Tuesday, May 31, 2011

Pawlenty vs. Romney: Round one is a knockout

Iowa leads the nation in the production of corn, a main input into the production of ethanol. It also holds the first presidential caucus, and is very influential. What do you think a politician would say to Iowans?

ROMNEY: “I support the subsidy of ethanol,” he told an Iowa voter. “I believe ethanol is an important part of our energy solution for this country.”

PAWLENTY: the federal government’s subsidies of ethanol were bad policy that we can no longer afford.

Search this blog for unslanted opnions on ethanol subsidies:

FX: foreign exchange is just a price

In the book, we show how to use the tools of supply and demand to understand the market for foreign exchange. After all, the exchange rate is just a price, whose movements can be understood by looking at movements in demand and supply for foreign exchange. Former CEA chair Christine Romer, who lost her job for famously predicting that the stimulus would keep unemployment from rising, has a nice column on what the exchange rate means:

Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.

Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.

This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.

BOTTOM LINE: a strong dollar, by itself, doesn't tell you very much. You have to look at the reasons for its strength. Some are good, but some are not.

HT: Greg Mankiw

Tuesday, May 24, 2011

The Returns to Studying Economics

Researchers at Georgetown University's Center on Education and the Workforce have recently released a rather comprehensive report on salaries by undergraduate major. Entering college freshmen usually are quite ignorant that the median salaries can differ fourfold (Petroleum Engineering at $120,000 versus Counseling/Psychology at$29,000). I was. As a parent of a college-bound high school student, this is a great way to introduce him to the consequences of some rather important choices. A general theme appears to be the return to quantitative or scientific skills.

Among business degree holders, graduates with "Business Economics" majors had the highest median earnings ($75,000 versus $60,000 for all business). They are also more likely to go on to earn a graduate degree. Interestingly, their occupations appear to be very similar to Finance majors - they just earn more. Economics majors from social science do well too. In my case, it was just dumb luck that what I enjoyed doing turned out to be quite remunerative.

Monday, May 23, 2011

Nearly Perfect Rent Seeking

It used to be that we had laws against taking cash away from other people.

Really, is this much different from the Somali pirates? I suppose this is further evidence that incentives matter. Be careful how you design the incentive system within your organization.

Hat tip Mungowitz

Tuesday, May 17, 2011

Physicians turning away patients who need them the most

OB/GYN's concerned with high costs and law suits are turning away obese patients:  Students will recognize this as a form of screening, a solution to the problem of adverse selection.
"People don't realize the risk we're taking by taking care of these patients," the newspaper quoted Dr. Albert Triana of South Miami as saying. "There's more risk of something going wrong and more risk of getting sued. Everything is more complicated with an obese patient in GYN surgeries and in [pregnancies]," he told the newspaper.

It is not illegal for doctors to refuse overweight patients, but it has medical ethicists worried. So far, the weight cutoffs have been enacted only by South Florida ob-gyns, who have long complained about high numbers of lawsuits after difficult births and high rates for medical-malpractice insurance.

Obviously, they decided not to charge a higher price. It may be that the government (CMS) has effectively set a uniform price.

Wednesday, May 11, 2011


Free App for those of you with an iPhone 4. Generates millions of phrases that sound important but mean absolutely nothing. As one reviewer said, it "deconstructuvely streamlines communication channels."

Tuesday, May 10, 2011

Innovation and capitalism

My favorite line: if you believe that capitalism is a zero-sum game, then production is just like stealing.

HT: Virginia Postrel's Dynamist blog

Monday, May 9, 2011

Organizational form affects decision making

The new Consumer Financial Protection Agency seems designed to be accountable to no one:

As an unaccountable bureaucracy with a single head, the bureau will be susceptible to bureaucracy’s worst pathologies: a tunnel-vision focus on the agency’s regulatory mission, undue risk aversion and agency overreach. While a more coherent consumer-protection regime is needed, consumer-protection goals often can conflict with other goals, such as promoting competition, lower prices and expanded choice for consumers; and ensuring safety and soundness.

The FTC, which enforces identical consumer protection laws, is organized along functional lines, with attorneys and economists each writing memos to a bipartisan Commission. By design, this results in conflict between the economists and attorneys, which allows benefit-cost analysis done by economists to be heard at the highest levels of the organizations.

Watch the organizational design of the new agency. I suspect it will put economists, if it has them at all, under the supervision of attorneys to reduce their influence, as was done during the FTC early years.

Sunday, May 8, 2011

I smell opportunity

In San Francisco, one of the toughest places in the country to find a place to live, more than 31,000 housing units — one of every 12 — now sit vacant:

“Vacancy rates are going up because owners have decided to take their units off the market,” said Ross Mirkarimi, a progressive member of the Board of Supervisors. He attributes that response to “peaking frustrations in dealing with the range of laws that protect tenants in San Francisco that make it difficult for small property owners to thrive.”

From chapter two: The one lesson of business is to identify assets in lower-valued uses, and figure out a way to profitably move them to higher-valued ones. It cannot be that hard to figure out a way to consummate these implied wealth creating transactions.

Friday, May 6, 2011

The wisdom of blog readers

Our friends over at Organizations and Markets celebrate their 5th year of blogging with a list of the most popular blog posts. Its a fun read.

