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Brooks Wilson's Economics Blog: December 2009

Wednesday, December 30, 2009

Grabar on the Legalization of Marijuana

I am a conflicted libertarian on the issue of the legalization of marijuana.  As a libertarian, I believe that people should have the freedom to do stupid things like smoke marijuana and that social norms and economic exigencies will limit the number of stupid behaviors.  Restricting freedom to use marijuana and other drugs has been costly.  The arguments against legalization are real.  I don't like the creation of a protected class of marijuana, those using it for "medical" purposes and I don't want to support a marijuana induced zombie lifestyle with my taxes.  It will give incentives for people to find medical "needs" to support their current habit ("Medical Marijuana and the Drug War").  And even if legalized for adults, its use will properly be banned from children, eliminating nearly all the savings from the war on drugs. 

Mary Grabar offers good arguments for a libertarian to oppose any type of legalization of marijuana in, "Libertarians Need to Rethink Support for Drug Legalization" (Pajamas Media, December 22, 2009).  She blogs at The Literate Citizen.  I recommend the entire article, but provide only paragraphs that summarize her position. 
Doc Washburn...invited former Congressman Ernest Istook from the Heritage Foundation and Tina Trent , who blogs on crime, to speak about the dangers of marijuana to the user and to society. Trent indicated that Grande had faced probably only a misdemeanor charge; she pointed to studies showing that the illegal drug trade flourishes despite the legality of marijuana in certain states and other countries. And legalizing marijuana will remove the freedom employers now have to test for the judgment-impairing drug.

The position on the legalization of marijuana provides the point of departure from the traditional libertarianism of Barry Goldwater. In abandoning the duty to enforce social order, today’s libertarians have made a devil’s pact with the pro-drug forces of George Soros and company.

My libertarian friends like to say, “I’m a libertarian, not a libertine.” But though many of the advocates of libertarianism lead socially conservative lives, their agendas promote libertinism — especially when it comes to legalizing drugs. They forget that the moral order they have inherited is put at even further risk as laws change to allow more destructive behavior...
The libertarian maintains that values are the function of the private sphere: the family and church. But as Goldwater argued in the riot-plagued year of 1964, when safety and order are not maintained by the government, our freedoms are affected. In so many ways, the legalization of drugs will lead to the further breakdown of order.

To give sanction to a drug that robs the individual of reason and conviction is to give up on our way of life. It is another surrender to the counter-culture. It sends a dangerous message to young people. A recent study shows that the creeping sanction through legalization of “medical” marijuana in certain states is giving young teenagers a sense of safety about marijuana use.

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Kling and Schulz: The Importance of Markets

The first twenty pages of "From Poverty to Prosperity" by Arnold Kling and Nick Schulz has been a pleasure to read.  They compare the economy to a computer.  The hardware is the visible and countable resources of the economy, the operating system, the less visible, nonrivalrous system of law and institutions, and the software, the nonrivalrous ideas and innovation and that bring technological advance.  They argue that economic inquiry has shifted from the hardware to the operating system and software, which places renewed focus on markets.  Kling and Schulz write,
Economics 2.0 offers a completely fresh perspective on the role of markets in society, one that will become clear over the course of this book.  Traditionally, the debate over markets has been between the "Chicago school" and the "Harvard-MIT school."  The Chicago school says, "Markets usually work.  That is why we need markets."  The Harvard-MIT school says, "Markets often fail.  That is why we need government."

Economics 2.0 says, "Markets often fail.  That is why we need markets."

What do we mean by this?  Economics 2.0 says that overcoming market failure requires innovation.  Innovation is best delivered by markets.  It is rarely delivered by government.  Hence, the paradoxical conclusion is that markets are 0ften the best solution. 
The book includes interviews with Robert Fogel, Robert Solow, Paul Romer, Douglas North, William Easterly and others, and yes, I have skipped ahead to read several of the interviews.  After twenty pages and several interviews, I believe that the book is assessable to undergraduate students. 
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Monday, December 28, 2009

Banks, Equity, Liquidity, and Insolvency

It was my intention to write a number of posts on bank operations and tie them into a narrative of the 2008 financial crisis.  I got no further than explaining the role of capital in protecting banks against losses (Banks and the Importance of Equity) before the exigencies of finishing my classes in the fall semester delayed my plans.  A question by an anonymous reader has placed me back on path.
Thanks for taking a simple example to explain a complex issue such as this. Could you please explain the following for me:

- As loans given out by banks result in profits (e.g., through interest/fees less operating costs), these get added to the equity capital and thus, the equity capital account line grows. However, to me this does not feel like a "real thing" that is available to a bank to absorb losses. It feels like "Cash" is the thing that is ultimately available to the bank to absorb losses. If that is true, then why worry about equity capital at all?
In this post, I attempt to distinguish between insolvency and liquidity.  An institution is insolvent if its liabilities are greater than its assets.  It is illiquid if it does not have sufficient cash to meet its liabilities as they come due.  In the short run, an insolvent institution can be liquid if it has sufficient cash to pay its most immediate liabilities.  Obviously, it will eventually become illiquid as more liabilities become due.  I will also demonstrate that leverage, the number of dollars of liabilities per dollar of equity, magnifies both profits and losses.  
As a quick review, a bank's balance sheet is described by the equation, Assets=Liabilities+Equity.  The owners of a bank have a goal of maximizing profits for a given level of risk.  The risks are the probability that the bank will suffer losses from operations ( expenses exceed revenues) or a decline in asset value.  I will begin with the example provided by Juliusz Jabtecki and Mateusz Machaj, "The Regulated Meltdown of 2008," Critical Review, 21(2-3): 301-328, 2009.  At the beginning of operations (Year 0), the bank's leverage ratio is $20 of liabilities (deposits) for every $1 of equity. 

Figure 1. Year 0
Reserves (Cash) $10Equity $5
Loans $90 Deposits $95
Total $100 Total $100
To keep the math simple, assume that in the first year of operations (Year 1), the bank earns a return of $5.00, or a 100% return on equity.  The bank must decide how to distribute the profit between dividends and retained earnings (I will show retained earnings as an increase in equity.), and if the profit is retained, how it will be invested.  In Figure 2, the bank did not pay dividends, increasing equity by $5.00, and it held all new equity as reserves (cash).  As it begins its second year of operations, it has $9.50 of liabilities for every $1.00 of equity; its leverage has decreased.  

Figure 2. Year 1: The Conservative Option with Profit
Assets   Liabilities  
Reserves (Cash) $15 Equity $10
Loans $90 Deposits $95
Total $105 Total $105
If the bank earns a return of 5% ($90*.05=$4.50), the resulting return on equity is ($10/$4.50*100=) 45%.  
Figure 3. Year 1: The Aggressive Option with Profit
Assets   Liabilities  
Reserves (Cash) $2 Equity $7
Loans $100 Deposits $95
Total $102 Total $102
Alternatively, if the bank had taken a more aggressive, riskier position as it began is second year of operations, paying $3.00 as dividends, increasing equity by $2.00, and investing the additional $2.00 of equity and $3 of returns in new loans, its balance sheet would be depicted by Figure 3.  Its leverage is $13.57 of liabilities for every $1.00 of equity.  In this case, a 5.0% return on loans ($100*.05=) $5.00, results in a return on equity of ($5/$7*100=) 71.4%.  The additional leverage magnified the return on equity. 

