...oil was the objective. Maybe.

From ABC:

Five years after the US-led coalition stormed into Iraq there is set to be another western invasion.

This time it is the world's biggest oil companies leading the charge, 36 years after Saddam Hussein kicked them out.

The oil giants are seeking access to Iraq's rich crude reserves, Australian companies BHP Billiton and Woodside are among them.

The Iraqi government wants to make up for the lost opportunities under Hussein's rule and has the ambitious goal of doubling Iraqi oil production to more than 4 million barrels a day within five years.

Peter Zeihan, an energy analyst at geopolitical intelligence group Stratfor, says there is plenty of incentive for the big oil companies.

"They have the largest, easiest reservoirs to tap, they're very close to existing export points, there's infrastructure in place for over double the amount of oil that currently is being produced in Iraq," Mr Zeihan said.

"When Iraq does ultimately open up in a big way and allow greenfield investments, every single oil major in the world wants to be part of that play. And if that means signing deals that you're not exactly thrilled with today, so be it."

The Iraqi government insists the companies that win contracts must take on a local partner who in turn must have a minimum 25 per cent stake in the deal.

In an attempt to fast track oil production the government will award six contracts on a no-bid basis, to a handful of mainly US companies.

The move has been criticised by some US law-makers but State Department spokesman Tom Casey insists Iraqi arms were not twisted.

"The United States was not involved in any decisions to award contracts, to make determinations of what kinds of contracts would be offered," Mr Casey said.

Still the mad rush for Iraqi oil has reignited debate over why the US invaded Iraq in the first place.

Rick Barton of the Washington based Centre for Strategic and International Studies says gaining access to the Iraqi oil fields was always a key strategic motivation.

"Of course oil is important. It matters to the world, it is one of the true assets of this region," Mr Barton said.

"And to be more matter of fact about it and then to make it clear to people that really the more oil that is produced and exported, it's better for the world markets and it's better for the Iraqis."

"Instead of people being coy about it, my feeling is that total transparency makes it - takes away the argument."

Actually, I'm not quite as optimistic as this article. And the reason I'm not is that it's not clear that these oil contracts will be implemented. And that's because, as the GAO made clear in its recent exhaustive analysis "Securing, Stabilizing and Rebuilding Iraq" [pdf] of how many -- or more accurately, few -- of the benchmarks associated with "the surge" have been achieved. Most importantly, the central elements of the hydrocarbons laws have not been achieved. In fact, Figure 10 from the GAO report puts this point in pretty stark relief.

Figure 10 from GAO, SECURING, STABILIZING, AND REBUILDING IRAQ: Progress Report: Some Gains Made, Updated Strategy Needed, June 2008.

The report's motivation recalls for us the original rationale for "The New Way Forward", aka "the surge":

Since 2001, Congress has appropriated about $640 billion for the global war on terrorism, the majority of this for operations in Iraq. In January 2007, the President announced The New Way Forward to stem violence in Iraq and enable the Iraqi government to foster national reconciliation. This new strategy established goals and objectives to achieve over 12 to 18 months, or by July 2008

.

GAO discusses progress in meeting key goals in The New Way Forward: (1) improve security conditions; (2) develop capable Iraqi security forces; and help the Iraqi government (3) enact key legislation, (4) spend capital budgets, and (5) provide essential services. GAO also discusses U.S. strategies for Iraq. [emphasis added -- MDC]

Summing up, GAO concludes:

The New Way Forward responded to failures in prior strategies that prematurely transferred security responsibilities to Iraqi forces or belatedly responded to growing sectarian violence. Overall violence, as measured by enemy-initiated attacks, fell about 70 percent in Iraq, from about 180 attacks per day in June 2007 to about 50 attacks per day in February 2008. Security gains have largely resulted from (1) the increase in U.S. combat forces, (2) the creation of nongovernmental security forces such as Sons of Iraq, and (3) the Mahdi Army’s declaration of a cease fire. Average daily attacks were at higher levels in March and April before declining in May 2008. The security environment remains volatile and dangerous. The number of trained Iraqi forces has increased from 323,000 in January 2007 to 478,000 in May 2008; many units are leading counterinsurgency operations. However, the Department of Defense reported in March 2008 that the number of Iraqi units capable of performing operations without U.S. assistance has remained at about 10 percent. Several factors have complicated the development of capable security forces, including the lack of a single unified force, sectarian and militia influences, and continued dependence on U.S. and coalition forces.

The Iraqi government has enacted key legislation to return some Ba'athists to government, give amnesty to detained Iraqis, and define provincial powers. However, it has not yet enacted other important legislation for sharing oil resources or holding provincial elections. Efforts to complete the constitutional review have also stalled. A goal of The New Way Forward was to facilitate the Iraqis' efforts to enact all key legislation by the end of 2007.

Between 2005 and 2007, Iraq spent only 24 percent of the $27 billion it budgeted for its own reconstruction efforts. More specifically, Iraq’s central ministries, responsible for security and essential services, spent only 11 percent of their capital investment budgets in 2007 -- down from similarly low rates of 14 and 13 percent in the 2 prior years. Violence and sectarian strife, shortage of skilled labor, and weak procurement and budgeting systems have hampered Iraq's efforts to spend its capital budgets.

Although oil production has improved for short periods, the May 2008 production level of about 2.5 million barrels per day (mbpd) was below the U.S. goal of 3 mbpd. The daily supply of electricity met only about half of demand in early May 2008. Conversely, State reports that U.S. goals for Iraq's water sector are close to being reached. The unstable security environment, corruption, and lack of technical capacity have contributed to the shortfalls.

The Departments disagreed with our recommendation, stating that The New Way Forward strategy remains valid but the strategy shall be reviewed and refined as necessary. We reaffirm the need for an updated strategy given the important changes that have occurred in Iraq since January 2007. An updated strategy should build on recent gains, address unmet goals and objectives and articulate the U.S. strategy beyond July 2008. [emphasis added -- MDC]

According to Congressional Research Service, we are now spending in the area of $12.5 billion per month.

Table 2 from CRS, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, Updated May 30, 2008.

Or, about 1% of U.S. GDP. [late addition -- on an annualized basis]. Of course, this does not include costs for medical care out of theater, and VA costs, etc. These are only direct fiscal costs, as best as they can be counted. Furthermore, the expenditure per troop is rising (at least through FY06). From the CRS report:

GAO, CBO and CRS have all testified to Congress about the limited transparency in DOD's war cost estimating and reporting. While DOD has provided considerably more justification material for its war cost requests beginning with the FY2007 Supplemental, many questions remain difficult to answer -- such as the effect of changes in troop levels on costs -- and there continue to be unexplained discrepancies in DOD's war cost reports.

I should alert Greg Mankiw to an article in today's National Post. From The Upside of $200 Oil: Stepping gingerly towards the crystal ball, one could also say that there...

Lynne Kiesling

Hi all! I write from St. Charles, Missouri, which was the starting point of the Lewis & Clark Corps of Discovery expedition in 1804 and is the terminus of our 2008 Corps of Discovery bike odyssey. We drive to Chicago tomorrow.

We are a bit behind in updating the L&C Bike Tour blog, but if you want to get a feel for what our first week of riding was like, it's there! Here's a teaser photo, one of my favorite shots of the beautiful South Dakota countryside:

And if you'd like to show your support for the six (yes, that's six) years of writing and commentary that you've found here, please show your support by donating to the Melanoma International Foundation.

More details to follow!

