Monday, June 30, 2008

Potential Correlation?

Okay, I apologize in advance, here goes.

In general, would we not expect that people who save less also weigh more? The first is by definition a function of the discount rate: How much is future consumption worth relative to today's consumption?

So the discount rate measures, effectively, the pain we're willing to incur today (by saving and foregoing the utility from consumption) to receive pleasure tomorrow. Or, if you like, how much pleasure we require today in order to feel pain tomorrow.

If we compare individuals of equal income and age, the one who saves more has a lower discount rate. Hopefully this exposition is unnecessary and you already understand (better than I do) what it is.

Now, overeating works on the same mechanic: pleasure today for pain tomorrow. I would argue that what holds true for the wallet also holds true for the gut: skinny people should be savers, the overweight are spenders. Unfortunately, I know of no data set that would allow me to test this hypothesis...

Saturday, June 28, 2008

Undeserved Confidence

I so rarely agree with Brian Milner, who seems to have come to dominate the front page of the Globe's business section. (Remember, the "National" Post is not available for sale in Newfoundland.) Here's a brief excerpt from his column today:
...there is no rational economic reason for the[] current level [of oil prices].

The actual quote is stuck in a question and is a bit unwieldly, but that's the meaning, I assure you. Read the article if you don't trust me.

Anyway, that strikes me as a hugely presumptive remark. It feels like he's trying to say there's some sort of unknown and hugely powerful malevolent force out to screw us all over at the pump just for kicks.

Oil prices are set in a highly competitive marketplace, and I can't think of a more rational reason than that to explain prices. Even if you believe that speculators influence the price of oil (which has been hotly debated in the econoblogosphere recently), they're simply trying to turn a buck, which is again a rational reason.

Saying that there's no reason oil prices to be where they are now only encourages economic voodooism and illiteracy.

NOTE: My personal view on oil speculation is that it can have a short-run effect on oil prices, but contributes more to the volatility than the level of prices. In the long-run, speculators are noise. No, I cannot justify this.

Friday, June 27, 2008

What It Takes

Chris Blattman shares stories of his life, particularly the fact that he swore off video games for life midway through his undergraduate degree, a fate I'd consider only mildly preferable to death.

This is why he's a professor at Yale, a post I will never hold.

Morning Roundup

Well, growth in wages continues to be robust, including in the manufacturing sector. Of course, layoffs can promote wage growth because typically those with less seniority/lower marginal product/lower wage tend to be the first to hit the streets.

Tourism remains solid, though mostly as a function of the world getting smaller - fewer internationals and more domestic tourists.

Japanese inflation hit new highs. Unlike Canada, Japan doesn't get anything out of higher commodity/food prices, placing their central bank in a tighter spot. And 1.5% CPI inflation isn't quite the end of the world.

UPDATE: Making deserved fun of the Green Party's green plan. The two most egregious sins are (a) it never actually tells you by how much they're going to tax carbon and (b) everyone finds themselves with more money at the end of the day, somehow.

Thursday, June 26, 2008

Something To Moo About

Today's Globe had a great article on why supply management in Canadian agriculture, particularly dairy, has been a miserable failure.

As pointed out by the author, not only does it prevent Canadians from reaping lower prices on dairy goods by virtue of competition amongst dairy farmers or cheaper imports - Canada levies, for example, a 299% tariff on butter - but the quota system stops ambitious Canadian farmers from developing export markets.

Of course, given the dysfunctional role of Quebec within the confederation - and since Quebec farmers reap the majority of the rents accruing from supply management - the benefits from free trade aren't going to show up in Canada anytime soon.

Supply management prevents lower prices, prevents productivity increases, prevents economic growth. The system should have never been implemented, should now be torn up as soon as possible, but don't count on either happening.

Wednesday, June 25, 2008

Rochester Entering Class, 2008

Size: 17
Names of obviously oriental descent: 9

I'm told there's typically more latin americans (as opposed to the two this year). The entering class of 17 is larger than it has been in some years.