Figure 4: Year 2: The Conservative Option with Losses
Assets   Liabilities  
Reserves (Cash) $9.40 Equity $4.60
Loans $90.00 Deposits $95.00
Total $99.40 Total $99.40
Now consider the bank's financial position if it had lost 6% on loans.  Figure 4 adjusts Figure 2 for losses in operations.  The bank's return on equity is (-$5.40/$4.60) -117.4%.  The bank's equity position is weaker, but it is both liquid and solvent.  Compare that outcome to that of the more aggressive investment strategy.  Figure 5 adjusts Figure 3 for a 6% or $6.00 loss on loans after one year of operations. 
Figure 5.  Year 2: The Aggressive Option with Losses from Operations
Assets   Liabilities  
Reserves (Cash) -$4 Equity $1
Loans $100 Deposits $95
Total $96 Total $96

The bank is still solvent (Assets-Liabilities>0), but it is illiquid, it does not have cash to meet short term depositor demands.  Its return on equity is (-$6.00/$1.00) -600%.  The higher leverage magnified the losses.  The bank might be able to secure short-term loans to meet its cash demands.  If not, it will be forced to liquidate.
Figure 6.  Year 1: Operating losses
Assets   Liabilities  
Reserves (Cash) $4.60 Equity -$.40
Loans $90.00 Deposits $95.00
Total $94.60 Total $94.60
Compare this outcome to a 6% loss on loans ($90*.06=$5.40) in the first year of operations (Figure 6).  If the same level of losses had occurred before implementing an aggressive investment strategy after a profitable year, the bank would have been liquid, but insolvent.  If the losses had occurred after a year of profitable operations, even with the aggressive strategy and illiquid cash position, the increase equity from the first year of operations protected it against insolvency.

My next post on banking will explain maturity mismatching (long-term assets and short-term liabilities), and how it impacts the regulation of banks. 

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Thursday, December 24, 2009

The Nanny State and the Carbon Footprint of Pets

I like pets.  Even when I have had a bad day, my dogs enthusiastically welcome me at the door.  Their needs are relatively small.  The National Center for Infectious Disease claims that the bond that you form with your pet may have medical benefits such as decreasing your blood pressure, cholesterol levels, triglyceride levels, and levels of loneliness.  The center also writes that pets can increase opportunities for exercise and socialization.   

(HT Drudge Report)  Isabelle Toussaint and Jurgen Hecker (Yahoo!News) inform us in, "Polluting pets: the devastating impact of man's best friend," that our pets have a huge carbon paw print.
PARIS (AFP) – Man's best friend could be one of the environment's worst enemies, according to a new study which says the carbon pawprint of a pet dog is more than double that of a gas-guzzling sports utility vehicle.

But the revelation in the book "Time to Eat the Dog: The Real Guide to Sustainable Living" by New Zealanders Robert and Brenda Vale has angered pet owners who feel they are being singled out as troublemakers...
Pet owners should lighten up, after all, hard core environmentalists don't like people either (see, "When Carbon Limits Are Not Enough," or "A Nanny State That Doesn't Like Children).  Toussaint and Hecker further describe the authors of the book and the carbon footprint of a medium sized dog.
The Vales, specialists in sustainable living at Victoria University of Wellington, analysed popular brands of pet food and calculated that a medium-sized dog eats around 164 kilos (360 pounds) of meat and 95 kilos of cereal a year.

Combine the land required to generate its food and a "medium" sized dog has an annual footprint of 0.84 hectares (2.07 acres) -- around twice the 0.41 hectares required by a 4x4 driving 10,000 kilometres (6,200 miles) a year, including energy to build the car.

To confirm the results, the New Scientist magazine asked John Barrett at the Stockholm Environment Institute in York, Britain, to calculate eco-pawprints based on his own data. The results were essentially the same.

"Owning a dog really is quite an extravagance, mainly because of the carbon footprint of meat," Barrett said.

Other animals aren't much better for the environment, the Vales say.
I'm sorry but I won't do my dogs in to stop your polar bears from drowning.  If man is altering the climate in a catastrophic way through carbon emissions, and that is a big if (see "Study shows CFCs, cosmic rays major culprits for global warming," On Watts Up With That," for a description of a non-carbon based explanation for man-made global warming.  There are others.) there must be a better way to resolve the problem than upending the world economy and our pet rich lifestyles (see "Nathan Myhrvold's Anti Global Warming Scheme," for one.).

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Wednesday, December 23, 2009

Slow Growth: A Glass Half Full

(HT Drudge Report)  Jeannine Aversa of My Way, explains new statistics released by the Commerce Department in "Recovery not as strong as previously thought."  It sounds very much like the glass is half full.  Growth is good, but too slow to bring the recession to a quick end.
WASHINGTON (AP) - The economy grew at a 2.2 percent pace in the third quarter, as the recovery got off to a weaker start than previously thought. However, all signs suggest the economy will end the year on stronger footing.

The Commerce Department's new reading on gross domestic product for the July-to-September quarter was slower than the 2.8 percent growth rate estimated just a month ago. Economists were predicting that figure wouldn't be revised in the government's final estimate on third-quarter GDP...
The main factors behind the downgrade: consumers didn't spend as much, commercial construction was weaker, business investment in equipment and software was a bit softer and companies cut back more on inventories, according to Tuesday's report.

Despite the lower reading, the economy managed to finally return to growth during the quarter, after a record four straight quarters of decline. That signaled the deepest and longest recession since the 1930s had ended, and the economy had entered into a new fragile phase of recovery.

Many analysts believe the economy is on track for a better finish in the current quarter.

The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts say. If they're right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 - well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29.

Yet even such growth wouldn't be enough to quickly drive down the unemployment rate, now at 10 percent. High unemployment and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery. Many economists predict the economy's growth will slow to a pace of around 2 or 3 percent in the first three months of 2010.

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Tuesday, December 22, 2009

Intel, Antitrust and Stock Price Volatility

The Federal Trade Commission (FTC) under the Obama administration is stepping up antitrust activities.  In the past, aggressive antitrust actions have been associated with declining stock values, suggesting that current efforts are ill timed.  Justin Bloom of Bloomberg describes the action against Intel in, "Intel Case May Signal Increased Antitrust Enforcement (Update2)."
Dec. 17 (Bloomberg) -- The government’s case against Intel Corp., accusing the world’s largest computer-chip maker of using monopoly power to stifle competition, may signal that antitrust enforcers under the Obama administration will be more aggressive than their predecessors, lawyers said.

The Federal Trade Commission, led by Jon Leibowitz, who was elevated to serve as the panel’s chairman by President Barack Obama, yesterday filed an administrative complaint saying Intel tried to block “superior” products by rivals and hurt consumer choice.
This is a bipartisan action having roots in the Bush administration.
Commissioners are nominated by the president, serve seven- year terms, and no more than three people on the five-member panel can be of the same political party.

The Justice Department, which isn’t involved in the Intel case, in May revoked a Bush administration antitrust policy that it called an impediment to the government’s ability to fight anticompetitive conduct by dominant companies.

Christine Varney, who heads the department’s antitrust division, said in a May speech that the Obama administration “will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers.”

Varney’s remarks, the Intel case and comments by Leibowitz suggest more enforcement, said Bernard A. Nigro Jr., a lawyer with Fried, Frank, Harris, Shriver & Jacobson LLP in Washington. He previously served as deputy director for the competition bureau of the FTC.
Intel interprets events differently.
Intel said that it has competed “fairly and lawfully” and that its actions have benefited consumers. The microprocessor industry is competitive and prices have declined at a faster rate than in any other industry, the company said in a statement. In settlement talks with Intel, the government asked for “unprecedented remedies” that would make it “impossible for Intel to conduct business,” general counsel Doug Melamed said.
It is hard to envision an industry that has innovated as rapidly or seen such consistent price declines. 