Happy Independence Day to all our readers. Here's our favorite excerpt from the seminal document:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

John Trumbull's "Declaration of Independence"

Today we outsource with some interesting links on oil markets and housing.

Lots of useful observations on oil supply and demand from Yves Smith, including the fact that BP's Thunder Horse, which promises soon to be pumping a quarter million barrels per day of crude oil out of the Gulf of Mexico, has finally started production.

Ironman gives us another neat tool to calculate whether it pays to move closer to your worplace.

Phil Miller describes what it's like to find oil in your backyard in North Dakota.

WSJ Real Time Economics surveys various takes (all negative) on today's jobs report.

And the always useful Calculated Risk updates graphs of the price-to-rent ratio

and directs us to modern ghost towns among the would-be Los Angeles exurbs.

Source: Calculated Risk

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Technorati Tags: macroeconomics, housing, oil

Bryan Caplan - Bryan Caplan Politely Declines to Join the Pigou Club. The entire argument is excellent (and worth reading). I would just like to comment on this: My...

The stimulus checks may be propping up consumer spending, at least temporarily, but the job market is still weakening.

Initial jobless claims jumped to 404,000 mark last week, up from 388,000 the week previous the Labor Department reports. That's only the second time the 400,000 mark has been passed on the upside in many a moon, the previous instance coming this past March 29 when claims reached 406,000.

As our chart below shows, the trend is clear: new filings for unemployment benefits continue running higher. It's not clear that the stimulus checks will deliver salvation. There are many negatives weighing on the economy, from rising energy prices to the unwinding of various debt burdens, and those ills aren't about to evaporate next week because consumers are receiving checks in the mail for $600 to $1,200.

Reading the writing on the economic wall, Washington is now talking about a second stimulus package.The political inclination to act is understandable, but at some point the correction will have its way. Trying to keep the growth cycle alive indefinitely isn't plausible, nor is it possible--or even healthy. Yes, the past 20 years suggests otherwise, but the pain has simply been pushed forward.

Strong growth ultimately arises from ashes of recessions--a harsh but ultimately accurate fact. Artificially keeping the growth alive in order to avoid recessions risks nipping future growth in the bud. Again, politics calls for no less, but in the end it's not obvious that letting the political mindset run the show is the best long-term strategy for the man in the street. That won't stop Washington from moving heaven and earth to try and re-engineer a more comforting outlook, although the patient may not respond as expected this time.

Michael Giberson

Maybe you already knew this, but I just learned a few days ago that the United States Association for Energy Economics has a working paper series online, hosted at the SSRN. Your research paper can be included (see guidelines here).

And while we're talking about the USAEE, note that the 2008 annual meeting will be this December 3-5 in New Orleans. Next year's meeting of the International Association for Energy Economics will be held June 21-24 in San Francisco.

(HT to Cheryl Morgan/MorganEnergy)

The European Central Bank did what the Fed decided against - a 25 basis point rate hike. The details: The minimum bid rate on the main refinancing operations of...

A lot, according to this well argued post on Coyote Blog. I won't even try to summarize it. Just read it. I am not at all embarrassed by...

From Growthology: we should aim to tax the bad things (noise, gasoline, trash, violent crime, evil foreign dictators) and untax the good things (homegrown profits, employment, innovation). To which Three Sources...

The path to growth remains elusive for many of the world's economies. Prescribing effective growth policies is exceedingly difficult. The unique features in each of the world's economies defy formulaic approaches to growth—it's not necessarily clear that Japan's path will work for Cambodia. Economic history offers a bit more clarity when it comes to what won't work. Of the more recent episodes of economic collapse, Zimbabwe's is perhaps the starkest. The Mugabe regime's mismanagement of the Zimbabwean economy reads like a step-by-step guide to economic ruin.

In 2000, Zimbabwe's autocratic ruler, Robert Mugabe, implemented a clumsy and often violent land redistribution program. Mugabe forcefully seized white-owned farmland and gave it to black farmers unfamiliar with commercial farming practices. The absence of any cooperative knowledge transfer between white and black farmers led to a precipitous fall in agricultural output. The failure of the agricultural sector caused a severe contraction in overall economic output, creating massive unemployment. The collapsing economy sapped Mugabe's regime of the tax revenues necessary to pay soldiers and finance government outlays. An autocrat's reign is only as secure as his army is brutal—hungry, underpaid soldiers aren't much for intimidating political opponents or scaring the populace into submission. To maintain his government's outlays, Mugabe turned to borrowing. Of course, the loans would eventually need to be repaid. Lacking the tax base to repay the loans, the government resorted to the capstone of many economic disasters: printing money.

The results were predictable: hyperinflation reached roughly 4 million percent per year as of June 2008. At these levels of inflation, even the most mundane daily transactions involve considerable uncertainty and frustration. Mugabe's response to the hyperinflation that he himself initiated could not have been worse. The government imposed price ceilings, threatening to jail shop owners if they charged more than the official price. The price ceilings led to massive shortages of necessities like bread and milk. Many firms shut down production, escalating an already high unemployment rate.

You don't have to be an economist to recognize the first step to improving Zimbabwe’s economy: get rid of Mugabe. But removing Mugabe from power is easier said than done. Opposition presidential candidate Morgan Tsvangirai gave it an impressive go during this year's elections, but widespread violence against opposition supporters caused Tsvangirai to withdraw from the presidential run-off. At this point, Mugabe remains president.

Discussion Questions

1. Mugabe is 84 years old—why doesn't he just step down? Charlayne Hunter-Gault's article in The Root suggests that Mugabe has strong incentives to maintain his grip on power given the fate of other overthrown tyrants. Hunter-Gault raises an interesting dilemma for freedom-lovers all over the world: we want to get rid of brutal dictators, but the dictators may do everything they can to retain power precisely because they fear what we'll do to them once they're out of office. Should we offer Mugabe amnesty just to get him to step down?

2. In a recent Wall Street Journal editorial, former World Bank president and U.S. Deputy Secretary of Defense Paul Wolfowitz suggests a way to pressure Mugabe out of office. Wolfowitz calls on the international community to very publicly declare promises of aid and debt relief for Zimbabwe under the condition that Mugabe is removed from office. Do you think this strategy would succeed?

3. Mugabe's land redistribution program was catastrophic for Zimbabwe's economy, but as this NPR story points out, several neighboring countries attempted to benefit from the displacement of white farmers in Zimbabwe. How could the Zimbabwean government have balanced the goals of efficiency of the farming sector and equity for the black population that suffered a history of oppression by a ruling white minority?

Garth Brazelton on oil speculation: Both Paul Krugman and Alan Reynolds (and Mike Moffatt) don't believe oil specualation is significantly driving prices. Last week I made the argument that it could be,...

A newspaper is a bundled product. A bundled product is one that combines a number of products the demands for which may be quite different--some consumers may want some of the products in the bundle, other consumers may want other products in the bundle. (Another good example is the Windows operating system, a bundle of a number of different programs.) Bundling is efficient if the cost to the consumer of the bundled products that he doesn't want is less than the cost saving from bundling. A particular newspaper reader might want just the sports section and the classified ads, but if for example delivery costs are high, the price of separate sports and classified-ad "newspapers" might exceed that of a newspaper that contained both those and other sections as well, even though this reader was not interested in the other sections.

Bundling also facilitates price discrimination by snagging consumers who place a high value on particular products in the bundle. It also increases the risk of entry by single-product competitors because the marginal cost to the consumer of the bundle of any component of it is zero. He gets the sports section for "free" (in the sense that the newspaper costs him no less if he throws the sports section away without reading it) but would have to pay a positive price for a free-standing sports newspaper.

