Please turn on JavaScript

Brooks Wilson's Economics Blog: September 2010

Monday, September 27, 2010

Pod Hotels

Innovation is an important function of entrepreneurs.  With hotel rooms in New York averaging $260 per night, pod hotels are opening.  The rooms are small, 50 square feet, and inexpensive, $100 per night for a room with a bed and $125 per night for a room with a bed and a bunk.  Pod hotels have been successful in Tokyo and cities in Europe.  Will they make it in the United States? To learn more, read “Pod hotels in a bid to take New York by storm.”

Read more!

Friday, September 17, 2010

The Trash Police

John Brandon asks a couple of good questions in “Cities Increasingly Turn to 'Trash Police' to Enforce Recycling Laws.”

Beware the green police. They don't carry guns and there's no police academy to train them, but if you don't recycle your trash properly, they can walk up your driveway and give you a $100 ticket.

They know what's in your trash, they know what you eat, they know how often you bring your recycles to the curb -- and they may be coming to your town soon. That is, if they're not already there.

In a growing number of cities across the U.S., local governments are placing computer chips in recycling bins to collect data on refuse disposal, and then fining residents who don't participate in recycling efforts and forcing others into educational programs meant to instill respect for the environment.

From Charlotte, N.C., to Cleveland, Ohio, from Boise, Idaho, to Flint, Mich., the green police are spreading out. And that alarms some privacy advocates who are asking: Should local governments have the right to monitor how you divide your paper cups from your plastic forks? Is that really the role of government?

Rather than trying to police, fine and reeducate people into respecting the environment, local governments could hire people to sort trash.  Specialization creates wealth.  A sorting center would allow some workers to specialize in sorting trash, lowering the cost of sorting.  With the time saved, household members would have more time to concentrate on their areas of expertise or better enjoy their leisure. 

Read more!

Arch Ritter and The Cuban Economy

To understand why communism failed, look at the shelves in the picture taken from Arch Ritter’s blog The Cuban Economy.  His blog a tremendous resource.  Ritter earned his Ph.D. at the University of Texas at Austin. 
Read more!

Thursday, September 16, 2010

Glaeser on Austan Goolsbee

Principle 6 in Manikiw’s Principles of Economics is “markets are usually a good way to organize economic activity.”  This is not a point of contention in the economics profession.  Economists on the political right and left tend to trust markets more than non-economists.  Edward Glaeser offers evidence that a politically left of center economists like Austan Goolsbee, President Obama’s new chairman of the White House Council of Economic Advisers, finds markets a good mechanism for organizing economic activity in “Sizing Up Obama’s Nominee as Chief Economist.”
While his abundant practical talents brought him to Washington,…he was known for research that used new innovations — like the Internet — to answer old questions.

His most cited paper, which he wrote with Jeffrey Brown, looks at the value of the economic competition created by the Internet. Comparing groups with more and less Internet usage, the authors find that “a 10 percent increase in the share of individuals in a group using the Internet reduces average insurance prices for the group by as much as 5 percent.” On one level, the paper produced an interesting new fact about an emerging technology, but on a more basic level, it illustrates a timeless economic truth: competition is better for consumers than monopoly.

Professor Goolsbee’s work on direct-broadcast satellite television pushes further along this line. Using elegant econometrics, he concludes that “without DBS, entry cable prices would be about 15 percent higher and cable quality would fall.”

He also illustrated the power of competition in the airline industry, where he found that Southwest didn’t even need to fly somewhere to lower fares. Just the threat of the low-cost airline’s entry into a market spurred incumbent airlines to cut their prices…

Professor Goolsbee’s pregovernmental career was technically sophisticated but still grounded in the real world. His research shows a nuanced understanding of public policy that exaggerates neither the upside nor the downside of public action. He can apply the logic of economics in settings far from his core areas of scholarship – and on top of that, he is very, very funny.

Read more!

Wednesday, September 15, 2010

Economic Reform in Cuba

In “Say It Ain’t So, Fidel!”, I wrote about Fidel Castro’s statement that “The Cuban model doesn't even work for us anymore.”  New evidence of economic reform was reported by Paul Haven and Will Weissert in “Cuba to Cut 500,000 Government Workers.“
Cuba on Monday said it is laying off nearly half a million workers, an eye-popping figure in any country, but especially in a nation where the government so totally dominates the economy.

