” “The Truth About Dogs,” and the extraordinary “Laws Concerning Food and Drink.” I often will send these to my former students in the Peace Corps, who are always happy to get something interesting. Actually, they are happy to get anything, period.

I was reminded of these when my renewal notice came along with my latest edition and I was wondering whether I should continue to support these guys.  The answer was a resounding yes.

Why?

Here are few sample sentences from this month’s issue to wet your beak:

Simpson is not yet selling his rum by the bottle—he serves it at his bar and trades it for other exotic liquors—but I had a chance to try it recently when a sample arrived in the mail. It came in Simpson’s standard packaging: a used whiskey bottle tightly wrapped in a brown paper bag, the cap sealed with duct tape.  “Gunpowder on the Rocks“

Then there is this strange and horrifying image:

Many of the visitors to the tin-roofed shrine labeled Pol Pot Cwmation site in Anlong Veng are local men who light incense in the hope that the spirit of the murderous Communist leader will provide them with money for prostitutes. “Dark Tourism“

And, finally, this bit of comedy of absurdity, also strange and horrifying in a different dimension:

“If you’re a terrorist, you’re going to hide your weapons in your anus or your vagina.” He blushed when I said “vagina.”

“Yes, but starting tomorrow, we’re going to start searching your crotchal area” — this is the word he used, “crotchal” — and you’re not going to like it.” “For the First Time, TSA Meets Resistance“

And all that is before I’ve gotten to the feature articles I want to read, which generally run about 2000 words longer than a reasonable person would find reasonable.

The economics writing is a different matter, a lot of what Paul Krugman used to call “pop internationalism.”  I remember reading a cover story when I was in grad school called “Head to Head,” where Lester Thurow was arguing that the Japanese and Europeans were going to bury the US in the 1990s (I don’t see that one in the archives now?).  It’s not clear why they keep giving that guy space. But, I don’t read it for the economics.

So there you have it, my pitch for you to subscribe to The Atlantic.

Not Everyone in the US Loves QE2

As a follow-up to Professor Gerard’s post, I  draw your attention to Tom Hoenig, President of the Federal Reserve Bank of Kansas City, who has been the lone dissenter on the Open Market Committee votes on monetary policy.  He fears the consequences of our short term reactive policy making.  His position parallels that of Raghuram Rajan, among others, who note that monetary policy has done all it can and that some of the potential consequences of further monetary easing are destructive both domestically and internationally.  The Chinese and the Brazilians aren’t the only ones yelling STOP!

QE2

Those of you who think that “quantitative easing” means that we’ve relaxed the general education requirements might consider cracking a newspaper — or the virtual equivalent.

This second round of quantitative easing, or QE2 for short, is all over the news because the Federal Reserve Board (the Fed, not “the feds”) plans to “inject” $600 billion into circulation.  Out of thin air.  Wa la.

As you might expect, the dollar is down and gold is up.  And stocks are up, too, though I didn’t necessarily believe this argument.

Not everyone is happy about this, and by not everyone, I mean the Brazilians and the Chinese. Keep an eye on this one.

The Fiscal Train Wreck at the End of the Tunnel

Courtesy of a former student of Professor Gerard, Lawrence faculty and students have access to the Roubini website.  I encourage you, especially those of you interested in either international economics or macroeconomics, to pay regular visits to the site.  Recently, Nouriel Roubini – after whom the site is obviously named – penned a short opinion piece entitled “U.S. Fiscal Policy:  A Train Wreck Down the Line?” which lays out some fundamental questions that our political structure has failed to address.  Although next year’s Congress will have different interests than the current group, Roubini’s concerns (and mine too) still obtain.  Check it out.

Moral (Among Other) Hazards

Continuing on with our Halloween theme, here’s an old story just posted at Marginal Revolution that  illustrates the basic problems of moral hazard.

L.W. Burdeshaw, an insurance agent in Chipley, told the St. Petersburg Times in 1982 that his list of policyholders included the following: a man who sawed off his left hand at work, a man who shot off his foot while protecting chickens, a man who lost his hand while trying to shoot a hawk, a man who somehow lost two limbs in an accident involving a rifle and a tractor, and a man who bought a policy and then, less than 12 hours later, shot off his foot while aiming at a squirrel.