Like other intellectual products, a newspaper has high fixed costs (the newsroom, etc.) but low marginal costs (the cost of printing and selling one more copy), and so there is a tendency to natural monopoly in local newspaper markets. It is offset, however, to an extent, by differences in content, outlook, and so forth among different newspapers, which limits substitutability and therefore makes some degree of competition viable. Nevertheless newspapers tend to be quite profitable (as recently as 2006, the average ratio of profit to revenue was 17 percent, which is high relative to industry as a whole), because competition is limited. High newspaper profits sometimes are attributed to the fact that most information comes free from public sources and that newspapers deal directly with their customers and so economize on distribution costs. But low costs are not a reason for high profits, since competition tends to push revenues down to costs.

High profits may seem inconsistent with declining revenues, but are not if the firm, seeing no future for itself, ceases investing in the its future and instead cuts costs to the bone (thus treating the firm's product or service as a "cash cow"). Many newspapers are doing that. Still, newspaper profits are plummeting, and with them the value of the companies. The reason is declining ad revenues (an inflation-adjusted decline of 20 percent between 2000 and 2007, and a further decline this year). This is a function in part of declining newspaper circulation but more profoundly of unbundling, as unbundling is the cause both of the declining ad revenues and of declining circulation. The Web provides a virtually costless method of distributing the products that are bundled in a newspaper. The distribution is not only cheaper, but better, because it avoids the time and space constraints of hard copy delivered on a daily (rather than instantaneous) basis and space-constrained by the cost of paper. The unbundling goes deeper than the section level (classified ads, the sports section, etc.), for every section of a newspaper is itself a bundle. The news section bundles a variety of news stories that different readers value differently; readers who have no interest in foreign policy nevertheless pay for a newspaper that may maintain costly foreign bureaus in order to produce good stories on foreign policy. The Web provides a customized news service that enables the tastes of particular readers to be identified and then satisfied by instantaneous and often costless delivery of a product laser-focused on those tastes. The bother associated with the physical bulk of the newspaper is also eliminated.

A study by comScore, Inc. in March of this year found that persons 65 and older are almost six times as likely to read a newspaper six days a week than persons aged 25 to 34 (and almost ten times as likely as those aged 18 to 24). The principal reason for the difference is not I think that older people have more leisure, because people in the 45 to 54 year old bracket, who do not have more leisure than the young, are more than twice as likely to read a newspaper six days a week than the young cohort. The reason, rather, is that younger people are much more comfortable getting information online than older people are; they have grown up in the electronic revolution. This will not change as they get older.

It appears that the only hope for the newspapers is to go online, and they have done this and have attracted many viewers to their Web sites. But they have not been able to charge for online ads anything like what they can charge for ads in their hard-copy editions. The reason I think is that there is much more competition in online advertising than in print advertising, especially for advertising, such as classified advertising, that is primarily informational; for the information in the ads is often available online at no or nominal cost from other sources, such as Craigslist. Moreover, the online newspaper is still a bundled product, and the Web provides close substitutes for all the sticks in the bundle. The blogs are a big factor here; in the aggregate, they not only are nimbler, but contain a vastly greater body of specialized knowledge, than the newspapers or other conventional media (as Dan Rather learned to his sorrow).

Suppose, then, that the newspapers are doomed, or, more realistically, that they are likely to continue to shrink, eventually becoming a retirement service, like Elderhostel. Are there social consequences that should trouble us? A common argument is that if news is customized to the tastes and interests of every individual in the society, people will not be exposed to conflicting views and as a result will become incapable of active civic engagement, for example as voters. That is implausible. It is important to distinguish between opinion and fact. Most people do not want their opinions challenged. So if they are liberal they read the New York Times and if they are conservative they read the Wall Street Journal. But people are both interested in, and influenced by, facts, such as the fall of communism or the rise in gasoline prices, and they will learn these facts (and more quickly) on the Web even if they do not read newspapers. The few people who actually read, compare, and take seriously opposing views on matters of public policy will continue to do so after they stop subscribing to print newspapers. With the rise of the blogs, moreover, the amount of information and opinion reaching the public is far greater than in the heyday of the print newspapers.

A second concern, to which the rise of the blogs may be only a partial answer, is that Internet news services (such as Google News) are parasitic on the print newspapers' large staffs of reporters, so that if they drive the newspapers out of business the Internet news services will lose much of their content. The copyright law cannot prevent this, because a newspaper can prevent the copying only of its articles--that is, of the verbal form in which the information in an article is expressed--and not the information itself. And it cannot prevent a news service from simply sending the viewer to the newspaper article via a Web link. The concern, in short, is that the Internet will kill the goose that lays the golden egg. But this is unlikely. If online viewers want the level of news and opinion that print reporters generate, the Internet news services will hire reporters, defraying the cost out of their online advertising revenues, which will be greater for an Internet news service that attracts additional viewers by offering them richer, newspaper-type fare. Indeed, long after newspapers like the New York Times and the Washington Post have ceased print publication, their Web sites may be among the leading Internet news services. The aggregate amount of news and opinion may be less, however, because unbundling will eliminate internal subsidies, for example of the news and op-ed pages by revenues from classified ads.

Yes, Newspapers are Doomed-Becker
The number of general-purpose newspapers has been declining in cities ever since the growth of television, and the decline accelerated after the Internet was developed. The trend downward will continue, and perhaps even accelerate. I do not see much of a future for the general-purpose hard copy newspaper that combines opinions, sports, advertisements, comics, and information.

A telling fact is that young people today do not read general newspapers, whereas they did in the past. When I was a boy my father bought at least five newspapers every day, and I "read" (that is, looked mainly at sports and comics) three or four of them. It is now rare to see anyone under age 30 reading the New York Times, Chicago Tribune, or any other major newspaper. A teacher used to be bothered when bored students starting reading newspapers in class. That is no longer a problem since they now turn to their computers and play video games or email friends.

I find it hard to reconcile the rapid decline in the number of newspapers with Posner's data suggesting that newspapers are quite profitable. Declining industries, such as the American automobile industry, have always been associated not with profits but with substantial losses, as is happening to Ford, General Motors, and Chrysler. There is no doubt that the many newspapers which went out of business did so because they were losing money. Of course, the surviving newspapers tend to be the ones that are more profitable, but they too are experiencing financial problems. They are cutting staffs, long-term owners are selling their papers to others- as with the Wall Street Journal and Chicago Tribune- and they are trying various approaches to deal with the tough competition from online advertisements and other online services.

The Internet has gravely wounded the newspaper industry because it provides information, opinion, and entertainment more frequently and effectively than newspapers do. The Web offers as much sports news as desired, and presents the progress of baseball and other sporting in real time. The weather is updated every hour, or more frequently, and so are stock market quotes. Online ads give pictures and personal information about individuals looking for jobs, and prices and other characteristics of products offered for sale. Major as well as minor news stories, local and general news, and opinions on numerous issues are continually being presented.

A case still made for good newspapers and magazines is that they separate facts from opinions, and do enough checking to stand behind the materials presented as facts. I do not know of anything comparable on the Internet, although the reputations of better-known bloggers do rise and fall with changing perceptions about their insights and accuracy. Yet it is not apparent that the demand is very strong for this dimension of what newspapers have traditionally provided.

