Friday, May 30, 2008

Richard Fisher's storm on the horizon

Richard Fisher, president of the Federal Reserve Bank of Dallas, gave a few days ago a speech about some of the challenges the US economy faces over the coming decades. In a nutshell, the current sub-prime debacle and the federal debt are nothing compared to the burden of the entitlement programs of Social Security and Medicare. The numbers he cites are truly sobering.

First, he thinks that the government projection of fiscal surpluses in 2012 are right up there with unicorns and flying pigs. Indeed, it is obvious that if spending has vastly outpaced revenues for the last seven years, a sudden reversal is highly unlikely, even when factoring out war spending. Even a change of administration cannot make this happen. But this is, relatively, a minor problem.

Second, he comes to the conclusion that the unfunded part of Social Security amounts in present value terms to almost one year of GDP. This comes from lengthened lives not followed by lengthened work lives, and lower fertility. We knew that, but it is important to remind us about the scope of the problem.

Third, Richard Fisher claims that the unfunded liabilities for Medicare are, in present values: two years of GDP for hospital stays, two yearly GDPs for medical visits and one yearly GDP for the recently introduced drug benefits.

Add this up, we have six years worth of GDP in unfunded liabilities for the US. As a point of comparison, the current public debt is about 40% of GDP. This amounts to $330,000 per capita. This could be paid by a permanent 68% increase in income tax revenue, or reduce government spending by 97% (not a typo).

These are truly scary numbers, but they do not include other unfunded liabilities that Richard Fisher is not talking about: the medical care for the veterans of the current wars, the replacement of infrastructure that has been postponed beyond reason, and the consequences of climatic change.

Rarely do you see a Federal Reserve official be so frank and direct about economic predictions. Time to take this seriously.

Thursday, May 29, 2008

Microsoft gives finally in

I have ranted previously about the evil of Microsoft Word. One of the issues is the use of proprietary file formats that keep changing, both to force Word users to buy upgrades to be compatible and to prevent other word porcessors to manage to read or save into the Word format. It turns out at least this aspect of Word is coming to an end.

According to The Motley Fool, Microsoft has now agreed to adhere to the open-source ODF format. This will make Microsoft Office format compatible and easy to interpret. Microsoft is seeing now the consequences of its strategy, which drove ore and more institutions away from MS Office. So it seems markets can force monopolies to behave.

Wednesday, May 28, 2008

100 posts!

This is my 100th post on this blog, thus a good opportunity to see whether it is going in the right direction.

When I started this blog, I wanted not only to get a forum for my ideas, which does not make it different from most blogs, but also use some serious economic discourse for a wide spectrum of economic issues. By wide spectrum I mean beyond the stock market and political economy, for which there are already plenty of blogs.

Some told me that running a blog can be overwhelming, especially if one wants to post on a different topic everyday. Indeed, I confirm that it takes time, but I enjoy and I do let it overtake my other responsibilities, occasionally skipping a day.

Is it a success so far? Only the reader can judge. From traffic reports and the number of comments, I conclude that this blog is still rather confidential. The fact that I post anonymously probably does not help. But there are some good quality commentators, and I hope that eventually more people will stop by. Let me reassess after the first year of operation.

Tuesday, May 27, 2008

Unsettling economic jargon

We economists are among themselves, they obviously use jargon. But when they use that jargon with a larger audience, said audience is sometimes uneasy about some of the formulations we use. The fact is that we see markets in many situations, à la Becker, where other would rather look for emotions, instinct or morals.

Take for example the term marriage market. We often model marriage as a search matching problem not unlike the labor market. But the term we use for it has in the general public of a slave market, and thus John Doe has little understanding for our jargon.

Or look at the child quantity vs. quality trade-off. Now, that is a way to get people riling against us, as we treat children like commodities. Even human capital is offending. This term was designated in 2004 as the "unword" of the year in Germany, as it "degrades the workforce and people in general to economic quantities only."

Economists have a hard time getting their point through with the general public. Maybe changing the jargon a little would help, even if this means giving in to political correctness.

