Economics Planet - Daily Blog Posts about Economics

The money-inflation connection: It's baaaack!

Our St. Louis Fed colleague David Andolfatto declares it is time to bury the old saw that says when it comes to inflation, follow the money:

"One of the ideas that stuck in my head as an undergrad was the proposition that 'inflation is always an[d] everywhere a monetary phenomenon.' The idea is usually formalized by way of the Quantity Theory of Money (QTM)—or more precisely—the Quantity of Money Theory of the Price-Level. (QTM is not a theory of money, it is a theory of the price-level).

"In its simplest version, the QTM asserts that the equilibrium price-level is roughly proportional to the outstanding supply of money (however defined). As inflation is the rate of change in the price-level, the phenomenon of inflation is attributed primarily to excessive growth in the money supply (typically viewed as being controlled by the monetary or fiscal authority)."

Andolfatto goes on to note that the monetary base—the sum of currency in circulation and the banks' reserve balances held at the Federal Reserve (at that page, search "reserves")—more than doubled since fall 2008, while the rate of inflation fell.

That's certainly true, though most versions of the quantity theory applied to monetary policy discussions lean on broader measures of money—for no better reason than those measures help the theory fit the facts. Specifically, since the 1980s the phrase "inflation is everywhere and always a monetary phenomenon" has in effect meant "inflation is everywhere and always a monetary phenomenon when we measure money by M2."

And here's an interesting thing. If you look at the relationship between M2 growth and core inflation over the past decade and a half, it appears that the money-inflation nexus has been gaining in strength:

Another way to see this relationship is to look at the correlation between M2 growth and core inflation over rolling 10-year windows:

Could it be that the death of the quantity theory has been greatly exaggerated?

There are plenty of reasons to be cautious. For one thing, it is oft-noted that any connection between money and inflation could be purely coincidental. In fact, if you stare hard at the picture it does appear that changes in inflation often precede changes in money growth. One interpretation is that the same factors that push trend inflation around also result in responses by policymakers or private market participants that ultimately cause the money supply to move in a sympathetic direction.

But even if causation does run from money to prices, the case is not quite solved. The monetary base measure that the Andolfatto post emphasizes has a lot to recommend itself, not least being that it is the measure of money that central banks actually control. The stark disconnect between the growth in currency and bank reserves (the quantity of which is determined by the Fed) and M2 growth (the quantity of which is determined by the decisions of banks to expand their balance sheets) raises legitimate questions about how policymakers would exploit an M2-inflation connection in an environment when the monetary base–M2 connection—the so-called "money multiplier"—has changed so dramatically.

There could be lots of answers to that question. The relatively new Federal Reserve policy of paying interest on bank reserves is one possibility. Andolfatto's suggestion that all changes in money are not created equal might contain the germ of another explanation. For our part, we think the question is quite a bit more than academic.

By Dave Altig, senior vice president and research director at the Atlanta Fed, and Brent Meyer, economic analyst at the Cleveland Fed

July 26, 2010

The Capital Spectator

THE CAPITAL SPECTATOR ON VACATION...

Postings will be light to nonexistent for the rest of the week as I indulge in some mid-summer R&R. The usual editorial tricks resume on Monday, August 2. Meantime, stay cool, be well and watch out for falling economic numbers.

The Capital Spectator

CORPORATE EARNINGS: HIGH STANDARDS & RECENT HISTORY

As rebounds in corporate profits go, recent history is probably about as good as it gets. That's no surprise, considering that the hammering of corporate America just prior to the rebound was no less extraordinary. The implication: the best days are behind us. That doesn't mean that corporate profits are destined for trouble, but recent history delivered a backdrop of nirvana for the stock market. If something less, and perhaps considerably less is coming, so too are attitude adjustments. The question is whether the crowd's expectatiions are fully and fairly adjusted?

July 21, 2010

Gauging the inflation expectations of business

Last Friday, the U.S. Bureau of Labor Statistics (BLS) reported that the consumer price index (CPI) declined in June for the third consecutive month. And although core inflation edged up a bit, the entire increase can be accounted for by the BLS's seasonal adjustment factor. In an environment of "business-not-as-usual" like today, data driven by seasonal adjustment are certainly suspect. So overall, the June CPI news seems largely in line with the downward inflation trend we've been seeing for a while.

Does recent disinflation imply deflation? Well, that wouldn't be the consensus coming out of the June 22–23, 2010, FOMC meeting minutes:

"A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower,… However, inflation expectations were seen by most participants as well anchored, which would tend to curb any tendency for actual inflation to decline."

A similar sentiment was expressed recently by European Central Bank (ECB) President Jean-Claude Trichet in describing the ECB's view on inflation expectations:

"Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term."

Of course, how firmly something is anchored has meaning only relative to the forces working to move that anchor. Being well anchored against a five-knot drift isn't exactly the same as being well anchored against a 10-knot current. But assuming the idea here is that expectations are likely to hold against the usual range of events one might expect in an environment like ours, we can ask the question: How does one judge whether expectations are well anchored?

Presuming this analogy, one way we might gauge how anchored inflation expectations are is to monitor the behavior of inflation expectations relative to recent shocks. By this standard, expectations seem rock-solid. Virtually every measure of inflation expectations has held steady against the tug of widely fluctuating commodity prices, persistent retail disinflation, expansion of the central bank's balance sheet, large current and projected fiscal imbalances, and the general economic and financial volatility of the past few years.

But economists know very little about how expectations are formed and, therefore, we don't know what sorts of events are likely to pose the greatest threats to the expectations' anchor. In other words, we may not know when inflation expectations are likely to move until, well, they actually move.

In an attempt to get a more direct read of inflationary sentiment and to put more light on how inflation expectations are formed, the Federal Reserve Bank of Atlanta is looking into polling businesses about their inflation expectations. With help from the folks at Kennesaw State University (a very big hat-tip to Don Sabbarese and Dimitri Dodonova, who compile the Georgia and Southeast Purchasing Managers' Indexes) we asked a group of purchasing managers a handful of questions related to the inflation outlook. The poll was conducted during the week of July 7–July 13, and 32 respondents answered the call. Here's what we learned.

Over the next 12 months, this sample of purchasing managers expects unit costs to increase 1.7 percent, just a shade higher than the consensus CPI forecast of economists. The distribution of the poll responses is represented by the red bars in the chart below. About half of the respondents saw unit costs rising "somewhat" defined by the range of 2 percent to 4 percent, while about one-third of the respondents indicated they expect virtually no change in unit costs over the period.

But what probability do respondents attach to their expectations? It turns out that some respondents have great confidence in their expectation for unit cost changes—they assigned little chance that unit labor costs would do anything other than what they forecast. But most purchasing managers attached a significant likelihood to a large range of possible outcomes. We show the distribution of the average respondents' expectation for unit costs by the blue bars in the chart. So, keeping in mind that the mean expectation of the group was for unit costs to rise 1.7 percent, respondents on average assigned a 17 percent chance that unit costs could decline over the coming year, while they put an equally large likelihood of inflation at 5 percent or more (20 percent).

What does all this mean for the inflation outlook? Well, first, let us caution that a sample of this size doesn't lend itself to any strong conclusions, and these data will have to be carefully evaluated in light of other poll questions and against other benchmarks. Those important caveats aside, we can say that while the average purchasing manager in our poll is expecting price pressures that pretty closely correspond to the Federal Reserve's long-term inflation projection, this group attaches significant upside and downside risks to the inflation outlook.

Have any thoughts about how we proceed from here? We'd love to hear your ideas. The next poll will be sent to potential respondents in about three weeks.

By Mike Bryan, vice president and senior economist, and Laurel Graefe, senior economic research analyst, both at the Atlanta Fed

July 16, 2010

A curious unemployment picture gets more curious

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UPDATE: One of our eagle-eyed macroblog readers thought something was fishy-looking in the second chart of yesterday's (July 15) post. He was right—the chart was in error. This post is an updated, edited version with the erroneous chart replaced. There have also been some text revisions to better reflect the revised chart. The new text is bolded in this post.

At first blush, the second quarter statistics from the Job Openings and Labor Turnover Survey (commonly referred to as JOLTS and released Tuesday by the U.S. Bureau of Labor Statistics) suggest little has changed recently in U.S. labor markets:

"There were 3.2 million job openings on the last business day of May 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.4 percent. The hires rate (3.4 percent) was little changed and the separations rate (3.1 percent) was unchanged."

Despite a slight step backward in May, the overall trend in job openings has been positive—Calculated Risk has the picture—but in a sense this fact has just deepened the puzzle of why the unemployment rate is so darn high. As we wrote in the first quarter issue of the Atlanta Fed's EconSouth:

"The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve. Named after British economist William Beveridge, the curve is a graphical representation of the relationship between unemployment (from the BLS's household survey) and job vacancies, reflected here through the JOLTS."

Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.

The dashed line in the chart above, which is estimated from the data from 2000–08, represents the predicted relationship between the number of unemployed persons in the United States and the number of job openings. That simple relationship would suggest that, given the average number of job openings in April and May, the unemployed would be expected to number about 10.4 million—not the nearly 15 million we actually saw.

Some analysts have suggested the unemployment benefits policies of the last couple of years may be responsible for abnormally high unemployment rates. Estimates generated by several researchers in the Federal Reserve—here and here, for example—suggest that extended unemployment benefits may have increased the unemployment rate by somewhere between 0.4 and 1.7 percentage points. But even if we accept those numbers and adjust the Beveridge curve by assuming that the number of unemployed would be correspondingly lower without the benefits policy, it's not clear that the puzzle is resolved:

If you tend to believe the higher end of the benefits-bias estimates, no puzzle emerges until the second quarter of 2010. And, of course, some estimates apparently deliver an even larger impact of the extended benefits policy. Let's call the question unsettled at this point.

The most tempting explanation for the seeming shift in the Beveridge curve relationship (to me, anyway) is a problem with the mismatch between skills required in the jobs that are available and skills possessed by the pool of workers available to take those jobs. The problem with this tempting explanation is that it is not so clear that the usual sort of structural shifts we might point to—for example, only nursing jobs being available to laid-off construction workers—are so obviously an explanation (an issue we explored in a previous macroblog post).

But these sorts of subplots may miss the truly big part of the story. I have noticed a recent spate of articles repeating a theme we hear anecdotally from many sources, in many industries. For example, this from a June USA Today article…

"…the [auto] industry is poised to add up to 15,000 this year and could need up to 100,000 new workers a year from 2011 through 2013.

"…Automakers need workers with more and different skills than in the past on the factory floor.… Among priorities: computer skills and the ability to work with less supervision than their predecessors. That likely means education beyond high school."

… or more recently, this one from the New York Times:

"Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery…

"Yet some of these employers complain that they cannot fill their openings.

"Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed."

Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.

The data necessary to test this proposition are not easy to come by. That challenge is unfortunate, because the return on figuring out what is beneath those Beveridge curve graphs is very high.

By Dave Altig, senior vice president and research director at the Atlanta Fed

July 09, 2010

How close to deflation are we? Perhaps just a little closer than you thought

Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent. On an ex-food and energy basis, the number is a little lower, at 0.5 percent. And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.

And this is before we take into account any potential mismeasurement, or "bias," in the construction of the CPI.

How big is the CPI's bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living. This so-called "Boskin Commission Report" said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.

Since that time, the Bureau of Labor Statistics has initiated a number of methodological changes that have reduced the CPI's mismeasurement. In a 2001 paper, Federal Reserve Board economists David Lebow and Jeremy Rudd put the CPI bias at only about 0.6 percentage points. And again, of this amount, the big share of the bias (about 0.4 percentage points) resulted from the imperfect accounting of new and improved goods.

Now, in an article (available to all in its working paper version) appearing in the latest issue of the American Economic Review, Christian Broda and David Weinstein say the earlier estimates of the new goods/quality bias may be a bit understated. The authors examine prices from the AC Nielsen Homescan database and conclude that between 1996 and 2003, new and improved goods biased the CPI, on average, by about 0.8 percentage points per year. If this estimate is accurate, consumer price increases since last October would actually be around zero, or even slightly negative, once we account for the mismeasurement of the CPI caused by new and improved goods.

But (oh, you just knew there was going to be a "but" in here, right?) the authors also point out that, because new goods are introduced procyclically, this bias tends to be larger during expansions and smaller during recessions. In other words, given the severity of the recession and the modest pace of the recovery, there may not be a whole lot of innovation going on right now in consumer goods. This is a bad thing for consumers, of course, but it would be a good thing for the accuracy of the CPI.

By Mike Bryan, vice president and senior economist at the Atlanta Fed

March 18, 2010

Can You Impose an Externality on Yourself?