Newspapers are trying to strengthen their survival prospects by expanding online presentations, and combining these with print editions. In the short run this may help them, which explains why all the major newspapers are moving aggressively to expand online materials, and widen their online customer base. However, I do not believe this approach will succeed in the long run. The reason is that the way newspapers bundle different services is not the right approach to online presentations that usually provide information about the weather on websites that are different from those used to discuss sports or present ads for cars. Some online sites specialize in opinions about domestic politics, others discuss religion, some present pornographic pictures and films, while others focus on economic issues. The traditional newspaper does not readily fit into this format, and so they are generally losing money in their online efforts.

This does not imply that online presentations in the future will continue to be organized in the same way as at present. Perhaps the growing tendency for some websites to link to other sites will coalesce into organized multi-site presentations that deal with many different topics. Already some subscriber-based sites collect and present the best blogs on different topics. How that will evolve is not clear to me, but it is unlikely to develop into anything that looks like the conventional newspaper that has bundled news, information, and advertisements for hundreds of years.

The rapid and continuing decline in the number of major newspapers will be regretted mainly by older persons who are accustomed to reading several newspapers daily-my wife and I still subscribe to four and read others online. However, by voting with how they use their time, the great majority of consumers clearly have shown that they prefer to get their information, entertainment, and opinions from television, and especially from the Internet, than from newspapers.

Last week the Liberal Party of Canada and the Green Party of Canada released their carbon tax plan. It appears they're both applying to be let in to the...

The 2008 Celtics-Lakers NBA finals featured two great straight-from-high-school athletes: Kobe Bryant and Kevin Garnett. The NBA benefits from a host of other players drafted straight from high school, such as LeBron James, Dwight Howard, Tracy McGrady, Amare Stoudemire, and Tyson Chandler.

Early entry into the NBA is a classic example of opportunity cost—the notion that the cost of something is what you give up to get it. For elite players, attending college can cost millions in forgone earnings as an NBA player. So until recently, the decision for most was simple. Skip college, sign a huge NBA contract, and worry about getting a degree later, if at all.

Curiously, a 2005 collective bargaining agreement between the NBA and the players' union implemented a draft-eligible age limit of 19 with the requirement that athletes be one year removed from high school. This was great news for the NCAA, since most draft-worthy players would spend their first year away from high school wowing college basketball fans. Without the rule, we'd have missed Derrick Rose in the 2008 NCAA tournament. Of course, Rose might not have missed us, since he'd be earning a big paycheck as a rookie in the NBA.

As a recent article in the New York Times points out, labor mobility and the presence of European leagues offer young players an opportunity to break free from the strictures of NBA and NCAA rules. Europe promises pay and a chance to develop against professional players, an alternative that may prove superior to an earnings-free year of college ball and freshman classes.

Discussion Questions

1. Why would the NBA players' union support the age barrier to draftees? Why would the NBA support the restriction?

2. College basketball generates big money. Should college players be compensated in accordance to the value that they add to their school's program? How would less-than-NBA-caliber players benefit from such a system?

3. Under what circumstances might it make sense for a phenomenal young athlete to play one year in the NCAA rather than playing professionally abroad?

Reader Steve made a terrific comment on a recent blog post: Long speculators continually roll their long position forward at expiration time. I don’t have direct experience with oil markets but...

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Right on the heels of Cyclone Nargis in Myanmar came news of another equally shocking and destructive natural disaster in China. The very first reports of the devastating earthquake centered on the destruction of schools and the resulting loss of many young lives. The quake left many families without children—particularly because China enacted a policy in 1979 that restricts families to having just one child in an attempt to help ease the pressures of a fast-growing population. The Chinese government is now ensuring that families who had a child killed or disabled by the earthquake understand that they are allowed to have one more child, as reported here.

Why was China’s birthrate so high before this policy was implemented? Japan has no one-child policy, yet its birthrate is relatively low. What is the difference between these two countries in this regard?

In a developing country (as China arguably still is to an extent), markets for retirement savings and pension funds are often absent. To compensate for this, parents must count on their children for support later in life. And a couple must decide how many children they need to have in order to be reasonably certain they will be supported. This is determined in part by the couple’s attitude towards risk, and when it comes to security in old age, it is reasonable to assume that most people will be quite risk averse. To assess the risk of ending up alone and destitute in their old age, they need to estimate the probability, given current economic and social factors, that any single child will provide old-age support. Assuming the child lives into adulthood, he or she must earn enough income to be able to provide support, as well as being willing to do so. Furthermore, if only men have the earning potential needed to provide financial assistance, the necessary number of children will double. Facing these risks, couples in developing economies often choose to have larger families than needed for the sake of old-age security, leading to relatively high birthrates. China’s one-child policy was meant to curb this trend.

Discussion Questions

1. The opportunity cost of raising children is another factor that influences birthrates. Women in China (particularly rural China) face fewer employment opportunities, and at lower wages, than women in Japan. How does this help to explain the disparity in desired number of children between the two countries?

2. Will a grown child be able to support two elderly parents any better than a single parent could provide for him- or herself and two young children? How might this problem be magnified further with multiple generations of only children?

3. Has China’s one-child policy been a success? Why or why not? What unintended consequences might result from this policy?

According to a recent NPR story, dry-cleaning costs increased substantially after the U.S. imposed import tariffs on wire hangers from China—so much so that many dry cleaners are now soliciting customers for unused hangers. The U.S. imposed the tariffs after several American producers made dumping accusations against Chinese producers. Dumping occurs if a Chinese firm sells hangers in the U.S. for significantly less than it sells the same hangers for in China, or for significantly less than it costs to produce the hangers in China. The U.S. International Trade Commission found that Chinese manufacturers were, in fact, dumping hangers in the U.S. market.

Economists tend to be skeptical of trade restrictions based on the anti-dumping argument. In markets for standardized goods (like wire hangers) with relatively free entry and exit, there's no long-term benefit from selling a product at below cost. While legitimate cases of dumping certainly come up, some cases may simply involve domestic firms that want to protect their market position from lower-cost foreign manufacturers. In the case of hangers, the tariffs benefit U.S. manufacturers at the cost of the dry cleaners and consumers who would otherwise benefit from lower-priced Chinese imports.

Milton Magnus III, owner of one of the U.S. manufacturers that filed for the anti-dumping duties, argues that the costs to consumers are negligible—amounting to a penny or two per hanger. "If I pay $12.95 to have my suit cleaned and that hanger cost him a cent and a half more, that's $12.96 and a half. It's not a factor." Magnus's point partly explains why import-competing industries often succeed in their efforts to lobby government for the imposition of trade restrictions: the tariff offers concentrated benefits to a few domestic firms, while the costs of the tariff are spread out among millions of consumers—none of whom see a sharp increase in price. Of course, over millions of hangers, a penny or two per hanger can add up.

Advocates of trade restrictions often argue that protection will save jobs. Since we can observe price and cost increases associated with trade restrictions, we can estimate how much it costs to save each job in a protected industry. According to the NPR story, there are roughly 30,000 dry cleaners in the U.S., and on average, each pays an additional $4,000 per year due to the hanger tariff. This indicates an average annual cost of 30,000 firms x $4,000 per firm = $120 million. According to the U.S. International Trade Commission's report, U.S. employment in wire hanger manufacturing was 564 workers in 2004 and fell to 236 workers by 2006. Let's assume that employment in this sector would have fallen to zero in the absence of the tariff, and that with the tariff, employment will recover to 2004 levels. In other words, assume the tariff "saves" 564 jobs. Dividing the cost of the tariff to U.S. dry cleaners ($120 million year) by the number of jobs saved (564 jobs) indicates that each job saved costs about $212,765 per year. Keep in mind that the typical full-time worker in this sector earns about $30,000 per year. Even if we assume that industry employment doubles, the cost of the tariff is still roughly $120,000 per job.