Monday, May 26, 2008

Nigeria and the US: scary parallels

Nigeria is once more in the news for gas related riots. While the United States are obviously not yet at this level, there are e few disturbing parallels between the two countries:

  1. Cheap gas is a right or at least it is considered to be a right. In both cases, the government is typically asked to "do something about it," in Nigeria by trashing the neigborhood, in the US by making trash calls on radio.
  2. Both are major oil producers, yet are not able to satisfy domestic demand. And both governments have major debts as well, despite oil revenues.
  3. Refining capacity is 20 years behind and stuck. In Nigeria, this has two reasons: 1) government-owned refineries are so poorly managed the government itself realizes it should not build another one; 2) privately owned refineries would not be able to make a profit given the price controls subsequent to the previous point. Why no refineries have been built in the US is subject to wide speculation, from conspiracy theories to environmental concerns.

Friday, May 23, 2008

The dilemma with postal services

The mission of a postal service is to deliver and collect mail over all its attributed territory. But should it do so at a uniform cost to users?

Delivering mail in rural areas is much more costly than in urban ones. Yet in most countries, postal fee do not differentiate delivery areas, in fact they do not even distinguish distances, as long as delivery stays within the country. In economic terms, this is highly inefficient, as areas where delivery is easy subsidize areas where it is difficult. This encourages rurals to send and receive more letters than they should (for efficiency's sake).

Of course, the free market could circumvent that by offering at a lower cost delivery services in urban areas. This would erode the principle of uniform cost, and is thus banned in many countries by granting monopoly for postal services. This has been gradually relaxed, in particular for packages.

But why have this principle of uniform cost? Why encourage people living in remote places that are economically not self-sustaining? Is having economic development on all the territory a public good?

Thursday, May 22, 2008

How things have changed...

Germany plans to partially privatize its railways, Deutsche Bahn. A few decades ago, nobody wold have thought this to be possible. To top this, Russia is apparently interested in buying a stake in Deutsche Bahn. A few decades ago, this was even less imaginable. How the end of the cold war and globalization have changed things...

Wednesday, May 21, 2008

The oil price problem is a dollar problem

The price of crude oil keeps going up, and we read in the press dark forecasts for the world economy. Are these warranted? Let us see whether the price of crude oil also increases in an other currency, say the euro.

Year$$ change€ change

Sources: FRED and US Dept. of Energy. I used data closest to May first, to prevent seasonal factors from mattering. Data is nominal, as inflation differentials are an order of magnitude smaller than the changes we see here (which are %age changes from 2000).

What do I read from this first table? That more than half of the increase in the dollar denominated price of crude oil is due to the weakness of the dollar, and less than half to the actual increase of oil prices. So much for blaming China and India, the real culprit is the US dollar. But crude oil prices are not really what matters to an economy, it is rather the price of the end product, the gas that fuels engines. So let us look at the price for a gallon of gas, around May first, in the United States and in Germany, the largest European economy.

YearUS $US $ changeGerm. €Germ. € changeGerm. $Germ. $ change

Sources: FRED and US Dept. of Energy.

We can see clearly that gas prices have increased much less in Germany in euro terms than anywhere in dollar terms. Two thirds of the US increase can be attributed to the weak dollar.

Tuesday, May 20, 2008

Milk, marriage and Economics

It is always sobering to learn how emotions like love are the results of hormones and chemical processes. So it is no surprise that a hormone is responsible for the strong bonds that one feels for someone else. Oxytocin for females, vasopressin for males are the recipes for mutual love and respect. But what does this have to do with Economics?

Plenty. Think about the institution of marriage. In societies where there is little wealth inequality, one should expect most marriages to be monogamous: no single man (or woman) can provide for more than one spouse when competiting with the other suitors. Thus, hunter-gatherer societies are characterized by serial monogamy, as individuals did not have the ability to gather any wealth.

But in agricultural societies, wealth is accumulated, and thus wealth disparities can arise. As societies are mostly patriarchal, it is usally some men that can have multiple spouses. This equilibrium is both economic and biologic: rich men can guarantee the survival of more offspring. But it turns out that the correlation between agricultural development and prevalence of polygyny is negative. Thus, something else must be dominating the wealth effect as described above.

Marina Adshade and Brooks Kaiser suggest that the reason lays in the presence of oxytocin in some agriculture production. In particular, oxytocin is released during lactation, the evolutionary reason being that it creates affection of the mother for her child (thereby sobering me even more). Therefore, the use of milk products should favor monogamy, as oxytocin is not unique to humans. Indeed, a regression between the prevalence of monogamy aganst the prevalence of milking, soy and oilseed production (the later also producing oxytocin) as well as other controls yields a positive coefficient.