George Bittlingmayer describes the impact of antitrust enforcement in the 1920's and 1930's in, "The 1920'S Boom, The Great Crash and After."  The stock market crash began on October 23, 1929 with a 6% decline, while Warner Brothers and Paramount awaited merger approval from the FTC.  It is likely that the participants knew that the deal would not be approved by the Attorney General on October 23.  One week later, the stock market had declined by 30%.  Bittlingmayer finds hat stock price movements are strongly and negatively correlated with antitrust activity. 
Attorney General Mitchell sent a clearer signal on Friday, October 25 in a dinner speech to the American Bar Association. He promised to enforce the antitrust laws as they were written; he characterized "the machinery of some trade associations [as] dangerously near pricefixing;" he revealed that the Department had not approved a single merger since the new administration took office in March, which implied a clear break with Coolidge-era practice; and he reserved the right to file suit against any merger not explicitly approved.3

Lawsuits followed. Mitchell filed two cases against publicly traded movie producers on November 27. One involved Fox's acquisition of a controlling share of Loew's, the other Warner Brother's acquisition of a controlling interest in First National Picture. The merger attacked in the second case was itself a response to antitrust objections...
Stock market volatility also lowers consumption. 
The ups and downs of antitrust tell a simple and unified story for the twenties boom, the Great Crash and some of the volatility that followed. The identification of a possible cause of stock market volatility also enriches Christina Romer's (1990) finding that greater stock market volatility lowers consumer purchases, thus explaining the 1930 slump. Other potentially fertile ground remains untilled. The unstable antitrust politics at the end of World War I, Supreme Court decisions of the twenties and thirties, the changing fortunes of the FTC at the hands of Congress and the courts, the 1933 National Industrial Recovery Act, and the monopoly policies and investigations of the late 1930's should provide additional insight into the effects of antitrust on financial markets.

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The Health Care Sausage Factory

Despite very good economic advisors, the Obama administration seems enmeshed in 1960's economics that assumes that markets fail and the a benevolent government is needed to act in the public interest to set things straight. This system of beliefs cannot be based on an empirical investigation. Much of what critics claim as a market failure, increasing cost of medical care, can be attributed to government tax policy, and as always passing new legislation includeds a grabbag of favors. An article titled, "ObamaCare's Longshoremen Rules," in the Wall Street Journal's Review and Outlook section describes a few of the concessions made to special interest groups.
President Obama praised the Senate yesterday for clearing a 60-40 procedural vote on his health plan in the dead of night and "standing up to the special interests who've prevented reform for decades and who are furiously lobbying against it now." They're furiously lobbying all right—not against ObamaCare but for the sundry preferences in the Senate bill.

Start with the special tax carve-outs included in the "manager's amendment" that Harry Reid dropped Saturday morning. White House budget director Peter Orszag has claimed that the bill's 40% excise tax on high-cost insurance plans is key to reducing health costs. Yet the Senate Majority Leader's new version specifically exempts "individuals whose primary work is longshore work." That would be the longshoremen's union, which has negotiated very costly insurance benefits. The well-connected dock workers join other union interests such as miners, electrical linemen, EMTs, construction workers, some farmers, fishermen, foresters, early retirees and others who are absolved from this tax...
The Reid bill also gives a pass on the excise tax to the 17 states with the highest health costs. This provision applied to only 10 states in a prior version, but other Senators made a fuss. So controlling health costs is enormously important, except in the places where health costs need the most control.

Naturally, the Secretary of Health and Human Services will decide how to measure "costs" and therefore which 17 states qualify. (Prediction: Swing states that voted for Mr. Obama in 2008 or have powerful Democratic Senators.)

These 11th-hour indulgences make a hash of Mr. Orszag's cost-control theories and Mr. Obama's cost-control claims. Their spin has been that wise men would convene and make benevolent decisions about everyone's health care based only on evidence and the public good. But as the Reid bill shows, politics will always dominate when Washington is directing a U.S. health industry that is larger than the economy of France...

The press corps is passing this favoritism off as sausage-making necessary to "make history," but that's an insult to sausages. What this special-interest discrimination illustrates in how all health-care choices will soon be made as Washington expands its political control over one-seventh of the U.S. economy.

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Monday, December 21, 2009

The Medical Care Reform Glass is Broken

Janet Hook and Noam N. Levey (Los Angeles Times, "Senate Democrats get 60 votes to move healthcare bill along," December 21, 2009) describe Harry Reid's monumental accomplishment of guiding massive health care reform to the point of passage in the face of declining public support.  Apparently, elected officials supporting the legislation believe that the falling support comes from the left, people who believe that the legislation does not go far enough, or from independents, people who do not see the benefits that they will receive.   
...Democrats and the White House are intensifying efforts to reshape public perception of the bill as a glass half full, not half empty.
There is an alternative, that the medical care reform glass is broken.  David Brady of Stanford was interviewed by Russ Roberts on EconTalk ("Brady on Health Care Reform, Public Opinion, and Party Politics," August 24, 2009).  Brady gave two reasons why health care reform failed in the past based on research conducted with Daniel Kessler and published in the Health Affairs, August 18, 2009.  First, 83% of the population are satisfied with their own insurance.  Second, using contingent valuation, a type of survey that measures willingness to pay, they found that people are not willing to pay for providing universal coverage. 
Replace this text with...
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Travel to Cuba

The Obama administration is attempting to thaw relations with Castro's Cuba.  I believe this is good news not because it will bring dollars to Cuba, but because it will expose Cubans to our freer, wealthier society.  Can the Castro regime survive such a comparison?  A Reuters article, "U.S. travel industry gearing up for return to Cuba" posted at UK and Ireland provides the details.
President Barack Obama has said he wants to improve ties with communist-run Cuba and lifted restrictions introduced by the Bush administration on visits and family remittances by Cuban Americans to the island.

But whether American tourists will return to Cuba will hinge on debate in Congress, where opponents say sanctions should not be lifted until Cuba frees political prisoners and undertakes democratic reforms to its one-party state.

They say American tourism will help prop up the communist government of President Raul Castro, who succeed his ailing brother last year.

A bill to end the travel ban sponsored by Democrat Bill Delahunt of Massachusetts and Republican Jeff Flake of Arizona has 195 backers in the House of Representatives, 23 votes short, supporters of the measure said.

Similar legislation in the Senate has the support of key senators such as Republican Richard Lugar of Indiana, but needs 60 votes to pass...

The article also reports projections of travel to Cuba.
"Americans really want to see Cuba," said Robert Whitely, president of the U.S. Tour Operators, which together with the National Tour Association also present at the event, handles 75 percent of all package tour business to the Caribbean.

"We predict that at least 850,000 Americans will go to Cuba in the first year," Whitely said.

That does not include an estimated 480,000 Americans who will go to Cuba on Caribbean cruises when U.S. ships are allowed to dock there, and another 480,000 Cuban American visiting family in Cuba each year, a Cuban official said.

Cuba plans to build 30 hotels over the next six years with the help of foreign investors, adding 10,000 rooms to the 48,600 that exist now, as well as golf courses, said Miguel Figueras, the top adviser to the Cuban tourism minister.

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Saturday, December 19, 2009

Another Reaction to Ethanol as an Additive

I feel for those who comment on posts; they often have insufficient room to fully articulate their thoughts.  At least this has been my experience responding to comments with comments on my blog.  Another reader made valuable comments to, "Ethanol as a Gas Additive," and I wish to respond in a post.

Anonymous said... You're assuming the only difference between your fuels was the ethanol content. Gas composition can vary quite drastically. I assume the research that has been done on this makes sure that they have consistent products. Was everything else consistent? Did you add or subtract weight from the vehicle? Speeds? Weather or temperature? Or maybe there's something goofy with your car. I believe that anecdotally this could happen from time to time, but what you're saying is not a claim that even the scientists opposed to ethanol production are claiming. That leads me to believe there's a factor that you've failed to realize.