Discussion Questions

1. Our cost estimates ignore possible job losses in the dry-cleaning industry. How would this impact the overall cost of the trade restrictions? Will dry cleaners organize to oppose the tariff on wire hangers from China?

2. According to the Trade Commission report, China provides tax rebates to firms that export items that use steel (such as wire hangers). As of July 2007, the tax rebate amounted to 5% of the value of exports. How do you think export subsidies or tax rebates should factor into government analysis of trade policies?

3. The story mentions dry cleaners' attempts to reclaim and reuse wire hangers. Are there inadvertent environmental benefits from the tariff? Could the U.S. government encourage dry cleaners and their customers to reuse wire hangers without resorting to tariffs on Chinese manufacturers?

A recent paper by McGill University's Jennifer Hunt to an NBER labour studies programme conference asks whether the increase in foreign-born college graduates has contributed to innovation in the United States. Her paper, How Much Does Immigration Boost Innovation? (PDF), finds that it does: In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the...

Inter-county migration in China - mostly rural migrants moving to urban areas - increased four-fold during the 1990s, from just over 20 million in 1990 to 79 million by 2000. With what effect? Co-authors Alan de Brauw from the International Food Policy Research Institute and Michigan State University's John Giles examine the impacts this great tide of migration has had on China's rural villages. Their paper, Migrant Labor Markets and the Welfare of Rural Households in the Developing World: Evidence...

Even more than the law of supply, the law of demand, or the law of diminishing marginal utility, economists love the law of unintended consequences. A brief editorial in the New York Times provides a nice illustration of that law.

One of the McCain-Feingold campaign finance reform laws was an exception to campaign finance limits for the case in which a rich candidate contributes a large amount to his or her own campaign. The idea is simple: campaign finance laws generally govern how candidates for office can raise money from others, but don’t restrict how much money they themselves can spend on their own candidacy. Therefore, if one candidate is of modest means while another is rich, campaign finance laws that make it harder for the poorer candidate to raise money implicitly help the richer candidate.

To solve this problem, McCain-Feingold lifted campaign contribution limits for candidates facing a challenger who spent more than $350,000 of his or her own money on the campaign. This provision of the law is now being challenged as unconstitutional by Jack Davis, a millionaire who ran unsuccessfully for Congress in 2006. Davis claims that the effect of the law is to deter rich people from public service.

The Times editorial makes the following rebuttal:

GDP (Gross Domestic Product) is a statistic that economists use to gauge the output of a nation. Movements in GDP provide clues about the health of an economy.

Look at GDP growth over the last five years, and the United States comes out smelling like roses, relative to other high-income countries, at nearly 3% growth per year. But statistics can be deceiving.

An article from the Economist titled “Grossly Distorted Picture,” questions whether GDP is an accurate measure of a nation’s economic health. The article suggests that, though GDP growth for the United States is higher than other countries, other factors, like population, also play an important role. As the article points out, growth of GDP per person is perhaps a more meaningful measure of economic progress than simply growth of GDP.

For example, over the same four-year period (2003-2007) Japan’s GDP growth was just over 2%, far below the nearly 3% growth the United States experienced. But during that time, Japan’s population was shrinking while the population of the United States was growing at nearly 1% per year.

If you calculate GDP per person Japan’s economy actually grew faster (2.1%) than that of the United States (1.9%).

Discussion Questions

1. Which countries have the biggest discrepancies between GDP growth and GDP per person over the last five years? Does that change your perceptions of the health of these nations?

2. As the article points out, annual U.S. population growth is roughly 1%. The annualized growth of U.S. real GDP (real GDP is an inflation-adjusted measure of output) was 0.6% during the last three months of 2007. Assuming U.S. real GDP growth in the first three months of 2008 was about the same—what does this imply for U.S. GDP per person?

3. Economists typically define a recession as six months or more of declining real GDP How would the use of real GDP per person rather than real GDP change our perspective on recent U.S. economic performance? According to this method, is the U.S. economy in recession?

4. As gauges of economic output, both GDP and GDP per person have their flaws. For starters, each measure misses the value of things that are not traded in a legitimate marketplace but may nonetheless impact our economic well-being. Underground activity, whether illicit drug dealing or benign babysitting, does not register in national income accounts. Environmental damage associated with our production and consumption is also not a factor. Can you think of other statistics we should consider when measuring a nation's economic health? What are some of the benefits and drawbacks to those methods?

Like Hamlet, we often face tough decisions without perfect information. In Hamlet’s case, the choice was something like, “My dad was murdered. I think my uncle did it. Now he’s my stepdad. Sigh.” What’s a prince to do? Should he seek revenge? Should he rat out his uncle? Seemingly incapable of making a decision, Hamlet stuck with the default: do nothing and stew.

Maybe Hamlet had the right idea. According to Ofer H. Azar, a lecturer in the School of Management at Ben-Gurion University of the Negev in Israel, inaction may often be a prudent choice in situations where most of us feel compelled to do something.

Mr. Azar studied high-stakes decision-making—not in the boardroom, but on the soccer field, where he collected data on the attempts of professional goalies to block penalty kicks. Regularly faced with huge incentives to block penalty kicks, goalies offer a great proxy for people who routinely make quick, high-pressure decisions. Mr. Azar hoped to see just how rationally people respond to such situations. Surprisingly, he found that goalies facing penalty kicks tended to let their emotions dictate their actions—often leading to detrimental outcomes.

During a penalty kick, the goalie must stand with his heels on the goal line while an opponent kicks the ball from 12 yards away. The goalie cannot move until the opponent has kicked the ball, and there is not enough time for the goalie to watch the shot and react. Thus, goalies must make a choice about where they think the ball will be kicked before the shot is made.

Since the greatest proportion of shots end up near the center of the net, the goalie’s best defense is to stay put. The trouble is, goalies find it very difficult to stay in the middle, simply because it makes them feel they aren’t doing anything. When asked why they jump left or right when it's efficient to stay put, they explain that they would feel worse if they stayed in the middle and the shooter scored than if they had at least jumped one way or the other.

We are not all professional soccer goalies. But we may feel the compulsion to act under pressure. Even if inaction is more efficient, we may take action just so we feel good about doing something. Emotion can play a large part in our decisions, especially high-stakes decisions. Economists may need to reassess the degree to which emotions can influence decision-making. In the same article, Stanford economist Paul Romer says, “How people feel about various kinds of activities means a lot about what they decide to do. In many situations, [economists] just look at the narrow monetary payoffs and forget about the effects of preference or feelings.” To learn more about the blend of emotion and calculation that goes into our decisions, read this article from the New York Times and think about the questions below.

Discussion Questions

1. Apply this logic to high-stakes business decisions made by major corporations. When times are tough, do companies tend to want to do something rather than ride out the storm? Is that always the right decision?

2. What about playing the stock market? How much do emotions play a part in the decisions we make?

3. Identify areas in your own life where emotion plays a part in important decisions. Would the outcomes of your decisions be better if emotion did not play a part?

The government's monthly survey of businesses indicates that payrolls experienced a net drop of 63,000 jobs during February. At the same time, numbers from the government's monthly survey of households indicated that the unemployment rate declined from 4.9% in January to 4.8% in February. How can the unemployment rate fall even as the economy sheds jobs? Understanding this paradox requires a closer look at the household survey numbers for the past two months.

