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Archive for June, 2012

Remember Merle Hazard? You know, the brains behind “Inflation or Deflation?” and “Bailout”?

Now he’s back with a surf-music take on the looming Fiscal Cliff.

Let’s hope we don’t wipe out.

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The fun economics story of the day is that Orbitz sometimes looks at your computer’s operating system to decide what hotel options to show you. Dana Mattioli breaks the story over at the Wall Street Journal:

Orbitz Worldwide Inc. has found that people who use Apple Inc.’s Mac computers spend as much as 30% more a night on hotels, so the online travel agency is starting to show them different, and sometimes costlier, travel options than Windows visitors see.

The Orbitz effort, which is in its early stages, demonstrates how tracking people’s online activities can use even seemingly innocuous information—in this case, the fact that customers are visiting Orbitz.com from a Mac—to start predicting their tastes and spending habits.

Orbitz executives confirmed that the company is experimenting with showing different hotel offers to Mac and PC visitors, but said the company isn’t showing the same room to different users at different prices. They also pointed out that users can opt to rank results by price.

Here are examples from the WSJ’s experiments:

The WSJ emphasizes that Mac users see higher-priced hotels. For example, Mattioli’s article is headlined: “On Orbitz, Mac Users Steered to Pricier Hotels.”

My question: Would you feel any different if, instead, the WSJ emphasized that Windows users are directed to lower-priced hotels? For example, Windows users are prompted about the affordable lodgings at the Travelodge in El Paso, Texas. (Full disclosure: I think I once stayed there.)

As Mattioli notes, it’s important to keep in mind that Orbitz isn’t offering different prices, it’s just deciding which hotels to list prominently. And your operating system is just one of many factors that go into this calculation. Others include deals (hotels offering deals move up the rankings), referring site (which can reveal a lot about your preferences), return visits (Orbitz learns your tastes), and location (folks from Greenwich, CT probably see more expensive hotels than those from El Paso).

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Over at the Economist, Greg Ip points us to a new IMF working paper that surveys all the systemic banking crises–147 in all–since 1970. As Greg notes, one of Luc Laeven and Fabian Valencia’s most striking findings is that banking crises disproportionately begin in the second half of the year, with a particular spike in September:

So let’s enjoy what few days of June remain.

P.S. Theories to explain this pattern are appreciated. Or maybe it’s a spurious correlation, at Tyler Cowen hints.

Update: Joshua Hedlund at PostLibertarian crunches the underlying data and finds that (a) the authors provided a date for only 63 of the crises and (b) that 22 of the 25 in September happened in 2008.  ht: Tyler Cowen

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Financial repression and extractive institutions are two of the big memes in international economics today.

Financial repression occurs when governments intervene in financial markets to channel cheap funds to themselves. With sovereign debts skyrocketing, for example, governments may try to force their citizens, banks, and others to finance those debts at artificially low interest rates.

Extractive institutions are policies that attempt to redirect resources to politically-favored elites. Classic examples are the artificial monopolies often granted by governments in what would otherwise be structurally competitive markets. Daron Acemoglu and James Robinson have recently argued that such institutions are a key reason Why Nations FailInclusive institutions, in contrast, promote widely-shared prosperity.

Over at Bronte Capital, John Hempton brings these two ideas together in an argument that Chinese elites are using financial repression to extract wealth from state-owned enterprises. In a nutshell, he believes Chinese authorities have artificially lowered the interest rates that regular Chinese citizens earn on their savings (that’s the repression), and have directed these cheap funds to finance “staggeringly unprofitable” state enterprises that nonetheless manage to spin out vast wealth for connected elites and their families.

I don’t have the requisite first-hand knowledge to judge his hypothesis myself. But both his original post and recent follow-up addressing feedback are worth a close read.

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Twenty years ago, world leaders gathered in Rio de Janeiro to grapple with climate change, biological diversity, and other environmental challenges. Today they are back again, but with much less fanfare. If my Twitter feed is any indication, Rio+20 is getting much less attention that the original Earth Summit.