Management Journal Impact Factors 2008
PhD Candidate Shortage in Accounting
Agency Theory in Management
Method versus Methodology
Physics Envy and All That
Agency Theory and Intrinsic Motivation
21 Economic Models Explained
The University of Phoenix and the Economic Organization of Higher Education
Management Journal Impact Factors 2005
The SWOT Model May Be Wrong
Design Puzzles
Is Entrepreneurship a Factor of Production?
Porter’s Five Forces, Updated
Econ Courses at Open Yale
Four Theories of Profit
Summary of Dodd-Frank Act
Market-Based Management
Why Study the Humanities?
Accounting: A Brief History
Funny Professor Names
Taxes al Carbon
Keynesian Economics in Four Paragraphs
The New Bashing of Economics: The Case of Management Theory
One Part of the Financial Sector Is Still Growing
Management Journal Impact Factors 2009
In Praise of the US Auto Industry
How Does Management Affect Capabilities?
Management Journal Impact Factors 2006
March & Simon: Early Socialist Calculation Revisionists
Do We Need a Project Project?
Has Corporate Corruption Increased?
Coase and the Myth of Fisher Body
The Logic of Appropriateness
John Nash’s Dissertation
The History of Marketing
The Hawthorne Effect Revisited
What Would Hayek Say?
Why Did the Chicken Cross the Road: Strategic Management Edition
How to Read an Academic Article

This good idea comes from California,

...but only because it undoes a really bad idea: Governor Jerry Brown has proposed eliminating California’s approximately 400 redevelopment agencies (RDAs).

California’s redevelopment agencies got their start in 1945, ... as a way to jump-start development in impoverished inner cities. Today, many urbanists recall these projects as a national travesty, a failed experiment in top-heavy government and liberal social engineering that obliterated neighborhoods, eroded property rights, gave developers downtown land on the cheap, uprooted city dwellers, and exacerbated urban problems.

To add insult to injury, these "shadow governments" consume 12% of local property taxes,

diverting billions of dollars from traditional services, such as schools, parks, and firefighting; use eminent domain to seize property for favored developers; and run up California’s debt to pay those developers to construct projects of dubious public value, such as stadiums and big-box stores.

The article is a fascinating read in how central planning and subsidies can do so much harm.

Wednesday, May 4, 2011

Another good reason stop giving away stuff for free

The people who "buy" it don't appreciate it.

Donald Marron notes the irony of lousy reviews for iPhone apps when you give them away for free.

Free is a risky price because it allows people to get something without really thinking about whether they want it. That’s why health insurers insist you pay at least $5 to see your doc or get a prescription. And it’s why DC’s nickel bag tax has been so effective in cutting use of plastic bags.

Using Incentives to Reform Prisons

In a new book, baseball stats geek, Bill James, proposes some prison reforms.
James also posits a way to reform prisons, which he dubs “violentocracies.” His proposal: smaller facilities that house no more than 24 inmates and are part of a larger, incentives-based system. At a Level 1 prison, for example, you get a lawyer, a Bible, and around-the-clock supervision; at Level 5, a cat and a coffee machine. At Level 10, you can earn a living and come and go with relative ease. The idea, James says, is not only to reduce the paranoia-fueled violence in large prisons but to encourage prisoners to work their way up the ladder.

Its all in the details though. Move far enough up the ladder and you may not want to leave. But move far enough up the ladder and the costs of your incarceration may be negative.

Hat tip Tyler Cowen

Tuesday, May 3, 2011

Tuition Differences Across Programs?

There appears to be an increasing trend toward "differential tuition" of college courses.
According to Nelson, 18 institutions have adopted differential tuition based on academic programs in the past three years. Nelson, then a financial officer for the Oregon University System, studied the issue while earning his doctorate from UNL in 2008.

What is not clear is the economic cause. Does this merely represent differences in marginal costs as Art and Humanities professors and their office equipment cost much less than Engineering and Science professors and their lab equipment? Or does it reflect differences in demand as the future earnings in the Arts and Humanities are so much lower than in Engineering and the Sciences? I note that Business students tend to pay more despite the lack of expensive equipment.
Business and engineering are the two programs most frequently subject to higher tuition rates, Nelson found. On average, the 2008 study found that business students pay 14 percent more tuition at colleges that have adopted differential tuition policies; engineering students pay 15 percent more.

Hat tip to Mark Perry

Monday, May 2, 2011

New entitlement problem: disability insurance

From the Economist:
America has a smaller fraction of prime-age men in work and in the labour force than any other G7 economy. Some 25% of men aged 25-54 with no college degree, 35% of high-school dropouts and almost 70% of black high-school dropouts are not working (see article). 
Beyond the toll to individuals, the lack of work among less-skilled men could have huge fiscal and social consequences. The cost of disability payments is some $120 billion (almost 1% of GDP) and rising fast. Male worklessness has been linked with lower marriage rates and weakening family bonds.

Sunday, May 1, 2011

The effects of tornados

A colleague at University of Alabama sent a note about the recent tornado:

It was very, very bad. The tornado cut all the way across town. Many communities were devastated and many businesses destroyed. The town will recover, but there is a great deal of rebuilding to do.

Our prayers and thoughts go out to Tuscaloosa, especially those who lost loved ones.

As the community rebuilds, income will increase. But no one would argue that the people of Tuscaloosa are better off. This fallacy (?) features prominently in the Keynes vs. Hayek debate, round 2:

Density is green

Ed Glaeser's new book makes the point:

Living out of town may feel green, but it isn’t. Americans live too far apart, drive too much and walk too little. The tax- deductibility of mortgage interest encourages people to buy houses rather than rent flats, buy bigger properties rather than smaller ones and therefore to spread out. Minimum plot sizes keep folk out of, say, Marin County, California. He sees it as an indictment of planning that spreading Houston has “done a better job of providing affordable housing than all of the progressive reformers on America’s East and West coasts.” Mr Glaeser hopes, for the planet’s sake, that China and India choose density over sprawl and public transit over the car. If his own country set a better example, there might be more chance of persuading them.