The shift would mean that one-tenth of the island's 5.1 million-strong work force will be looking for jobs in the private sector by April 2011, a drastic change that could mean a radically altered economic outlook, especially for Cubans in their 20s and 30s who have known nothing but a paternalistic communist system ushered in by Fidel Castro in his 1959 revolution.

The changes are the most dramatic yet in a reform program that began when Raul Castro permanently took over the presidency from his brother in 2008 - but which have sputtered in fits and starts since then.

But they were not entirely surprising. Raul Castro has warned for years that the state could no longer afford to subsidize every part of Cuban life, nor pay workers who contribute little. In April, he floated the idea that up to 1 million workers were superfluous and must go.
The government announced changes in property rights to help the newly unemployed.
To soften the blow, the statement - which appeared in state newspapers and was read on television and radio - said the government would increase private-sector job opportunities, including allowing more Cubans to become self-employed. They also will be able to form cooperatives run by employees rather than government administrators, and increasingly lease state land, businesses and infrastructure…

Larry Birns, director of the Washington-based Council on Hemispheric Affairs, said a series of small changes - such as privatizing some state-run barbershops, licensing more private taxis and distributing fallow land to private farmers - have moved Cuba toward economic reform. While none of those were blockbusters, Birns said, Monday's revelation has the potential to be one.

"Cuba is rapidly becoming like any other country," he said. "It is not going back. These are big changes."
Economic rights are civil rights.  The U.S. should devise polity to support reform in Cuba.  I believe that the reform should focus on increasing contact between average Americans and Cubans. 
Read more!

Monday, September 13, 2010

Goolsbee and the Electorate

President Obama has named Austan Goolsbee to replace Christina Romer as chairman of the White House Council of Economic Advisers.  He has been a long time economic adviser to the president and is well qualified for the position.

Phil Izo of the Wall Street Journal writes on Goolsbee and his background in “Who Is Austan Goolsbee?”  It is not easy being an adviser.  As I observed in “Experts Vs. Partisans (Repost II)” an economist might show loyalty to her political employer rather than economic science.  One paragraph caught my attention because it highlights a second problem that advisers might face and that is loyalty to the president rather than the American people.
Goolsbee has been an advocate of free trade. During 2008, he took some lumps when a Canadian government memo surfaced, citing Goolsbee saying that Obama statements on scaling back the North American Free Trade Agreement amounted to “political positioning.” Obama took a hit from then-opponent Hilary Clinton, but many economists were relieved.
What a web of deceit.  Here is my interpretation.  The Canadian government was concerned about trade policy statements made by candidate Obama.  Goolsbee, Obama’s economic adviser informs Canadian officials that Obama’s rhetoric is “political positioning,” or lying to the American electorate for political gain.  That’s nothing new, but it is wrong and it isn’t endearing and thus the hit from Hilary.  Many economists were relieved that Obama was lying to the electorate rather than adopting protectionist policy.  That paints economists as elitist who prefer good policy to an honest description of their candidate’s true beliefs. 

In “The Views of Economists and Non Economists on the Economy (Repost I),” I describe four biases about the economy held by the public.  One is antiforeign bias, a systematic undervaluation of the value of trade.  It is logical for politicians who know that trade is good for the economic wellbeing of a country to lie, feigning to support protectionist policies.  The lying and demagoguery will end when voters better understand the benefits of trade.

Read more!

Saturday, September 11, 2010

China Is Liberalizing Its One Child Policy

China’s population is set to peak at 1.4 billion in 2026 and then to decline to 750 million in 2100 (“China's Impending Population Bust”).  Allie Townsend writes clearly and concisely about China’s plans to liberalize its one child policy and a factor that may be driving the change in “China Could Overthrow One-Child Rule.”
The pilot projects, which are set to begin in 2011, allow for a second child per family if at least one spouse is an only child. USA Today reports that Beijing, Shanghai and four other provinces will follow suit in 2012, with nationwide adoption of the new policy expected by 2013 or 2014. In 1979, China's one-child policy was introduced after decades of huge population boom followed by mass death due to resulting food shortages. The policy, which has prevented 400 million births, restricted the country's ethnic Han majority to have only one child per family (exempting most ethnic minorities) and has remained nearly the same since, though a few exceptions have been made. (Some rural farm families have been allowed to have a second child if the first is a girl.)