So suppose—and I’m not trying to get you down here—that an asteroid were to hit the earth, wiping out 90% of known species. (Or, if you prefer, that a combination of deforestation and our fascination with only growing a few key crops achieves the same outcome.) How could we regain our current biodiversity?

In case these kinds of things keep you up at night, you can rest easier thanks to the Svalbard Global Seed Vault that opened yesterday in Arctic Norway. There’s a great blog post about it on the New York Times website. The vault is a step up from existing seed banks, which are threatened by political instability or a lack of funding.

The post points out, though, that a group called grain.org has criticized the seed vault. Read their criticism here.

Discussion Questions

1. The post asks, “How much of this intergovernmental work help[s] sustain farming diversity, as opposed to museum-style genetic diversity?” Another way of asking this is as follows: producing food requires land, labor, and capital. The seeds themselves are just part of the equation. What happens if farmers, after hundreds of years of not farming these crops, lose the skills associated with their use? What can be done to preserve knowledge of how to maintain a species that is no longer actively farmed?

2. The seed vault acts as a centralized mechanism, much like a kidney donor list, that describes who is entitled to the seeds in the vault and under what circumstances. How does that mechanism compare to a market mechanism? Is it true, as grain.org argues, that the wrong stakeholders are given priority in this system? What rights do (and should) farmers have, as opposed to governments?

In an important scene from the 1999 movie American Beauty, two characters—Jane and Ricky—watch footage of a plastic bag dancing in the wind. That there's beauty all over the place, even in garbage, seems to overwhelm Ricky: "Sometimes there's so much beauty in the world, I feel like I can't take it, like my heart's going to cave in."

Unlike Ricky, Dubliners have to live without the heartbreaking splendor of airborne garbage. Plastic bags nearly disappeared from Ireland's cities after the government began taxing them in 2002. The tax, 33 cents per bag, was enough motivation for most shoppers to replace plastic bags with reusable cloth bags. Ireland's experience illustrates a basic principle of taxation: if you want less of something--like the not-so-biodegradable, sewer-clogging plastic bag--tax it. Read Elisabeth Rosenthal's New York Times article to learn more about Ireland's bag tax.

Discussion Questions

1. There's nothing like a green tax to bring out our inner-environmentalists. As Rosenthal points out, after the tax passed, plastic bag use became socially unacceptable in Ireland. In what way does the tax lower the barrier to adopting a disapproving attitude toward plastic bag use?

2. Ohio issues yellow and red license plates to drivers convicted of drunk driving (apparently, Ohio officials didn't give much thought to tourists from the great state of New Mexico). Can you think of other situations or even laws that are governed largely by the threat of disapproval from others?

3. How is the Irish government's campaign against plastic bags similar to government campaigns against tobacco? In what ways do cigarette and plastic bag taxes increase efficiency for society as a whole?

4. Taxing bad behavior can be good, but implementation and enforcement are issues. It'd be relatively easy to cut down on paper waste from ATM receipts because the fee can be collected electronically at the site of the transaction. Why does a plastic bag tax that works remarkably well in the digitized supermarkets of Ireland run into implementation problems among the vendors and mom and pop shops in China?

Labels: Taxes, Incentives, Market Failure, Externalities, Environment

Those who know me well know I’m not often at a loss for words. Yet, here I find myself truly stupefied.

I thought that, for Valentine’s Day, I’d write a blog post on the economics of love. So I Googled “economics of love” and got Solve Dating. It’s one of the more interesting, if bizarre, applications of cost-benefit analysis I’ve ever seen.

Now don’t get me wrong—I wrote my Ph.D. dissertation on search-based marriage matching models, so I’m not against applying economic principles to questions of matrimony. But I wonder: how useful is it to try to get into the nitty-gritty of quantifying the costs and benefits of love? Is the equation “rejection cost = – (your self-esteem + frequency of past rejections)” a valid one? What units could you possibly use?

On the other hand, some of the conclusions on the site are fairly decent applications of basic economic analysis. For example, just below that equation is the insight “People who are sensitive to rejection are less likely to find their soulmates.” They suggest, “Build up your self-esteem. Convince yourself that it was their loss.”

Now there’s cost minimization for you! Happy Valentine’s Day.

Discussion Questions

1. We use a lot of math and graphs in economics, but some questions are better answered with equations than others. What lends a phenomenon to mathematical analysis? Do the good folks at Solve Dating go too far?

2. What kinds of questions of the heart can you answer with economic principles? Do you apply your knowledge of economics to your own love life?

3. My favorite title of a search-based marriage model paper was “Transplants and Implants: The Economics of Self-Improvement.” This paper discusses the fact that people rationally improve themselves when trying to attract a mate, and then optimally “let themselves go” once they get married. Is that an argument that makes sense to you? How could you test that hypothesis?

For more information on the conference:
http://www.iea-tek2008istanbul.org/

More than 1615 documents matching "Turkish economy" or "Turkey" among working papers, articles, books, book chapters and software indexed in EconPapers Archive : please click here!

The big news this morning is that Microsoft has made a nearly $45 billion bid to buy Yahoo.

In general, regulators might frown on such a deal: after all, wasn’t Microsoft the behemoth that was going to take over the entire technology world in the late 1990s? And yet, as the Associated Press reports, most analysts believe that regulators in the U.S. and Europe are unlikely to stop the deal. Why?

In a word: Google.

What could Google possibly have to do with a proposed Microsoft–Yahoo merger? To answer this question, you need to stop and consider the current state of the Internet search-engine industry.

It’s difficult to use a single yardstick to measure how competitive an industry is. For much of the last century, regulators would use the four-firm concentration ratio, which measured the total market share of the top four firms in an industry. Unfortunately, that didn’t give a measure of the precise extent to which one of those firms might dominate the industry. For example, suppose that in two different industries, the top four firms each have a total of 80% of the market. However, in Industry A, each of the four firms has a 20% market share, while in Industry B, one firm has a market share of 50% and the others each have a 10% market share. The four-firm concentration ratio would treat these two industries equally.

Nowadays, the usual method used by the FTC is to examine the Herfindahl index, which is calculated as the sum of the squared market shares of each firm in an industry. By squaring the market shares, the HI rises when market power is concentrated in one or two companies. For example, in Industry A (described above), the HI would be equal to 20² + 20² + 20² + 20² = 1,600; but in Industry B, the HI would be equal to 50² + 10² + 10² + 10² = 2,800.

According to comScore, which tracks Internet usage patterns, there were approximately 9.6 billion “core” searches performed in 2007. Of those, Google accounted for about 58%, Yahoo for 23%, Microsoft for 10%, Time Warner for 5%, and Ask for 4%. This is clearly a very concentrated industry already; but since Google’s position is so dominant, it might actually help consumers if Google had a larger adversary within the industry.

Discussion Questions

1. Calculate the HI of the search industry before and after a potential merger between Microsoft and Yahoo. By how much does the HI of the industry increase?

2. Google and Yahoo get their search-based revenue from advertisers who place ads based on what people are searching for. However, using Google or Yahoo is free to Internet surfers. If you were a regulator, how would that fact impact your decision to support or oppose a merger between Microsoft and Yahoo?

3. Microsoft’s core business is selling operating system software. How might the acquisition of Yahoo affect that aspect of its business? Might regulators be concerned that having Yahoo become a part of Microsoft could increase Microsoft’s market share in its main market as well?