One item that deserves attention is greater emphasis on getting business involved in protecting the environment. For example, two dozen leading businesses–from Alcoa to Xerox–teamed up with The Nature Conservancy on a vision for The New Business Imperative: Valuing Natural Capital (interactive, pdf).

The report lays out the business case that natural resources have real economic value, even if they aren’t traded in markets, and that protecting them can sometimes reduce costs, maintain supplies, soften the blow of future regulation, and build goodwill with customers, communities, and workers. All kind of obvious, at one level, but nonetheless useful to see in print with examples and commitments.

One item that caught my eye is the potential for “green” infrastructure to replace “gray”:

Strong, reliable manmade (“gray”) infrastructure undergirds a healthy marketplace, and most companies depend heavily on it to operate effectively and efficiently. Yet increasingly, companies are seeing the enormous potential for “natural infrastructure” in the form of wetlands and forests, watersheds and coastal habitats to perform many of the same tasks as gray infrastructure — sometimes better and more cheaply.

For instance, investing in protection of coral reefs and mangroves can provide a stronger barrier to protect coastal operations against flooding and storm surge during extreme weather, while inland flooding can be reduced by strategic investments in catchment forests, vegetation and marshes. Forests are also crucial for maintaining usable freshwater sources, as well as for naturally regulating water flow.

Putting funds into maintaining a wetland near a processing or manufacturing plant can be a more cost- effective way of meeting regulatory requirements than building a wastewater treatment facility, as evidenced by the Dow Chemical Seadrift, Texas facility, where a 110-acre constructed wetland provides tertiary wastewater treatment of five million gallons a day. While the cost of a traditional “gray”treatment installation averages >$40 million, Dow’s up-front costs were just $1.4 million.

For companies reliant on agricultural systems, improved land management of forests and ecosystems along field edges and streams, along with the introduction of more diversified and resilient sustainable agriculture systems, can minimize dependency on external inputs like artificial fertilizers, pesticides and blue irrigation water.

To encourage such investments, where they make sense, lawmakers and regulators need to focus on performance–is the wastewater getting clean?–rather than the use of specific technologies or construction.

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Michael Cembalest, head of investment strategy at JP Morgan, is famous for his beautiful, insightful charts. His latest (courtesy of Paul Kedrosky) illustrates two millennia of world economic history:

According to the chart, India (orange) and China (red) together comprised more than two-thirds of the globe’s economic activity back in year 1 (well, not so much the globe, but the chosen countries). By 1950, their share had fallen to only one-eighth, thanks to the growth of the United States (green), Western Europe (shades of blue), Russia (gray), and Japan (yellow). Since then, China has been gaining share.

Not surprisingly, the chart has already attracted attention in the blogosphere. Over at the Atlantic, Derek Thompson slices and dices the data to see how much of the pattern reflects  the ebbs and flows of population vs. productivity.

At the Economist, meanwhile, K.N.C. channels Edward Tufte, expressing appropriate alarm about the compressed x-axis. The first millennium gets as much real estate as the 1990s. K.N.C. then offers another approach:

Given data limitations, this chart also compresses the x-axis, but using bars and variable-width gaps make it much clearer that there are jumps between years. The focus on a limited number of countries also makes it clear that the chart omits countries that account for 30-40% of world GDP. In Cembalest’s chart, in contrast, one wonders what happened to South America, the Nordic countries, Canada, Africa ex Egypt, etc. His listed countries appear to sum to 100% of world GDP, but large swathes of the world are unaccounted for.

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Will natural gas ever catch on as an important transportation fuel?

Yes, argues MIT Professor Christopher Knittel, in a new discussion paper for the Hamilton Project. Given the now-enormous spread between gasoline and natural gas prices, Knittel thinks that natural gas vehicles should become increasingly popular. Here, for example, are his calculations of the lifetime operating costs for various vehicles using gasoline or natural gas (click to enlarge, and be sure to read the caveat in the footnote): 

As you would expect, the biggest potential savings accrue to the most fuel-guzzling vehicles, heavy-duty trucks in particular.