Further economic consequence: if monogamous marriage is to be considered a good institution, for example because it reduces the tension stemming from frustrated males, governments should promote and subsidize milk consumption...

PS: Sorry for the hiatus. Exams were taking much of my time.

Wednesday, May 14, 2008

World competitiveness rankings

The latest World Competitiveness Yearbook is in. While all rankings need to be taken with a grain of salt, they still give some information. In this case, over 300 indicators relating to economic performance, infrastructure, government and business efficiency are collected. While one can discuss the methodology of aggregating these indicators, the yearbook has value in the compilation of this wealth of data.

The USA is number 1 again this year (see the 2008 "scoreboard", from 2007 data), followed by a series of smaller nations (Singapore, Hong Kong, Switzerland, Luxembourg). In fact, it is somewhat puzzling that so many small countries are ahead of the larger European countries. Germany is 16th, just ahead of China, the UK 21st. In that respect, the USA is an anomaly.

Will it last? Twenty years ago, the USA was 3rd, well behind Japan and Switzerland. If Japan managed to drop all the way to 22nd, The US could as well, and the current pessimistic mood may indicate that. Especially as Japan was then hit by low interest rates and a major banking crisis...

Tuesday, May 13, 2008

The fitness tax credit

Healthy people are good for an economy: they are productive, happy and in particular do not generate (poor) health related costs. As long as all those characteristics are private, there is no need for the government to intervene and promote good health. Everybody is free to choose the lifestyle she prefers, and suffer the consequences.

If there are externalities, it is another story. Second-hand smoke, drunk driving, are all example of lifestyle choices that have a negative impact on others. But health itself also has an impact if health care costs are at least partly carried by the community. This is the case in socialized health care, like in the United Kingdom and Canada, in mandatory group health insurance like in Germany, or in state supported old age health care like in the United States. There are two ways to address this: tax bad behavior, or subsidize good behavior.

Thus the plethora of sin taxes. Among existing ones, let us mention cigarettes and alcohol. But other possibilities could be trans-fat, French fries, corn syrup and sodas. One can also encourage good behavior: some health insurance companies offer lower rates for non-smokers or subsidize various sports activities. Canada introduced last year a tax credit for up to C$500 towards a child's sport activities. There is now a proposal on the table to create a similar tax credit for adults, up to C$1,500.

Telling people to exercise and eat well is only going so far if they are bombarded with temptations. But making them see the consequences in their budget, and early rather than later when they get sick, is bound to have more impact.

Friday, May 9, 2008

Tax cow burps

A basic principle of environmental economics is that you want to tax negative externalities and subsidize positive ones, a principle we have highlighted already several times on this blog. This is already applied in many countries for activities related to industrial production. It is thus natural to extend the principle to agriculture.

One of the big contributors to greenhouse gas emission in the large quantity of methane burped by ruminants. Thus the idea of taxing cows, as put forward in New Zealand in 2003. There, cows account for about 50% of greenhouse gas emissions, by far no negligible quantity. The idea has, however, been ridiculed as a "flatulence tax", but even if it were cow farts rather burps that would pollute, it makes perfect economic sense, once people understand the principle.

It turns out Estonia just put such a tax in place. Cows there seem to be less a problem than in New Zealand (15-25% vs. 50%), but it is still economically significant. Obviously, farmers are up in arms, understandably as they suddenly have to pay a tax, but the rest of the country should be OK with it, once it understands the purpose of the tax.

Thursday, May 8, 2008

The 19th century westward expansion of the U.S.

One dramatic feature of 19th century U.S. history has been the tremendous addition of land in the West. Given the speed at which these new expanses have been added, one has to wonder why this did not happen earlier. Guillaume Vandenbroucke argues that two factors needed first to be in place: low transportation costs and a critical mass of population.

Indeed, the North-American continent is gigantic, and moving people and resources to the new lands needed new transportation technologies to be developed. These lands needed to become accessible, both for immigrants in and for products out. The standard rationale for the westward expansion, the fact that land was basically free, is in fact flawed: Before being cultivable, land needs to be prepared: clearing, fencing, irrigating, draining all sum up to considerable investments. This work needed a lot of manpower, more than was typically living locally. You thus needed transportation and surplus population to bring in.