Today, amid foreign financial market volatility, the Federal Reserve cut the federal funds rate from 4.25% to 3.5% to prevent a recession. You may read the official press release here. The move is rare for two reasons. The Federal Reserve reduced the federal funds rate before its regularly scheduled meeting next week, and the Federal Reserve reduced the rate by 75 basis points, as opposed to its usual 25 or 50 basis point increments. In summary, today’s move is rare for its timing and magnitude.

The federal funds rate, or the interest rate that U.S. banks charge each other for overnight loans, is the benchmark rate for many short-term and long-term interest rates in the United States. A reduction in the federal funds rate, often times (though not always), decreases the interest rate on credit cards, automobile loans, and mortgages. Lower interest rates encourage consumers to spend and businesses to build new offices and purchase computers, machinery, and software. A boost in consumption (e.g. buying new clothes) and investment (e.g. building new offices) spending are exactly what the economy needs when it is slipping into a recession caused by sudden drops in overall spending. Though the U.S. economy is NOT officially in a recession, the Federal Reserve forecasts “slowed growth” and would like to cut rates just-in-case.

The previous explanation shows how the Federal Reserve could use monetary policy to minimize the depth and length of a recession. However, what is less well known is the process with which the Federal Reserve is able to manipulate the federal funds rate. Essentially, the Federal Reserve lowers the federal funds rate by expanding the money supply. This is easier said than done.

First and foremost, the Federal Reserve does NOT print new dollar bills. So how is it able to create new money? There are two main forms of money—cash in circulation and checking deposits held in banks. Separate from the money supply are “reserve accounts” that commercial banks are required to have at the Federal Reserve. These reserve accounts hold cash for the commercial banks in case depositors cash-out some of their deposits.

The Federal Reserve can expand the money supply by expanding the amount of deposits held in the U.S. commercial banking system. One way to do so is to purchase U.S. government bonds issued by the U.S. Treasury department. When the Federal Reserve purchases government bonds from commercial banks, it takes bonds out of circulation and electronically credits reserve accounts. U.S. commercial banks armed with more cash reserves will issue new loans which are then deposited back into the banking system. This method effectively increases the dollar amount of checking deposits in the economy, and hence, expands the money supply.

Discussion Questions

1. Suppose U.S. commercial banks are highly reluctant to issue new loans even if they are armed with more reserves. How would this impact the Federal Reserve’s ability to expand the money supply and lower the federal funds rate?

2. Republican presidential candidate, Ron Paul, believes that the Federal Reserve “debases and depreciates” the currency through its manipulation of the money supply. In fact, he wants to abolish the Federal Reserve altogether. Using the definition of the money supply and the relationship between interest rates and unemployment, how could the money supply be “pro-cyclical” without the Federal Reserve?

The likelihood of slow growth or a recession in the United States has policymakers looking for ways to soften the blow. There are two basic ways the government can stabilize output: monetary policy (changes in the money supply and interest rates) or fiscal policy (changes in government taxation and spending). The U.S. monetary authority, the Federal Reserve (or Fed), responded to the threat of recession by lowering interest rates. Lower interest rates reduce the cost of borrowing, accommodating investment and consumption spending during downturns (with the added benefit of lowering the value of the dollar and thus boosting U.S. exports). The timing and magnitude of interest-rate changes are always tricky, but even if rate cuts don't avert a downturn altogether, they'll almost certainly reduce the depth and length of a recession.

But what, if anything, can the fiscal authority—Congress and the President—do to assist the economy? According to Fed chair Ben Bernanke, "Fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary actions alone." (Read this New York Times article for more.) However, Bernanke is hedging a bit here. By saying that tax cuts or spending increases "could be helpful in principle," he implicitly acknowledges that such measures may be ineffective, or even harmful, in practice. The process of agreeing on and passing legislation limits the usefulness of fiscal policy for stabilizing mild fluctuations in economic output. By the time our representatives haggle over and pass legislation, the downturn may be over or the resulting policy may reflect political rather than economic considerations. For this reason and others, recent commentaries by Greg Mankiw and Robert J. Samuelson argue that we should leave the Fed to address mild ups and downs in the business cycle, reserving fiscal policy for deep or prolonged recessions.

Discussion Questions

1. Limitations of fiscal policy aside, Bernanke seems to understand that politicians seeking a track record to run on will often favor policy action over informed inaction. What advice does he give policymakers who are eager to implement fiscal policy?

2. Three specific types of "lag" may delay the beneficial effects of economic policies. The recognition lag is the time it takes us to figure out we're in an economic pickle. We often don't know that we're in a recession until months after it's started. The implementation lag is the time it takes policymakers to agree on and implement policies. The impact lag is the time it takes a policy to work its way through the economy and affect economic output and unemployment. For example, an increase in government spending on highway construction will show up as additional output over the entire life of the project, not all at once. How might these lag times differ between monetary and fiscal policy?

3. Plotting economic output over time reveals two basic observations: the smooth upward trend in output growth over the long haul, and the up-and-down wiggle of output in the short term. To paraphrase Aplia's founder Paul Romer, it's easy to lose sight of the trend for the wiggle. Policymakers can get so wrapped up in temporary economic tumults that they lose focus on the bigger picture. If we're headed for recession, odds are that it will be mild by historical standards and the Fed will have plenty of policy ammunition to soften its adverse effects. Meanwhile, small changes in the long-run rate of economic growth have large impacts on future living standards. Given that, what policies would you recommend the action-minded fiscal authority focus on to improve the long-term growth prospects of the U.S. economy?

For more on the appropriate role of fiscal policy, listen to Bloomberg’s interview with Stanford economist John Taylor.

I don't know what I did to deserve such good fortune, but for some reason, God saw fit to allow me to be born in the state of Ohio. Growing up a Buckeye, you learn early in life that blue is a four-letter word (maize might as well be also), and that all good things come packaged in red sweater vests.

It is also my good fortune that Ohio State will be playing the college football national championship game in New Orleans this January, as I will be in town attending the ASSA meetings*, and thus will naturally be attending the game shortly thereafter.

The teams are set: OSU vs. LSU. The only big question left is—what will I pay for the privilege of watching them duke it out? I'm not counting on getting a ticket from the lottery drawing, so I plan to buy a ticket from a reseller. For your typical fan, buying tickets from resellers is the norm for big games like this. It is not uncommon for these tickets to be sold for 5 to 10 times their face value in the resale market.

Some games are unexpectedly good (see Browns vs. Bills this Sunday in an unlikely battle for a playoff spot, or the recent Missouri vs. Kansas game as #1 and #2). With these games, it's easy to see why the resale market would dominate—most tickets were sold cheaply early in the season before anyone realized the game would be so meaningful. When demand rises, so do prices.

The explanation isn't so straightforward, however, for games that are guaranteed to be important (like the national championship). In this article, ESPN writer Gregg Easterbrook discusses some reasons why tickets are still sold by sports teams at face value, regardless of expected market rates.

*A big economics conference. There is a good chance your professor is going. Maybe they'll buy you a hat.

Discussion Questions

1. Fairness is always an issue with pricing decisions. Easterbrook calls it a “public relations move” to keep prices standard. Might raising prices for important games create resentment that could extend forward into the months and years to come?

2. In his autobiographical Fever Pitch, Nick Hornby writes that club owners would be daft to raise prices beyond what their rabid fans can readily afford, since the marginal fan comes to games as much to see and experience these crazed fans as to see the action on the field. How would raising the price affect the demographics of those who could attend? Do rabid fans confer a positive (or negative) externality on the rest of the crowd?

