Picture of the Day: Falling Investment in Education

From the Wall Street Journal:

U.S. public-education spending per student fell in 2011 for the first time in more than three decades, according to new U.S. Census Bureau data issued Tuesday.

Soccernomics: Principal-Agent Models and Options, MLS Style

Image credit: AFP/Getty Images

Forbes has a piece on-line that describes David Beckham's 'windfall' now that Manchester City FC and the New York Yankees have teamed up to purchase the franchise rights for an MLS team in New York City for $100 million:

As part of his deal with MLS when he played for the Los Angeles Galaxy, Beckham was given the right to buy an MLS expansion team for $25 million. The league has confirmed that Beckham has been having discussions with MLS recently about doing just that. Grabbing an MLS team for $25 million would be a huge windfall for the 38-year old Beckham.

This type of option contract is familiar in the corporate world where companies are eager to link executive pay to company performance to avoid moral hazard problems familiar in principal-agent situations. For example the CEO taking decisions that benefit themselves personally but harm the long-term profit of the company.  The problem with these in the corporate world is that they have created a myopia among some CEOs who are eager to drive the stock price up in the short-term and cash out disregarding the future profits of the company.  A classic example is the CEO who cuts costs and increases profitability by eliminating the R&D division.  Good for now, but what happens when the new products dry up?

But I digress.  My point is that MLS was not just sweetening the pot when it offered Beckham the option of buying into the league for $25 million, it was giving Beckham a big incentive to care about the long term health of the league which depended more than a little in how he behaved post contract.  It would be interesting to know who first proposed the option: the MLS or Beckham but it seems a reasonable way to align incentives and help ensure the visibility and reputation of the league.

All of this suggests why the MLS has survived and is starting to show some real life: there are some savvy folks running the league...

Obama Wants More Infrastructure Investment, Will Democrats Go Along?

NOTE: Once more into the breach from Fred Thompson.  The title refers to this piece by Kevin Drum. 

“The proposed Keystone XL project consists of a 875-mile long pipeline and related facilities to transport up to 830,000 barrels per day … of crude oil from Alberta, Canada and the Bakken Shale Formation in Montana. The pipeline would cross the U.S. border near Morgan, Montana and continue through Montana, South Dakota, and Nebraska where it would connect to existing pipeline facilities near Steele City, Nebraska for onward delivery to Cushing, Oklahoma and the Texas Gulf Coast region.”

I should acknowledge up front both that I am an infrastructure enthusiast and that I think Keystone XL is a very smart infrastructure project. Montana, North Dakota, and probably Alberta crude would sell for $20 a barrel more than it does now if it could be cheaply transported to Houston, Texas. A rough, quick and dirty calculation suggests that XL, which will move 800,000 barrels a day at low cost, would generate about $6 billion in net benefit per year; that’s a present value of approximately $120 billion (i.e., the size of Oregon’s annual state product). But like all big infrastructure projects Keystone XL has an environmental downside, in this instance arguably a very big one. James Hansen, for example, asserts that its effects would be both catastrophic and irreversible.

Most of the principled disagreement over the Keystone XL pipeline appears to reflect different counterfactuals. By principled I mean arguments that do not involve the rejection of anthropogenic climate change or denial that prudence requires that we take the possibility of catastrophe very seriously and take action to avert or, if that is not possible, mitigate its dimensions.

The key counterfactual has to do with what will happen if Keystone XL is not built. Opponents claim that the crude oil it would carry will remain in the ground, resulting in a net reduction in the output of greenhouse gases. Proponents believe that Canada’s tar sands will be exploited at more or less the same rate whether XL is built or no.

Can we bring some simple economic thinking to bear on this issue? Perhaps, but before that some context. First, nearly all of the crude oil exported from Canada will be refined and consumed in the United States. Second, most of the Canadian crude now consumed in the US comes here via pipeline and is refined in Oklahoma, Missouri, and Illinois. Relatively small amounts are shipped by rail, some all the way to Texas and New Jersey, but not much. A handful of fairly small pipelines carry oil from Alberta through British Columbia and Washington. Some of the crude they carry is refined in Washington State but most of it is shipped on to California. Third, Keystone 3, which runs from Oklahoma to Texas, will be completed this year. Consequently, because the refineries there can process the Canadian stuff much more efficiently, a lot of the Canadian crude now refined in Illinois and Oklahoma will soon go on to Texas. Fourth, Canadian crude going to Texas will replace Venezuelan, Mexican, and Nigerian crude that now arrives by ship. Expansion of the pipelines from Alberta to British Columbia and Washington would replace oil from the Mideast (where California gets most of the oil it refines).

Building Keystone XL also means that the crude oil produced in North Dakota and Montana, the bulk of which is now moved by train to refiners, would instead be transported by pipeline. Consequently, building XL would have the immediate result of reducing the amount of crude transported by rail in the US. Whether it would also forestall an increase in rail shipments from Canada to the US is more iffy.