Let me begin with an apology.  In my post, I correctly limit my conclusions by stating, "if my experience is typical."  This disclaimer should have been written in my first paragraph, not buried in the middle.  In, "Responding to Comments about Ethanol," I again limit my conclusions writing, "If my experience is the average."  Although I have found evidence that others have shared my experience, the sample size if very small and conclusions should be modest.It was my skepticism that my experience was typical that drove my search for others who shared it.  I cited "Drivers avoiding ethanol additive," written by the AP and published in the  and "Waco's Reaction to Ethanol," written by J. B. Smith for the Waco Tribune-Herald.  Both articles reference drivers who have had bad results using ethanol.  We may not be representative drivers, but my guess is that we represent a significant subset.

Anon makes a very good point suggesting that other variables than ethanol content might explain the difference in mileage.  This is called the omitted variable problem.  I do believe that the drive constituted a decent experiment.  I did consider several variables which I omitted because they were controlled or tended to favor the ethanol blend to gasoline.  For example, the weight of the load of the vehicle didn't change.  The weather got warmer but wetter as I drove south, but it was in a modest band of about 20 degrees Fahrenheit; because it was warmer, I used the air conditioning, but only in Texas and only when using gasoline.  If anything, this should favor E10 to gasoline.  The biggest omitted variable was traffic, which grows heavier driving south.  I was caught in stop and go traffic for about one hour at the merger of I35E and I35W while driving with gasoline.  I did not check tire pressure assuming that if it changed, it would have lowered again adversely affecting mileage.

Smith interviewed David Derosier who appears to be the general manager of Freddie Kish’s Complete Car Care Center and he suggests that minor mechanical problems due to ethanol use that his mechanics have encountered might be caused by inadequately blended ethanol. If correct, this is a strike against ethanol. It also raises questions about the stability of the blend.  How long does ethanol stay blended to gasoline once mixed?  I don't have a clue, but I assume that others have considered the problem.

I don't have an inherent problem with ethanol as a fuel.  For example, I don't mind food being converted to fuel.  If it is not subsidized by taxpayers, and it delivers more miles per dollar than gasoline without harming my car, I'll buy it.  But the burden of proof should be on the seller to demonstrate that ethanol is a superior product.  The government should not mandate its use. 

I have avoided environmental issues intentionally, but will make one point.  Other additives oxygenate gasoline, producing the same environmental gains.  I am willing to pay a little more for that benefit but I should be free to choose the additive I consume.   

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Friday, December 18, 2009

Waco's Reaction to Ethanol

J.B. Smith, of the Waco Tribune-Herald, describes consumer dissatisfaction with E10 ethanol blended gasoline in,"Ethanol blend makes way to Waco gas stations."  It seems that others are having the same experience and reaction that I had. 
Ethanol blends have quietly made their way to Waco-area gasoline pumps this fall, and that has Bob Potter fuming.

Potter, a retired defense worker who lives in Hewitt, calls the 10 percent ethanol blend a “snake oil concoction” that hurts his gas mileage and maybe his engine.

“I’m not getting my money’s worth,” he said. “I don’t see any difference in price with the ethanol blend. I’m worried about damaging my vehicle, and I’m incensed that I’m paying the same price for less miles per gallon.”
It might be that Potter and I are the only two people that don't like E10 and that gasoline retailers are filling that demand, but Smith provides a more likely explanation.
Refiners have begun selling stations the 10 percent blend, called E10, because of federal laws that require them to ratchet up their ethanol sales nationwide over time. And E15, a 15 percent ethanol blend, may be on the way.

Responding to requests from the ethanol industry, the Environmental Protection Agency this month said it was considering increasing the amount of ethanol that retailers could blend into gasoline to 15 percent. The final decision would come no sooner than May, when the U.S. Department of Energy is to complete tests of whether E15 damages cars. The blend would be recommended only for cars from the 2001 model year and later.

The ethanol industry has sought the new standard, saying the ethanol market needs to expand to avoid overproduction. The industry argues that expanding the market would create an incentive for developing a new generation of ethanol plants that could use grass, corncobs and wood chips.
We are buying it because the federal government under the Bush administration says that we must.  Notice the contorted logic of the ethanol industry: "the market needs to expand to avoid overproduction."  Generally, when a producers find the market glutted, they cut production and price, but not ethanol producers.  They run to Washington and lobby for mandated use. 

Let me be blunt, if my experiences is the mean (my experience is described here), and if environmental benefits are as exaggerated as fuel efficiency, it would be cheaper to close ethanol plants and pay workers to stay home than continue making ethanol.  The only savings in gasoline would come from a decline in demand due to a fall in purchasing power (real income).  Ethanol makes our nation poorer.

Smith then interviews local mechanics and reports some problems but nothing major.  E10 has only been in local markets since October.  My guess is that major problems will occur in the future.  

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Mankiw on the ITC as a Fiscal Stimulus

Greg Mankiw describes "Nine Observations about Investment," on Greg Mankiw's Blog. In the fourth observation, he explains why he believes that an investment tax credit would be an effective fiscal stimulus. I quote the first four.
1. Above is a chart of the growth rate, from four quarters earlier, of real investment in equipment and software. Notice the left scale. Investment spending is very volatile. This is one of the standard stylized facts about the business cycle.

2. Investment has been particularly weak during this economic downturn. Weak residential investment is not a surprise, as the downturn was started by events in the housing market. But as this graph shows, business investment has also been very weak. Indeed, by the metric used in this graph, it is far weaker than in previous deep recessions, such as 1982.
3. Why is business investment so weak? Part of the reason is that the downturn is severe and investment responds to the overall economy. Part of the reason is that the credit crunch makes financing more difficult. Part of the reason is that the policy environment seems adverse to business. I am referring here to a group of policies that include higher minimum wages, the seeming retreat from free trade, proposed mandates to provide employees health insurance, higher prospective energy costs from climate change regulation, and the likelihood of higher future tax rates resulting from the huge fiscal imbalance we are now experiencing. All of these factors have worked in concert to depress business investment.

4. The recent weakness of business investment was one of unstated reasons why, in my recent NY Times column, I suggested that an investment tax credit (ITC) might have been a better form of fiscal stimulus than what we in fact were given. Given the amount of money being spent on stimulus, the ITC could have been sizable. The measure of investment used in the chart above is about $1 trillion per year. So, to give a very rough example, if Congress had passed a 20 percent ITC in 2009, 10 percent in 2010, it would have cost the Treasury about $300 billion. Essentially, the Treasury would have picked up 20 percent of the cost of all of these investments if done this past year, and half that amount next year.

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Thursday, December 17, 2009

A 4-Year-Old Boy Battles Texas School Over Hair

A reader from California informed me about a story of a four-year-old who is in in-school suspension because he does not want to get a hair cut. He likes his hair long, his parents won't force him to get his hair cut and the school is applying their conservative standard which is probably acceptable to or liked by 90% of the parents. A short video of the AP story, "Texas parents battle school over son's long locks," is carried by Yahoo!News.

I don't think that the problem is the boy, the parents or the school. It is public funding of schools and not students. The parents could put their son in a private school, but they must do it after paying taxes to support the public schools. In essence, they are paying twice.

If the student was funded, the parents could withdraw him from the public school and place him in a private school that allowed long hair. Schools would be forced to compete for students. Reasonable expectations of students and higher teaching standards would emerge through competition.