Tuesday, June 24, 2008

Are Transport Costs and Tariffs Subsitute Bads?

Okay, two things. One, trade restrictions make the world "larger" by increasing the cost of moving goods and services. Higher cost, less volume. We're less likely to sample the fruits of other parts of the world. Similarly, higher oil prices, transport costs, whatever, have the same effect.

Thus, if oil was at $30 or whatever, would we see that much more protectionism? It seems that many people have a preferred world-size in that they want some trade, but not totally free trade - or just derive a certain amount of utility from inertia. If so, the increase in transport costs would lead to an increase in calls for freer trade.

Certainly, Obama's protectionist rhetoric has cooled as oil heated up, and McCain was in Ottawa the other day to extol the benefits of NAFTA with oil at record highs. If we had some sort of "index of global protectionist sentiment", I'd like to bet that it would exhibit a negative correlation with a one-year lagged time series of shipping costs (for which we could use the Baltic Dry Index, no less!)

Monday, June 23, 2008

The McCain Prize

I expect to see the econoblogosphere flooded with this in the near future: John McCain is proposing a $300,000,000 prize to anyone who can come up with a revolutionary car battery.

Well, at least it's not 300m in up-front handouts. And it looks like there are pretty stiff requirements. And it's certainly better than billions and billions in biofuel subsidies.

...You know, I don't really mind this. There are positive externalities that arise from finding substitutes for oil (increased national security, improved environmental quality), so government intervention is justified. The only caveat is why is the government picking winners, but we're rewarding ex post and not ex ante, so I'd expect less waste relative to subsidies.

Really, the incentives here aren't bad. Admittedly, it could be a waste of the money, but do your research and pick a good target, and you're minimizing that chance, and the rest of the ducks are lined up.

Friday, June 20, 2008

Review: American Politics

I apologize for wandering into this area. Really, I do. I'll break down how I see the relevant economic issues.

1. Trade. Most economists would give McCain the edge, I think. I'm certainly a free-trader. Obama has threatened to pull out of NAFTA numerous times, and Goolsbee was gone after leaking to us Canucks that maybe it was all huff and no puff. However, Obama has raised objections so far on the basis of labour and environmental standards, and I can't imagine Canada and the States diverge significantly on either of those topics. I doubt either candidate will significantly affect our bilateral relationship, but I have to suspect Obama is less likely to push forward on trade internationally.

2. Fiscal: Even though the economics profession can't really put numbers on how big a deficit must be run for how long before things get really bad, I don't think there is anyone out there that says that large, long-run deficits are sustainable. Eventually, someone has to pay the piper - as we're all so fond of saying, there's no free lunch. McCain plans to tax less, but neither candidate is anywhere near to a balanced budget. Flip a coin: anything we see now probably means nothing. Remember, it's almost a full year before either of these people can put ideas into practice.

3. Everything else: Insufficient detail to differentiate. They both want cap-and-trade. Neither of them is going to shake up the Fed, or bring back the gold standard, or diverge on anything else that is the primary purview of economists.

4. Potential for facepalming: Well, we have McCain on record as saying he doesn't understand economics, but the potential for protectionism/populism rests moreso in the Democratic camp, I think. Whichever Administration it is, I expect some sighs of frustration from academic economists.

The problem is is that this post is pointless. Neither of the candidates have stepped up to actually deal with the issues. Obama has a giant uncosted and unelaborated health care liability. McCain would presumably require still more money for Iraq than is currently budgeted. Social Security has to be fixed somehow, but McCain doesn't have a plan, and Obama wants to turn it into a welfare scheme instead of a pension plan.

Either way, talking about their economic plans should lie more in the domain of the psychologists than the economists: given that they say they will react this way, how will they act when confronted with reality?

And so I will not post on American politics again until after the person who wins the White House can actually do something. Well, at least federal politics - I might develop an interest in New York politics this fall.

Riddle Me This: Retail Sales

Retail sales fell 1.8% in Alberta during April, but rose 0.7% in Ontario for the same period. Annually, sales are up only 1% in Alberta for the year ending April 31, but by 4.5% in Ontario.

