Tuesday, August 23, 2016

My Fall Semester Has Started

Welcome to any new students. The entries usually have something to do with a basic economic principle that is related to a recent news story. If you want to learn more about me go to Why is college so hard? (you may have to be patient with this site but the article is not long)

If that link is not working try this one

Thursday, August 11, 2016

Cartels: They're not just for drug dealers and oil producers anymore-maple syrup producers have one, too

See Maple Syrup Cartel Battles a Black Market Rebellion: Canadian production is set to grow 10 percent in a push for market share by Jen Skerritt of Bloomberg. Cartels are producers who get together and all agree to reduce output. That raises the price and profit (more or less, price goes up more in percentage terms than quantity goes down). But the higher price creates incentives for some producers to sell more than their quota or for other businesses or entrepreneurs to enter the market. This has happened with both oil and diamonds.

This is a government sanctioned cartel and they even have a strategic reserve (the U. S. has a strategic petroleum reserve). Excerpts:
"The cartel that produces 72 percent of the world’s maple syrup is starting to crack.

After eight years of tightly limiting output to keep prices high, the Federation of Quebec Maple Syrup Producers next year will boost its quota by 12 percent for 13,500 sap farmers who operate in the Canadian province. The goal is twofold: Reclaim the 10 percent of market share lost to the U.S. over the last decade, and quell a rebellion by producers increasingly turning to black market sales for growth.

Boosting the quota now is “almost perfect timing” as farmers are seeing record output, according to Alan Bryson, 41, who drains sap from 45,000 taps on trees in Notre-Dame-de-la-Merci, Quebec. The prospect of more sales “outweighs the frustration” felt by farmers in the past, he said."

"Bryson wants to add as many as 15,000 taps this year and seeks to expand to 75,000 eventually, he said. Overall, Quebec produced about 148.2 million pounds of maple syrup this year. Under the new quotas, output could grow by 15 million pounds, according to the federation."

"The unanswered question is where all this additional product is going to go. Tappers this year will be paid C$2.88 ($2.20) a pound, based on a weighted average, federation data show. That’s up a penny from the previous two years,

“It’s a lot of new production,” said Matt Gordon, executive director of the Vermont Maple Sugar Makers Association in Waterbury Center, Vt. “There are plenty of examples throughout history of agricultural crops where there’s been increased demand, so production increases. Then suddenly, it’s a little too much.”

U.S. production this year totaled 4.2 million gallons, a 23 percent boost from a year earlier, with Vermont accounting for 47 percent of the total, the U.S. Department of Agriculture said in June. The number of taps rose 5 percent this year, to 12.55 million, after increasing 45 percent from 2007 and 2015, according to the USDA.

That growth frustrated Quebec farmers, who have been urging an end to quotas. While the government-sanctioned cartel kept prices stable by limiting output and maintaining strategic stockpiles, tappers complained that the system imposed a “heavy, inflexible handicap to the province’s performance,” according to a 70-page report commissioned by Quebec Agriculture Minister Pierre Paradis, released earlier this year.

That frustration was leading some farmers to sell on the black market, and some said they felt harassed by the federation, according to the report.

After a formal request from producers last year, Regie des Marches Agricoles et Alimentaires du Quebec, the province’s agricultural marketing board, authorized the cartel to increase quotas as it deems necessary, said Caroline Cyr, a federation spokesman.

The quota increase makes the system more flexible and adaptable to the free market and will curtail black market sales, said Simon Trepanier, executive director of the Federation of Quebec Maple Syrup Producers.

“If we allow producers to add more taps or at sell inside here, they will not be interested in selling on the black market,” Trepanier said in a telephone interview. “It will help to have a clean market, instead of a black market.”"

Wednesday, August 10, 2016

The American middle class is shrinking because more people are becoming upper middle class and rich

See By Scott Burns. Excerpts:
"A new study, however, suggests something different. It shows that the big growth is in people who are "upper middle class" and "rich." Those who are "middle class," "lower middle class" and "poor or near poor" are actually shrinking as a percentage of the population. More people are moving up than moving down, not more people moving down than up."

"Yet the study comes from the Urban Institute, a think tank more inclined to worry about the poor than celebrate the rich. Stephen J. Rose, the author of the study, is an accomplished labor economist with a Ph.D. from City University of New York."

"Rather than dividing all of us into quintiles and examining income changes in each quintile, Rose starts with a level of inflation-adjusted income and examines how different slices of income have done over time. In this case, he has examined 1979 through 2014, a period believed full of economic duress for most working Americans.

He divides us into five income classes:
--- The Poor and Near Poor, with incomes from $0 to $29,999 in 2014.
--- The Lower Middle Class, with incomes from $30,000 to $49,999.
--- The Middle Class, with incomes from $50,000 to $99,999.
--- The Upper Middle Class, with incomes from $100,000 to $349,999.
--- The Rich, with incomes of at least $350,000."