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Responding to Comments about Ethanol

In response to, "Ethanol as a Gas Additive," in which I questioned the value of ethanol as a fuel additive, Anonymous wrote,
Are you serious? Where do you think jobs for additional gasoline would be located? NOT IN THE UNITED STATES! Ethanol is better for the environment and helping the economy. It's sticking money right back into the U.S. instead of shipping it overseas. Ethanol does provide a lot of good jobs in which we seem to have quite a shortage of right now. So for a few miles you would rather send your money overseas?
My response is too long to fit into the small comment box.  First, thanks for the comment. I am serious about the public’s misguided focus on job creation rather than productivity. Bryan Caplan, the author of “The Myth of the Rational Voter,” calls it the “make work bias.” Before I proceed, I do realize that the economy is in a deep recession and that many are unemployed, including some in my family.  My comments still apply.  Despite occasional recessions, economies from market oriented to socialistic generally have little problem finding jobs for everyone. Wealthy countries are highly productive, poor countries are not.  Both experience periods of high unemployment.  The question should be: how do we increase the productive of our workers? 

Increasing productivity does have costs.  American farmers are so productive that we now have about 2.2 million compared to 15 million a century ago. The “freed” farmers of the last century went on a productivity binge that dramatically raised our standard of living. I placed freed in quotation marks because nobody wants to be "freed" from their occupation. It is a hard, painful process but it is part and parcel of economic growth through rising productivity.

I have no problem with the production of ethanol so long as it is produced without a dime of taxpayer money. If it is a good product, meaning that it has as much as or more value per dollar spent than other products, people will buy it. My experience was that it cost more to drive the same distance. This means that I have less money to buy food, clothing, shelter, and entertainment. If my experience is the average, then producing ethanol creates jobs but loses productivity and wealth. 

And yes, a higher price for gasoline would produce jobs in the United States. We are the world’s third largest producer of oil and last year witnessed a large increase in American oil production (see “Drill Baby, Drill”). Even if all the gasoline or oil came from abroad, Americans would be needed to transport it from ports to end users and the money that I save from buying the best fuel for my vehicle would also employ Americans.  A higher price for gasoline would not improve productivity.

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Chavez and Mugabe at Copenhagen

(HT The Drudge Report)  Andrew Bolt describes a scene from Copenhagen for the in, "Putting our economy in the hands of Chavez fans" that should give pause to Americans as leaders from Western countries negotiate the wealth transfer to third world countries necessary to establish a global cap and trade system for carbon. 
President Chavez brought the house down.

When he said the process in Copenhagen was “not democratic, it is not inclusive, but isn’t that the reality of our world, the world is really and imperial dictatorship…down with imperial dictatorships” he got a rousing round of applause.

When he said there was a “silent and terrible ghost in the room” and that ghost was called capitalism, the applause was deafening...
But then he wound up to his grand conclusion – 20 minutes after his 5 minute speaking time was supposed to have ended and after quoting everyone from Karl Marx to Jesus Christ - “our revolution seeks to help all people…socialism, the other ghost that is probably wandering around this room, that’s the way to save the planet, capitalism is the road to hell....let’s fight against capitalism and make it obey us.” He won a standing ovation...

And a mass-murderer at Copenhagen lectures us about our crimes:

The anti-capitalist theme was picked up on by Mr Mugabe, Zimbabwe’s veteran President, who is the target of Western sanctions over alleged human rights abuses. “When these capitalist gods of carbon burp and belch their dangerous emissions, it’s we, the lesser mortals of the developing sphere who gasp and sink and eventually die.”

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Wednesday, December 16, 2009

Mankiw on Fiscal Policy

In a New York Times article titled, "Tax Cuts Might Accomplish What Spending Hasn’t," Gregory Mankiw, my students favorite textbook author, explains why he believes that the Obama administration should look to cut taxes rather than increase spending to simulate economic activity. 
IMAGINE you are a physician and a patient arrives in your office with a troubling and mysterious disease. Some of the symptoms are familiar, but others are not. You have never treated anyone with quite this set of problems.

Based on your training and experience, imperfect as it is, you come up with a proposed remedy. The patient leaves with a prescription in hand. You hope and pray that it works.

A week later, however, the patient comes back and the symptoms are, in some ways, worse. What do you do now? You have three options:

STAY THE COURSE Perhaps the patient was sicker than you thought, and it will take longer for your remedy to kick in.

UP THE DOSAGE Perhaps the remedy was right but the quantity was wrong. The patient might need more medicine.

RETHINK THE REMEDY Perhaps the treatment you prescribed wasn’t right after all. Maybe a different mixture of medicines would work better.

Choosing among these three reasonable courses of action is not easy. In many ways, the Obama administration faces a similar situation right now...
So what to do now? The administration seems most intent on staying the course, although in a speech Tuesday, the president showed interest in upping the dosage. The better path, however, might be to rethink the remedy.

When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy.

The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises G.D.P. by $1.57, while a dollar of tax cuts raises G.D.P. by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

But various recent studies suggest that conventional wisdom is backward.

One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity.

According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 — three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

All these findings suggest that conventional models leave something out. A clue as to what that might be can be found in a 2002 study by Olivier Blanchard and Roberto Perotti. (Mr. Perotti is a professor at Boccini University in Milano, Italy; Mr. Blanchard is now chief economist at the International Monetary Fund.) They report that “both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is difficult to reconcile with Keynesian theory.”

These studies point toward tax policy as the best fiscal tool to combat recession, particularly tax changes that influence incentives to invest, like an investment tax credit. Sending out lump-sum rebates, as was done in spring 2008, makes less sense, as it provides little impetus for spending or production.

LIKE our doctor facing a mysterious illness, economists should remain humble and open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not be the best medicine.

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Ethanol as a Gas Additive

My family and I drove to Johnson County in Kansas for Thanksgiving.  I filled up with a  E10 and 10% ethanol-90% gasoline blend before leaving expecting about a 3% decline in fuel mileage.  A gallon of ethanol contains about 70% of the energy contained in a gallon of gasoline and the government claims that 1.03 gallons of the ethanol blend is needed to replace every gallon of unblended gasoline.  I experienced much worse fuel mileage.  I tried to buy unblended gasoline for the return trip but failed.  For the first 325 miles my Sienna got 24.1 miles per gallon (mpg), and for the second 325 miles, 26.7 mpg.[1]  The E10 reduced my fuel mileage by 10.79%!  On the first half of the trip, I used 11.95 gallons of gasoline, and on the second, 11.98.  If the purpose of the E10 is to reduce oil consumption, it isn't working.  Perhaps it will keep the air cleaner, but I would require an explanation to be convinced.  After all, I am using the same amount of gasoline, and if the government claims of gasoline mileage are exaggerated, why not the environmental claims?[2]

I did a little research meaning that I did a Google search, read three articles and found one describing similar experiences.  The article, "Drivers avoiding ethanol additive," and  is written by the AP and published online by the  A Honda Accord driver experienced an even bigger decline in fuel economy (20%) than I.  
Corcoran said her husband's Honda Accord got a bit more than 30 mpg on “pure” gasoline versus 25 mpg on E10. Blakey, who lives in O'Fallon, Ill., soured on E10 after noticing a big drop in mileage in her family's 2002 LeSabre on a trip to visit her daughter in Ohio.
The writer interviewed Ron Lamberty, a vice president of the American Coalition for Ethanol, an industry group, who both sells and drinks Kools-Aid if my experience is typical.  He claims that,
...many vehicles running on E10 will experience a 3 to 4 percent drop in fuel efficiency, though some vehicles actually see a slight increase because of E10's higher octane rating.
The article paraphrases Lamberty as explaining that
...mileage critics are not taking a larger picture into account. Ethanol burns cleaner, creates jobs, is good for fuel-injection systems and - by reducing overall demand - reduces gasoline prices...Ethanol burns cleaner, creates jobs, is good for fuel-injection systems and - by reducing overall demand - reduces gasoline prices.
Lamberty earns a big uh-hu for the claim of reducing gasoline demand and therefore prices if my experience is common.  Gasoline prices will remain unchanged and corn prices will rise.  And what about those jobs?  Here Lamberty expresses make work bias, focusing on job creation rather than productivity.  We cold also create more jobs in the oil sector by simply pouring one gallon of gasoline in ten into the earth every time we fill up.  Think of the additional jobs needed to produce 10% more gasoline to compensate for the spilled gasoline and all the jobs that will be needed to clean the environment and the medical personnel needed to detoxify our bodies.  What a boost to the economy!  