Initially, many of Keystone XL’s opponents implicitly took the ‘no effect’ position. They argued that XL is unneeded, that XL’s only effect would be to make the route traveled by crude from Alberta to Texas less circuitous, and that existing pipelines and railroads have more than enough capacity to move Canadian crude to the US: “Keystone XL’s capacity won’t be needed until sometime after 2020 at the earliest and maybe not until after 2030.” Consequently, most of the opposition focused on XL’s threat to the Ogallala Aquifer and the environmentally sensitive Sand Hills area of Nebraska. It was only after Keystone changed XL’s proposed route to avoid the Sand Hills that opposition coalesced around the argument made all along by XL opponent James Hansen that “If this project gains approval, it will become exceedingly difficult to control … exploitation of tar sands [which] would make it implausible to stabilize climate and avoid disastrous global climate impacts.”

The crux of this claim is that extraction and use of fossil fuels like oil and coal are directly related to the cost of transport. “If a pipeline provides cheaper transport, it’s going to suppress the cost of fossil fuels, prolonging their use. The cost of transport and the price of fossil fuels cannot be separated.” With respect to oil from Alberta’s tar sands, “the payoff from getting bitumen out of the sand is very low, it has to be heated to make the oil flow. The acidity of the oil is high and it’s full of stuff that no one wants to burn. Lacking the pipe line, there won’t be enough margin to support moving the product by rail.” Clearly, at least some opponents of the Keystone XL understand that the relevance of transportation costs to the extraction and use of crude oil depends on whether its producers are marginal suppliers or infra-marginal suppliers and by how much. If they are marginal suppliers, transportation costs are critical, if they are infra-marginal suppliers, not so much.

What is the weight of the evidence on this issue? My reading of the evidence is that, at $50 a barrel, the tar sands would be marginal suppliers. At $100 a barrel, exploiting this resource is a license to print money, even if the cost to get it to refiners is >$20 a barrel. Right now Alberta is an infra-marginal supplier. That is also the case with respect to North Dakota and Montana. Of course, one can imagine contingencies in which things would be otherwise. The price of oil could drop, for example, or, some time in the future, producers may choose to exploit harder to access or process tar sands. Clearly, there are circumstances in which transportation costs would affect the exploitation and use of these resources, although it is hard to imagine situations in which they would matter as much as the development of production technologies. The bottom line is that success in the fight against greenhouse gases does not depend in meaningful ways on this or any other infrastructure project. 

What does the fight against greenhouse gases depend upon? The enactment of measures such as carbon taxes, the payoff to investments in alternative technologies, and, to a lesser extent, trade policy. How would a carbon tax work? A carbon tax would drive a  Investing in technologies that provide substitutes for coal and petroleum: conservation, solar and wind power, nuclear power, algal biofuel, even natural gas and methane hydrates, will further reduce the demand for fossil coal and oil. That’s the next most important thing we can do. At best, fights about infrastructure are sideshows; at worst, distractions from issues that really matter in the fight against pollution and global warming.

wedge between the price paid by consumers and the price received by producers, reducing both supply of (production) and demand for fossil fuels (consumption) and encourage alternative, less carbon intense technologies. For example, a carbon tax of approximately $50 a barrel would render Alberta a marginal supplier (assuming fixed technology) and go a long way toward preempting more intensive exploitation of this resource. It doesn't matter whether the tax is levied at the pump or on the producer/importer and it most emphatically doesn't matter what you call it, the incidence of an excise tied to carbon content would be the same, as would the effects on consumption and production. Enacting something like a carbon tax is the most important thing we can do to fight greenhouse gases.

A Tale of Two Cities: Southern Hemisphere

A few weeks ago I took a trip from my temporary home of São Paulo to Buenos Aires.  This trip is a study in contrasts and a fascinating study for an economic naturalist.

Street market in San Telmo

São Paulo is a reflection of modern Brazil.  As a city it has sprung up like a weed - all rapid growth and no planning - and now the government is desperately trying to bring some order and their showcase weed-garden hampered by the fertilizer of robust growth that keeps the weeds springing up all over. As I have mentioned before, what is curious about SP is that the private investment in amenities (all safely within the confines of luxury apartment complexes) results in even less interest in creating lively and livable public spaces. The public good problem writ large.

La Bombonera - legendary home of Boca Juniors

Buenos Aires is a reflection of the past glory of Argentina.  As a city it evolved slowly and it was plotted, planned and designed to resemble the grand European capitals from whence the population largely came.  It is like a beautiful European garden that at one time was glorious but now has been left to decay a bit.  Despite the neglect and decay however, the city retains its charm.  Perhaps because of the repeated economic crises that have hit Argentina and perhaps because of the populism of the government there is still heavy investment in the public spaces of BA and because of that the city seems to revel in them and for that the city feels more human and humane.