Garth Brazelton thinks so, in an argument I find somewhat persuasive:

My issue is that he keeps saying 'sin taxes' are not Pigovian. I've disagreed on this point, and I disagree continually. A basic definition of a Pigovian tax is: a tax levied on a particular behavior in the market that is generating negative externalities. The idea is the tax re-aligns the real social cost with the benefits of the activity. Mankiw distorts this defintion and implies that negative externalities can only occur as an action by one group negatively affects another... The externality is there - it's not external of self at that time, it's external of self OVER time. It's correcting behavior that, if a person had complete foresight and 20/20 clarity of the totality of their life, one likely would do less of. ...And this is ignoring the very real argument that many 'sins' DO have real negative external consequences at a given point in time - consequences on family and relationships that, while often non-pecuniary, cannot be ignored.

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March 09, 2010

Raising Revenue Through a VAT

I am a supporter of the VAT, so I was interested in reading Veronique de Rugy's anti-VAT piece The Wrong Policy at the Wrong Time. I was surprised to ...

Pigouvian Tax the Rich?

A millionaire in Switzerland was recently fined a world-record $290,000 for driving his Ferrari Testarossa 87 miles per hour in a 50 miles per hour zone. The amount was so high because fines for speeding in Switzerland are based on a driver's wealth (and, in this case, because the driver falsely claimed diplomatic immunity). The story got me thinking about the economics of speeding tickets.

To an economist, speeding tickets can potentially act as a Pigouvian tax: a tax that makes an individual's cost of engaging in an activity equal to the cost imposed on society. For a driver, the cost of speeding includes things like fuel, the increased likelihood of damaging one's car, and injuring oneself in an accident. For society as a whole, though, the cost of speeding also includes the increased likelihood of an accident that damages other people's property or injures other people. As a result, speeding (and driving in general) imposes costs on society above and beyond those incurred by the driver. Moreover, the other people affected by speeding aren't compensated for the risk by the benefits of speeding, which are enjoyed strictly by the driver. Economists refer to the costs from an activity that are imposed on other people without any compensation as negative externalities. By making an individual's costs equal to society's costs, a Pigouvian tax gives individuals incentives to act as if they were considering everyone's costs. By doing so, a Pigouvian tax internalizes the externality and decreases the activity to the level that maximizes net benefits to society.

It can be difficult to set the Pigouvian tax exactly equal to the external costs of driving because these depend on so many hard-to-estimate variables (such as the likelihood of accidents at different speeds and the monetary damage caused by injuries or death). It's easy to determine, however, that externalities don't depend on the wealth of the driver. For example, the potential consequences for others of a poor person driving a rented Ferrari at 87 miles per hour are the same as from a rich person driving his own Ferrari at the same speed. Thus, for speeding tickets to serve as a Pigouvian tax, the fine for driving the same speed in the same car in the same conditions should be the same for everyone, regardless of wealth.

One consequence of not basing them on wealth, however, is that wealthier people will likely speed more. In most cases, the richer you are, the more you are willing to spend to save time, and thus the more willing you are to speed and risk getting a ticket. Moreover, if the "pure desire for speed" (in the words of the Swiss court that sentenced the driver) is a normal good, wealthier people will consume more of it. From an efficiency perspective, this result is completely appropriate. As long as individuals act as if they were considering all the costs of an activity, their decision to engage in it means that there are net benefits to them and thus to society.

However, because speeding puts others' lives at risk, the idea that it is appropriate for wealthier people to speed more runs counter to many people's idea of fairness. Switzerland's law suggests that its citizens are willing to forego the efficient level of speeding in order to obtain an arguably more equitable result—everyone has similar incentives to speed, and endanger others, regardless of wealth. So, if you ever find yourself about to drive in Switzerland, be sure to check your bank account first: the less you have, the better.

Discussion Questions:

1. What if, considering its external costs, $290,000 was actually the appropriate fine for speeding, but that only extremely wealthy drivers paid that much, with most drivers paying considerably less. Who would speed at the appropriate rate, while who would speed more than was appropriate?

2. Consider what factors make speeding more or less dangerous for other people. On what variables could you base fines for speeding so that drivers internalized the external costs?

3. Are there variables used to determine fines for speeding where you live that have little or no relation to the external costs of speeding?

4. In addition to acting as a deterrent for speeding, fines for speeding can also serve as a source of government revenue. How does this consideration impact the efficiency and equity of basing the fines on wealth?

March 04, 2010

Larry Murphy: Hall of Famer, Champion, Economist?

Over his NHL career, Hall of Fame defenseman Larry Murphy was praised for his reliable defense, gifted offense, and his immense hockey skill. But until now, I doubt he has been lauded for his economic insight. Perhaps even Murphy is unaware that his recent comments about head injuries in the NHL perfectly illustrate a real-world example of moral hazard. Speaking to an NHL.com reporter, Murphy explained current players rely on referees rather than their own decisions to keep them safe on the ice. "You always had to be aware of where you are in relation to the boards and you had to stay close to the boards and protect yourself that way," Murphy said. "Now the play is to turn your back to a guy and it's like, hands off.” While it may appear that Murphy was simply talking about how his sport has changed, his logic rests on the same clear principles economists use when analyzing many situations with the concept of moral hazard.

First, let’s start with a bit of back-story for those not familiar with hockey. The rules of the game allow for a great deal of contact, called checking, during play on the ice. Legally, only the player who controls the puck can be checked, and contact is allowed anywhere on the ice, even near the boards. As modern medical understandings of head injuries and long-term brain damage have advanced, the hockey community, and specifically the NHL, has made efforts to further protect its players. In the past three seasons, a large emphasis in rule enforcement has been made to prevent hits from behind that would send a player head-first into the boards without warning. There is no debate in my eyes that the intent of this policy should be supported in every way. The economics in all this stems from the fact that players have begun to play the game differently due to a change in incentives.

Murphy outlined how current players now take a more aggressive position on the ice because they no longer have to protect themselves; rather, the players know that the referees will protect them by calling penalties. From an economic standpoint, defensemen now face different incentives than they did before the rule change occurred. The risks associated with being hit from behind can be viewed as the cost associated with turning around on the ice. Since the new rules make those dangerous hits less likely, they essentially lower the cost defensemen face when deciding if they should put themselves in a vulnerable position. Economists refer to a moral hazard as any time a change in the larger economic system designed to protect an individual causes that person to alter his behavior to be more risky.

Perhaps the most vivid illustration of moral hazard comes from a quip by an economist who realized that as safety features in automobiles have advanced, so have the number of accidents. He stated that technological advances that have reduced the number of fatal car accidents in the country (e.g. airbags, seatbelts, etc.) would be just as successful as removing all safety features from a car and installing a giant metal spike in the center of the steering wheel that would be sure to impale the driver even in a minor crash. While the comment is tongue in cheek, its underlying point is very valid. Consider if this alternate proposal were true. I imagine that drivers would be much more attentive when driving and make many more efforts to drive safely, such as reducing their speed and avoiding distractions like cell phones. Whether talking about new rules on the ice or safety changes on the road, the theme is the same: as technology changes the rules of the game to make people safer, they will respond by worrying less about risks and engage in more dangerous behavior.

Discussion Questions:

1. Suppose the NHL is unhappy with the change in the style of play that has occurred since hits from behind have been more carefully officiated. What sort of rules or incentives could they introduce to continue to keep protecting players, but return play to the way it was before?

2. Consider the following scenario: A baseball pitcher is traded in the middle of the season. His previous team was the worst defensive team in the league. However, now he has been traded to the team with the best defensive players. In his first start for his new team, his coaches are baffled when he starts throwing many more aggressive and risky pitches that could be hit into play. How would you explain the change in the pitcher’s behavior to his coaches? What would you suggest they do if they want him to continue to pitch the way he did for his previous team?

3. Suppose the U.S. government passes new legislation that provides free healthcare to everyone in the country. As an economist, apply the principle of moral hazard to predict what will happen to the number of doctor visits that patients choose to make in a year.

February 26, 2010

How Much Does Public Policy Contribute to Long-Term Unemployment?

Arnold Kling quotes from a terrific piece by Eric S. Raymond:

We've spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker -- which meant the minimum revenue-per-employee threshold below which hiring doesn't make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it's not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can't pull enough weight to justify a paycheck; it's the marginal ones, the mediocre, and the mildly dysfunctional.

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February 25, 2010

Oil and Ingenuity

Five years later, We Will Never Run Out of Oil is still one of my most read articles and the source of the majority of the angry e-mails ...

February 24, 2010

How to Think About Keynesian Economics?

The international trade / public policy course I teach at Ivey is quite Keynesian. Next time I teach the course I will give my students Arnold Kling's How I Think About Keynesian Economics - it is absolutely brilliant. I particularly find this part useful:

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February 21, 2010

A Good But Fatally Flawed Argument For Higher Inflation

Paul Krugman makes an excellent argument based on behavior economics on the benefits of higher inflation:

I would add, however, that there's another case for a higher inflation rate -- an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it's really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts.

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February 19, 2010

Do We Need To Rethink Canadian Monetary Policy?

A terrific post at Worthwhile Canadian Initiative - Rethinking Canadian macroeconomic policy. A good read even if you're not Canadian. Most interesting is the suggestion is for the Bank of Canada to raise the target inflation rate from 2% to 4%. I am skeptical of our ability to measure long run inflation, but in the period of a year or so we can certainly do so.

I do not believe a higher inflation rate would cause too many economic problems so long as the Bank of Canada could keep it stable between a 3 and 5% bound. I can't imagine the menu costs problem is a great deal more of a problem at 4% rather than 2%. There would be some distributional effects - the Bank of Canada would earn more in seignorage, people on fixed incomes would lose, the Canadian dollar would depreciate (assuming our trading partners did not follow the same policy), so exporters would win but imports would become more expensive.

I agree with Stephen Gordon when he states:

My point of departure is 'If it ain't broke, don't fix it'. And it's not at all clear to me that the 2% target has failed as a policy... We could probably safely trade low and stable inflation against higher and stable inflation as an insurance policy against hitting the lower bound, but it's not clear that this choice is available to us... Did we hit the lower bound, or did we just graze it? The Bank never did see fit to actually implement a policy of quantitative easing, even though it (quite rightly) laid out the groundwork to do so.

One frustrating thing through this whole recession or crisis or whatever you want to call it is how many have equated monetary policy with setting interest rates. However, that is far from the Bank of Canada's or the Federal Reserve's only policy option, despite claims to the contrary by well known economists. As someone who teaches macroeconomics, I must take my share of the blame. For a generation we taught that monetary policy was simply altering the Federal Funds Rate. Occasionally we talked about altering the reserve ratio. I guess it is not surprising that so many believe the zero bound problem is such an important one - we never taught students that there are alternatives!

February 18, 2010

Cafe Hayek on Peak Oil

Some terrific links here: We're Not Running Out Of - Or Even Low On - Sources of 'Nonrenewable' Energy.

I am not a geologist, so I am not going to provide any commentary on physical reserves. What I can comment on is the bad economics behind the peak oil theory (see: We Will Never Run Out of Oil). Peak oil theorists are a lot like basketball's Washington Generals - they haven't got anything right since 1971.

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Of Course There's a Case for a VAT!

Tyler Cowen asks: Is there a case for a VAT?

I'm shocked he has to ask this - of course there is! The U.S. federal government has very few options ...

Did The Stimulus Work?

King at SCSUScholars on the evidence (or non-evidence) that the stimulus package "worked":

Most of what we write about the effects of stimulus are just that, "an attempt to gain knowledge." A bureaucrat writes down some numbers. Reporters and bloggers find flaws. Econometric models estimate the effects, but those models were used to propose the policy put in place. It's not likely those models would go back and say the proposed plan didn't work: Econometric models aren't built to do that: If the model has as a premise that future government spending will create jobs, it isn't going to tell you that past government spending did not. Meanwhile, those in political opposition will look to find contradictions when none really exist. (GDP growth can lead employment growth.) And people get angrier and cynical.

There is nothing wrong with saying we don't know. It might have worked; it might not have. What we know is there are between three and four million fewer jobs than a year ago, and the deficit is larger. We want to know more. We are trying to know more. And if the volume of studies since 2000 of the Great Depression are any indication, we'll still want to know more a century from now.

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February 16, 2010

Econolympics

As a recurring Winter Olympics viewer, I am counting down the days until the games begin on February 12. As an economist, however, I am intrigued by the number of tools an introductory economics course provides students with to analyze the effects of the Olympic games on the local economy of Vancouver. Three topics in particular come to mind that most students will encounter in a basic economics course: consumer spending, negative externalities, and cost-benefit analysis.