Wednesday, May 7, 2008

Slovakia and the Euro

Slovakia is now a virtual lock for joining the Euro next year, missing just a formality (a ministerial meeting). But the approval comes with serious reservations. Indeed, while the current economic numbers fit the requirements, it is clear to everyone this will not last, especially for inflation. Then why approve?

The problem is that precise rules have been established for entering the Euro-zone, and to avoid politicizing the process, these rules are strictly applied. To the point of absurdity, like in the Lithuanian case two years ago: inflation was to high by a minuscule amount, and the application was rejected despite the fact that Lithuania has no monetary policy as it is in a currency board with the ... Euro. Yet, Slovenia got in the same year with OK numbers on the very application date, but not before (or after).

It looks like the rules for entering the club have not been thought through. But it is nevertheless a good idea to apply rules. I only wish they would be applied for those already in the monetary union, where especially the large economies seem to be doing pretty much what pleases them.

Tuesday, May 6, 2008

The Baby Boom and World War II

Why was there a baby boom after World War II? A popular explanation is that the war postponed fertility, the men being away and the women busy with working. One could also argue that the Great Depression was a bad time to have children, and WWII prolonged that. Others argue that improved household technology made it possible to have more children.

Doepke, Hazan and Maoz argue that this was due to labor market competition after the end of the war. The war generated a huge demand for female labor, and those women continued to work thereafter. But those that were in school during the war faced stiff competition for jobs thereafter. Not having work experience, they were disadvantaged dropped from the labor market and had kids earlier. This is really a story of asymmetric response: the older women work more, the younger ones have more children.

But just stating this does not make it true. Doepke, Hazan and Maoz build an elaborate model of female labor supply and fertility decision, calibrate it for the period at hand, and are able to explain most of the dynamics seen in the data.

Monday, May 5, 2008

Commodity futures serve a purpose

In light of recent price increases in several commodities, in particular food items, commodity future markets seem to have been highlighted as major culprits, to the point that some governments are closing these markets (example: India). This is a very bad idea, as these markets serve a useful purpose: hedging against market fluctuations. This means that prices would have been even higher if it were not for future markets.

Indeed, these markets allow anyone to buy commodities to be delivered in the future in order to guarantee some supply. Without such a market, supplies become more volatile, and so become prices as well. Also, one can read into the futures prices what the supply situation is expected to be. The current increase in commodity price increases were fully predicted, and if policy makers had followed them, they could have prevented some of the current adverse consequences.

It is wrong to think that speculators somehow remove commodities from the markets. They only deal with promises of delivery. The actual goods are untouched (and may even not exist yet) until delivered. It is not like there are huge piles of corn and rice accumulating in Chicago.

But after shutting these markets down, we face even more uncertain times.

Thursday, May 1, 2008

What is wrong with today's undergraduates?

Exams are coming up, and so is the predictable disappointment at the students' performance. Not all students, of course, but there is always a significant part of the class that just does not get it. And from what I hear, this is not limited to Economics classes.

Juniors do not understand the concept of substitution, of elasticity or of indifference curves. Seniors cannot compute growth rates or grasps what a logarithm means. They cannot write a sentence without blatant errors. And the list goes on, and is not limited to my classes or my current campus.

I have not analyzed this deeply, but my take on this problem is the following. Many students lack motivation, basic skills and perseverance. They do not know how to organize their time, how to take notes, how to determine what is important and where to put the effort. Many of them are not at the right place: they do not really know what they want to study, or were kicked out of the business school. I dare even to say they should not even be on a college campus.

I was thinking about posting this rant for some time. Conveniently, the Chronicle of Higher Education just posted an article echoing my sentiment. Those low performing students have typically also been low performing in high school, and they will end up working in jobs that do not require a university education anyway (my plumber has a degree from a flagship state university). Even worse, these students most likely do not get financial aid, and thus will leave campus (with a degree or not) heavily in debt and with little capacity to reimburse.

So, what are universities to do? First, admit drastically fewer students. The goal here is to improve the quality of the marginal student and obtain a more even distribution of entering skills. Second, have the guts to fail students, and fail them early. A degree should indicative of competences, not of a willingness to pay. The goal should not be high graduation rates, which give the wrong incentives to students. Third, reduce on-campus housing, which nowadays is just a pretext for continuous partying and slacking.

But foremost, the myth that everybody needs a college education needs to be killed.