Graffiti

I was surprised at how much English was spoken in BA by almost everyone you encounter from taxi drivers to waiters the clerks.  This is in stark contrast to SP where almost no one speaks English apart from wealthy business types.  I speculated that this is partly a reflection of the two economies: employment opportunities are abound in SP and labor is scarce so less educated workers find themselves working in restaurants, taxis, hotels and the like.  Since Argentina's economy has been so poor, highly educated young adults are resorting to restaurant work, taxi driving and so on.  Even the bell-boy of our rather modest hotel spoke almost fluent English.  I speculated as well that in Brazil English was not seen as a pathway to success, there is plenty of economic opportunity domestically so the incentive to learn English is less than in Argentina where domestic opportunity is scarce.

Porteños relaxing in the park on a perfect day in BA.  Other than the gated and heavily patrolled Iburapuera park, you will not find this in SP.  This is Parque Las Heras. 

I still think there could be a lot of truth to these theories but my Brazilian friends had another when I mentioned it to them: Argentina is a lot more educated than Brazil, full-stop.  And it is true.  Argentina has a high-school enrollment rate of over 70% while Brazil's is around 36%.  The average years of education for an Argentine is 9.3 while for a Brazilian it is 7.2.  Though I knew the stats for Brazil I was surprised at the stats for Argentina.

Modern BA: Old cars and new heros.

Still one cannot escape the difference in the energy of Brazil versus Argentina - Brazil's feels like a booming economy, no where more so than SP, while Argentina still feels like it is struggling and BA reflects this.  Black market money changers assault you all over tourist areas of BA thanks to the government trying to control the exchange rate at about 5 pesos to the US dollar when the black market is offering 10 (when the black market rate hit 10, they Argentine press said it had reached the Messi-Peso!).  The Kirchner government is trying to control prices by fiat and even tried to prosecute economists for publishing an non-government approved inflation rate.  Unemployment is high but there are a lot of public works going on which is nice in the Keynesian sense but worrying given Argentina's recent debt history.

Still despite all this I found Buenos Aires to be delightful.  I last visited BA in 2009 and I found it very grim.  The weather was cold but the mood seemed dark.  I was pleasantly surprised to find the mood considerably better (the absolutely perfect weather certainly helped) and surface signs that the economy was picking up abounded - full restaurants, few empty shops in the main commercial areas, etc.  And, by the way property in BA is incredibly cheap - large luxury apartments in Palermo, for example, go for around US $150,000, so if you want to be an international speculator in property, this is a good place to start.

Picture of the Day: Young Adults Driving Less

From US PIRG via The New York Times.

Oregon April Unemployment Falls to 8% on 3,700 New Jobs

The Oregon labor situation continues to improve at a glacial pace, but string of positive jobs reports does show the state economy moving in the right direction.  The unemployment rate is down to 8% and the state added 3,700 jobs on a seasonally adjusted basis and 3,800 private sector jobs.

Given the still shaky state of the world's economies, it is welcome news.

UPDATE ON COAL PORTS II

NOTE: Just in the nick of time Fred Thompson is back with a two-part long-form blog piece on coal ports in the Northwest.  Today (Thursday) is part two and part one posted yesterday (Wednesday)

UPDATE ON COAL PORTS II

At the beginning of this semester, one of the teams in my cost benefit class took on the assignment of looking at Oregon's coal terminal projects. I asked them to think about the following arguments reported in The Oregonian:

PRO

* The projects would create hundreds of Northwest jobs, boost tax revenues and preserve U.S. mining jobs.

*Exports would increase Asia's supply of "clean coal" and, thereby, improve their quality of life; Powder River Basin coal, like coal from Indonesia, is relatively low in sulfur and mercury and high in BTU content.

* China's newer fleet of coal-fired power plants is more efficient than America's, but its mining is far more hazardous, particularly at the marginal mines likely to be displaced by U.S. exports.

CON

* Exports would increase Northwest diesel and coal dust pollution, especially near marine terminals, squeeze rail and barge routes, and split communities with long and loud coal trains.

* Powder River Basin coal from Montana and Wyoming would help Asia add electricity A reliable U.S. supply would encourage more Asian coal plants. That would reduce prospects for clean power, and boost pollution and global warming.

My students turned in their final report last Thursday, but we have talked about the topic for an hour or so each week throughout the term and shared sources. So my thinking has been influenced by theirs and vice versa.

To address the first PRO claim, we did quick and dirty analyses of the regional economic effects of the two Oregon projects using IMPLAN Pro^TM input-output data and software. Both indicted substantial gains, but it is our assessment that the net benefits deriving from those gains are largely contingent on the state of the economy overall. With Oregon unemployment rates still over 8 percent, it is reasonable to count the full simulative effect of these infrastructure projects, which is to say the local multipliers from building and operating these projects are currently >2. Hence, the boost to state product from the Morrow-Pacific project alone would be nearly .5 percent.