A recent article reports that the winter games are expected to boost travel-related spending by $800 million in Vancouver thanks to the incoming surge of general spectators, friends and families of competing Olympians, and athletes themselves to the metro area. But where does this spending go? Hotels, restaurants, and transportation are the likely candidates to benefit from such a surge, so the leisure and tourism industry should receive the largest boost. Although this positive shock to the industry is temporary, Olympics-related spending in 2010 is expected to account for 0.8% of Vancouver’s economic growth, trailing only housing investment and government spending.

However, accompanying this boost in tourism are some negative externalities on locals. While you may not always need a reservation to your favorite restaurant on a normal weeknight, the increase in the number of visitors to the metro area is likely to cause long lines for restaurant-goers. Even getting to your favorite watering hole might be no small feat, as traffic congestion and parking dilemmas are likely to pick up due to the additional vehicles on the road at any given time. Finally, increased pollution and trash creation are also likely to impose a negative externality on residents during the winter games.

Setting up shop for the winter games comes at a high price. Holding the Olympics requires that the host city build the necessary facilities, hire additional security, and provide extra health care in the case of injury to athletes or spectators. This is likely to weigh on the spending budget for Vancouver’s economy. Therefore, standard cost-benefit analysis would require you to determine whether the benefits gained from having the Olympics in a particular city outweigh the costs.

In short, there is a plethora of economic topics you could use as a conversation starter regarding the Olympics. So pick your favorite concept, and analyze away!

Discussion Questions:

1. How would you value having the Olympics in your hometown? Would the benefits you receive from this outweigh the negative externalities imposed on you by the winter games?

2. How do you think the Olympics will affect things like hotel and menu prices during the winter games? Do you expect such a short surge in demand to affect other local pricing? Why or why not?

3. State how the following introductory economic concepts could be used to analyze the effect of the Olympics on Vancouver: the multiplier effect, the Tragedy of the Commons, and demand shocks.

February 11, 2010

Economics Goes Viral

Nothing gets me more excited than getting people with no formal background in economics to see how econ fits in their everyday life. In light of that, imagine my surprise when my good friend Eva Funderburgh, a professional sculptor, wanted to share some economics with me! Apparently she’s not the only one spreading the video above, because, as of this writing, the viral video above created by TV producer/director John Papola and economist Russ Roberts has already received over half a million views on YouTube! Papola and Roberts’ video does a wonderful job creating a new way to take a traditional economic discussion and make it more approachable and entertaining to a much wider audience. In my mind, every economics student should watch the video, and hopefully share it with others as well. For those with a little more time, NPR has put together a very entertaining look at how the project came to be.

The economic thoughts and ideas represented in the video are spot-on, and the lyrics are a fair presentation of the differing schools of thought. While the deeper issues behind the video are much larger than anyone could take on in a single blog post, I do see a place that might deserve a small footnote. I do not mean to take anything away from all the great work that went into this video, but I feel that Keynes’ introduction might deserve a bit of further discussion:

“John Maynard Keynes, wrote the book on modern macro”

Depending on how you define “modern,” an economist who died more than sixty years ago may no longer fit the bill. I think it is totally appropriate to say that Keynes wrote the book on 20th century macroeconomics, but the research frontier of the field is moving beyond his ideals. Starting in the 1970s, some members of the field have explored more complicated models based on critiques of Keynes’ work by Nobel Prize winners Robert Lucas and Milton Friedman, among others. These researchers worry that some of Keynesian economics’ critical assumptions oversimplify the world and make the model invalid. While Keynesian theory is still widely taught today and used by many people advising current policy decisions, some macroeconomists now advocate for models that are built on individual decision making, rather than only analysis based on total expenditure.

These “micro-founded” macro models seek to explain trends in data that defy Keynesian theory. One difference between these schools of thought centers on if household consumption decisions can change in response to fiscal and monetary policies. For example, Keynesian theory assumes that policy does not affect the fraction of net income spent and saved and that the amount of economy-wide consumption will simply change by the product of the tax’s size and the proportion of a household’s after-tax income spent on consumption (often referred to as the marginal propensity to consume, or MPC).

On the other hand, extensions of the micro-founded model proposed independently by Frank Ramsey, Dave Cass, and Tjalling Koopmans suggest that if the government were to lower taxes and give households more money, consumers may choose to change their entire consumption-spending decision based on having larger net income, thus resulting in a new MPC. Whether or not the assumptions made by Keynes are valid (or small enough to be overlooked) is a matter of personal opinion, but as the research horizon of economics extends more than half a century after his writing, it appears that there is still work to be done before macroeconomics can perfectly explain an entire real-world economy.

Discussion Questions:

1. Why should we “fear” booms and busts? Why might booms and busts be good? Is there an “optimal” level of economic fluctuation?

2. Who do the bartenders “Ben” and “Tim” represent in the video? Why are they pouring liquor? What does the liquor represent?

3. The chorus of the rap has Keynes saying “I want to control markets” and Hayek saying “I want to set [markets] free.” Is either of those positions right or wrong in all circumstances? Under what circumstances is more government intervention in markets warranted, and under what circumstances should the government stay out as much as possible?

4. What are the critiques that Keynes offers of Hayek? What are the criticisms that Hayek proposes about Keynes? Does one side seem to have a much stronger argument than the other, or do they both suggest that the theory’s view of the world is still incomplete?

5. Do you think the financial crisis of the past few years was caused by people who thought more like Keynes or more like Hayek? Why?

Economics of Flu Vaccines

In the last few months, the H1N1 influenza virus, or “swine flu,” has been dominating the news, and many people are worried about access to flu vaccines or “flu shots.” (That is, unless you work for Goldman Sachs, who got first dibs. But don’t they always?)

Unlike other viral diseases, flu viruses constantly mutate, or change into new “strains.” A vaccine that works to protect against a specific strain one year will probably not work to prevent against a new strain the next year. Because of this, hundreds of hours of lab work are devoted each year to identifying specific flu strains, developing a vaccine against them, and then producing that vaccine in large enough quantities to distribute to the population.

This year, the efforts of flu vaccination labs have been split, with only some of the labs producing vaccines against the “regular” flu, and the rest working on vaccines against the specific H1N1 swine flu strain. Because of this, the supplies of both of these types of vaccines are greatly reduced this year in comparison to previous years.

Given the scarcity of both traditional and swine flu vaccines, how should the existing vaccine be distributed? If the goal is to maximize societal health, the flu vaccine should first be given to those whose health would benefit from it the most, who are people at risk of complications and death from the flu, including young children, the elderly, and the immuno-compromised. On the other hand, if the goal is to minimize the cost of the flu to an economy, the most productive and important members of society should get the first vaccine.

To a certain extent, extreme examples on both ends are small in number and easy to take care of. For example, health care employees are at greater risk of contracting any disease and, consequently, of infecting those whose health is vulnerable. So it’s clear they should be the first in line to get the vaccine. But what about people who don’t have such critical jobs (and keep in mind that you probably qualify as one of these people)? This topic relates not only to the health of the economy, but your personal health as well.

Discussion Questions:

1. Do you think that the goal of those who control flu vaccine policy should be to get the best health outcome, to minimize the cost to GDP, or some combination of the two? What public health policies would achieve your preferred policy goal?

2. Assume that society does want to maximize productivity in dollar terms rather than health outcomes. Now, take into consideration the fact that those who do get sick might require expensive medical treatment, the cost of which will be partially borne by society. How does this alter the analysis of who should receive the vaccines?

3. Economists often are fond of markets as allocation mechanisms because the forces of supply and demand determine a price that allocates goods to those who are willing to pay for them the most. How would a market for flu vaccine work? Why is it different from a market for non-life-affecting goods and services, like books or cars?

4. Firms (especially ones with high-productivity employees) value their employees’ health. It is estimated that that the total yearly economic cost of the flu in the U.S. is over $80 billion. Many companies have started to recognize this and have made attempts to protect their own economic interest by paying for or providing flu vaccines to their employees. As a result, employees who otherwise may not have been vaccinated (since the unsubsidized cost exceeds the expected health benefit) are more likely to accept the free vaccine. Is this efficient? Is it equitable?

5. Vaccines have a limited shelf-life – that is, they can only be used for a particular period of time if they are to be effective. For this reason, the timing of development, production, and distribution of flu vaccines in the United States is largely based on the pattern of the flu season in previous years. Go to Google Flu Trends to see a graph comparing the incidence of flu activity in the United States this year with previous years. How does the current flu season differ from previous years? If you were in charge of setting production policy for 2010, what might you change in order to produce the correct amount of vaccine for each strain of flu at the appropriate time?

January 12, 2010

Fed Chairman Bernanke Chosen as Time Magazine's Person of the Year

In a December 16, 2009 article, Michael Grunwald details the reasoning behind Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year. The article delves into Bernanke’s background such as his working class roots and the consensus that he is “a leading scholar of the Great Depression.” It also details the unique nature of the crises of 2007-2008 to which the Fed responded in creative and beneficial ways.

Chairman Bernanke is currently awaiting a Senate vote to be confirmed for another term as Fed chairman. The vote is being held up by a Senator from the far left and another from the far right. The Time article is largely critical of those who oppose Bernanke, portraying them as nitpicky demanders of perfection who fail to realize that the Federal Reserve’s actions over the past two years most likely “prevented an economic catastrophe.” It is apparent that the Fed, like most people caught up in benefiting from the bubbles of those years, took too long to recognize the danger signs. Yet, the desire to criticize and rein in the Fed’s power now that the crises are largely history is short-sighted and will be harmful to long-run inflation rates. Most economics textbooks cover the extensive research that shows that greater central bank independence goes along with more stable and lower inflation rates.

As Bernanke is quoted in the article, "We came very, very close to a depression ..." That is because in the fall of 2008, the collapse of the financial sector and asset prices looked remarkably similar to the events that marked the start of the Great Depression. However, thanks largely to the bold actions of Bernanke’s Fed, the US experienced a severe recession rather than a depression. That distinction is significant and reason enough for the awarding of Time Magazine’s honor. Grunwald’s article gives evidence that Bernanke’s knowledge and research into the Depression made him the perfect man to hold one of the most powerful positions for influencing the world economy. As written by Grunwald, “He didn't just reshape U.S. monetary policy; he led an effort to save the world economy.”

Admittedly, the severe recession has caused significant hardship to billions of people. However, based on economists’ consensus definition of recession, the US economy has been in recovery and thus out of recession for several months now. Indeed, the figure to the right shows a picture of an economy that will most likely experience positive net job creation in coming months. Such positive net job creation has not occurred since the recession began in December 2007. This scenario looks much rosier than could have been hoped for back in the fall of 2008. This is an important reason why Bernanke is expected to be confirmed for another term:

Price for Will Ben Bernanke win Senate confirmation for a second term as Fed Chairman? at intrade.com

Finally, Bernanke’s critics need to understand that macroeconomics is not a true science. Despite the mathematical rigor required to publish articles in the field, macroeconomists cannot perform true experiments with a nation’s economy. Therefore, there is no comparison “control group” of a US economy run by someone who chose not to bailout AIG or who refused to dramatically expand the Federal Reserve’s balance sheet with risky assets. We will never know with any respectable precision what might have happened if it had not been for Bernanke’s bold leadership.

Perhaps someday a scientific genius will invent a time machine so that Bernanke’s critics can go back to the early 1930s to experience a collapsed economy. Most economists agree that the experience of those years is the best counterexample to show what we would have experienced without bold action by the Fed and our elected officials. Let the critics be reminded that the demand for perfection is all too often the enemy of good governance.

Discussion Questions

1. What is your reaction to Time Magazine’s choice of Federal Reserve Chairman Ben Bernanke for Person of the Year? Why?

2. Suppose that you were able to cast a vote in the Senate on Bernanke’s reappointment. How would you vote? Why?

3. Imagine you were currently chairperson of the Fed. What, if anything, would you be doing differently?

4. Do you approve or disapprove of the movement to rein in the power of the Federal Reserve? Explain.

December 21, 2009

Who Says There's No Such Thing as a Free Lunch

One of the most popular sayings associated with the “dismal science” of economics is “There’s no such thing as a free lunch.” The major idea behind this phrase is that even if you aren’t given a bill to pay, there is always an implicit cost associated with any action.

The economic concept supporting this statement is that of opportunity cost, which is defined as the best foregone alternative. Simply stated, it’s what you give up in order to do something else. Consider the following example: you have $10 that you can either spend on a movie or a pizza. The opportunity cost of going to the movie is therefore the pizza that you give up by attending the movie, and vice versa.