Knittel does not believe, however, that the private market will exploit this potential as fast or extensively as it should. He thus proposes policies to accelerate refueling infrastructure build-out and to encourage natural gas vehicles. Here’s his abstract:

Technological advances in horizontal drilling deep underground have led to large-scale discoveries of natural gas reserves that are now economical to access. This, along with increases in oil prices, has fundamentally changed the relative price of oil and natural gas in the United States. As of December 2011, oil was trading at a 500 percent premium over natural gas. This ratio has a number of policy goals related to energy. Natural gas can replace oil in transportation through a number of channels. However, the field between natural gas as a transportation fuel and petroleum-based fuels is not level. Given this uneven playing field, left to its own devices, the market is unlikely to lead to an efficient mix of petroleum- and natural gas-based fuels. This paper presents a pair of policy proposals designed to increase the nation’s energy security, decrease the susceptibility of the U.S. economy to recessions caused by oil-price shocks, and reduce greenhouse gas emissions and other pollutants. First, I propose improving the natural gas fueling infrastructure in homes, at local distribution companies, and along long-haul trucking routes. Second, I offer steps to promote the use of natural gas vehicles and fuels.

His “steps to promote the use of natural gas vehicles and fuels” are subsidies and regulations. Regular readers will recall that I believe environmental taxes would be a better way of addressing environmental concerns and, in particular, of promoting natural gas over gasoline. Of course, that view hasn’t gained much traction among policymakers. As least not yet.

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I get the impression that many Americans believe Medicare is financed like Social Security. They know that a portion of payroll taxes goes to Social Security and a portion goes to Medicare. So they conclude workers are paying for Medicare benefits the same way they are paying for Social Security benefits.

That isn’t remotely true, as new data from the Congressional Budget Office demonstrate.

In 2010, payroll taxes covered a little more than a third of Medicare’s costs. Beneficiary premiums (and some other earmarked receipts) covered about a seventh. General revenues (which include borrowing) covered the remainder, slightly more than half of total Medicare costs.

If you prefer to focus on just the government’s share of Medicare (i.e., after premiums and similar payments by or on behalf of beneficiaries), then payroll taxes covered about 40% of the program, and other revenues and borrowing covered about 60%.

In contrast, payroll taxes and other earmarked taxes covered more than 93% of Social Security’s costs in 2010, and that was after many years of surpluses.

The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don’t get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing.

As recently at 2000, general revenues covered only a quarter of Medicare’s costs. That share has increased because of the creation of the prescription drug benefit in 2003 and because population aging and rising health care costs have pushed Medicare spending up faster than worker wages. Over the next decade, CBO projects that premiums will cover a somewhat larger share of overall costs, while the general revenue share will slightly decline.

Note: For simplicity, I have focused on the annual flow of taxes and benefits. The same insight applies if you want to think of Social Security and Medicare as programs in which workers pay payroll taxes to earn future benefits. That’s approximately true for workers as a whole in Social Security (but with notable differences across individuals and age cohorts and uncertainty about what the future will bring). But it’s not true at all for Medicare.

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Today I had the chance to testify before the Select Revenue Measures Subcommittee of the House Ways and Means Committee about a perennial challenge, the “tax extenders,” which really ought to be known as the “tax expirers.” Here are my opening remarks. You can find my full testimony here.

As you know, the United States faces a sharp “fiscal cliff” at yearend when numerous policy changes occur. If all these changes happen, they will reduce the fiscal 2013 deficit by about $500 billion, according to the Congressional Budget Office, before taking into account any negative feedback from a weaker economy. About one-eighth of that “cliff”—$65 billion—comes from the expiring and expired tax cuts that are the focus of today’s hearing.

In deciding their fate, you should consider the larger problems facing our tax system. That system is needlessly complex, economically harmful, and widely perceived as unfair. It’s increasingly unpredictable. And it fails at its most basic task, raising enough money to pay our bills.

The “expirers” often worsen these problems. They create uncertainty, complicate compliance, and cost needed revenue. Some make the tax code less fair, some more fair. Some weaken our economy, while others strengthen it.