In the long run, as we approach full employment, multipliers will fall. Indeed, at full-employment, the net economic benefits from these projects will be approximately equal to their net increases in incomes and tax payments, both direct and indirect. In other words they will promote economic development only if they replace less productive jobs with more productive jobs. By regional standards the expected average wage associated with these projects, about $60,000 ($50-$80 thousand) per annum looks pretty good

We largely discounted the next two PRO claims. We subsumed the second under our discussion of the effect of the projects on pollution and global warming. The third was simply too distant to influence the decisions contemplated here.

On the first CON point, we concluded that these issues are not relevant. If the projects fail to mitigate these problems adequately, they will simply not be permitted to proceed. The Morrow Pacific project has done so. The Kinder Morgan project has not, but that is not to say that it cannot.

The second CON claim is the crux of the matter. The effect of the projects on pollution and global warming will depend on the quantity Powder River coal to the Far East shipped and the effect of those shipments on the total quantity of coal consumed. If all four plants were to be completed shipments would probably be about 100 million metric tons. As I have indicated, at this point, there is little chance that all four of the remaining terminal projects will be completed, so there is considerable uncertainty about the quantity of shipments.

The CON claim presumes that there would be no substitution of Powder River coal for local supplies whatsoever, so that Asian coal consumption would increase by the full amount of shipments and none of the potential benefits from substituting clean coal for dirtier coal would be realized. That is the most pessimistic scenario. In contrast, proponents of these projects imply that shipments would have no effect on Asian consumption (consumption would remain the same) and all of the potential benefits from substituting clean coal for dirtier coal would be realized. This is the rosy scenario. I think the most likely scenario would involve some increase in Asian coal consumption, primarily because the availability of cleaner coal might delay the transition to cleaner sources of energy. However, it is also likely that this increase would be largely offset by the benefits from substituting clean coal for dirtier coal. I also think that the rosy scenario is at least as likely as pessimistic one, although IMHO both are highly unlikely.

In any case, this issue should be put in context. The success or failure of efforts to fight greenhouse gases does not depend upon the success or failure of these projects. There are plenty of sources of low-cost coal available to Asia. South and East Asia consumes 6 billion metric tons of coal per annum. China alone, for example, used approximately 4.5 billion tons of coal last year, increasing at more than 10 percent per annum. The Morrow Pacific project proposes to ship 4.4 million tons a year, perhaps increasing to 8.8 million tons. Adding up all the proposed US projects, Kinder Morgan’s Port Westward project, the Millennium Bulk Terminal in Longview, Washington, and the Gateway Pacific Terminal project in Cherry Point, Washington, on Puget Sound near Bellingham, would add about 100 million tons to that total (1.7 percent), this is less than ¼ the annual increase in Chinese consumption alone. The fight against greenhouse gases depends up the enactment of measures such as carbon taxes, the payoff to investments in technology, and, to a lesser extent, trade policy. At best, this is a sideshow.

Nevertheless, it should be acknowledged that there is evidence that increased shipments of US coal to Europe (or, perhaps, more correctly the availability of reliable supplies of low cost thermal coal) have delayed its transition to cleaner sources of energy and may have, therefore, increased future ambient greenhouse gas stocks. Would selling Powder River Coal to Asia have a similar effect?

If US coal can penetrate Asian markets only by reducing prices, the answer is probably yes. But I am not persuaded that is the case. While it is true that increased reliance on natural gas in the US has led to substantial reductions in domestic coal prices, making US coal potentially more attractive to East Asian importers, once transportation costs are taken into account, the price of US coal, especially cleaner coal from the Great Basin, is often higher than the price of locally mined coal in East Asia. Evidently the reason that US coal is preferred in East Asia to local coal is that it is cleaner. Compared to the lignite mined in China, for example, burning western coal from the US generates less CO2, Carbon monoxide, and nitrogen oxides per unit of energy, 30-60 percent less sulfur dioxide and particulate matter, and one-tenth the oxides of mercury. Burning imported cleaner coal in Chinese coal-fired power plants could, therefore, reduce global greenhouse emissions, and will reduce most other kinds of air pollution.

Would that slow the transition to alternative, cleaner energy sources? Right now, East Asia wants Powder River Basin coal, because it is cleaner than its local coal. However, Asians are much less constrained than Europeans with respect to energy access and likely to be a lot less fussy about using alternatives to coal like nuclear power, methane hydrates, algal biofuel, or natural gas from fracking. Many of Asia’s newer coal-fired power plants could be converted to natural gas. China, for example, has more shale gas than the United States or so we are given to understand. It is not unlikely that Asians will increasingly pursue these options, to the extent that they can afford them. That is really the only hope we have that their greenhouse gas emissions will be abated, but it is not I think entirely a vain hope.