But what about when a good is free to consume? What is the opportunity cost in this situation? Usually in cases like this, the opportunity cost is associated with the value of your time or some other implicit cost. For example, if you work hourly, the time it takes to wait in line for a “free” offer is time that you could’ve spent working and earning money; “free” in this case simply means that there is no explicit monetary cost, but it says nothing about the implicit costs of waiting for the item. Another common example is when you receive a “free” weekend getaway, but the cost is that you have to sit through a 2-hour sales pitch with a timeshare organization.

I was thus astonished when I received something truly for free a few weeks ago at Auntie Annie’s pretzel shop. I was at the mall with my friend when the two of us realized we were getting pretty hungry. Wanting to avoid eating a fast-food meal at the food court, we decided to each grab a pretzel at Auntie Annie’s to hold us off for awhile. As we were waiting in line, one of the workers started giving out samples. My friend suggested that we try them since the line was pretty long and we were quite hungry. As I walked over to receive the samples and my friend stayed in line, the worker also instantly handed me a coupon: BUY ONE PRETZEL, GET ANOTHER ONE FREE. Having already committed to wait in line to purchase two pretzels before I got the coupon—it was my friend’s birthday so the two pretzels were on me—I actually received a free pretzel! After consulting with some other economists, none of us could find an implicit cost that I incurred in order to receive the free pretzel (though you could argue that my time to write this blog post is an after-the-fact cost associated with the pretzel purchase). In short, who says there’s no such thing as a free lunch?

Discussion questions:

1. Can you think of a time in your life where you actually received something for free? That is, there were no explicit monetary costs or implicit opportunity costs.

2. If I was just passing by Auntie Annie’s and received the coupon, why would the second pretzel not be free? What opportunity costs would be associated with using this coupon in that case?

3. Suppose you have a “Buy 10 pretzels, Get One Free” card for Auntie Annie’s. Does it distort your behavior in any way? Is the 11th pretzel actually free?

December 08, 2009

Leggo My Eggo! Really!

It’s hard to miss the barren shelves in grocery stores due to a pending Eggo Waffle shortage. The recent run on the popular breakfast food is one of the few times when a very clear-cut piece of microeconomics hits home enough to capture the attention of people without an economics background. What fascinates me the most about this story is how people with no interest in economics still have the shortage on the tips of their tongues. I believe there are two different microeconomics concepts at play here: one covered in nearly every introductory economics class and the other a deeper assumption that deserves more discussion than it normally gets.

First, the shortage in stores essentially comes from Kellogg’s self-imposed price ceiling. It seems that Kellogg has decided to continue selling Eggo Waffles at the same manufacturer’s suggested retail price (MSRP) rather than raising it to reflect a decrease in supply since two of their four production plants are out of commission. By leaving the price where it is, there is a shortage in the market because more people would like to buy at the MSRP than Kellogg wants to serve. This decision seems odd to economists because it introduces inefficiency. The price ceiling creates a shortage in the market which leads to the inefficiency. On the corresponding graph, you can see the minimum amount of deadweight loss (DWL) in the market for Eggo waffles given this shortage; the DWL could be larger if those consumers with a lower willingness to pay are the ones who end up buying the existing waffles. One possible reason for the price ceiling is that Kellogg does not want to appear like it is trying to profit off of its own misfortune (the Atlanta plant closed due to heavy rain) and planning (the Tennessee plant closed for repairs).

Operating under typical economic assumptions, unless Kellogg or individual stores decide to raise the price, the shortage in grocery stores should continue. This means that some consumers who would be willing to pay more than the MSRP will be unable to get waffles. Which customers end up with the waffles will only be a matter of timing and luck, and it is very likely that some people who are unable to purchase waffles will value them more than others who buy a box they find on the shelves. One common explanation economists offer about how this situation will be resolved is the emergence of a secondary market or black market. USA Today interviewed Joey Resciniti, a shopper who bought one of the last boxes, who said, “I told my husband that maybe I need to put them on eBay." In secondary markets, people who are lucky enough to buy the boxes at the MSRP are able to turn around and sell them to an unlucky person who is willing to pay above the sticker price but was unable to buy any waffles in the store, exactly what Ms. Resciniti suggested.

The second economic concept at play here is the competitive hypothesis. The classic supply and demand analysis used above rests on some core assumptions of economics, such as rationality of agents, complete information, and the competitive hypothesis. When any of these assumptions are broken, we need a different model to understand what will happen in the world. The competitive hypothesis can be summed up by the assumption that a consumer believes that if they decide to buy a product they can afford, they are able to get it. For example, if I worried that the gas station near my house would run out of coffee before I get there in the morning, I might behave much differently. The same can be said of Eggo Waffle consumers. In the USA Today article, Ms. Resciniti also said, "We have eight of them, and if we ration those—maybe have half an Eggo in one sitting—then it'll last longer.” If consumers believe they will have a hard time finding an item they want to buy, they may instead chose to change what they want to buy. If for example, Ms. Resciniti does start to ration her waffles, then she may need to buy more oatmeal or fresh fruit for breakfast on other days. If consumers start rationing because the competitive hypothesis does not hold, a more complicated model is needed to correctly determine equilibrium behavior.

Discussion Questions:

1. What should the shortage of Eggo Waffles do to the demand for other brands of waffles? What about the demand for maple syrup?

2. Think of some secondary markets you are familiar with, like eBay, ticket scalpers, or craigslist. How are prices determined in these markets? If a secondary market for Eggo Waffles forms, what can you say about the equilibrium price?

3. If a black market for Eggo Waffles did emerge, who would be worse off at the equilibrium? Would anyone be better off?

4. Think of some other real-world examples where the competitive hypothesis is violated. What would need to be added to the basic supply and demand model to accurately predict what people do when they aren’t sure if the store will have the goods they want in stock?

November 13, 2009

Towards Gasoline Market Efficiency

For the past year or so, I’ve been using the same website to save money on gasoline. The parent site of the one I use is Gas Buddy. Commuting to work I spend about $130 per month on gas, or roughly $1,550 per year. There are several reasons for this. Gasoline is one of my biggest work-related expenses, California gas prices are consistently among the highest in the nation, and I’m also an economist. I feel impelled to fill up at the station offering gasoline at the cheapest price, without going significantly out of my way to get there, of course.

Economic theory would typically classify a local gasoline market as a competitive market, yet, I often see differences of 20-25¢ per gallon for the same gasoline grade among nearby stations. Why does the standard model of competition not seem to apply here? Because most consumers probably accept the notion that gasoline of the same grade is nearly identical regardless of the station, competition should drive prices to the same competitive market clearing price. However, gasoline retailers often try to differentiate their product through methods such as affiliated credit cards, which give the holders a discount when they purchase gas with the card from a retailer that is part of the corporate chain. Another strategy they use is to offer a discount on a car wash to consumers who have purchased gas at their station. Nevertheless, it doesn’t seem like such differentiation would be important enough to keep the market from a perfectly competitive equilibrium.

What else might explain these facts? One possibility is that some gas stations employ a strategy of luring customers into their stores with gasoline sold below cost, to sell them high margin convenience goods. Another possibility is that some stations enjoy location advantages that allow them to command higher prices, such as the first station located off of a high traffic freeway exit. Nevertheless, the explanation that I prefer is that gasoline consumers do not have all of the information regarding prices of gasoline in surrounding areas. Websites like Gas Buddy help alleviate this informational deficiency in a nearly costless way thanks to its gas price maps and price lists. As more people use the site, the local gasoline markets covered should theoretically approach a perfectly competitive equilibrium.

Where does the website get its price information? People who are interested in either winning gas cards or making the gas market more efficient have accounts on the site and post gas prices there. Although there are obvious benefits to the information provided by Gas Buddy, there may also be drawbacks to the site. Besides the obvious damage to the profits of gas station companies, there are likely to be people who misuse the information. For example, imagine the user who drives several miles out of his way to fill-up on gas that is only 5 cents cheaper per gallon than the nearest station. This person may save $.75 or so, but environmental costs of the extra driving distance, the cost of the additional gasoline used and vehicle wear, and the value of the person’s extra driving time are likely to sum to significantly more than $.75. So, while getting the cheapest gas is great, remember that there are more to costs than just retail prices.

Author’s note 10/19/09: During her review of this post, Kasie Jean mentioned the possibility that consumers may have gasoline brand loyalties. The author found this unlikely but later received advice from a trusted mechanic regarding the benefits of Chevron with Techron gasoline. The author owns no securities issued by the Chevron corporation.

Discussion Questions

1. Now that you are aware of a gasoline price website, would you use one to locate the cheapest nearby gas prices? Why or why not?

2. Think about the characteristics of perfectly competitive markets. Do you believe that gasoline markets are perfectly competitive? If not, what are some aspects, besides those described above, that keep them from perfect competition?

3. In 2007, a study concluded that the optimal tax on gasoline was $2.10 per gallon. What is your opinion of this conclusion? Do you think that gas price websites would be viewed more if gasoline taxes were significantly higher?

4. In what other ways has the internet made markets more efficient or perhaps less efficient?

The 2009 Nobel Prize in Economic Sciences

A few weeks ago, the committee that awards the Nobel Prize in Economic Sciences announced the winners of the 2009 award. The prize winners were Elinor Ostrom of Indiana University and Oliver Williamson of the University of California, Berkeley. The committee awarded this year’s prize to these economists for their work in economic governance. For Ostrom, the committee cited her research on the methods that actors use to avoid over utilization of common property resources. Williamson’s research provided theory on the conditions under which firms are better suited for economic organization than markets.

Ostrom found numerous examples in which actors had successfully avoided the “tragedy of the commons.” Standard theory had found that common property resources are too often exploited to the point of inefficiency and depletion. Ostrom examined numerous case studies in which actors avoided resource depletion through various governance structures. Much of her insight involved applying theories of repeated games in which actors may punish others who over extract common property resources.

Williamson provided theory to explain firm organization and conditions under which economic activity is better suited to take place within a firm than in a competitive market. An important basis for his theory involved the timing of work and bargaining. For instance, agreements made prior to work being performed can break down once the work is completed due to a change in the bargaining position of the actors. When the work is highly firm-specific then the actor who completed the work may find himself in a weak market position with only a single prospective buyer. In contrast, by arranging activity within a firm, the ex-ante and ex-post market issues are avoided. Similarly, the firm provides a clear hierarchy of authority which can help to clearly dictate the work that must be done. However, Williamson’s research also highlights an important disadvantage of firms: authority is prone to abuse.

The research of both Nobel Prize winners provided a richer framework for analyzing economic activity through its insight into governance. To learn about their research in greater detail, see the scientific background paper provided by the Nobel committee.

Discussion questions:

1. Describe some ways in which common property resources may be governed for the long term benefit of stakeholders. What are some of the difficulties involved in such governance?

2. What are some of the other advantages or disadvantages of firms, when compared to markets, which are not described above?

3. What other economic governance issues do you observe? Are these issues dealt with in a way that improves or worsens economic efficiency?

November 06, 2009

Virtually Bankrupt

The space-themed video game EVE Online is described as a massively multiplayer online game (or MMO). In other words, the game is played over the internet in a virtual world where all (or nearly all) characters are controlled by users who are able to interact with each other. EVE Online separates itself from many other MMO games by offering an incredibly robust and fascinating economy, complete with its own currency of InterStellar Kredits (ISK), in-game supported contracts (that cover loans, trade agreements, and hiring other players to complete tasks for a fee), user-created and managed banks, and trade between players (in both money and goods). And if the game wasn’t realistic enough, the in-game universe even mirrored the troubles on Wall St. when the economy was hit by a bank scandal!

In July 2009, a manager of EBank, the largest in-game bank, embezzled 200 billion ISK then turned around and sold the in-game currency outside of the game for a real-world $5,000. Once news of the scandal became public, many depositors became concerned about the bank’s stability and decided to withdraw their money. These fears created a bank run that left EBank short 380 billion ISK. The chairman of the bank attributed this shortfall to both the embezzlement and further mismanagement that stemmed from ignoring safeguards and controls. Only a month later, the bank faced a total deficit of 1.2 trillion ISK and announced that it was freezing withdrawals on current funds and suspending all interest payments until it reached an equity status of 90%. As of this post, depositors are still awaiting the next announcement of EBank’s policies.

Many parts of the EVE online environment closely mimic economic events in the real world, but I do not think a bank run like this could be observed in America today because of the modern level of regulation. That said, the circumstances that led to the game’s financial crisis do mimic real-world occurrences from the early twentieth century. EBank’s problems stem, at least in part, from the fact that it was left to self-regulate and that its actions were largely unmonitored. Historically, similar conditions led to the banking crises of the 1930’s. These wide-spread bank failures led to increased legislation and controls on banking which established three main systems that prevent bank runs today: deposit insurance, capital requirements, and reserve requirements. If members of the game’s community wish to restore a reliable banking system, it seems likely policies that mimic one or more of these systems would be implemented.