Not what I would have expected from reading the papers at any point over the last year.

Thursday, June 19, 2008

Pricing Bandwith

One subject that has recently been in the news is that of traffic shaping. Which, for the uninformed, is when companies "shape" your access to the internet by prohibiting some applications on your computer full access to bandwith.

For example, I can open my bittorrent client right now, and start downloading and uploading about 1 megabyte per second. Conceivably, I could push 200GB of bandwith in just one day - more than many people use in a year - were I so inclined, if my internet provider didn't cut me off.

The problem is that bandwith is rival. When I, or others like me, use a ton, someone else - maybe many others - experience slowdown in their surfing. Thus, traffic shaping: limiting high-bandwith applications during peak hours. Not surprisingly, this irritates a lot of people.

The solution is appropriate pricing. My household pays a monthly flat fee for internet - ergo, the marginal cost to me of my utilizing extra bandwith is zero. However, a cost is incurred by everyone else serviced by our ISP, as my abuse of the network wastes their time. Negative externalities. Private costs do not equal social costs. This same old refrain.

This is the exact same problem as we confront with managing health care under a single-payer system - how do we control demand when the marginal cost to the consumer is within an epsilon of zero?

I suspect that much of the furor around this issue comes from people lumping phone service and internet service together. But they're not the same: tying up a phone line has a real cost (your time), while chewing up bandwith can be done autonomously.

Either way, with internet use continuing to explode, it's only a matter of time before we start paying by the kilobyte - traffic shaping can only do so much to alleviate the problem, I would imagine.

Wednesday, June 18, 2008

Missing The Point

I don't know if this was public before, but the Liberal carbon tax exempts gasoline.
They say that we will tax at the pump – we will not,” Mr. Dion said.

The whole point of a carbon tax is to make gasoline more expensive, so we consume less.

Full disclosure: I don't have any faith in any political party that I know of. That being said, even exempting gasoline from the carbon tax, the Liberal plan is still better than the Conservative one, if they indeed have a plan. Further, the Conservative reaction to the carbon tax discussion is in general immature and ignorant. All taxes are not equal is a message that Harper could stand to learn.

Review: Energy

Okay, I admit this is a softball post. Sue me.

1. Biofuel is not a long-term solution to anything. This includes global warming, American "energy independence", etc. The energy required to create biofuel is typically only marginally above what we get from burning it. Until breakthroughs arrive in this area (see: cellulosic ethanol, or the removal of trade restrictions on Brazilian sugar cane), this won't change.

2. Some sort of cap-and-trade or carbon tax is the preferred system to fight emissions of greenhouse gases. Remember, greenhouse gases are not limited to CO2. Methane, ozone, nitrous oxides and whatnot also play a role. I prefer carbon taxes for these reasons. Carbon taxes are simpler and would likely spawn less additional government. Just because the theoretical end result of both plans is this same, doesn't mean there are not second or third order differences.

3. Locally to Newfoundland, the idea to start metering water usage is a great one.

4. Also locally to Newfoundland, the energy debate in the province hasn't received sufficient scrutiny because nobody complains when the money is rolling in. Of course, two of the province's three offshore fields will be dead within five years - we aren't Saudi Arabia. One more field (Hebron) remains to be developed, but there have not been any significant offshore discoveries for twenty-five years.

5. In the very long run, I don't think that energy prices are anything to worry about. High gas prices aren't going away tomorrow, but people who preach about a return to the 18th century are numb to both economics and the human condition. This does not mean I think there is a ton more oil out there, indeed, I'd be surprised if world oil production ever significantly increases from current levels. I have faith in nuclear, solar, and maybe even things we don't know about right now.

Tuesday, June 17, 2008

Vacation's Over

Okay, I'll be back to posting tomorrow, tomorrow being the halfway point between the first day of summer vacation and the first day of classes in Rochester - where I will be attending for PhD studies (in economics), starting August 18th, if you didn't know.

Time to start getting excited about economics again.