In the long run the greenhouse gases produced in the Far East will depend not on the availability of coal, but on the rate of transition to green technologies, which will depend on the willingness and ability of the East Asians to pay to make the transition. The richer they are, the more environmental quality they will want to buy. Environmental quality is a superior good. So we should do everything in our power to make them (and us) richer.

UPDATE ON COAL PORTS I

NOTE: Just in the nick of time Fred Thompson is back with a two-part long-form blog piece on coal ports in the Northwest.  Today (Wednesday) is part one and part two will post tomorrow (Thursday) 

UPDATE ON COAL PORTS I

Although proposals to build and operate coal-export terminals at Grey’s Harbor, Washington and Coos Bay, Oregon have been withdrawn, the Morrow Pacific project (Boardman – Port Westward) is well under way and projects on the lower Columbia River and Puget Sound remain under serious consideration.

Ambre Energy, an Australian company, has contracts to supply Powder River Basin coal to South Korea. Its Morrow Pacific project is designed to fulfill those contracts. It will haul coal from Montana and Wyoming by BNSF trains to Spokane, Washington and, then, by Union Pacific trains to a transfer and loading facility at the Port of Morrow, near Boardman, Oregon, about 200 miles east of Port St. Helens. Morrow Pacific will then move the coal by its own “energy-efficient, covered barges” down the Columbia River to Port St. Helens’ Port Westward Industrial Park, where it will transfer the coal directly from the barges to ships bound for Asia.

The Morrow Pacific project is smaller (5-10 million metric tons per annum), than are its potential rivals, but more capital and labor intensive (its planned investment in plant and equipment is 30 percent greater than Kinder Morgan’s and its output per employee approximately one-third Kinder Morgan’s). This is because it was explicitly designed to minimize infrastructural development and regulatory uncertainties, which put its Korean contracts at risk. Using barges, for example, meant building and operating two transfer and loading facilities instead of one, not to mention transporting coal from the Port of Morrow to Port Westward; eliminating coal piles and dust meant building storage barns with pollution scrubbers, sealed conveyer belts and enclosed loading equipment. But these choices also minimized train-related problems of all sorts and other environmental impacts.

Consequently, the Morrow Pacific project is tantalizingly close to realization. Construction at both ports has begun and the barges that will carry coal to the Port of St. Helens are being built at Gunderson Marine and Vigor Industrial in Portland. Nevertheless, completion of the project depends upon securing an operating permit from the US Army Corps of Engineers, an air-quality permit from Oregon's Department of Environmental Quality, and authorization from the Department of State Lands to dredge the riverbed, which is leased from the State of Oregon, from the approach channel to the dock. The Corps of Engineers must assess the effect of the project on river and lock congestion, recreation, fish populations and safety in the gorge. This process appears to be proceeding smoothly and it seems likely that the Corps will issue a permit in a timely fashion. That is not the case with respect to Oregon’s Department of Environmental Quality and the Department of State Lands. Both have been unaccountably delayed.

Ambre Energy is also keeping open the option of building a train-fed coal terminal nearby in Longview, Washington, the Millennium Bulk Terminal, at the former site of a Reynolds Aluminum smelter. Striking that option will depend largely upon the regulatory precedents set in deciding the other two main coal-terminal project proposals – Kinder Morgan and Gateway Pacific –, market prospects, and the likelihood of prerequisite public infrastructure investments.

Kinder-Morgan’s train-fed terminal project at Port Westward Industrial Park proposes to export up to four times as much coal as Morrow-Pacific (i.e., 15-30 million metric tons per annum), which will entail substantial increases in train traffic. If it goes forward, up to 12 round-trip coal trains a day will proceed down the Columbia Gorge to Vancouver, across the Columbia Bridge, through Portland to the Willamette River rail bridge and then up U.S. 30 on Portland & Western's one-track line, through Northwest Portland, Scappoose, and Columbia City, to Port St. Helens and back again. Substantial infrastructure investments will be required to relieve rail congestion in and around Vancouver, Washington and to bring the Portland & Western Railroad, owned by short-line operator Genesee & Wyoming, up to the standard needed to serve the Kinder Morgan Terminal adequately, both in terms of grade crossings and additional sidings to handle the coal trains. Ports on the lower Columbia from Portland to Astoria are eager to see these investments made, but they are by no means certain.

The Gateway Pacific Terminal project in Cherry Point, Washington, on Puget Sound near Bellingham, is even more massive. Starting in 2015, its developer, SSA Marine, plans to export approximately 24 million metric tons of coal per year through the Gateway Pacific Terminal and hopes to export even more. BNSF trains will bring Powder River coal to Cherry Point via Vancouver, Washington and Seattle.

Viewed purely as commercial propositions, the comparative advantages of the Kinder Morgan project vis-à-vis the Gateway Pacific Terminal project are relatively few. Port Westward is a lot closer to Vancouver, Washington than is Cherry Point. However, this advantage is largely offset by two considerations: first, empty coal trains from Cherry Point can save considerable distance on the return trip to the Powder River Basin by cutting straight back across the Cascades, avoiding entirely the rail congestion in and around Vancouver, Washington; second, Kinder Morgan does not control the infrastructure investments required to bring the Portland & Western Railroad up to the standard needed to serve its terminal adequately.