Fundamental tax reform would, of course, be the best way to address these concerns. But such reform isn’t likely soon.

So you must again grapple with “the expirers.” As a starting point, let me note that they come in three flavors:

  1.  Tax cuts enacted to address a temporary challenge such as recession, the housing meltdown, or regional disasters.
  2. Tax cuts that have reached a sunset review. Prolonged economic weakness and recent omnibus extensions mean there aren’t that many of these, but they do exist.
  3. Tax cuts that expire to game budget rules. These appear to be the most common. Supporters intend these provisions to be long-lived or permanent, but they haven’t found the budget resources to do so.

To determine which of these policies should be extended and which not, you should consider several factors:

  • Does the provision address a compelling need for government intervention?
  • Does it accomplish its goal effectively and at reasonable cost?
  • Does it make the tax code more or less fair?
  • Do its potential benefits justify the revenue loss or the need for higher taxes elsewhere?

In short, you should subject these provisions to the same standards applied to other policy choices. And in this case, you should keep in mind that most of the so-called “tax extenders” are effectively spending through the tax code. You should thus hold them to the same standards as equivalent spending programs.

You should also reform the way you review expiring tax provisions.

  1. Flip the burden of proof. Today’s standing presumption is that most of these provisions will ultimately be extended. That’s why they are called “the extenders,” even after they have expired. Ultimately, though, we should move to a system in which the presumption, rebuttable to be sure, is that expiring provisions will expire unless supporters can justify their continuation. In short, they should be “the expirers.”
  2. Second, divide them up. Like musk oxen, the beneficiaries of these provisions have realized that there is safety in numbers. They thus do their best to coalesce as a single herd—“the extenders”—and to migrate across the annual legislative tundra with as little individual attention as possible.You should break up the herd. Reviewing each provision in detail may not be practical in a single year, but you can identify specific groups for careful review. For example, you can separate out the stimulus provisions, the charity provisions, the energy provisions, and so on.You should also spread scheduled expirations out over time. If fewer expire each year, you will be able to give each one more attention.
  3. Third, change budget rules for temporary tax cuts. Pay-as-you-go budgeting creates crucial discipline but has an unfortunate side effect: long-term tax policies often get chopped into one-year segments. In addition, 10 years of offsets can be used to pay for a single-year extension.To combat this, you could require that any temporary tax provision be assumed to last no less than five years in the official budget baseline. Proponents would then have to round up enough budget offsets to pay for those five years.In addition, Congress could require that offsets happen over the same years as an extension. That would eliminate situations in which 10 years of offsets pay for a single-year extension.

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Why did Homer immortalize the “wine dark” sea rather than, say, the “deep blue” sea? Was Greek wine blue?

That’s what we thought back in high school. But over at Radiolab, Jad Abumrad, Robert Krulwich, and Tim Howard offer a different hypothesis: Homer didn’t have a word for blue. Indeed, William Gladstone–yes, the British Prime Minister–poured through The Odyssey and The Iliad and found no references to blue whatsoever.

And Homer wasn’t alone. Many old texts in many languages don’t reference blue.

Radiolab offers two hypotheses to explain this.

The first is essentially commercial: blue is extremely rare in nature and hard to synthesize. Red dye easy, blue dye hard. So people didn’t often encounter blue in their daily commerce. As a result, “blue” shows up in most languages later than other, easier-to-experience colors.

The second involves perceptual psychology. At the risk of oversimplifying, you don’t see what you don’t have a name for. So, in a sort of perceptual positive feedback, cultures develop words for “blue” once they start seeing it, and vice-versa. As Robert Krulwich puts it, “weirdly, color is a loss of innocence.”

Listen to this segment here (particularly if you are thinking “wait a minute, what about the sky?”):

http://www.radiolab.org/widgets/ondemand_player/#file=%2Faudio%2Fxspf%2F211213%2F;containerClass=radiolab

P.S. Radiolab rocks. I became an avid podcast listener about three months ago–a side effect of doing physical therapy on my shoulder for an hour plus every day–and it is clearly best of breed.

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