Wednesday, March 18, 2015

Of Learning Curves, Infant Industries and Streetcars

Photo Credit: Daniel Rosenbaum for The New York Times

Two interesting articles caught my eye this morning.

In the first, The New York Times reports that the streetcar fad appears to be waning:
Just a few years ago, the streetcar revival was all the rage in cities across the country. Portland, Ore., seemingly set the trend with its 11.5-mile system, which opened in 2001 and was said to spur economic development while carrying 16,000 passengers on weekdays.
Elsewhere, New Orleans is extending its streetcar lines, while Atlanta, Tucson and Salt Lake City have also moved ahead with similar systems, almost always pegged to the promise of transit-related economic growth.
Yet as several cities inaugurate new systems or expand older ones, the streetcar revolution, facing fiscal and operational challenges, has stalled elsewhere. Last July, San Antonio abandoned its planned streetcar system after changing mayors, reallocating the $92 million it had set aside.
In the second, the Oregonian has a post-mortem of sorts on United Streetcar, the troubled nascent streetcar builder in Clackamas that finally called it quits.

United Streetcar, the Clackamas company expected to put hundreds of Oregonians to work manufacturing a new generation of streetcars, has all but closed up shop without meeting job projections.
In the years since, United Streetcar landed contracts and built 18 vehicles for Portland, Washington, D.C., and Tucson, Arizona. But the company shut down manufacturing in late 2014 when orders dried up.
While it is true that the market for streetcars has slowed I think United Streetcar's problems were more fundamental.  It was trying to learn streetcar manufacturing from scratch in an industry that has high fixed costs.  There was a big learning curve to surmount and it is quite clear that they did not do so with nearly enough speed.  There are many instances of infant industries that, spurred on by initial government support, ended up becoming globally competitive.  Take Airbus as example number one.

But streetcars to me seemed to be a losing proposition from the start.  And without emergence into a viable ongoing concern without government support there was little to recommend spending taxpayer dollars on streetcars from the USA rather than more reliable, timely and cheaper streetcars from the Czech Republic.

I am sad to report that I was right.

Oh and as a coda to this whole thing, the idea of streetcars (without the ability to engage in avoidance manouvers) commingling with regular car traffic easily appears to be wishful thinking.

Tuesday, March 17, 2015

Oregon February Employment Picture Looks as Sunny as the Weather

The February Oregon jobs report is out and it looks pretty fantastic.  It has been a long, hard slog but it appears about time to declare the Oregon economy back. Why?  Well unemployment is back below 6% at a very healthy 5.8%, and almost the same as the US unemployment rate (Oregon typically is slightly above).  As the Oregon Employment Department notes, the number of long-term unemployed is way down to 35,000 from a peak of 100,000.  And the U-6 number (the measure of underemployed - those working but not as much as they would like) is down to 12.1%.

It is good to know the worst of the recession is behind us but there is still one stubborn metric that has not moved much - wage rates. Wages in Oregon have risen only 0.8% in the last year.  We should see this increase as the slack in the labor market disappears.

Friday, March 13, 2015

Fred Thompson: Musings about Economic and Environmental Sustainability

Another dispatch from Fred Thompson:

A friend wrote: “For the sake of the planet's future, we must find a way to restrain our impulse to breed.  A target population number needs to be objectively determined and a finger kept on the scale so that attrition finally reaches that number. Let's assume that the planet can comfortably sustain 3 billion people (I think that number is too high).  That means we must lose 4 billion people in a relatively short time. If we get to a fertility rate of 2.1 or replacement, the population still rises for a time. The fertility rate has to be greatly curtailed until we reach the target population before we allow it to return to the replacement rate. But attrition would be sufficient to reduce the population; all we have to do is breed less.”

If that were that simple, China's population would have stabilized after 1960 and dropped significantly after 1980. Indeed, world population growth would now be a historical curiosity.

Population growth is not just about fertility. It depends upon the difference between the birth rate and the death rate. The problem, from my friend’s perspective, is that, for the past 200 years, death rates have consistently fallen faster than birth rates. As long as infant mortality continues to fall and life expectancy continues to increase, so too will population.

Worldwide, you have to get the fertility rate to less than 1.4 to stabilize population (given current trends in the death rate) and below 1.2 for it to fall any time soon. As the world’s population-bulge ages, in about 30 years or so, the death rate will rise and the fall in population will accelerate. That is where Japan is now; its population has been stable for 15 years. After 25 years of birthrates below 1.5 (dropping as low as 1.1) and already low infant mortality rates and high life expectancy, its population is beginning to fall. I think that’s where we are going – many rich countries with egalitarian income distributions are there already.