In contrast, Gateway Pacific Terminal features several strengths. Its site is large enough to allow efficient turnaround of trains and to handle more than one commodity at a time and still preserve a majority of the site as natural buffer. It is 1-2 days closer to East Asian destinations and its deep water (80 feet near-shore) can accommodate Capesize-class bulk carriers (in the range of 175,000 deadweight tons (DWT)). Port Westward’s 43 foot channel and 6,000-foot turning basin limits it to handling Panamax-class colliers (60,000 to 80,000 DWT). It is claimed that use of Capesize-class carriers reduces shipping costs 25-25 percent.

Both projects must make similar investments to ensure that air and water quality are protected:

•       Coal must be stored away from the shoreline, either in enclosed barns or surrounded by natural buffers and protected by berms, sprayers and foggers.

•       Rail cars must be unloaded in a closed buildings equipped with a negative air pressure ventilation system to filter the air. Special chutes must be used to transfer coal directly to the ships’ holds.

•       Coal must be moved in covered conveyer systems over land and enclosed conveyer systems over water.

Both projects face arduous permitting processes and well-organized opponents, although it seems that the political climate is somewhat friendlier to coal exports in Oregon than in Washington. Overall opposition to these projects seems directed less at the terminals themselves than at the commodity they will handle and the rail traffic they will generate. Because the relevant regulatory agencies lack statutory authority to address these issues directly (indeed, coal trains have been traveling these same routes on their way to power plants in Washington and Oregon and export terminals in Canada for decades), their attention will likely focus on the effect of coal dust from incoming trains on air and water quality, issues that do fall under their supervision. For example in suit brought by Riverkeeper and other public interest groups against BNSF, it is alleged that: “…each rail car loses between 250-700 pounds of coal and coal dust on each trip for an average loss of 500 pounds of coal lost from each car per trip.” … “For trains with 120 cars – the typical length of a coal train – over 30 tons of coal is lost each trip. In other studies, again according to BNSF, as much as three percent of the coal in each car (around 3,600 pounds per car) can be lost in the form of dust.” In this instance, whether or not measures such as proper coal sizing, low profile loading procedures and coal sealants (water-based products that create a glue-like crust over the cargo) represent best-available control technologies or meet the standards to be issued permits under the Clean Air and Clean Water Acts are matters that could potentially be tied up in administrative procedure and/the courts for years, perhaps decades. (The US Administrative Procedures Act is heavily biased in favor of the status quo. It is nearly as hard to make someone stop doing something they are doing already, as it is to do something new). Moreover, the Corps of Engineers, which does have a broad regulatory portfolio, has opted to pursue the full Environmental Impact Statement review process for the Gateway Pacific Terminal and the Kinder Morgan projects and will probably do so with respect to the Millennium Terminal project as well.

Soccernomics: The Green and The Green

It is Friday, I haven't posted in a while and there is lots of serious economic realted stuff to discuss.  So, naturally I am going to talk about soccer!!  As a matter of fact I stayed up way too late watching a grainy pirated-feed of the Timbers (did you know they showed the match in the UAE?) so now it is Friday afternoon and I am over-tired and my post about São Paulo and Buenos Aires will have to wait.

So off we go to talk first about the Soccer

First, turf.  The MLS website (which has undergone a transformation to essentially a news and blog site covering MLS and is quite good) has a long-form piece on the growtrh of turf in US soccer.  Unfortuately for all that length it misses what I think is the most important aspect - it does not discuss at all the aesthetic impact of turf on soccer as a spectator sport.  It asks the question: since turf is becoming so ubiquitious at the youth level will it soon become normal for it to be used at the pro level.  The focus is on players who grow up playing on it be accustomed to it.  I think that matters not one whit.  The point is what it does to the spectator experience and there I am pretty convinced it provides a lesser product.  I prefer to play on turf (except old or worn out turf) becuase the community grass fields are so bad in Portland. And I think they are great for kids. But that does not mean I want to watch pros playing on it.

[NB: Oops, now it is Monday and my unfinished post is still sitting here, so keeping on the soccernomics theme, lets look at the Timbers salaries]

Second, MLS salaries.  Here is the Timbers list:

For all you parents investing thousands of dollars for club soccer for your kids in the hopes that they might one day play for the Timbers and earn millions $35K.  Remember these humble salaries when you are out there cheering - most of these guys are out there for the love of the sport not the riches.

Valeri's salary is not surprising, but I was surprised by Silvestre - didn't think his market value had slipped so far. Takes the sting out of his injury, I suppose.  Piquionne: $150,000 for a rarely used back-up striker...hmmm.  Will Johnson is worth every penny, but I was surprised to see he had raised his value so high.