[1]  To keep the math simple for the purpose of exposition, I assumed that the trip was evenly divided between the two fuels.  The first part of the trip, which used the ethanol blend was approximately 390 miles and the second part, 260 miles.  My vehicle got 24.10 mpg with the ethanol blend, and 27.35 mpg with gas.  I used .0373 gallons of gas per mile, not counting the ethanol, on the first half of the trip and only .0366 gallons per mile on the second.  I burned more gas with the ethanol blend than with just gas.  And the story gets slightly worse.  My tank completely empty when I filled up with unblended gas.   

[2]  The Clean Air Act Amendment of 1992 requires the use of oxygenated gasoline in areas with unhealthy levels of air pollution. 

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Blinder: The End (of the Recession) Is Near!

It is near Christmas, a time of optimism and hope for many Americans.  Alan Blinder feeds that hope by focusing on positive developments in recent economic data in his Wall Street Journal column, "The Case for Optimism on the Economy."  His byline states that he is "a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board."  He starts by describing the state of the economy and reasons for optimism.
The U.S. economy is digging itself out of a deep hole. You have probably heard a lot of doom and gloom lately, including talk of a jobless recovery, an L-shaped recovery (which means no recovery at all), or even a W—the feared double-dip recession. The Scrooges have a point: There are serious dangers to the nascent recovery. But you've heard all that many times. Let me offer instead, in deliberately one-sided fashion, the case for optimism. It is, after all, the holiday season.

The case begins with the "slingshot effect" I wrote about on this page last summer ("The Economy Has Hit Bottom," July 24, 2009). When the growth rate of any component of GDP rises, it gives overall GDP growth a boost. And going from sharply negative growth to zero is a notable rise. In July, the slingshot scenario was hypothetical—though likely. In today's economy, it's a real phenomenon...
The second major source of optimism is the amazing performance of productivity during the recession. To be sure, that performance had a downside: While real GDP was falling 3.7%, payroll employment dropped 5%, devastating many American families. But by definition, that discrepancy means that productivity—output per hour of work—rose substantially during the recession, which is pretty unusual.

The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think...

There is more to the case for optimism. For one thing, less than 30% of February's $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package ("Please don't call it a stimulus!") looks to be in the works.

Then there is the Federal Reserve's stupendously expansionary monetary policy. It is well known that interest rates work on the economy with long lags. But the Fed's last rate cut came a year ago. So isn't the monetary policy pipeline empty? The answer is no, for at least three reasons. First, history suggests that the time lag is closer to two years than to one. So even the normal policy lags are not over...
Blinder states his expectation of growth.
I warned at the outset that I would present a deliberately biased case. So let me admit, once again, that serious downside risks remain. The investment slingshot and the fiscal stimulus will both peter out in 2010. Consumer finances and confidence are shaky. Banks are still failing and commercial real estate is a mess. We cannot count on exports to pull us out of this slump. All true. And all reasons not to expect the kind of exuberant boom that typically follows a deep recession—such as the 7.7% growth spurt in the six quarters following the 1981-82 slump. No one expects that.

So my optimism is guarded. The 3%-4% growth rate that I anticipate for the rest of this year and for 2010 is a lot worse than 7.7%, to be sure. But compared to what we've been through, it will feel a whole lot better.
I agree that 3%-4% growth will make us feel a "whole lot better."

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Tuesday, December 15, 2009

The Passing of Paul Samuelson

Paul Samuelson, Nobel laureate in Economics, passed away earlier this week leaving an enduring legacy on the field. David Henderson, writing for the Wall Street Journal in, "Why Everyone Read Samuelson" describes that legacy in brief. In part he writes,
Three years after World War II drew to a close, a young professor at MIT published "Foundations of Economic Analysis." Its mathematical approach to economics would revolutionize the profession. And its author, Paul Samuelson, would go on to earn many awards and honors, culminating in 1970, when he won the Nobel Prize in economics—the second year it was awarded. Samuelson died on Sunday at the age of 94.

His influence has been profound, but the mathematization of economics has been a mixed blessing. The downside is that the math hurdle in leading U.S. economics programs is now so high that people who grasp the power of economic concepts to explain human behavior are losing out in the competition to mathematicians.

The upside is that Samuelson sometimes used math to resolve issues that had not been resolved at a theoretical level for decades. As fellow Nobel laureate Robert Lucas of the University of Chicago said in a 1982 interview, "He'll take these incomprehensible verbal debates that go on and on and just end them; formulate the issue in such a way that the question is answerable, and then get the answer."
Samuelson had a standard view of the impact of the minimum wage which he described in his textbook.

One of the best and punchiest statements in the 1970 edition was his comment about a proposal to raise the minimum wage from its existing level of $1.45 an hour to $2.00 an hour: "What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"

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Monday, December 14, 2009

Tax Cheats or Avoiders

The IRS is establishing a new unit to catch rich international investors attempting to use law to avoid taxes through investments in trusts, real estate and closed corporations.  At one point, the article uses the phrase, "tax cheat" to describe people involved in activities that is better called tax avoidance.  A tax cheat does not pay taxes he or she knows are legally due. 

People respond to incentives, and both the demeaning language used to describe these international investors and the bill may decrease incentives to invest internationally and domestically.  Imagine that you are an international investor and you have read the following article (Kim Dixon, Reuters, "Exclusive: IRS hires "hundreds" for new wealth unit").  How would it affect your investment strategies?
WASHINGTON (Reuters) - A new Internal Revenue Service unit set up to catch rich tax cheats hiding their wealth in complex business entities is rapidly taking shape with the hiring of hundreds of employees.

The IRS high wealth unit, part of a broader effort to combat international tax evasion, is focusing on "the entire web of business entities controlled by a high wealth individual," IRS Commissioner Doug Shulman told a tax conference this week.

Another IRS official told Reuters "hundreds" of people have already been hired to staff the new unit, including some from within the agency.

"We have drawn top talent within the IRS that have expertise involving wealthy individuals as well as examination of their related entities," said Mae Lew, an IRS special counsel.
The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals.

While use of sophisticated legal structures can be legal, in other instances they "mask aggressive tax strategies," Shulman said.

Tax authorities in Japan, Germany and the UK have also created similar units.

The U.S. House of Representatives on Thursday approved a $387 million boost for the IRS for the fiscal year that started October 1, in part to fund the high-wealth unit. The Senate is expected to vote on the measure on Sunday.

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Sunday, December 13, 2009

Hamilton and the College Football Playoffs

James Hamilton, one of my favorite economists, at Econbrowser, one of my favorite blogs, wrote the following post.  
Since Congress and the President are taking positions on a college football playoff system, it must be time for Econbrowser to weigh in as well.