However, if banking or using fiat money (currency with no underlying value) is viewed as unreliable, let me propose some other responses the game’s community could have. First, and most simply, a barter economy could develop as the main source of trade. In this scenario, any player seeking a good would need to find another player willing to give that good away in exchange for other goods. Obviously this sort of economy comes with drawbacks, as trade partners take time to find and each trade would need to be negotiated. This barter economy could expand to a commodity money trade system: where all goods are expressed in terms of multiple or fractional values of a single good with intrinsic value. (One of the best known examples of an economy like this occurs in prisons. Inmates are not allowed to hold money, but a system of trade develops around a single good, often cigarettes or energy bars.) Since this underlying good has a use, unlike fiat money, a bank often has no role since players can put money not spent to other uses.

The final system I’ll suggest is trade based on credit. For a system of trade that is built entirely on credit to support long-term trade, all traders in the market must know each other’s reputations prior to trading with any partner (even if they have never met). In the modern world, having a record of every person’s reputation instantly is simply not possible, so we do not observe this kind of trade. However, by definition, all trades occur in a game played over the Internet, so it seems perfectly practical for all players to always have access to websites at the same time. To support a credit trade system, a webpage could track the trading desires of each player (uniquely identified by their in-game name) as well as their reputation. Any player who does not fulfill his or her end of a deal could then be monitored and either punished or simply barred from future trade. All honest players would then be left to agree to turn over a good they don’t need to a player, and in exchange receive what they desire from someone else on credit. One further potential layer to make this more practical would be for all trades to go through a neutral third party (the same way people exchange valuable goods in escrow in the real world). This third party could charge a small fee to make a secure transaction and to maintain the outside website. The third party would also remove the potential for traders to attempt to blackmail each other by falsely reporting dishonest trades in order to sabotage reputations.

Discussion Questions:

1. How did rational expectations contribute to the bank run? Think about whether or not a bank run would have happened if each individual believed that everyone else had faith in the bank.

2. Who was hurt the most by the bank run: debtors, creditors, or people with no ties to the bank?

3. Based on the sale of embezzled money, find the U.S. Dollar-ISK exchange rate. How would the game’s economy change if purchasing in-game fiat with U.S. dollars was allowed?

4. Suppose one player proposes using an entire ship as the unit for commodity money, and another player suggests using one ton of steel as the unit. Assume that half a ship is useless, but that half a ton of steel is half as useful as a full ton. Which of these is a better proposal for commodity money? Is it important that money is divisible?

October 15, 2009

Bags Don't Fly Free

As a frequent Southwest passenger, paying for checked baggage is not quite commonplace for me yet, since Southwest is a firm proponent of bags flying free. As any traveler is well aware, many airlines now charge an additional fee for checking baggage, averaging roughly $20 per bag. However, I was initially surprised when I recently checked in online for my US Airways flight, and was offered the option to declare the number of bags I’d be checking and thus pay a reduced price of $5 less per bag.

Although at first glance you might be tempted to think this is a classic example of price discrimination, further examination will reveal other possible explanations for this pricing disparity. If price discrimination were the sole justification for the two different prices, this would mean that US Airways is trying to extract additional consumer surplus (and thus increase profit) by segmenting the market into those who check in online and those who don’t. Based on the pricing differences, this would mean that US Airways believes that those passengers who check in online have a lower willingness to pay than those who check in at the airport.

However, there is reason to believe that many passengers who check in online might actually have higher willingness-to-pays than other passengers, as they are likely to be business travelers who are either in an office with wifi or have internet connections on their phones. Since business travelers tend to have a more inelastic demand for travel services (mostly since they do not directly incur the expense), an argument could be made that this market segmentation isn’t the most profitable.

An alternative, and more plausible, explanation for the two different prices is that US Airways is creating an incentive for passengers to declare the number of bags they’ll be checking and pay for them ahead of time. Incentives are at the core of economic analysis, so this result isn’t incredibly surprising. By charging a lower price to those passengers who “check bags” ahead of time, US Airways is inducing passengers to plan ahead. Some possible justifications for why they would want to do this are as follows:

Paying for bags ahead of time reduces the wait time for passengers seeking to check in at the airport. This makes customers happy and more willing to fly US Airways, and perhaps lessens the need for extra employees working the check-in booths.
If passengers declare the number of bags they are checking ahead of time, US Airways can more accurately predict the number of bags that will be on the flight and perhaps the need for overhead space in the cabin.

Discussion Questions:

1. If US Airways’s goal is to increase profits through price discrimination, is the market segmentation they are using appropriate? Can you think of any other existing ways that airlines segregate their markets?

2. How does this information friction about the price of checked bags affect efficiency in this market?

3. Can you think of other markets where different pricing mechanisms exist in order to incentivize a particular action, such as cities charging for trash removal but providing free recycling services?

September 28, 2009

Rethinking Rationing

“There need to be some guarantees that the government is not going to take away the health care decision-making from a patient and their doctor. I think we need to start with the guarantee that there won’t be any government rationing or discrimination of any kind.”

-- Representative Eric Cantor (R-Va.)

As demonstrated by the quote above, the word “rationing” doesn’t sit well with proponents of free markets. While the goal of rationing health care is to control costs by restricting insurance coverage for expensive procedures that yield relatively low benefits, doing so would also limit patients’ freedom to choose treatment options that might otherwise be available under their private insurance plans. As you learned from the basic supply and demand model, restricting the supply of a good can preclude the occurrence of transactions that could benefit both the producer and the consumer. However, the fact that the market for medical treatment is already substantially distorted by the insurance system complicates the standard supply and demand analysis.

When receiving medical treatment under most insurance plans, patients pay a copayment that accounts for only a small portion of the true cost of the treatment. Their insurance company pays the remainder, using the money it receives from monthly payments from all of its insured patients. This monthly payment is known as the insurance premium. While the monthly premium varies with different plans and individual circumstances, the amount charged is largely a function of the total number and cost of insurance claims by insured patients – as the number and cost of treatments covered by insurance companies rises, so too do the premiums paid by the insured.

While the copayment on an expensive procedure may seem like a fair price to the recipient of the treatment, those indirectly paying for the remainder of the cost in the form of high premiums may not consider it such a bargain. In economic terms, the marginal private benefit of treatment is lower than the marginal social cost paid by all the insured.

The benefit to insurance is, of course, the fact that it disperses large risks over a large number of individuals. This increases the utility of risk averse individuals who prefer paying the monthly premium as opposed to the possibility of needing serious medical care and facing enormous costs.

An additional complication to normal cost-benefit analysis is the difficulty of putting a dollar value on life and health. While it is hard to quantify the benefit of a procedure, it is simple to consider the opportunity cost of a procedure: every dollar that is spent on one patient is a dollar that can’t be spent on another. Britain’s National Health care System uses the QALY (Quality-Adjusted Life Year) as a measure of the benefit a medical treatment will provide in terms of the number and quality of years it will add to a patient’s life. Comparing the ratios of QALYs per dollar cost across treatment options, cost-utility analysis helps economists determine the allocation of health care resources that provides the most benefit to society, also known as allocative efficiency.

Markets without distortions are allocatively efficient by nature. In efficient markets, the standard conclusions about rationing can be applied. In the market for health care, however, risk aversion leads people to demand insurance which distorts costs, benefits, and allocative efficiency. While it is beyond the scope of economic analysis to determine whether the ideas behind rationing can be transformed into successful health care policy in the U.S., it can help to illuminate the myriad of economic issues involved.

Discussion Questions

1. President Obama has talked about lowering copayments and bringing down total costs for health care coverage. Based solely on the simple graph presented above, is this a reasonable claim? How could the use of rationing help make this claim more attractive?

2. From a standard economic standpoint, insurance causes “overconsumption” of health care because the marginal benefit of treatment to the patient is often lower than the marginal cost to society. However, the benefit of care is perhaps underestimated, since it does not take into account the positive externalities of treatments like vaccines. How do positive externalities help justify this “overconsumption” in the health care market?

3. Moral hazard refers to a situation in which a person who is protected against risk might behave differently from the way he or she would behave if fully exposed to the risk. Relate this concept to the effect of insurance on health care costs. How might having health insurance affect an individual’s decision to take care of their health? How could moral hazard in the health care market potentially be discouraged?

September 08, 2009

I Read the News Today, Oh Boy.

07.07.07 marked the Live Earth festivals to combat Climate Change. 08.08.08 saw the opening of the Olympic Games in Beijing. 09.09.09? This date, my friends, belongs to Beatles fans. The number 9 has long been associated with the Beatles, specifically John Lennon. For this reason, this date was chosen to release the newly re-mastered Beatles catalogue and the video game "The Beatles: Rock Band."

Since my primary interest is getting my hands on the re-mastered box set, I figured I’d just pre-order it on Amazon so it would arrive straight away. However, I was quickly thwarted by this message indicating that Amazon was out of stock. After further investigation, I found their explanation for this lack of inventory:

“Collectible box sets take time to manufacture, and initial quantities must be determined well in advance of the product release date. In this case, demand has far outstripped initial supply…While we predicted that the box sets would be highly popular items, we had to work with the inventory allocated to us by the manufacturer.”

No problem, I’ll just call my local Best Buy; they should have plenty in stock since it’s a large store in a big city, right? Wrong. The manufacturer allotted Best Buy just eight copies! At least they could have kept with the theme and given them nine!

While it’s possible that the manufacturer just underestimated the demand and is doing all they can to make more and get it into stores, I’m skeptical that they could really be so off the mark. The Beatles have sold nearly a billion records worldwide, their albums hold four spots in Rolling Stone’s all-time top ten, and come on… they’re THE BEATLES.

A more plausible explanation is that this may be a deliberate shortage, designed to make headlines about its popularity and stir up new eventual sales as more of the product is slowly released into stores and onto websites. Tim Harford discusses other possibilities in this Slate post, in reference to the Xbox 360 shortage of 2005.

Discussion Questions

1. Can you think of other examples of supply shortages which successfully generated press?

2. The Beatles catalogue is not available digitally largely due to their dispute with Apple Computer over use of the name “Apple” in the music business; this is because the Beatles had a corporation called Apple Corp (pun intended). How might the fact that the music is not available digitally impact their CD box set sales?

3. How might the shortage of Beatles box sets affect the resale market for this item on websites like eBay, Craigslist, etc? Does this “scalping” of sets achieve allocative efficiency?

4. How does patience (normally referred to in economic models as the parameter β) affect the profitability of this approach to releasing a collectible set?

5. Despite the shortage for the Beatles box set, the price for the good seems relatively consistent across retailers. Why might the manufacturer want to keep prices constant over time? How could this be profit maximizing?

September 03, 2009

Trash Talk

I recently moved from Philadelphia, where trash and recycling pick-up are included in property taxes, to a smaller town where my taxes cover recycling but not trash pick-up. The waste management companies where I currently live offer several pricing options for garbage collection:

1. Pay-by-weight at the dump: The catch is that there’s a minimum $15 fee, so you need to generate lots of garbage to make this worthwhile.

2. Pay-by-the-can pick up: You pay a nominal charge, usually about $3-$3.50, per 33-gallon trash can. Under this option, your fee fluctuates directly with the amount of garbage you produce.

3. Flat rate: You pay a flat monthly fee of say $10, and this includes only 1 trash can pick-up per week. If you have more than one can, you pay an additional fee, but if you don’t have any trash, you will not receive any credit for future collections. This service makes sense if you reliably generate 1 can per week.

I decided to go with option two: pay-by-the-can pick up. Each Tuesday morning, I put out my 33-gallon trash can (if it’s full), and the lowest cost trash company I could find ($3.00 per can) comes to collect. The window in my home office overlooks the road, so I typically hear any cars and trucks that drive by. To my surprise, I heard five different waste management trucks drive by my house in one day! My immediate reaction was: How can this be efficient? Surely there are economies of scale to trash pick up?

Consider the following simple example. Suppose there are four houses located along Country Road. The road is a one way street, so the only way to drive by any of the houses is to drive east along Country Road, passing by all four houses with any trip. If a trash collection company is hired to pick up trash for House 1, what are the additional costs associated with picking up trash at any of the other three houses?