Ok, there, now I am done.

Picture of the Day: Salem Psychedelia

Wow.

Game Theory and Public Policy: SoloPower, United Streetcar & Nike

Molly Young has an excellent article in The Oregonian explaining the downfall of SoloPower and the various incentives bestowed upon them by the feds, the state and the City of Portland and related agencies.  It wasn't long ago at all that the state was still doubling down on its investment in SoloPower.

This investment appears to be a complete bust.

Over the weekend The Oregonian's Brad Schmidt had a similarly excellent article about the troubles at United Streetcar, another beneficiary of public largess.

This investment appears troubled and its success seems entirely dependant on other municipalities being forced to source streetcars domestically.

These two stories along with the ultimately failed efforts to lure Nike to build on the South Waterfront point out a particularly risky aspect of public policy: proactive interventions in the local economy.

I have been weary of investments in specific industries and especially for ones in which it seems dubious that the region has a comparative advantage.  I do not like all the investment in manufacturing of solar cells as it seems highly unlikely that without government subsidy there would be any economic reason for manufacturing to stay here.  The counter-argument is, I suppose, that after initial manufacturing here, the operation could morph into more local R&D and engineering while the bulk of manufacturing got shipped overseas.

I never liked the streetcar for this same reason especially because the counterargument is not really credible in this case.  The logic of the streetcar investment rests on the creation of a self-sustaining industry in the future.  It could happen - but I suspect that the streetcar demand domestically is not going to be enough to see it mature and scale up to something viable.

What we end up doing is overpaying in both time and money for streetcars whose quality is probably not as good as the Slovakian ones currently in operation.  But local jobs!, cry the critics - what about all the great jobs.  To which the rejoinder is familiar: pay a whole lot less in public money for the streetcar and invest the extra in education, infrastructure, etc. that will lead to overall economic improvement.

Finally there is Nike, which shared a little of the same policy question: should you bet public money on this risky venture.  To which I argued yes (from the perspective of the City of Portland).  With Nike you were on as safe territory as you can get company-wise, the bet was on how other private investments in the surrounding areas would evolve. I thought it a pretty good gamble.

Which all leads back to the modern reality that policy makers are increasingly involved in game-theoretic decisions - how much public investment to make in trying to lure companies, sustain companies, and create companies.   The reality is the world now works this way and taking the high road and not offering anything will probably mean communities lose out on investment.  

But it will always be a game and a risky one at that.  And in the press we will hear disproportionately about the failures, because they are easy to notice. But policy makers don't want to get caught chasing their tail, always offering greater and greater incentives because in game theory reputation matters and if you get a reputation as an easy mark, the other players will start holding out for more.

Left on Red

I find this little article from Joe Rose on left turns on red very funny.  I remember when I returned to Oregon after a long absence (they still had me in the system and so the re-issued my ODL with my old number - I liked that, I still remembered it) I had to take the written driver's test to get my ODL.  Well, in fact it was the computer test, but anyway I remember reading through the manual and reading the same law that allows a vehicle in Oregon to take a left turn from a two-way street onto a one-way street on a red light (arrow or not).  I was amazed.  I always knew you could do a left on red from a one-way to a one-way but not this.  In Corvallis, I often found myself at the intersection of Western and 3rd, facing east (or west on Western at 4th - same deal).  I still do.  Here is the picture of the intersection:

Now, you can, legally turn on red here.  But I have NEVER seen anyone do it.  And I have never had the courage to do it myself - it just feels too wrong.

So why do I mention this.  Well, I think its funny, but I also think this is an example of how social norms can effect our decisions in a way that is not often talked about by economists.  Clearly, turning left on red is better for me than waiting for the light to turn (assuming I can do it safely).  But my conditioning and the fact that I am sure folks will think I am recklessly braking the law keeps me from doing it.  So in the end my optimal decision is to wait.

Which is really neither here nor there in terms of the law, but it does seem that if the norm is so strong that no one turns anyway, perhaps the law should follow the norm.

[NB: There is also the fact that, as the article suggests, I have no confidence that I would not get a ticket anyway from a police officer who thought I had made an illegal turn]

Oregon Unemployment Falls to 8.2% on 1,900 New Jobs

So says the Oregon Employment Department:

On a seasonally adjusted basis, preliminary estimates from the federal Bureau of Labor Statistics (BLS) indicate nonfarm payroll employment in Oregon rose by 1,900 jobs in March. The private sector added 2,700 jobs over the month, while the public sector cut 800.

Another month another confirmation of a tepid recovery.  But it is a recovery and given the severe headwind of 800 public sector jobs lost, it is nothing to sniff at.  Okay maybe you can sniff a little.