A wide gender imbalance, as well as the need for more children to care for parents, has likely influenced the government's tight control on the country's birthrate. (Even though prenatal sex screening was banned in 1994, female infanticide is still in practice because of the cultural preference for boys.) A study published in the British Medical Journal in 2009 found that China has some 32 million more boys than girls under the age of 20.
I have two comments to add.  An aging population might also be contributing to the policy change.  Someone must pay for the social programs that support the elderly.  Finally, the mass death due to food shortages was not caused by the increasing population nor was the mass starvation due to bad weather.  It was due to bad policy pursued by China’s communist government.
Read more!

Friday, September 10, 2010

Say It Ain’t So, Fidel!

Jeff Goldberg of the Atlantic, with the aid of Julia Sweig, a Latin American scholar at the Council of Foreign Relations, write on a fascinating interview with Fidel Castro in “Fidel: 'Cuban Model Doesn't Even Work For Us Anymore'.”  Goldberg asked Castro about the Cuban economy. He writes,
“The Cuban model doesn't even work for us anymore,” he said.

This struck me as the mother of all Emily Litella moments. Did the leader of the Revolution just say, in essence, "Never mind"?

I asked Julia to interpret this stunning statement for me. She said, "He wasn't rejecting the ideas of the Revolution. I took it to be an acknowledgment that under 'the Cuban model' the state has much too big a role in the economic life of the country."
I’m not sure what constitutes “rejecting the ideas of the Revolution,” but rejecting state ownership seems important.  Goldberg continues, 
Julia pointed out that one effect of such a sentiment might be to create space for his brother, Raul, who is now president, to enact the necessary reforms in the face of what will surely be push-back from orthodox communists within the Party and the bureaucracy.  Raul Castro is already loosening the state's hold on the economy. He recently announced, in fact, that small businesses can now operate and that foreign investors could now buy Cuban real estate. (The joke of this new announcement, of course, is that Americans are not allowed to invest in Cuba, not because of Cuban policy, but because of American policy. In other words, Cuba is beginning to adopt the sort of economic ideas that America has long-demanded it adopt, but Americans are not allowed to participate in this free-market experiment because of our government's hypocritical and stupidly self-defeating embargo policy. We'll regret this, of course, when Cubans partner with Europeans and Brazilians to buy up all the best hotels).
The emphasis added to Goldberg’s point is mine, and I couldn’t agree more.  It will be ironic if we don’t recognize that we’ve won.  The Obama administration has taken small steps to normalized relations with Cuba and it should take more.  Those steps should be overwhelmingly supported by both parties and the Cuban community in Florida.  Is our government’s goal to punish the Cuban government or aid the Cubans by promoting a market system and democracy?

In twenty years, Fidel’s and Rual’s progeny along with those of loyal communists will be wealthy crony capitalists.  Our embargo will not change that.  The people of Cuba will be better off under a corrupt capitalist government with too much military influence, whether or not we normalize relations with the island state.  Somehow I believe that we, meaning Americans, could nudge Cubans in a positive direction, not through government channels, but direct trade, travel and other interactions between the people of Cuba and the United States. 

Read more!

Wednesday, September 8, 2010

Measuring Changes in the Duration of Unemployment

In “The Folly of Subsidizing Unemployment,” Robert Barro attributes an increase in the observed duration of unemployment during the Great Recession to the extension of unemployment benefits from 26 to 99 weeks.  He supports his hypothesis by observing that the current recession is the only one in which benefits have been extended and that the duration of unemployment has been much greater.
A second method for measuring the impact of extending unemployment benefits on the duration of unemployment exists if states are allowed to follow different rules when awarding benefits.  Have any states declined to extend benefits, reduced the benefits over time or offered bonuses to the unemployed if they find work quickly?  If so, we can compare the duration of unemployment conditioned on the generosity of the state’s unemployment programs.  States with more generous programs should experience higher duration of unemployment if Barro is correct. 

The second method does have flaws.  The logic of the argument might reverse causality.  Perhaps the states with the longest duration of unemployment are the ones that extended benefits.  If this were the case and states can vary in allocation unemployment, then we would expect states with the longest duration to have increased the generosity of benefits.

Any thoughts?
Replace this text with...
Read more!

Monday, September 6, 2010

Hassett and Viard on Extension of the Bush Tax Cuts

After the November elections, Congress will consider the extension of the 2003 Bush tax cuts.  A growing number of Congressmen support some sort of extension.  The Obama administration favors permanent extension for single taxpayers earning less than $200,000 and married couples with incomes below $250,000.  