One could argue that the additional costs are negligible. In other words, the cost of picking up trash at the first house is high because you have to have a trash collection truck, a worker to drive it, a worker or two to collect the trash, fuel, etc. But once you’re out on Country Road, the marginal cost of collecting trash from the surrounding houses is just the wear and tear on the truck’s brakes, a slight wage expense to your workers, and the cost of taking care of the additional waste (such as bringing it to the local dump).

It’s probably true that the average cost curve for a trash collection company is not strictly downward sloping since once a certain number of houses are served, the company would need to obtain additional trucks and workers. I would still argue that there are economies of scale for trash collection companies once they enter a particular neighborhood. It seems silly to me that in a given week I see at least ten different trash collection trucks drive by my street.

Wouldn’t it be more profitable for all companies if they each monopolized a small region? The additional cost of collecting trash from a neighboring house must be smaller than the additional cost of servicing a house in an entirely different neighborhood. Even without changing prices, revenue would probably remain constant while costs would decline, leading to higher profits for each firm.

Discussion Questions

1. What kind of market structure does trash collection represent? If the city decided to step in and control trash collection for my town, what pricing options might it choose?

2. Do consumers benefit at all from having several waste management companies to choose from with different pricing schemes?

3. If the city allowed waste management companies to “monopolize” particular neighborhoods, how might this affect the market? What are the effects of competition on prices, welfare, and pick-up quality (such as timeliness, effectiveness, etc)?

4. Given the number of trash collection companies in my neighborhood, what does this say about the profitability of this industry? If the town does not have strict anti-trust laws, would it be profitable for one firm to buy out all the others? What problems might arise if only one firm controlled trash collection for my entire town?

August 21, 2009

The Demand for Natural Light

I once participated in a blind taste test involving eight light beers. Faced with eight un-marked cups, I was certain I’d prefer the priciest, and presumably classiest, light beer in the field. Alas, I chose Natural Light. For me, the cheap and down-market “Natty Light” is the choicest light beer on offer. But people who have (or think they have) a more refined palate gladly pay for a more expensive option like Heineken or Bud Light.

With the economic downturn, however, cash-strapped beer drinkers appear to be switching to cheaper beers like Busch, Natural Light, and Keystone. As average incomes declined in the United States, sales of these cheaper options have increased substantially. Meanwhile, sales of ‘premium’ brands like Budweiser and Heineken were reportedly down 18% and 14% respectively from a year ago in July 2008.

Discussion Questions

1. If, other things being equal, a reduction in average income leads to an increase in the demand for Natural Light, what type of good is “Natty Light”? If, during the same period, the demand for Bud Light declines, what type of good is Bud Light?

2. What additional information would be useful if you were trying to use changes in average income and beer sales to determine whether a particular brand of beer was a normal or inferior good?

3. What strategy might a large beer company adopt to protect itself from an economic downturn?

4. Information Resources, Inc. reports that sales of Bud Light were down about 7% from a year ago in July 2008. Let’s assume that the price of Bud Light is fixed, so that the percentage decrease in sales is the same as the percentage decrease in the quantity of Bud Light demanded. Assume that personal income per capita in the United States declined by about 3.4% over the same period. Keeping in mind that factors other than income probably affected Bud Light sales over this period, use these numbers to come up with a rough estimate of the income elasticity for Bud Light. Is the income elasticity of demand for Bud Light elastic or inelastic? Would you characterize Bud Light as a luxury or a necessity?

August 13, 2009

I'd Like to Bid $1, Bob!

In a previous post, we used The Price Is Right as a starting point for a discussion of probability theory and decision-making analysis. But the opportunities to learn from the show hardly stop there. Another practical game theory application can be observed six times a show – when contestants “bid” in an effort to win a prize and to get on stage from “contestants’ row.”

Each time the game is played, four contestants are shown a prize without being told its price. Each contestant takes their turn announcing a single bid, or guess, as to the value of the prize (rounded to the nearest dollar). All bids are known to all the other players as soon as they are made, and no player may bid the same value as another. After all four bids have been made, the player whose bid is closest to the actual retail price of the prize without going over wins both the prize and the opportunity to come on stage and play a “pricing game” in order to win more valuable prizes. If all four contestants guess a price higher than the price of the prize, all bids are erased and the game is played again. In the case that one of the four players actually guesses the exact value of the prize, they receive an additional cash bonus. For the remaining purposes of this analysis though, we will ignore the cash bonus and simply focus the analysis on a strategy to maximize the chances of winning the prize and going on stage. The game is most easily modeled from the perspective of the fourth player, so we will base our analysis on his perspective.

Suppose the first three players bid b1, b2, and b3; assume these are listed in increasing order because only the value of each of the first three bids matters to the fourth player, not which bid was made by which player. The fourth player will then try to pick a value, b4, that is priced closer to the true price of the prize (call it P) than b1, b2, and b3, without going over. Assuming none of the other three players has bid the exact price, P will fall in one of the following four intervals: (1,b1-1), (b1+1,b2-1), (b2+1,b3-1), (b3+1, ∞).

The optimal strategy for the fourth player is to pick what range they think contains P, then bid the lowest value in that range. It is important to note that any bid higher than this but within the same range does not help him, but it does increase the chance that he goes “over” and loses automatically. Suppose, for example, that the fourth player believes that P= $1,000 and b3=$900 (with b1 and b2 defined to be less than $900). The fourth player should bid exactly $901. With a belief that the price is around $1,000, any bid lower than $900 gives the player who guessed b3 the best chance to win, and any bid higher than $901 gives the same player more chances to win if it turns out the fourth player’s belief about the price is an overestimate. In order to act optimally, the fourth player should always bid either: $1, b1+1, b2+1, or, b3+1. Any other bid makes the fourth player strictly worse off; taking away values for P that make the fourth player win, without providing other values that make him win.

Discussion Questions

1. Given the fourth player’s optimal strategy, how should the third player pick their bid? Keep in mind, when making his choice, the third player knows b1 and b2, as well as the fourth player’s strategy. What method can you use to solve for each player’s optimal strategy in this game?

2. What would you expect to happen if all players wrote down their bids simultaneously and did not know the other players’ guesses when making their own selection?

3. Suppose the cash bonus for bidding the exact value of the prize were very large, so large that players would be willing to risk losing the game for a chance to collect the bonus. How would this change the optimal bidding strategy? How would each player’s risk aversion factor into his decision?

4. Many times on the show, we do not observe this optimal bidding strategy by the fourth player. One possible explanation is that players do not want to appear cutthroat and greedy by bidding a single dollar more than an opponent (thus giving the opponent only one way to win: if his bid is exactly the true price). How would the optimal strategy change if you add reputation costs?

July 08, 2009

Income and Substitution Effects Explain Changes in Burrito Consumption

I took many economics courses, and yet it wasn’t until I experienced a change in my own personal finances that I really understood the nature of the income and substitution effects. The technical definitions are as follows: the income effect explains spending responses to effective changes in income level; the substitution effect explains spending responses to changes in the relative price of one good to another.

Only when my parents stopped paying for my groceries did the technical definitions sink in. Back when groceries were “free,” I often faced the following decision: Do I make lunch at home at no personal monetary cost, or do I go out and spend $6 on a burrito? The answer depended on a number of factors, such as (1) how badly I wanted a burrito (my current preference for burritos vs. homemade food); (2) how much money I recently made and spent (my budget constraint); and (3) what I could do if I wasn't preparing food (the opportunity cost of making lunch).

Having to pay for my own groceries altered this decision-making process in two ways. First, the former trade-off between a $6 burrito and the homemade lunch with ingredients paid for by my parents became the choice between a $6 burrito and a homemade lunch that costs me $3 in groceries. Although the price of eating out remained the same, it became relatively less expensive. The explicit cost of getting a burrito is now only $3 more than that of making a sandwich ($6 burrito, $3 sandwich); before it was $6 more ($6 burrito, $0 sandwich). I might now be more likely to choose the burrito than before. In doing so, I would be substituting the burrito for the homemade lunch due to the reduction in the relative price of a burrito. Whether or not I actually choose to do this, however, would depend on the strength of the income effect.

Now that I allocate a substantial portion of my monthly income to buying groceries, I have less money for all other purchases. Among those purchases are burritos, so by adding another item to my budget, the income available for burritos effectively declined. If burritos are normal goods, this negative income effect may lead to a decrease in my burrito consumption.

Which effect dominates? In my case, probably the income effect, but in general—it depends. Given that my budget didn’t encompass a lot of luxury purchases to begin with, dining out was a big part of the non-essential purchases I cut back on to make room in my budget for groceries. I adapted my schedule so that I could go home for lunch more often, and I started buying groceries conducive to paper-bag lunches.

Discussion Questions

1. Suppose your parents decide to stop paying for your textbooks (assuming they paid for them in the first place). What is the expected effect on your food consumption as a whole? Is this an example of the income effect, the substitution effect, or both?

2. In addition to the income and substitution effects changing my spending behavior, paying for my own groceries made me internalize the cost of groceries. How might this affect my overall consumption of food? In terms of economic efficiency, is internalization a good or a bad thing?

3. What are some factors that might affect the opportunity cost of homemade lunches? How would changes in the opportunity cost affect the strength of the income effect vs. the substitution effect?

4. Consider what would happen if you didn’t plan ahead and face the choice between spending half an hour to walk home and prepare lunch or spend $6 to buy lunch. Which effect is likely to dominate if your hourly wage is $7.25? $13? How does this relate to the concept of opportunity cost?

May 26, 2009

Internet by the Byte

With significant contributions and analysis from Kasie R. Jean.

Many existing industries follow a pay-per-use pricing structure. Cell phone companies typically charge by the minute and taxi cabs charge by the mile—why should Internet usage be any different?

Time Warner took the pay-per-use approach recently when it announced a pilot pricing model for its broadband Internet service. The new tiered billing system resembles that of most cell phone plans: households choose one of five levels ranging from 5GB ($29.99) per month to 40GB ($54.90) per month (or a yet to be priced 100GB per month) with a $1 fee for each GB over the chosen plan.

For flat-rate customers, Internet bandwidth is like a common resource—everyone can use the Internet as much as they want, but when one person uses a lot of bandwidth, that slows down the service for everyone else. This is a practical example of what economists call “the tragedy of the commons.” The argument claims that heavy Internet usage imposes a negative externality on all users who share a provider. In order to control its product quality, Time Warner tried a tiered pricing plan in hopes that it would discourage large bandwidth users from bogging down the service’s speed. By adding a cost, Time Warner caused consumers to internalize the externality imposed by heavy Internet usage under the flat-rate scheme.

So, what's the downside? There isn't one, unless you happen to be a consumer whose usage puts you in a tier that's priced above the current flat rate. More and more people find themselves in this group as the Internet’s functionality expands. Nowadays it is not uncommon for consumers to work from home, stream episodes of TV shows that they missed, download music, or play video games through their PC console on systems such as the Xbox or Wii. Streaming and downloading are a surprisingly quick way to run through your monthly GB quota in a matter of days.

Suppose that you used to pay a flat rate of $39.99/month with Time Warner. Under the new pricing system, this same monthly fee would entitle you to only 10 GBs/month. A few movie downloads and streamed TV shows later, and you will already have run through your monthly usage allotment and will be stuck paying overage charges for routine Internet tasks.

It's not surprising that the trial runs of the tiered pricing system caused a major uproar among Time Warner users. Under the proposed new pricing, any users consuming more than 10GB’s per month will be paying more for essentially the same service (though access might be faster if the new policy is a successful deterrent to over-use of bandwidth). If Time Warner decides to go through with the pricing switch nationwide, only the very low bandwidth users will actually benefit from it, which will potentially cause a mass exodus from Time Warner to other services.

Discussion Questions

1. Under the newly proposed pricing model, is the overage fee always something consumers should choose to avoid? If you knew you would consume exactly 8GB of bandwidth next month, what is the least cost way to purchase it? Construct a graph that shows the least cost way to consume at any monthly usage.

2. Switching costs play a significant role in the market and pricing structure of an industry. How do switching costs affect Time Warner’s ability to change its pricing scheme with current users?

3. How do consumer preferences and alternative Internet services affect the decision to choose one service or another? Which consumers would prefer a tiered pricing system over a flat rate system?

4. Suppose the new pricing goes into effect. Since video streaming is bandwidth intensive, how might a website (like YouTube) or a service (like Xbox Live) be able to keep its current users?

May 11, 2009

Why Do Monthly Job Loss Estimates Exclude the Farming Sector?

In April, nonfarm payroll employment declined by more than 500,000 jobs for the sixth month in a row. While the pace of nonfarm job losses slowed, the Bureau of Labor Statistics (BLS) report on the employment situation continues to paint a fairly grim picture. Employment in the farming sector was actually a bit higher in January 2009 (the most recent month for which data is available) than it was in January 2008. Why doesn't the BLS cover farms and ranches in its payroll survey? Might the omission of the farming sector from the BLS payroll survey cause the jobs report to be too gloomy?