“There was another man who took out insurance with 28 or 38 companies,” said Murray Armstrong, an insurance official for Liberty National. “He was a farmer and ordinarily drove around the farm in his stick shift pickup. This day – the day of the accident – he drove his wife’s automatic transmission car and he lost his left foot. If he’d been driving his pickup, he’d have had to use that foot for the clutch. He also had a tourniquet in his pocket. We asked why he had it and he said, ‘Snakes. In case of snake bite.’ He’d taken out so much insurance he was paying premiums that cost more than his income. He wasn’t poor, either. Middle class. He collected more than $1-million from all the companies. It was hard to make a jury believe a man would shoot off his foot.”

It’s not often that I come across source material like this that I will use every single time a topic comes up in class.  I tested it out on Econ 300 today and I daresay the image is a lasting one.

Is this efficient or inefficient?

From the Kids Prefer Cheese blog, we have a story older than the hills — mackerel in a ball.

So you think the little fishies are cooperating? Not so much… It’s actually a straightforward prisoners’ dilemma problem: If all the little fish would scatter at the same moment, most would escape, because there are so many and the predators are few. But if I expect YOU to take off, I should stay in the ball. One or two fish trying to escape will be caught. And if I expect you to stay in the ball…I should STILL stay in the ball.

Got all that?

If so, have we got a course for you…

Plenty of seats still available.

Lawrence Scholars in Business Lame-a-rick

The LSB program burst on this year’s scene in the form of the Alternative Investments Summit on Sunday. (Here is the announcement.) I saw many new faces, which is great: students discovering the program. I know that students always learn a lot from these events. (Proof by Introspection: I myself always learn a lot from these events. Therefore, so do students. Q.E.D.) I enjoyed hearing from Messrs. Spaeth, Allweiss and Perille, who said that Private Equity people simply have more fun. Anyway, my quick summary:

Your liberal learning has gravity,
Match it with years in an industry,
Get credit training
(It isn’t too draining)
You’re ready to try private equity.

The case studies always add an element to this event that infuses it with that real-life excitement that I wish more of my classes had. As often in the past, Mr. Perille put his money where his mouth was, and offered up a small percentage of the proceeds of his latest deal for the best team in the room. After over an hour of reading and vibrant discussion, each team had to take the stage in turns. The winning team: Aimen, Minh, Ranga, Regina, Vishvesh. They showed us quick and smart analysis, presented cogently. The judges, Sandy and Kirk Ryan ’83 were visibly impressed. Their classmate, Jonathan Bauer ’83 is leading the next Summit, on Management Consulting–coming up on January 15th. That one’s always a riot, featuring–again–some hands-on case study work. No $100 prize in the past, though. That does give you a hint about one difference between consulting and private equity.

Old Ideas from Undead Economists?

A recent EconTalk has John Quiggin, left-of-center author of Zombie Economics, discussing ideas with Russ Roberts, moderator and pro-market guy. Quiggin names his book such because he asserts that there are many economists clinging to ideas that have been thoroughly thrashed and should be discarded, yet they continue to emerge and thrive.  Foreign Policy has a summary of  Quiggin’s five most egregious “undead” ideas:

I'm an idea zombie

The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability that could be expected to endure indefinitely.

The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment. (In the version most relevant to public policy, the efficient markets hypothesis states that it is impossible to outperform market valuations on the basis of any public information.)

Dynamic Stochastic General Equilibrium (DSGE): the idea that macroeconomic analysis should not be concerned with observable realities like booms and slumps, but with the theoretical consequences of optimizing behavior by perfectly rational (or almost perfectly rational) consumers, firms, and workers.

The Trickle-Down Hypothesis: the idea that policies that benefit the wealthy will ultimately help everybody.

Privatization: the idea that nearly any function now undertaken by government could be done better by private firms.

Roberts certainly doesn’t agree with Quiggin’s overall assessment, though they do find much to agree on.  This is a great EconTalk for those who think that economists all drink from the same cup.

Econ 300 students might listen to the part about the Efficient Markets Hypothesis and compare it to what Landsburg says in Chapter 9.

And, if you like the dead-undead econ riff, you might check out Todd Buchholz’s now-classic, New Ideas from Dead Economists.

Schump-Voter Fest?

Rational ignorance is a common theme of economists thinking about voting and the electorate, but what about willing ignorance?  That’s the gist of this Schumpeter quotation:

“[T]he typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his real interests…”

Here is some more background on that quote.  It is certainly consistent with the overarching theme of Capitalism, Socialism and Democracy that capitalism might die out due to lack of enthusiasm from its principal beneficiaries.

The accompanying illustration is from the legendary political cartoonist, Herblock.  I snagged both the quote and the picture from the Spirit of Moderation blog.