3. Last Monday night, Michael Vick and the Falcons took on Reggie Bush and the Saints in an epic battle for the NFC South. Oh, wait, nevermind—neither of these once-great teams is likely to even smell the playoffs this year, and neither of those players were even on the field to try and help the cause (Bush is injured, Vick is in prison). How might setting prices upfront allow teams to capture more total revenue on games that turn out to be duds?

In 1984, the U.S. government gave Honduras unfettered access to the American sock market. The move was the first of several trade deals that would ultimately unravel Fort Payne, Alabama's status as the sock capital of the world. Fort Payne's sock factories struggled to compete with the likes of Honduras, China, and Pakistan when it came to the labor-intensive step of seaming sock toes. American workers receive approximately 2 cents per seam (at about six seconds per sock, a good hour would bring in $12), but foreign workers sew for half of that. The labor savings add up over millions of socks. The cost disadvantage forced many Fort Payne sock mills to shutdown and lay-off workers.

Keep in mind that many people benefited from U.S. openness to trade in socks and other goods. Americans gained access to a wider variety of less-expensive goods—socks included. American firms and workers in U.S. export industries benefited from access to foreign markets. A cosmopolitan view also acknowledges the gains to firms and workers in developing countries. The Honduran sock industry thrived on access to the American market, generating more jobs and higher wages for workers. Of course, none of this is of much solace to a laid-off sock worker in Fort Payne.

A number of Fort Payne sock mills managed to hang on, but much of the town's industry consists of relatively new ventures, like bridge building and label making, with no relation to hosiery. As a recent two-part story (here and here) from NPR's Adam Davidson illustrates, Fort Payne's dynamic economy absorbed its losses from international trade—creating new, often better-paying jobs for many of the workers initially displaced by globalization. Even as Fort Payne's economy moved on, the political clout of the sock industry remained strong. Alabama congressman Robert Aderholt struck a deal with President Bush in 2005—Aderholt would support the Central American Free Trade Agreement (CAFTA) if the president agreed to re-impose tariffs on socks from Honduras. The president agreed; CAFTA moved one step closer to full implementation; and the administration gave itself a deadline for resurrecting the sock tariff—December 19, 2007. Read Davidson's report to learn more about the potential impact of rolling back free trade with Honduras.

Discussion Questions

1. How did sock tariff removal initially impact Fort Payne? How does the economy in Fort Payne look today? Would you characterize it as a sock dependent town?

2. How will the re-imposition of the sock tariff affect the historically small number of sock mills and sock workers in Fort Payne? How will the tariff affect sock mills and workers in Honduras? How will the removal of duty-free status for Honduras impact other developing countries, such as China, that currently face higher U.S. trade barriers than Honduras?

3. The president acceded to representative Aderholt on sock tariffs for Honduras in order to get a vote for CAFTA--a wide reaching agreement that has the potential to reduce trade barriers among multiple countries. Was the deal worth it?

4. Fort Payne's economy adapted to life with open trade, but not all workers experienced a smooth transition from the sock-based economy. According to Davidson's story, how have workers had to adapt to the new labor market in Fort Payne? What, if anything, is the appropriate role for government in easing the adjustment to globalization in towns like Fort Payne?

5. Think about the local, regional, or national economy. How would life be different today if everyone, everywhere were producing the same stuff that they were 30 years ago?

The Phillips Curve is a concept often covered in introductory macroeconomics. However, in some economic and political circles, the concept is considered outdated and useless. Some economists and commentators, such as Lawrence Kudlow, might go as far as to say that the Phillips Curve is dead. Why does the Phillips Curve command such controversy? Is it as irrelevant as some economists claim?

The traditional Phillips Curve is the trade-off between the inflation rate and the unemployment rate. Many economists in the 1960s thought that the Federal Reserve or Congress could permanently lower the unemployment rate by increasing the inflation rate. The trouble is, the traditional Phillips Curve violates one of the central tenets of economics: the classical dichotomy. According to the classical dichotomy, nominal variables do not affect real variables. Consider a simple example:

I hold a bag of apples that weighs 5 pounds. The weight (i.e., the force exerted on my arm) is a real variable and the unit of measurement (i.e., pounds) is a nominal variable. Suppose the U.S. government passes a new law that says all measurements must conform to the metric system. Now the same bag of apples weighs 2.27 kilograms. Notice that the nominal variable (how the weight is measured) has absolutely no effect on the real variable (the force exerted on my arm).

The traditional Phillips Curve is in direct contradiction of the classical dichotomy. The Phillips Curve implied that the government could effectively reduce the unemployment rate (a real variable) by changing how fast overall prices are growing in the economy (a nominal variable). Though the traditional Phillips Curve held up well in the 1960s, the 1970s would usher in the downfall of the traditional Phillips Curve.

In the 1970s, the trade-off between the unemployment rate and the inflation rate seemed to fall apart. The United States experienced soaring overall prices and rising unemployment. In other words, there appeared to be an upward-sloping relationship between the inflation rate and unemployment rate. Due to this fact, many economists declared the Phillips Curve to be dead.

Due to the abrupt change in the correlation between inflation and unemployment, several theories were proposed as alternatives to the Phillips Curve. These theories include the Real Business Cycle (RBC), Rational Expectations, and Monetarism. Often times these theories are called “New Classical” economics because they promote the classical dichotomy.

Under heavy pressure from competing theories and empirical evidence, a new school of thought known as “New Keynesian” economics sought microeconomic foundations for the Phillips Curve. Edmund Phelps, the Nobel Laureate in 2006, augmented the traditional Phillips Curve by adding the critical role of expectations. Under the expectations-augmented Phillips Curve model, a trade-off between inflation and unemployment does exist but only in the short run. According to the model, inflation expectations adjust to return the economy to its natural rate of unemployment (i.e., an unemployment rate consistent with non-accelerating inflation). George Akerlof, the Nobel Laureate in 2001, provided behavioral explanations for the trade-off. Subsequent works by economists, such as David Romer and Greg Mankiw, provided additional microeconomic foundations for a short-run trade-off.

Through all the intellectual turmoil, most economists agree on the following:

1. There is a short-run trade-off between the inflation rate and the unemployment rate.
2. In the long run, the inflation rate adjusts to restore the natural rate of unemployment. Hence, policy makers cannot permanently push unemployment below its natural rate by permanently increasing the inflation rate.

How well does the modern Phillips Curve describe the real world, and do practitioners actually use the modern Phillips Curve? James Stock and Mark Watson, authors of a famous introductory econometrics textbook and well-respected econometricians, empirically showed that the modern Phillips Curve bested all other alternatives in terms of forecasting inflation. Ben Bernanke, chairperson of the Federal Reserve, professed publicly here and here on the importance of the modern Phillips Curve in the Fed's inflation forecasts, which ultimately influence monetary policy.

The Phillips Curve has changed over the past 40 years, but it is very much alive as a reference for monetary policymakers.

Discussion Questions:

1. Go to the Bureau of Labor Statistics web site and pull data on the national unemployment rate and the CPI inflation rate. For your convenience, I have included the spreadsheet here. Does there appear to be a trade-off between inflation and unemployment between January 2001 and December 2001?

2. Does there appear to be a trade-off between January 1997 and October 2007?

3. Why do you think an increase in the inflation rate decreases the unemployment rate in the short run? Why do you think a decrease in the unemployment rate increases the inflation rate in the short run?

A central bank controls the economy's money supply—the growth of which ultimately determines the growth of the economy's price level (the inflation rate). Many of the world's central banks publicly announce inflation targets. An inflation target is a specific rate (such as 2%) or a range of inflation rates (such as 1%–3%) that the central bank will try to achieve over time. By