According to the BLS, farms simply fall outside the scope of the payroll survey. When the BLS began studying payrolls and employment in 1915, it focused exclusively on the manufacturing sector. The need for more accurate employment estimates during the Great Depression led the BLS to develop more comprehensive estimates of wages and employment in nonfarm industries during the '30s. Historically, at least, one can imagine the relative difficulty of gathering timely employment information in the rural farming sector.

The lack of agriculture in the payroll survey, however, is almost certainly inconsequential. The absence of farms in the Bureau's payroll survey matters less to today's employment picture than it did during the early and mid 20th century. In 1930, 21.5 percent of the workforce worked in farming, and agricultural output represented nearly 8 percent of U.S. economic output. At the turn of the 21st century, less than 2 percent of the labor force worked in agriculture, a sector that now represents less than 1 percent of national economic output.

The small share of the population employed in agriculture makes it unlikely that the Bureau's payroll survey--with a sample covering about one-third of total nonfarm payroll employment--will distort the overall jobs picture by failing to account for farm sector employment. Even an agricultural boom in the midst of the current recession would do little to reverse the dismal national employment trends.

Although the BLS excludes agriculture from its payroll survey, it does capture farm employment indirectly through a survey of 60,000 households. The most widely reported unemployment rate comes from this household survey, which includes respondents from all economic sectors: manufacturing, services, agriculture, or the ranks of the self-employed.

The household survey categorizes a person as employed if they worked for pay at some point during the past week, whether she worked in a factory, on a ranch, in an office, or for herself. A person who does not have a job, but actively searched for one at some point in the preceding four weeks, is considered unemployed. Anyone who does not have a job and has not been looking in the past month is classified as "not in the labor force."

The unemployment rate is simply the ratio of unemployed workers to the labor force (the sum of employed and unemployed workers). As the ranks of the unemployed continued to swell during April, the unemployment rate rose from 8.5 percent to 8.9 percent, reflecting an increase in joblessness among all workers, including farm hands and the self-employed.

Discussion Questions

1. There are a number of jobless people who would like to work but have given up on their job search because they believe it to be futile. The BLS classifies these discouraged workers as 'not in the labor force' rather than unemployed because they did not search for a job in the preceding four weeks. Consulting this table, how does the number of discouraged workers in April 2009 compare to the number in April 2008? If the BLS were to count discouraged workers as unemployed (and, by extension, part of the labor force), what would happen to the unemployment rate?

2. How has the recession affected the ranks of discouraged workers? For more information, consult this recent BLS report.

3. The BLS tracks the number of people who work part time for economic reasons, also known as involuntary part-time workers. By counting anyone who worked for pay during the preceding week as employed, the household survey classifies a number of involuntary part-time workers as employed. In what way does the official unemployment rate miss the underemployment associated with involuntary part-time work? This table contains information on involuntary part-time workers. How has the recession impacted the number of people employed part-time for economic reasons? What happened to the number of involuntary part-time workers between March 2009 and April 2009?

4. Even as Americans eat a larger variety and quantity of foods than ever before, the share of economic output attributable to agriculture declines. How can you explain this development?

April 24, 2009

The Price Is Wrong, Bob!

With significant contributions and analysis from Ben Resnick

The Price Is Right, one of America’s favorite game shows, can be used to illustrate numerous economic concepts, including optimal bidding strategies, risk preference, and search theory. Twice an episode, one of the most purely mathematical portions of the show occurs, when contestants take their turn to spin "the big wheel." In addition to being a crucial prelude to the Showcase Showdown, it is a convenient hands-on application of using probability theory to derive an optimal decision-making rule. The wheel contains 20 equally sized panels corresponding to values between $0.05 and $1.00. Three contestants reach the wheel during each half of the show. The winning contestant is the one whose total score comes closest to a dollar without going over; as a prize, they earn one of the two spots in the show’s final round, the Showcase Showdown. One at a time, each contestant spins the wheel to get an initial value. The player then has the option to keep his current value or spin one more time. If he spins again, his final score is the sum of his two spins. Any contestant that goes over $1.00 automatically loses. In the event that two or three contestants are tied with the same final value, they each spin the wheel once, highest score winning.

Consider three contestants: Mr. 1 will spin first, Ms. 2 will spin second, and Mrs. 3 will spin last. Assuming that all of the contestants aim to maximize their chances of winning a spot in the Showcase Showdown, we set out to derive the optimal strategy for Mr. 1. In order to determine his optimal strategy, we will make three simplifying assumptions. First, each result from spinning the wheel is an independently determined random outcome, where each panel is equally likely to be spun. Next, in the event of ties, each tied player has an equal chance of winning (either 50% for a two-person tie or 33% for a three-person tie). Finally, the show pays a $1,000 bonus prize (and a chance to earn even more money on a “bonus spin”) to any contestant scoring exactly $1.00 on one spin or a combination of two spins. However, we will not consider these cash prizes as an extra incentive to spin again since they have no bearing on which contestant goes to the Showcase Showdown. We focus only on the decision-making rule that gives Mr. 1 the best chance to make the final round.

The only decision a player makes during the game is whether to spin again or stop after the first. Clearly this decision will depend on the value of the first spin—the higher the first spin, the more reasonable it is to stop. To explain fully how a player maximizes his chance of reaching the Showcase Showdown, we solved for a cutoff value: the lowest initial spin value where Mr. 1 has a higher probability of winning by staying rather than spinning again. In order to find the optimal stopping value for Mr. 1, we first calculated the probability that Mr. 1 wins the game (either outright or through the tie-breaker) if he stays with any initial spin. This gives 20 different probabilities of winning the game if Mr. 1 stays, one for each possible spin value. For example, if Mr. 1 stops with $0.55, he stands a 7.4% chance of winning whereas if he stops with $1.00, he has an 86.2% of going to the Showcase Showdown. Next, we calculated the odds that Mr. 1 wins if he spins again. To do this, we looked at his likelihood of winning for each possible score after his second spin is added to his first. Mr. 1’s optimal cutoff in this game is $0.70, where stopping with a spin of $0.70 gives a 19.8% chance of winning, but spinning again gives only a 15.8% chance of winning. At any initial spin less than $0.70, Mr. 1 has a better chance of winning by spinning again. For example, after a first spin of $0.65, Mr. 1 has a 14.6% chance of winning if he stops and a 16.8% chance of winning by spinning again. By a similar method, we find that in the case where Mr. 1 goes over $1.00, the stopping rule that maximizes Ms. 2’s chances of winning is to stop with any initial spin of $0.55 or more.

Discussion Questions

1. How would you expect the stopping values to change if a fourth player were added to this game? What would the effect on the stopping values be if we factor in the bonus prize for a total score of exactly $1.00?

2. Given that the stopping values decrease as fewer players remain in the game, do you expect a player with a certain spot in the order to have an advantage? If so, which one?

3. Deal or No Deal is an example of another game show where a contestant’s optimal strategy could be described by a stopping rule. Can you think of other games where this type of strategy can be applied?

ARRGGHH... The Stakes Be High, Says I!

When you pay ransom to a hostage-taking pirate, traditional economic theory suggests that you increase the returns to piracy, encouraging more of it. If you kill a hostage-taking pirate, you increase the cost of piracy, which should discourage would-be pirates from taking to the seas.

The response by the Somali pirates to the U.S. Navy's recent killing of three pirates has been just the opposite though. These gangs say they are now devoted to revenge-taking over more ships and taking more hostages than ever. The cost of doing business has risen, and yet they want to do more of this business than ever. Why do you think this is?

Discussion Questions

1. In order to quickly obtain large ransoms, pirates must signal a credible threat to cargo ship owners. How might this credibility issue play into the pirates' response to the actions of the U.S. government?

2. The pirates killed by U.S. Navy snipers were holding an American captain of an American boat with an American crew. Might governments respond differently in situations involving multi-national crews?

3. The pirates who were killed were likely just henchmen with little power in the criminal organization. Did the "cost of doing business" really rise very much for the pirates running the organization?

4. In what ways does the government provision of naval security in international waters resemble a public good? Might the current allocation of security (both private and public) in international waters be inefficiently low?

5. From the standpoint of ransom maximization for a small individual gang of pirates, what is the optimal amount of piracy? What is the ransom maximizing strategy if the piracy off the Somali coast is coordinated by a cartel of gang lords?

April 15, 2009

Moody's Negative Outlook on U.S. Local Government Debt

A few days ago, Moody's Investors Service announced that its outlook for the entire U.S. local government tax-backed and related ratings sector is negative. This is newsworthy not only for municipal bond investors but also for anyone following the U.S. recession. It marks the first time that Moody's issued an outlook on this entire sector, although it has issued ratings on the sector since 1914.

Moody's Investors Service is one of the leading issuers of credit ratings. Investors use these ratings to gauge the risks of investing in debt assets. So, one might conclude that the analysts at Moody's are remarkably pessimistic about the impact that recessionary economic conditions will have on the ability of local governments in the U.S. to meet their debt obligations. This means that the risk of defaults on these debts has risen.

However, Moody's hedged its announcement by mentioning that credit pressures will vary significantly across locales due to differences in economic conditions, property assessment methods, and authority to raise revenue. The varying economic conditions can largely be explained by localities' exposure to industries hit particularly hard by the recession. These include real estate development, auto manufacturing, financial services, tourism, gaming, and general manufacturing. Differences in property tax systems will play a major role. Moody's report shows evidence that about 72% of local government tax revenue comes from property taxes. The bursting of the housing market bubble will bring declines in property tax revenue for most local governments because of falling home values.

Several of these governments might have the authority to increase property, sales, or income tax rates to raise revenue. Whether the elected officials running these localities are willing to do this is an open question. Moody's points out that taxpayers are worried about their own financial conditions and are highly resistant to increases in local taxes. Raising taxes in this environment will be unusually difficult for locally elected officials.

Cutting spending during the economic crisis will not be an attractive option either. In part, this is because many of these governments may face service mandates that prevent them from reducing service-related expenditures. An example of a service mandate is that a state government may mandate that local governments provide health services for the poor. Moody's analysts also reported that the demand for improved government services will make it that much more difficult for these governments to sustain healthy finances. Local officials may find that it is more palatable to default on their bonds rather than raise taxes or cut spending.

The credit crunch is also having a direct impact on local government finance. Moody's report states that access to credit will be more expensive for these governments than it had been in recent years. Moody's negative outlook announcement surely caused investors to demand greater yields on the municipal bonds trading in the credit markets. The company also warned that some localities are in such dire straits that they may be completely shut out of the credit markets.

Yet, the situation ought to be tenable for numerous governments. For instance, some well-managed localities increased their reserves during the boom years and were prudent with the funds generated during the real estate bubble. A simple example from portfolio theory can help show why investors may still be willing to buy the bonds of a cross-section of municipalities.

Suppose that a bond investor purchases three one-year bonds with different expected returns and probabilities of default. For simplicity, we'll assume that the investor is risk-neutral and the bonds pay nothing in the event of default. Bond A has a 25% probability of default this year but pays a coupon of 15% if it avoids default. Bond B has a 50% probability of default this year but pays a coupon of 20% if it avoids default. Bond C has a 75% probability of default this year but pays a coupon of 30% if it avoids default. Let's also assume that all the bonds have a face value of $100 each.

What is the investor's expected payoff from investing in this portfolio? It is

(0.75 × $115) + (0.5 × $120) + (0.25 × $130) =

$86.25 + $60 + $32.50 = $178.75

So, on average, an investor would be willing to pay less than 60% of face value on these bonds to make a positive expected return.

This example was purposefully simple, but from it you can see the advantage of diversification and the problem of gauging risk. If the probabilities of default end up being higher than estimated, the investor might lose money but will only lose all his money in the rare case that all bond issuers default. Yet, if the probabilities of default are lower than estimated, the investor might earn a high rate of return.

Discussion Questions

1. How does the bond portfolio example relate to the impact that mortgage-backed securities had on financial institutions? What must have happened to their default rates for them to become known as "toxic assets"?

2. If you had a large sum of money that you had to use for investment purposes, would you put together a portfolio of U.S. local government debt? If yes, why? If not, explain what your preferred investment would be.

3. Besides an economic recovery, what changes, if any, do you think are needed for local governments to avoid defaults in the future? How feasible are your proposed changes?