I want to suggest first that the purpose of a playoff cannot be to determine the best team in the country. I say that for two reasons. First, there is no such thing as the best team in the country. Different teams have different strengths and weaknesses that will match up differently against different opponents. In any given game, anything can happen. In 2007, for example, Appalachian State beat Michigan who beat Florida who beat Kentucky who beat the supposed national champions LSU. So you've either got to declare Appalachian State the best team in the country, or drop your insistence on transitivity.
Second, if you do believe in such a thing as the (probabilistically) best team in the country, the more teams you put in the playoffs, the less likely it is that the best team ends up being declared the champion. Suppose for example that there's a team that with 80% probability would win its game against any other team that might make the playoffs. With a single championship game, that superior team gets declared the champion with probability 80%. With a 4-team playoff, the best team must win both its games, the probability of which is (0.8)(0.8) = 0.64. With an 8-team playoff, the best team is only going to be declared the champion about half the time.

I therefore suggest that the primary purpose of the system is not so much to determine "the" best team as it is to bring enjoyment and satisfaction to the fans. Granted, the proposed playoff games themselves would do that very well for the handful of teams and games that get included in the playoffs, but at the cost of subtracting from the excitement of the 30 or so other post-season games that would have to be diminished as a result. Of course, the parties with a vested financial stake in those other games are for that precise reason opposed to the playoff idea, and that opposition is the main reason it hasn't yet happened. But if you took the objective to be to maximize the economic surplus of all the post-season games combined, I say you'd want to stick with a system like the present one. The lobbying power of those vested interests is precisely a lobby on behalf of maximizing total economic surplus.

But whatever you may think of the merits of a college football playoff, doesn't it bother you to see the U.S. Congress acting as if it's the nation's ruler on this matter?

It does me. Which is why I wrote this.
I wish that I had written this post.  I should add that I would love to see the NCAA institute a playoff system, but I am deeply offended that the U.S. Congress is "acting as if it's the nation's ruler on this matter."  My thanks goes to Rep. John Barrow, Ga, who was apparently the only no vote on this bad bipartisan legislation (follow the Congress link). 

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Friday, December 11, 2009

When Carbon Limits Are Not Enough

(HT Drudgereport)  Self-righteous elements of the environmentalist population, whose belief in their own dogma is both devout and zealous, are convinced that they must impose their wisdom on others to save the planet from disaster, or to save the planet itself.  That was the purpose of the Copenhagen meetings.  With the CRUtape letters released, the meetings have degenerated into debating man's role in global warming.  Some don't find international attempts to limit carbon emissions enough to "save" the planet and the environment sufficient, insisting that we must impose a policy of one child per woman on the planet.  The right of a woman to control her body is thrown out like the baby with the bathwater.  Children are not a bundle of joy that will fund a country's retirement benefits but a negative externality that will impose costs on the strained resources of an overpopulated planet. 

If a growing population threatens to impoverish the world, shouldn't it have started already?  Population keeps rising, and with the exception of the past two years of financial recession, world income keeps rising.  Nor does an imposed limit on reproduction seem necessary.  Wealthy countries have falling birth rates and low or negative growth rates.  In these countries, populations are growing because of immigration and increased longevity.  In fact, the world population growth rate probably peaked in the 1960's at 2% annually and fallen to the current rate of about 1.12% annually.

Diane Francis, of the Financial Post expresses this opinion well in, "The real inconvenient truth."  Ms. Francis believes that China, a poor country whose air is choked with soot and whose rivers are flowing with toxins, and whose people are ruled by a totalitarian regime set the example of good environmental policy. 

The "inconvenient truth" overhanging the UN's Copenhagen conference is not that the climate is warming or cooling, but that humans are overpopulating the world.

A planetary law, such as China's one-child policy, is the only way to reverse the disastrous global birthrate currently, which is one million births every four days.

The world's other species, vegetation, resources, oceans, arable land, water supplies and atmosphere are being destroyed and pushed out of existence as a result of humanity's soaring reproduction rate.

Ironically, China, despite its dirty coal plants, is the world's leader in terms of fashioning policy to combat environmental degradation, thanks to its one-child-only edict...
The fix is simple. It's dramatic. And yet the world's leaders don't even have this on their agenda in Copenhagen. Instead there will be photo ops, posturing, optics, blah-blah-blah about climate science and climate fraud, announcements of giant wind farms, then cap-and-trade subsidies.

None will work unless a China one-child policy is imposed. Unfortunately, there are powerful opponents. Leaders of the world's big fundamentalist religions preach in favor of procreation and fiercely oppose birth control. And most political leaders in emerging economies perpetuate a disastrous Catch-22: Many children (i. e. sons) stave off hardship in the absence of a social safety net or economic development, which, in turn, prevents protections or development.

China has proven that birth restriction is smart policy. Its middle class grows, all its citizens have housing, health care, education and food, and the one out of five human beings who live there are not overpopulating the planet.

For those who balk at the notion that governments should control family sizes, just wait until the growing human population turns twice as much pastureland into desert as is now the case, or when the Amazon is gone, the elephants disappear for good and wars erupt over water, scarce resources and spatial needs.

The point is that Copenhagen's talking points are beside the point.

The only fix is if all countries drastically reduce their populations, clean up their messes and impose mandatory conservation measures.

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Monday, December 7, 2009


An important story referred to as "Climategate," or alternatively as "The CRUTape Letters," has broken over the Internet.  A hacker or whistle blower has posted over 1,000 e-mails and 2,000 other documents from the University of East Anglia Climate Research Unit to a server in Russia (Watts Up With That, "Breaking News Story: CRU has apparently been hacked – hundreds of files released).  The information in the documents speaks ill of many of the scientist mentioned (at least eight), and more importantly, of their abuse of the scientific method and peer review process.  The scandal also shouts of the dangers of mixing science and politics.   

How does an economist become interested in climate change?  Our interests intersect in at least three areas.  Economists devise methods to minimize the cost to the economy of environmental protection and cleanup.  Economics and climatology have similar methodological problems.  Few questions we investigate can be answered through controlled experimentation.  Both disciplines establish control through complex mathematical models verified with equally complex statistical testing.  If lack of controlled experimentation were not enough, we generally have bad data.  Finally, all scientists have an interest in the integrity of science, and I fear that science may take a hit from politicized and bad science.[1] 

Before I proceed, I do not claim to know a great deal about climate science.  The scientists involved were important contributors in their fields and on the IPCC, but how important I don't know.  Some of the involved scientists managed important databases, but I do not know the percentage of the scientific literature that made use of it.   

In class, I place a great deal of emphasis on the scientific process.  The purpose of scientific training is to help practitioners think clearly and free of biases which tie conclusions to prior beliefs, eliminating the need to conduct research.  The scientists involved in this scientific scandal violated the process at almost every step.  An early step of scientific enquiry involves a search of the relevant literature, which they appeared to do, and incorporation of that literature into the formulation of models, and possibly into hypotheses, steps they did not take.  They were aware of criticism of their own work and ignored it, and worse, they attempted to keep opposing opinions from seeing the peer-reviewed light of day. 

Another important part of the scientific process involves testing hypotheses, and again, it appears these scientists behaved badly.  At the least, they manipulated data used to produce graphs explaining their findings to the general public.  They withheld data and statistical techniques that they used from scientists that were skeptical of their work.  While this is a very human thing to do, it is not the scientific thing to do.  The released data also suggests that one of the four great databases showing long-term temperature change was not as sound as the Climate Research Unit at UEA claimed.  Lower quality data lowers the strength of conclusions. 

The peer review process is the gold standard of scientific research.  It is supposed to be anonymous, meaning that the scientists who wrote the paper do not know those who review it, and those who review it do not know the authors.  Reputation should not influence the scientific judgement of what is published.  The released e-mails clearly demonstrate efforts to control scientific discourse without regard to merit.   