Nevertheless, in recent times, the only countries that have actually lost population are those like the Russian Republic, where, for some reason, both fertility and life expectancy declined and infant mortality increased (I say for some reason in this case because in Russia these trends started in the late 70s and continued through the 90s and, evidently, the oughts’), or where there was a ton of outmigration (like Ireland in the mid-19th Century).

What are the economic effects of a falling population? Any answer I could give to this question would be mostly guesswork. Historically, war, famine, and disease have been the drivers of population collapse. Their effects have not been good for productivity /income growth/consumption /investment, with the possible exception of the Black Death in the 14th Century. 

The best model for the effects of a dramatic reduction in the birthrate is, perhaps, Alvin Hansen's notion of secular stagnation. I remain enough of a hydraulic Keynesian to believe that we know how to mitigate the shortfalls in aggregate demand this would induce, but I have two big concerns. The recent evidence in Europe and, to a lesser extent, here suggests that there might be insufficient effective political demand for such policies. More seriously, I am concerned that an aging population will become increasingly unwilling to support or even actively oppose technological change and the replacement and expansion of plant, equipment, and infrastructure needed to exploit technological change sufficiently to allow high levels of productivity growth (in part simply because of the social cost of supporting increasing numbers of unproductive old people).

Of course, productivity growth is the sine qua non of income/consumption growth. Which takes me to the environment. The evidence is that environmental amenities are normal or superior goods; our demand for them increases with increases in income and tends to fall with reduced income growth. As is generally the case, richer is better, safer, healthier, and cleaner. Supply is a little harder, but, generally speaking, the less costly things, like environmental quality, are, the more of them people will want/supply, which also depends upon productivity/income growth (and in a democracy, where the preferences of the median voter are more or less decisive, the degree to which income growth is shared).

Another acquaintance said: “I think humanity could live sustainably on the earth, if our collective behavior and choices changed. I believe we could change if we decided to, however right now most of us accept the status quo. Basically, we seem OK with a model that promotes exploitation, of each other and our natural world, in order to provide a few people with great wealth—the basic change would be to an ‘all in this together’ model that creates wealth as well as general prosperity.”

“What are the choices we should make:

—Transfer most wealth and resources currently devoted to war into peacetime works, such as nutrition, education, housing, health care and transportation.

—Collect taxes fairly, eliminate offshore havens, improve collections, raise taxes on wealthy, tax negatives like carbon.

—End corruption in business and government.

—Set wages, benefits and social security at a minimum that ensures working families can live decently.

—Replace ‘you are what you own’ consumerism with tolerance, self-worth, community, inclusiveness.

—Have manufacturers accept cradle-to-grave product life cycles.

—Stop exploiting natural resources for short-term gains (for example, industrial hemp could replace most wood fiber uses and take pressure off forests).

—Redirect energy development into low-carbon options.

—Plan ahead and invest for impacts of climate change.”

“While I appreciate the barriers to making such changes, I also believe our situation demands comprehensive change. I vacillate between pessimism and optimism. Portland makes me believe big changes in a relatively short period are feasible—the progressive city of today did not exist 50 years ago, yet here it is now, and changes are gathering pace.”  

OK. While I am skeptical of the claim that rich were the main beneficiaries of the industrial revolution, these are not unreasonable proposals. Take #1, transfer resources devoted to war and the preparation for war into peacetime works. We are doing that; worldwide, military expenditures are at their lowest level as a share of total output in over 100 years. Even, in the US, one must go back 75 years to see a lower share devoted to the military.

#2. Americans invented confiscatory income and inheritance taxes. Indeed, we still have one of the more progressive tax structures in the developed world (transfers are another matter). Tax havens could be largely eliminated by getting rid of income taxes on C corps, making them pass-through entities. And, carbon taxes are a fine idea. It is altogether better to tax bad things than good things like working and saving.

#6. Most countries in N Europe already require manufacturers to accept cradle-to-grave product life cycles.


Would these proposals, the practical ones anyway (end corruption, really? How, exactly?), insure environmental/economic sustainability? No Way!