April 03, 2009

Gainfully Unemployed

A 35-year-old Wisconsin man was recently fired from his job at Qdoba after he trashed the place, throwing pots, pans, desserts, and boxes of hot sauce on the floor. His motive? He claimed he was trying to get fired so he could collect unemployment insurance. Apparently, nobody told him that Wisconsin only pays unemployment benefits for certain types of separations. Not surprisingly, getting fired for intentional wrongdoing isn't covered.

Nearly everyone has had a job they despised. At some point the earnings from the job no longer outweigh the costs of sticking with it. The typical reaction is to simply quit and begin look for a better job. True, the newly unemployed worker will no longer collect any wages. But the added leisure time and the prospect of better work are presumably more than enough compensation for the lost earnings.

During the current economic downturn, fears about prolonged unemployment may make another option more viable: getting fired or laid off. While those who quit are not eligible for government unemployment insurance benefits, those who get fired or laid off might be.

Although the Wisconsin man was unaware that trashing his place of employment would disqualify him for unemployment benefits, other workers may devise less obvious ways of getting themselves removed from their unpleasant job. If they land themselves in the ranks of the unemployed without compromising their unemployment insurance eligibility, they'll be out of an unwanted job and into a welcome series of government checks.

In normal times, the Wisconsin man may have simply quit, but it's not hard to believe that concerns over prolonged unemployment, combined with a dicey understanding of unemployment insurance eligibility, made this decision unacceptable.

It turns out that unemployment benefits influence worker decisions about whether to take a job as well. Search theory economists showed that the last time the British government reduced the number of weeks fired employees could collect unemployment insurance, the average duration of unemployment shrunk by the number of weeks that unemployment benefits were no longer paid.

Discussion Questions

1) Part of the federal economic stimulus package gives state governments the option of using funds to extend the amount of time that an unemployed person can collect benefits. What trade-off do governments face when they choose to extend the duration of unemployment benefit eligibility during tough economic times?

2) At the root of this entire disturbance was the worker's goal to qualify for unemployment. If he had been better informed about the rules regarding dismissal for cause, how would this change his decision?

3) How might a worker hoping to shake lose of a lousy job and collect unemployment insurance benefits game the system?

4) Ignoring cases where those fired are not elligible, would you expect to observe behavior where people seek to get fired to collect unemployment more among high-skill or low-skill workers? Which group typically faces more competition in the job market and has a harder time finding a new job? How are these two ideas related?

On Income Caps and the Market System

Yesterday morning on a local radio station, a few callers discussed a silly idea. The question posed to listeners was this: "Should there be a law against anyone earning over $1 million per year?" One caller talked about the celebrity Kim Kardashian, and how it is not right that she earns so much money. That is absurd. The market is rewarding Kim because of her looks, her connections, and because in recent years her public persona has been well-managed. If companies want to pay her ridiculous amounts of money for her various "talents" because people enjoy being entertained by her, then so be it. It might not be fair, but neither is life. On the bright side, we have a progressive income tax system that will tax such extravagant incomes at higher rates than the rates faced by ordinary Americans. A much better idea would be to raise marginal income tax rates on the highest tax brackets to help limit our budget deficits and get a fair amount of tax revenue from those whom our market system has allowed to earn enormous amounts of income in our nation.

Yet, how could economists ridicule a ban on excessive income when they support President Obama's limits on executive pay for firms that seek government assistance? The reason is that such firms were mismanaged, and as a result, they got pummeled by the market, forcing them to sheepishly seek government bailout funds. In this situation, executive salary caps are a brilliant proposal. If the firms do not like the caps, they could try getting bailed out by the market, but they will find that the market will most likely not come to their rescue. The market system will allow the firms to go bankrupt because of their poor performance. That is what the market system does to firms that perform poorly. Obama's limit is set at "only" $500,000 per year and lasts until the bailout funds are fully repaid by the firm.

The argument against the salary caps proposed by Obama is that these firms will lose good executives because they can be paid more elsewhere. But is this necessarily a problem? There are undoubtedly many capable people with better understanding of risk management and liquidity who would be happy to work for these firms for $500,000 per year. If the firms find that they cannot retain the best executives, then they will find themselves with a greater incentive to refund the taxpayer money that much sooner. If the executives who are running these firms want to earn more than $500,000 per year, they will have to get their firms back in shape and earn enough profit to repay the bailout money. An argument can be made that shareholders can oust poorly performing executives and limit executive pay by changing a corporation's board of directors. This argument is a diversion, as can be seen in an article named Shareholder Power from the Christian Science Monitor.

Let the Kim Kardashians of the financial sector go seek out new firms to mismanage!

Discussion Questions

1. Do you agree with this author's viewpoint about bans on enormous salaries? How about his viewpoint on Obama's executive pay cap plan? Is there inconsistency in his views? Is there inconsistency in yours?

2. How do you feel about America's progressive income tax system? If you were in control of the federal government, what would you do to change it, if anything?

3. What do you think about the concept that government should stay out of the free enterprise system? Do you believe that government involvement has made the global financial crisis worse, or has it helped moderate its severity?

4. Suppose that the U.S. did enact a law against anyone earning over $1 million per year. What would the corporate CEOs, celebrities, athletes, and other top earners do in response? Would they leave the country? What other complications might arise from such a law?

January 28, 2009

New Economist

IMF: "Risks to financial stability have intensified"

For those hoping that credit conditions might gradually be returning to normal, today's IMF Global Financial Stability Report market update contained a stark warning: Risks to financial stability have intensified since October 2008. Macroeconomic risks have risen as global growth has fallen precipitously alongside a sharp slowdown of global trade. Credit risks have also risen as a deterioration of economic and financial conditions have resulted in rising loan losses. At the same time, the flight from risky assets and illiquid...

January 27, 2009

New Economist

CBO: largest growth shortfall since the Great Depression

The Congressional Budget Office's new director, Douglas W. Elmendorf, testified on the state of the US economy before the House Budget Committee today. It makes sober reading. An accompanying blog post summarises his three key points: The economy is currently weathering a recession that started more than a year ago, and absent a change in fiscal policy, CBO projects that the shortfall in the nation’s output relative to potential levels will be the largest– in duration and depth– since the...

July 22, 2008

Tracing the Economic Transformation of Turkey from the 1920s to EU Accession.

Nas (2008): "Tracing the Economic Transformation of Turkey from the 1920s to EU Accession"

Nas, Tevfik F. (2008):

Leiden & Boston: Brill/Martinus Nijhoff Publishers.

Table of contents
1. Introduction

2. An Overview of the Turkish Economy: 1920–80

3. Stabilization and Restructuring during the 1980s

4. The Financial Crisis of 1994 and the April 5 Austerity Plan

5. Turkish Inflation

6. The Crisis of 2001 and the Program for the Transition to a Strong Economy

7. Economic and Policy Environment before the 2002 General Election

8. Macroeconomic Policies and Outcomes during the Post-2002 Election Period

9. Turkey and the EU

10. Starting the Accession Talks

11. Prospects for Full Membership: A Commentary

February 12, 2008

15th World Congress of the IEA, Istanbul, June 25-29, 2008

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

EconPapers: "Research on Turkish Economy"

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!

July 13, 2007

Macroeconomic Performances of Turkish Governments

"A Comparison of Macroeconomic Performances of Governments in Turkey, 1987-2007"
by Aykut Kibritçioğlu

Abstract:

In this paper, a macroeconomic performance index (MEP10) which consists of selected ten indicators is proposed to evaluate the relative performance of Turkish governments by using monthly data for the period of December 1987 – April 2007. According to the multi-staged evaluation process applied in the study, the governments are grouped in three classes:
(1) Relatively successful governments: 46. government (December 1987 – November 1989), 48. government (June 1991 – November 1991), 54. government (June 1996 – June 1997), and 59. government (March 2002 – April 2007),
(2) Relatively unsuccessful governments: 47. government (November 1989 – June 1991), 49. government (November 1991 – June 1993), 55. government (June 1997 – January 1999) and 53. government (March 1996 – June 1996), and
(3) Most unsuccessful governments: 50.-52. governments (June 1993 – March 1996) and 56.-57. governments (January 1999 – November 2002).The monthly performance index is also used to test some hypotheses regarding the relationship between the length of the governments’ term of office and their macroeconomic performances.

JEL Classification: E65 (Studies of Particular Policy Episodes), O53 (Economywide Country Studies: Asia including Middle East) ve C43

Key Words: Okun’s misery index, macroeconomic performance, macroeconomic stability, governments, political stability, general elections, economic crises, Turkish economy

Language: Turkish

Download: MPRA or Paper

March 15, 2006

Book: "Turkey: Economic Reform & Accession to the European Union"

Turkey: Economic Reform & Accession to the European Union
co-edited by Sübidey Togan & Bernard M. Hoekman
Publisher: World Bank Publications (May 15, 2005)
World Bank Trade and Development Series, Paperback: 400 pages, ISBN: 0821359320

March 06, 2006

World Bank: "Turkey: Country Economic Memorandum, 2006"

The World Bank launched "Turkey: Country Economic Memorandum - Promoting Sustained Growth and Convergence with the European Union". The study aims to contribute to the ongoing process of elaborating a strategic vision on Turkey's policy priorities during EU accession.
To download the full text of the report and/or get more information on it, you may visit:
http://www.worldbank.org.tr/cem2006

October 25, 2005

Prof. Uğur Korum has passed away... - Prof. Uğur Korum'un vefatı...

Professor Uğur Korum, one of the leading and most influential Turkish economists, has passed away on the 22nd of November 2004.
(Sevgili Hocamız, değerli iktisatçı, Ankara Üniversitesi SBF İktisat Bölümü'nün eski öğretim üyelerinden Prof Dr. Uğur Korum'u 22 Kasım 2004 günü kaybettik.)

October 09, 2005

Economia Exterior: "Special Issue on Turkey-EU Relations"

Economia Exterior, Primavera 2005, Núm.32, http://www.politicaexterior.com/economiaexterior/EconomiaExterior.php

October 06, 2005

"EU foreign ministers agree on membership talks with Turkey"

Economist: The European Union and Turkey have finally agreed on a negotiating framework that will allow formal talks on Turkish membership of the EU to begin.

EU's Press Relies

Worldbank: "Turkey has today crossed the bridge to Europe. This date will go down as one of the most important days in Turkey's history. The opening of accession negotiations with the EU represents an historic moment for Turkey and the EU. The negotiations will be long and cover many difficult subjects, however the end result will bring great benefits to Turkey, the EU and the wider world. The World Bank applauds the decision of the EU Council of Ministers to approve the Framework Agreement and looks forward to supporting Turkey and the EU during the accession process."

August 30, 2005

Forthcoming Book: The Turkish Economy

The Real Economy, Corporate Governance and Reform
Edited by: Sumru G. Altuğ and Alpay Filiztekin
London, UK: Routledge
For more information, please click here!

July 21, 2005

Nowak-Lehmann Danzinger et al.: "The Impact of a Customs Union between Turkey and the EU on Turkey's Exports to the EU: A Reassessment of the Paradox"

by Nowak-Lehmann Danzinger, Felicitas, Dierk Herzer, Inmaculada Martinez-Zarzoso, and Sebastian Vollmer (www.diw.de)
Series: DIW's Working Papers Series, No. 483, April 2005, 31 pages
For more information: please click here; PDF: download

wiiw: "Turkey: Macroeconomic Vulnerability, Competitiveness and the Labour Market"

by Josef Pöschl, Hermine Vidovic, Julia Wörz and Vasily Astrov (www.wiiw.at)
Series: wiiw's Current Analyses and Country Profiles, No. 21, April 2005
116 pages including 42 Tables and 26 Figures
For more information: please click here
Pdf: download

June 21, 2005

Report: "Turkish Agriculture in the 21. Century with Special Reference to Developments within the WTO and EU"

Çakmak, E. and H. Akder (2005): "Çakmak & Akder: "DTÖ ve AB'deki Gelişmeler Işığında 21. Yüzyılda Türkiye Tarımı". İstanbul: TÜSİAD.
Download: http://www.tusiad.org/turkish/rapor/tarim2/tarim.pdf

May 04, 2005

Dr. Faruk Selçuk has passed away... - Dr. Faruk Selçuk'un vefatı...

Dr. Faruk Selçuk, one of the most productive, young Turkish economists, has passed away on the 22nd of February 2005. (Değerli iktisatçı, Bilkent Üniversitesi öğretim üyesi dostumuz Dr. Faruk Selçuk'u 22 Şubat 2005 günü kaybettik.)
Taziye Defteri: http://cayfer.bilkent.edu.tr/fs/
Web Sayfası: http://www.bilkent.edu.tr/~faruk/
Faruk's Downloadable Papers in EconPapers: http://econpapers.repec.org/ras/pse79.htm