[1]  Daniel Botkin, one of the first ecologists to explore the impact of global warming, expressed similar concerns in a EconTalk podcast, "Botkin on Nature, the Environment and Global Warming," November 26, 2007).  Botkin demonstrates wonderful scientific restraint in not exceeding the bounds of his expertise. 

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Sunday, December 6, 2009

Tattoos and the Air Force

(HT Drudge Report) When recruiting, the Air Force and other branches of the armed services must decide the characteristics that will make a good soldier. These are the Air Force's determinants of demand for soldiers. I would include intelligence, the ability to follow orders, strength and speed, and patriotism. The Air Force list briefly included no tattoos on the right arm. After a week, they fell back to a more lenient policy (George Warren, "Air Force Changing Tattoo Policy").

SACRAMENTO, CA - One week after the Air Force adopted a strict prohibition of tattoos on the "saluting arm," the new policy has been scrapped.

A spokeswoman for the Air Force Recruiting Service in San Antonio, Christa D'Andrea, said the regulation that took effect Nov. 25 has been dropped and the entire tattoo policy will be reviewed.

"It's an effort to standardize the policy for all members of the Air Force," D'Andrea said.

As many as 17,000 recruits who joined under the delayed entry program were potentially affected by the ban on right-arm body art. The Air Force said it did not want tattoos to be seen when an airman salutes. The updated policy also prohibited tattoos on either hand.

This week some recruits were told they had been disqualified under the new rule even though their tattoos had been approved under previous, more lenient guidelines.

Replace this text with...
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Friday, December 4, 2009

November 2009 Unemployment

The government released two reports on unemployment that both indicate that the employment picture is improving and the economy is recovering. The 4 week moving average of initial unemployment claims of unemployment continued its thirteen week declining to 481,250 (Unemployment Insurance Weekly Claims Report), and unemployment for November 2009 fell .2% to 10.0% (Employment Situation Summary).

Given that the 4 week moving average peaked at 658,750 on April 4th of this year, it was likely that unemployment would peak soon as well. Robert J. Gordon did research looking at the relationship between the 4 week moving averages of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks.

The three graphs compare the current recession which began late in 2007 and one of the three previous recessions which began in 1981, 1990 and 2001. The graphs are not forecasts. I have not modeled the data with the goal of predicting future levels of unemployment. But the raw data does provide insights.

The first compares the current recession to the recession that began in 1981. At this point, the two look similar in depth and pace of recovery. The 1981 recession began a rapid recovery in the months immediately outside of the graphs' time horizon. Just eyeballing the graphs (and this is scientifically dangerous) suggests that if the 4 week moving average truly is a leading indicator of future employment trends, that the economy may experience a robust recovery.

The 1991 and 2001 recessions are somewhat different, both shorter from the peak of the previous economic boom to the highest 4 week moving average. In both cases,the unemployment rate declined slowly. Next months data will show unemployment beginning to fall approximately 15 months after the 4 week moving average peaked. During the 2001 recession, unemployment will peak 3 months beyond the graphed time frame, 20 months after the 4 week moving average peaked. If unemployment during the current recession has peaked, in will occur only 7 months after the 4 week moving average peaked.

The unemployment data suggests that unemployment begins to fall after the 4 week moving average peaks and between 84 and 128 weeks after the recessions began. It does not suggest that the 2007 will follow suit, or why the recessions ended. Did the recoveries occur because of smart policy or because markets recover on their own? Does policy help or hinder a recovery? If policy is successful, how were the policies employed to fight recessions similar and different?

My guess is that economists will consider these questions for a generation.

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Thursday, December 3, 2009

None of Their Business

The executive and legislative branches of government have found yet another problem that they must tackle.  Consumers prefer the Internet to traditional news outlets to get their news.  Joelle Tessler of the AP describes Federal Trade Commission workshop designed to solve the problem in, "FTC explores future of journalism in Internet age."
WASHINGTON — The federal government is wading into deliberations over the future of journalism as Americans abandon printed newspapers, television stations and other traditional media outlets for the Internet.

With the media business in a state of economic distress as audiences and advertisers migrate online, the Federal Trade Commission began a two-day workshop Tuesday to examine the profound challenges facing media companies and explore ways the government can help them survive.

Media executives taking part are looking for a new business model for an industry that is watching traditional advertising revenue dry up, without online revenue growing quickly enough to replace it. Government officials want to protect a critical pillar of democracy — a free press.

"News is a public good," FTC Chairman Jon Leibowitz said. "We should be willing to take action if necessary to preserve the news that is vital to democracy."
The emphasis added is mine.  Public goods have two defining characteristics: they are nonrivalrous in consumption and nonexcludable.  Nonrivalrous means that my consumption of the good does not affect yours.  A firework display  is  an example.  Nonexcludable means that the person who provides the fireworks cannot exclude others from enjoying the display.  These conditions create free-riders, people who benefit from the provision of the public good without paying.  Economists have demonstrated that the free-rider problem results in under provision of the public good. 

News does not fit the description of a public good.  News papers can exclude people from enjoying their presentation of the news.  You have to subscribe to the paper or buy it on a daily basis.  If the paper is presented on the Internet, the owners can exclude readers from content by requiring subscription and excluding content from search engines line Bing, Google, and Yahoo.  To open their content, they must provide code for search engines to find their content, and allow nonsubscribers to view it.  Then news is a public good but the owners have made it so.  They have found that it is their best option to remain commercially viable.   

The problem faced by newspapers and traditional news outlets face is too much competition.  Subscriptions are falling because consumers can get news in a more timely manner with a greater variety of perspectives for free from the Internet.

Some scholars and politicians see a problem with the variety of news providers.  Cass Sunstein, a brilliant scholar whose work spans law and behavioral economics, believes that Internet provisions of the news can lead to systematic bias where people only read news that agrees with their opinions compounding confirmation bias as if their wasn't enough to go around already.  With liberals only reading the Daily Koss and the Huffington Post, and conservatives only listening to Rush Limbaugh and Sean Hannity, group polarization hardens. 

Ben Van Heuvelen of Salon summarizes the problem in the preamble for an interview with Sunstein in "The Internet is making us stupid."
Freedom of choice is not always good for democracy. This observation is at the heart of University of Chicago law professor Cass Sunstein's book " 2.0" (an update of "" in 2001), which argues that our country's political discourse is fracturing in the information age. Sure, the Internet has been a boon to democracy in all sorts of ways, Sunstein acknowledges -- but if new technology gives us unprecedented access to information, it also gives us more ways to avoid information we don't like. Conservatives are increasingly seeking only conservative views, liberals are seeking only liberal views, and never the twain shall meet...

What gets lost in these polarized times, Sunstein writes, are traditional civic virtues like civility, self-criticism and open-mindedness. He uses experiments and statistical analyses to back that up: One study of hyperlinking patterns on the Web shows that political bloggers rarely highlight opposing opinions -- of 1,400 blogs surveyed, 91 percent of links were to like-minded sites. A central problem, Sunstein argues, is that Americans now think of themselves more as consumers than as citizens. When it comes to the Internet, we demand the right to reinforce our own beliefs without embracing the responsibility to challenge them.
Attempting to read between the lines with a public interest perspective, perhaps supporters of tax subsidies believe that traditional news outlets provide more balanced news and thereby counter confirmation bias, fostering public civility, self-criticism and open-mindedness. 

I expressed my opinion in the title, but must acknowledge that my favorite news program is the NewsHour with Jim Lehrer precisely because it has the civic virtues lauded by Sunstein.  I do not worry as much about the described problems as Sunstein while acknowledging their existence.  My fear is that public subsidies will contaminate the news process and increase government oversight of another industry, one that is to act as a counter weight to government and requires independence from government to do so, and be yet another burden on the "forgotten man," the taxpayer.

What do you think?

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