Playing with a few differential equations makes it pretty clear that there is only one thing that will permit sustained consumption going forward: endogenous technological development/deployment fast enough to offset resource depletion and to avoid or mitigate environmental degradation; otherwise no matter what you do, it all collapses eventually.

Of course, if endogenous technological development/deployment is fast enough, sustained growth is also feasible.

My point is that one cannot talk about economic dynamics meaningfully without thinking about the environment and, of course, the reverse is also true. The corollary is that we need to understand that our future is entirely hostage to the development and deployment of productive technologies. Nearly every other issue is trumped 

Tuesday, March 3, 2015

Oregon January Unemployment Falls to 6.3% on 7,600 New Jobs

The jobs picture continues to brighten in Oregon with January's numbers showing a robust increase of 7,600 new jobs on a seasonally adjusted basis.  The unemployment rate fell to 6.3% due to a combination of the new jobs as well as a slight dip in the work force (job seekers).

From the state report:

Putting Oregon’s employment growth into perspective, the rate of growth has steadily accelerated over the past few years: jobs grew 1.4 percent in 2012, 2.4 percent in 2013, and 3.3 percent in the past 12 months. This most recent over‐the‐year growth of 3.3 percent is the fastest pace since June 2006. Other than brief periods during 2004 through 2006, the last time Oregon jobs grew faster was the four‐year period ending in July 1997 when Oregon averaged 4.0 percent growth. 
It is finally feeling like we are well and truly out from the woods so to speak but there are still plenty of storm clouds - Europe is struggling, China growth is slowing, Brazil is tanking and climate change is real and starting to create real economic impacts.  Still, the fact that the U.S. economy is rebounding strongly despite all of these external factors is a real confirmation of the aggressive and innovative response to the economic crisis by the Fed and the Government in my view.

Monday, February 23, 2015

Global Shipping Visualized

My mother sent me a link to this fascinating visualization of global shipping (thanks mum!):

And just for some context, here is a snapshot of global trade since 1950:

Even more context: the first real voyage of a container ship was in 1966 (though the idea was first tested in 1955).  Since then, container shipping has revolutionized the industry and the result can be seen in the two visualizations above.   

UPDATE: @DaveKnowsPDX tweeted me this cool link for real time shipping data. Thanks Dave!

Friday, February 20, 2015

Fred Thompson: The Oregon Clean Fuels Program Is Nothing To Brag About

Another dispatch from Fred Thompson:

Senator Chris Edwards (D-Eugene) and chair of the Senate Committee on the Environment and Natural Resources, gave a statement following the Senate passage of Senate Bill 324, continuing Oregon’s Clean Fuels Program, which is aimed at reducing carbon pollution in automotive gasoline and diesel fuel in Oregon. “Today, Oregon has taken a step toward joining the west coast in adopting plans for creating a cleaner fuel future; a future that doesn’t depend solely on foreign oil; a future that is more secure; a future that offers cleaner choices for consumers…. The west coast is the 5th largest economy in the world and Oregon is a significant part of that. What we do on the west coast actually matters. This program, along with action from our west coast neighbors, will forever change what is possible in the United States.” I don’t think so.

The argument for Oregon’s Clean Fuels Program depends upon the aggressive deployment of biomass on the assumption that the use of biofuels is carbon-neutral, that plants pull CO2 back from the air when they grow, offsetting the carbon emitted from burning them as fuel, which is all true. But diverting a cornfield or a forest to produce energy means not using it to do something else, like make food or store carbon. Consequently, using biomass to produce energy could changes land uses, food supply and ecosystems without actually affecting climate change.

Moreover, opponents of reauthorization of Oregon’s Clean Fuels Program argue that it is very expensive, that it increases the price of gasoline “by at least 19 cents per gallon, and possibly much more.”

That’s not entirely a bad thing, of course. The best way to discourage carbon emissions is to make them more expensive, which the Clean Fuels Program does, albeit very inefficiently. Moreover, it is possible that genetic engineering will reconfigure biological processes to boost their energy output and that initiatives like the Clean Fuel’s Program will accelerate these efforts, which really could be a game changer. But the Clean Fuel’s Program seems a rather roundabout way to encourage the development of GMOs.

The best way to make carbon emissions more expensive is a carbon tax, as enacted by our west coast neighbors in British Columbia. That’s what I’d like to see happen.

But, in the interim, the simplest, most direct way to discourage carbon emissions would be to raise the state gas tax, which would also provide funds needed for road maintenance and improvement.