"The big change is in the middle class. Yes, it shrank in size. It dropped from 38.8 percent of all classes in 1979 to 32 percent in 2014. But the lower middle class and the poor and near poor also shrank in size. Together, they fell from 48.2 percent of all households to 36.9 percent, a drop of 11.3 percentage points.

The big surprise is that the upper middle class and rich more than doubled in size. The rich accounted for only 0.1 percent in 1979 but 1.8 percent in 2014. The upper middle class soared from 12.9 percent to 29.4 percent, a gain of 16.5 percent. Basically, the losses for the middle class were gains higher on the income ladder."

"The more affluent life of the upper middle class is visible everywhere. The group is nearly the same size as the middle class. And the number of people visibly worse off has shrunk."

"Luxury automobiles, Rose points out, now account for 13 percent of all new car sales, compared to only 5 percent in 1979.

But luxury cars are just the tip of the iceberg. Consider the super-sizing of refrigerators, miraculously quiet dishwashers, barbecue grills large enough to cook for a full platoon, 85-inch television sets, McMansions, and the proliferation of mini-luxuries such as Starbucks shops, spas and better dining venues."

Tuesday, August 09, 2016

Does the top 1 percent earn 85 percent of income? Is it 52 percent? Something Else?

According to the book The Economics of Macro Issues (6e, 2014), the top 1 percent earn 13.4% of income in the USA (p. 81). This came up in a letter to the editor by me in today's San Antonio Express-News. One of their columnists said it was 52 percent but had recently been 85 percent. What I think he got wrong was that there was a year when the top 1 percent got 85 percent of the growth in income, not total income. Anyway, click here to read the letter. It is also below.

But before you read the letter, here is something to keep in mind (it is from a post I did a few years ago)

"It is true that the top 1% of earners have seen their share of income rise. But 57% of those in the top 1% in 1996 were not there in 2005. The incomes of the top 1% fell about 16% from 2007-09 while the median income fell just 1.5%. The number of people making $1 million or more per year fell 40%." (although I posted that myself a few years ago I can't find the source)

But this link from the WSJ in 2013



"The one-percenters saw their incomes slide 36.3% during the 2007-2009 recession; incomes of the 99-percenters fell 11.6% during the downturn"


"All told, average inflation-adjusted income per family climbed 6% between 2009 and 2012, the first years of the economic recovery. During that period, the top 1% saw their incomes climb 31.4%"

Now my letter:

"Income growth

Re: “No revolution if there’s no civilization,” Brian Chasnoff, July 28:

Brian Chasnoff wrote, “(Bernie) Sanders repeated on Wednesday that the top 1 percent earns 85 percent of income, although that claim is outdated; in the past two years, it fell to 52 percent, according to Politifact.”

That claim is actually for the share of growth in income since 2009, not total income at any one point in time. This makes a big difference.

Politifact gets its information on this from a report by the Economic Policy Institute. It says (right in the first full paragraph) that “the top 1 percent captured 85.1 percent of total income growth between 2009 and 2013” (and that share has now fallen to 52 percent).

Notice it says income growth, not income. What it discusses is the share of “new” income going to the top 1 percent. They mean the share of income growth.

When the Census Bureau reports on incomes every year, usually the top 20 percent of households have 50 to 55 percent of the income. So the top 1 percent would have much less than that in total income share. On page 9, it shows that the top quintile in 2014 had 51.4 percent of all income.

Cyril Morong, Ph.D., associate professor of economics, San Antonio College"

Monday, August 08, 2016

Economic benefits from mega-events like the Olympics are often overstated

See Are the Olympics ever worth it for the host city? by Tim Hyde of the American Economic Association. Excerpts:
"A study appearing in the Spring issue of the Journal of Economic Perspectives breaks down the costs and benefits of hosting the Olympic Games and explains why some of the perceived economic blessings of the Olympics are mostly wishful thinking.
In Going for the Gold: The Economics of the Olympics (PDF), authors Robert Baade and Victor Matheson consult estimates from academic, public, and media sources on the costs and benefits of hosting the Games. As with any mega-event, costs and benefits can be hard to estimate, but the general story is clear: for most modern Olympics, the costs have far outstripped the benefits.
The direct costs of hosting the Games are probably easier to estimate and tabulate. First there is the non-trivial cost of mounting a bid, which can run into the hundreds of millions of dollars for planning, marketing, and architectural renderings."

"often the bids must include plans for new hotel capacity and dormitories."

"The IOC will tend to favor the city that makes the most lavish offer of gleaming new facilities and infrastructure improvements, so the bidding process can give way to a “winner’s curse” effect. The city that wins tends to be the one that overestimated the value of hosting the Olympics the most, and hence the one that went furthest overboard in their bid. 

Once the Olympics have been assigned, the host city must typically spend billions of dollars building transit and airport improvements, reaching the requisite hotel capacity, and constructing specialized athletic facilities like a swimming facility, a velodrome, or a larger stadium that can accommodate an Olympic track. Disentangling these costs from planned infrastructure improvements that would have happened even in the absence of the Olympics can be difficult, but the best estimates put the cost of hosting at between $5 and $15 billion for most recent events."