Some elected officials who support phasing out tax cuts on the wealthiest Americans assert that only 98% of American families and 97% of small businesses would pay more taxes.  The implication is that the percentage of small businesses that would face the tax is so low, that the negative impact on future growth would be small as well.  Kevin Hassett and Alan Viard of the American Enterprise Institute take issue with the statistic and its implication in “The Small Business Tax Hike and the 97% Fallacy.” 
The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?
It appears that 3% of households earn 48% of net income of small businesses.  They also cite economic literature that finds that increasing taxes on small businesses would reduce gross receipts of small businesses subject to the tax by 7%, impede long-run economic growth, and discourage entrepreneurs for starting new businesses. 

Which statistic is appropriate?  Normatively speaking, is the increased equality of after tax income worth the decreased economic activity?

Read more!

Sunday, September 5, 2010

Robinson on the Electorate

Economists have long examined the interaction of the electorate and politicians.  James Buchanan, a Nobel Prize winner in economics, wrote The Calculus of Consent: Logical Foundations of Constitutional Democracy establishing a paradigm known as public choice economics.  Bryan Caplan wrote The Myth of the Rational Voter, challenging assumptions of most models studying voter behavior.  Eugene Robinson eloquently expresses one of my fears about American voters in “Our Quick-Fix Electorate.”
The nation demands the impossible: quick, painless solutions to long-term, structural problems. While they're running for office, politicians of both parties encourage this kind of magical thinking. When they get into office, they're forced to try to explain that things aren't quite so simple -- that restructuring our economy, renewing the nation's increasingly rickety infrastructure, reforming an unsustainable system of entitlements, redefining America's position in the world and all the other massive challenges that face the country are going to require years of effort. But the American people don't want to hear any of this. They want somebody to make it all better. Now.
Another of my fears is that the electorate will become so deadlocked between competing ideologies that no decision will be made precipitating an irresolvable government debt crisis.Replace this text with...
Read more!

Friday, September 3, 2010

Barro On Extending Unemployment Benefits

I am dedicating a second post to Robert Barro’s article, “The Folly of Subsidizing Unemployment,” a rare occurrence.  The first post, “Barro on Obama’s Policy Objectives,” discussed a tangential point in Barro’s article.  The second will discuss his main point, that subsidizing long-term unemployment by extending benefits from 26 weeks to as much as 99 weeks is folly.  He begins by noting the tradeoff between efficiency and equity.
The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

Peak Unemployment Rate Nov-Dec 82 Oct 09
Unemployment Rate 10.8% 10.1%
Mean Duration (Weeks) 17.6 27.2
Long-term Share 20.4% 36.0%

Peak Mean Duration (Weeks) Jul 83 June 10
Unemployment Rate 9.4% 9.5%
Mean Duration (Weeks) 21.2 35.2
Long-term Share 24.5% 46.2%

When considering the tradeoff, it would be nice to know the size of the efficiency loss.  Barro compares the current recession to that of 1982.  I have placed the data he discusses into two tables.  The first is a snapshot of long-term unemployment statistics when the unemployment rate peaked during the 1982 recession and the current recession.  The second looks at these statistics when the average weeks of unemployment peaked.    Barro notes that long-term unemployment is a more prominent feature of this recession and that unemployment benefits were not extended in the 1982 recession but were extended from 26 weeks to 99 weeks during the current recession.  He offers the extension of unemployment benefits as a possible explanation, he considers no others.  He asks what the world might be like if the benefits were not extended and assumes that peak unemployment would have held at 24.5% of unemployed as it did in 1983, then total unemployment would have been 10.4 million rather than 14.6 and the unemployment rate would have been 6.8% rather than 9.5%.

This is a “back of the envelope” calculation that Barro calls “rough.”  I would consider two other factors if I were to attempt a more sophisticated model.  I would control for the age of the labor force, which has gotten older.  As another blogger, Calculated Risk, observed in “Older, more educated workers, have highest length of unemployment” in a tell-all title, older, more educated workers have the highest length of unemployment.  This raises an issue of causality.  Is the job search for these workers inherently longer than in the past or do they take longer to search for a perfect fit job because unemployment benefits have been extended?  Both may be true.  The latter explanation supports Barro’s hypothesis.

A second issue of note is that the unemployment rate, which is found by dividing the number of unemployed by the labor force participation rate, may influence the number of labor force participants.  High levels of unemployment discourage workers who drop out of the labor force.  As the economy improves, these workers may reenter the labor force keeping the unemployment rate higher than it would have been if the labor force remained constant through the recovery.  Barro assumes that the labor force participation rate does not change. 

Read more!