As John Charles of the Cascade Institute explains, the problem with this option is that it requires the approval of three-fifths of the state legislative assembly, rather than the simple majority necessary for non-tax measures like the Clean Fuels Program. Is it too much to hope for a win-win legislative compromise in which the Clean Fuels Program is given up in favor of across-the-board support for an equivalent boost in the gas tax (with, perhaps, higher shares going to counties and municipalities than is now the case)?

Saturday, January 24, 2015

Why Free Agency Would Improve the Level of Play in MLS

Excited about the return of the Portland Timbers?  Well, temper that enthusiasm because it appears more and more likely that the MLS is headed toward a work stoppage with the key sticking point free agency for players.

Under the current system, a player who is released by a team or whose contract runs out must enter the MLS re-entry draft and then be allocated to the highest team in the pecking order who wants him. The players want unrestricted free-agency - they want players in that position to be able to sign with the team of their choice.

The players are right.  Unrestricted free agency would improve the level of play in the MLS by allocating the best talent to the teams who will make the best use of it.  The draft system, while a decent way to ensure a level of parity is not efficient.  Teams and player are often not matched optimally.  For example, a team who has the first option on, say, a wing player who might already have a couple of decent wingers might just pick up the option to provide cover or to prevent the player from helping out a rival.  On the other hand, a team in desperate need of a winger is prevented from signing that player.

But the beauty of markets is their efficient allocation of resources. In an open bidding process, the team that expect to make the best use of the player will bid the most of the player thus ensuring the team with the highest valuation of the player gets him.  Players will be more likely matched to teams that fit their skills and teams will improve.

There are two counter arguments that I can think of.

First, a team might have a high valuation on a player because they are simply weather.  This is true in the Designated Player market but the re-entry draft does not affect that.  Salary caps or, much better, NFL style revenue sharing (or both) are the way to deal with income inequality seeping into player.  MLS has salary caps.  Problem solved.

Second, in the re-entry draft process teams can use the mythic 'allocation money' to trade picks and move up to get a player that want.  But the ability of teams to do so is limited and this method is inefficient and likely leads to many instances where the efficient outcome was not reached.

So I hope the MLS comes to its senses and grants free agency to players because the on-field product will be improved by so doing.

Friday, January 23, 2015

Fred Thompson: Capitol eyes gas tax — yet we’re 17th highest!

 Once again, Fred Thompson keeps the blog alive:

The Oregon Watchdog recently warned that “A gas tax was just approved by lawmakers a few years ago, and now it looks like they are back for more.” And asserted that “we are paying more than most states and apparently getting less.” Is that true? If it were, calls to boost the gas tax might seem profoundly wrongheaded. But the fact is that we are neither paying more nor getting less. 

These issues were explored at the 2015 Legislative Transportation Education Seminar, held January 14 at Willamette University under the auspices of the Willamette Center for Governance and Public Policy Research and the Oregon Public Policy Research Alliance. What we learned is that Oregon’s state gas tax ($.30 per gallon, non commercial vehicles, increased from $.24 in 2009) is 14th or 15th highest in the country. But most states rely more heavily on vehicle registration fees to fund transportation, about 40 percent of the total nationwide, than do we. Consequently, looking at state transportation funding, the combined cost of vehicle registration and state fuel taxes, Oregon is 27th highest in the US. On a per capita basis, therefore, the state of Oregon collects a bit less than the average state for highway maintenance and investment.

Oregon also relies less than other states on municipal and county level gas taxes to support city streets and county roads. Instead, we rely almost exclusively on state fuel taxes and registration fees to meet the needs of cities and counties (30% of state collections goes to counties and 20% to cities). Consequently, taking state, county, and municipal fuel taxes and registration fees together shifts Oregon even further down on the per capita transportation funding tables, to 32rd highest.

Of course, the US as a whole is running way behind on highway maintenance and investment. With respect to deferred highway maintenance and investment, the State of Oregon is actually a lot better off than most states. The civil engineers association ranks our state highway and bridge maintenance and replacement about tenth best in the country (giving Oregon a grade of C+, versus an average of D). Indeed, most experts (including those in the state DOT) believe that the highway trust fund will continue to meet the state’s basic maintenance and replacement needs through 2017.

That isn’t true of our cities and counties, however; their needs are large (billions) and pressing. Nor is it necessarily the case with respect to additional infrastructure investment, where arguably Oregon is a laggard. Moreover, many believe that the state currently relies excessively on debt to finance new construction and would like to shift toward current funding, which requires more cash now.