"The costs are clear, but the benefits of hosting the Olympics can be substantial as well, even if they are usually overstated by overzealous city officials or self-interested boosters. Host cities receive revenue from ticketing and sponsorships, and local organizing committees receive a share of the proceeds from the sale of television broadcast rights. These benefits are easy to quantify, but don’t add up to a significant fraction of the hosting costs in most cases. Vancouver 2010 produced about $1.5 billion in direct revenues and London 2012 about $3.3 billion; in each case, far less than the costs.

The rest of the benefits are more nebulous. Proponents tout supposed benefits ranging from the economic stimulus provided by construction demand, to increased tourism during and after the games thanks to a worldwide advertising campaign, to increased foreign investment and better trade connections, to an improved sports infrastructure for future generations (this last benefit is most easily debunked). The authors argue that most of these benefits tend to be less than hoped, or only appear in specific situations.

Infrastructure improvements can provide a form of fiscal stimulus to a city with a slack labor market, but if the city’s economy is near full employment anyway in the years leading up to the Games, the extra construction jobs are more likely to come at the expense of other sectors. 

Tourism, meanwhile, can be crowded out by the hustle and bustle of the Olympics themselves – Beijing and London both saw fewer international visitors during the months they were hosting the Olympics in 2008 and 2012 compared to the same months in previous years, and Utah ski resorts noticed a dip in traffic during the 2001-02 ski season that coincided with the Salt Lake City games.
A few cities have had success generating future tourism business with the Olympics...But many other host cities ... have seen limited increases in tourism after their games.

One study did find that countries hosting the Olympics see a 20% increase in export trade in the years after hosting, relative to similarly-situated countries, which might go a long way to justifying the economic expense of hosting the event. But the same study found similar gains for countries where cities unsuccessfully bid for the Olympics. The authors suggest that the very act of bidding for the Olympic Games suggests a government is looking to increase international connections and willing to make infrastructure investments, which can attract foreign interest. 

It is also likely that the types of cities that decide to mount bids are on an economic upswing and poised for growth, and actually winning that bid might be more likely to stunt that growth rather than accelerate it.

The balance of evidence is that the economic costs of hosting the Olympics far outpace the benefits, so why do cities bother to bid at all? One possibility is civic pride or the desire to affirm a city’s status as a “world city.” 

These benefits are hard to translate into economic terms, but two careful studies used contingent valuation survey methods (similar to the techniques economists use to see how much people value maintaining the rainforests or keeping a species from extinction) to measure this benefit in the runup to the 2012 Olympics in London. They found that people across the United Kingdom collectively valued the opportunity to host the Olympics at about £2 billion, still well short of the cost of hosting."

Sunday, August 07, 2016

Both numeracy and literacy were invented in the service of finance and commerce

That comes from a book review in the NY Times. See Finance Is the Master Technology — and It’s Funded the World by Felix Martin.

The book reviewed is Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann. He is a Professor of Finance and Management Studies at Yale University. Excerpts:
"finance is a “technology of civilization” — a way of thinking about and doing things that has been the central facilitator of the material, artistic and cultural accomplishments that we call civilized life. Indeed finance, Goetzmann argues, is a sort of master technology, from which an astonishing range of our most basic habits of mind derives."

"Autarkic subsistence farming had to be replaced by specialization, the division of labor and coordination on a massive scale. The innovation developed by the clerical bureaucracies to enable this transition was the invention of financial accounting. And it was only as part of this new financial system that writing and abstract numbers — those epochal inventions that so clearly transformed the subsequent history of humanity in so many other fields — were invented."

"finance is responsible for our modern conception of time. Pre-monetary society operated on sacred time, with the day divided up by ecclesiastical offices or prayer times, and the year into high days and holy days that reflected the cycle of the seasons or the phases of the moon. Financial reasoning and, in particular, the calculation of compound interest demanded a more regimented scheme arbitrated by objective mathematical rules rather than clerical authority."

"“financial technology is a time machine” — a set of ideas and practices that enable us to shift economic value backward and forward through time."

"the ancient Sumerians introduced a 360-day year in order to make calculating interest easier.'

"Modern ideas of probability and risk, of ethics and morality, and of appropriate models of commercial and even political organization — all were forged in the furnaces of finance,"

"“Like other technologies,” he writes, finance “developed through innovations that improved efficiency. It is not intrinsically good or bad.”"

"One does not have to be a hard-core Marxist to entertain the idea that finance is not, and did not evolve as, a neutral tool to improve the operation of the free market — itself an ethically colorless state of nature in human relations. This alternative view is in perfect agreement that finance is indeed one of the most powerful tools for the organization of human activity ever invented. But it holds that it arose historically, and continues to be used today, to codify and enforce relationships built on power and luck as much as to facilitate voluntary and rational decision-making."