In this instance Oregon’s Watchdog asks a good question, but reaches the wrong conclusion. Not keeping up with our needs in this area is penny-wise and pound-foolish.

Friday, January 2, 2015

Fred Thompson: Stuffing Oregon's Kicker

Note: Another Dispatch from the desk of Fred Thompson:

There are 12 Christmas trees in Oregon for every person, more than in any other state. That’s one way we are special. Another is our system of state and local public finances, where, by many measures, Oregon is an outlier.  Generally, special also means better.

Nevertheless, Oregon’s system of state and local finance has one difference that isn’t particularly praiseworthy: the so-called kicker law,  which requires the state to return actual revenues in excess of the annual budget forecast to taxpayers. No other state in the country has anything quite like it. Oregon’s kicker was justified as a means of keeping the legislature from rolling over revenue windfalls to future budgets, thereby unsustainably increasing state spending. This was and is a reasonable concern, but the kicker was and is an ill-conceived fix to this particular problem. Rather, it is fundamentally inimical to the very worthwhile goal of smoothing out state and local spending, which calls for setting revenue growth in excess of long-term trends aside for a rainy day.

Oregon’s Total Revenue and Total Expenditure

 Oregon’s kicker law dates back to 1979. The voters overwhelmingly ratified the law in 1980, but the first actual kicker rebate didn't actually occur until 1985. During the 90s a surprisingly good economy generated kicker rebates nearly every biennium: 1995, 1997, 1999, and 2001. The only subsequent rebate occurred in 2007, a personal income tax rebate of $1 billion. That year the legislature diverted the business-tax kicker to the state’s rainy day fund and in 2012 Measure 85 assigned it to the public-school fund for keeps.

The dearth of personal-income-tax kicker rebates so far this century is not entirely due to a disappointing economy. That is the main reason, of course. But Oregon’s recovery has by most measures outstripped that of the nation as a whole, especially with respect to state revenue growth. Consequently, it appears that the state also highballed the official revenue forecast. In so doing, its actions were entirely consistent with the recommendations of the 2008-9 Legislative Task Force on Comprehensive Revenue Restructuring. The Task Force aimed at making Oregon's tax system more stable and adequate. It found that the secret to stability and adequacy lies in stabilizing spending growth at a sustainable rate and in using savings and short-term debt to smooth out revenue volatility. The Kulongoski administration put these findings into place via its so-called reset budget. Then, so long as the administration remains committed to the reset-budget’s long-term spending targets, funds are automatically generated for Oregon’s rainy-day fund and/or to pay down its debt (the measures also allowed for automatic borrowing if revenue fell short of the spending target).

This year it probably will not be possible to avoid a kicker rebate without legislative action. Despite the best efforts to avoid such an outcome, actual revenues look to be running ahead of the forecast. Not surprisingly kicker repeal is once again on the legislative agenda. (Of course, the legislature can always put off the distribution of a kicker rebate by an emergency vote, as it did in 1991 and 1993, without actually repealing the law.)

Moreover, some legislators are concerned with the current administration’s apparent inclination to discard the reset budget: reset principles are not highlighted in the 2015-17 budget proposal and the medium-term fiscal planning unit in the Department of Administrative Services that formulated the reset budget and put it into place has been dismantled. This is a potential threat to the state’s long-term fiscal stability and, perhaps, also underscores the ongoing need to enact the Task Force’s recommendations for improvements to Oregon’s fiscal system, including reform of Oregon's personal-income-tax kicker, into law.

Senator Ginny Burdick, Chair of the Senate Finance and Revenue Committee, is the key to these reforms. She served on the Task Force and has a longstanding commitment to both fiscal stability and kicker reform. Interestingly, California, Oregon’s neighbor to the South, recently voted Proposition 2 into law. Proposition 2 amends the California Constitution to require that the Governor make mid-term spending and revenue targets part of the state budget process, requires the state to set aside revenues each year – for 15 years – to pay down specified state liabilities, and substantially revises the rules governing the state’s rainy day fund. In other words, California’s legislature did pretty much what Oregon’s has, so far, not done with respect to kicker reform. They referred a measure aimed at making state and local spending sustainable to the citizenry. On November 4, 2014, 70 percent of Californians voted in its favor.

We need to go there too.