Futebol no Brasil

Watching Football in Brasil 

The New York Times over the weekend published an article by their travel writer Seth Kugel about watching football in Brazil.  Though I would not call it irresponsible, I would call it a bit reckless.  In it, Kugel urges readers to forgo the guided tours that will take you to a football match and instead dive right in with the torcidas, the supporters groups, and especially try to go for a classico, a match between main rivals.

There are two things wrong with this: one, this is may not be stupid to do, but you should know that you are taking on some risk - much more than he would have you know - especially for those that have no Portuguese.  And I am not sure his three matches are a big enough sample to really give this advice.  Two, there is a middle way: you don't need a guided tour, but if you spend a little more you can sit in good seats in an area that is calm and safe for women and children.  You will still get the full effect of the torcidas, believe me, especially for a rivalry match. This is my suggestion at least.

Why? Well the torcidas are predominately young, male, passionate and drunk.  Need I say more?  Without knowing properly what is going on, what to expect from them and so on you run the risk of getting into a situation that you would rather not be in.  If you do decide to sit with the torcidas, leave that iPhone,wallet, fancy clothes, etc. behind.  Remember that electronics in Brasil go for about twice what they do in the US so that iPhone 5 is worth R$2,400 (about $1,200). You should not take a child. DO carry some money.  The Brasilians I know all make a point of carrying R$25-R$50 in cash in case of a mugger.  No money makes them mad and you risk assault.  This is not to scare anyone, but you should know the risks and I think Kugel does no one any favors downplaying them so much.  He went to matches recently during the less intense state championships, things heat up when the national championships start.

But choose the more expensive seats and everything is generally fine, but as with all crowded places the world over, watch for pickpockets and, again, leave the iPhone behind.  Oh and things might be different in the new stadiums (and probably will be for the World Cup), but in my experience no one pays any attention to their seat assignment.  The more expensive seats are thus physically seperated so just find a free one when you arrive.

All that said, do not come to Brasil and fail to go to a game!  However you go, it will be a fun experience and police have become very good about crowd control before and after the matches.

World Cup in Brasil

The new Macaranã is starting to look close to completion

The World Cup preparations are continuing predictably here in Brasil:  Stadiums are woefully behind schedule and other promised infrastruture projects have long been laid aside.  In fact, São Paulo will not host a confederations cup game, the warm up tournament for the WC.  The biggest city in South America and the one with the most transportation challenges does not get any practice thanks to the Itaquerão stadium being so far behind schedule.  Corruption in the CBF, the Brasilian football authority, is rampant and lots of graft is happening in the name of expediency.

And there are now even quesitons about the stadiums that they are building.  A brand new stadium, built in 2007 in Rio for the Pan-American Games, the Engenhão, has been shut down indefinitely due to fears that the roof will collapse in a strong breeze.

And it is not just the World Cup stadiums that are being built, Gremio has just opened a new stadium (where the grass was not playable initially and a barrier collapsed during a match), and Palmeiras in São Paulo is in the process of building a brand new stadium out of the skeleton of their old one (and just yesterday a worker was killed when a huge concrete section of the old stadium fell).

All this makes me wonder whether in a country lacking in human capital (read: engineers, etc.) can so many stadiums really be built at one time.  Early indications say no.

Still, it will all come off fine in the end, and no one should hesitate to come to Brasil for the World Cup.  I certainly plan to - though perhaps not to São Paulo.   You just need to understand that things here operate a little differently and to allocate much more time than you think to do...just about anything.

Finally here is an amusing aside from the Fonte Nova in Salvador, Bahia where the translations did not quite come off: 'saída' means 'exit.'

Economist's Notebook: How Far Should Portland Go to Land Nike?

Rough concept drawing for the Zidell's proposed mixed-use development

Pretty far.

There is no clear answer to this question, but that is my personal off-the-cuff opinion. The Oregonian is reporting that Portland is pondering about $80 in incentives that could rise to $140 if Mult. Co. kicks in tax incentives.  Whatever is invested in Nike is a gamble, there is no guarantee that related development will occur ex-post, but it has got to be about the safest bet around.  It is also a gamble with a huge potential social return: given the investment in the South Waterfront, the light rail, streetcar and so on, having Nike provide a workforce anchor would be a huge boon to the development of the entire downtown.  It accentuates the focus on density and transit and backs one of the few Portland area companies whose future is totally secure.

Critics will point out that you may end up overspending for Nike, that they would come for less or that the value of their presence is too little.  It is entirely possible.  But even if so, it is probably a good bet to take.  Remember that Nike is Oregon's only Fortune 500 company, that its presence in Oregon, along with good old Columbia, has led to a cluster of sportswear and apparel firms in Portland, and that, all things considered, it is a pretty nice industry to have.  Such a huge business employs a huge range of people from management, to design, to engineering and sales there is a lot of demand for a wide array of local graduates.  They are a forward-thinking company that is not belching out lots of waste.  In may ways, they are an ideal company to lure to the south waterfront.

It may not be the über-cool biotech firm that was dreamed about long ago when the south waterfront district was conceived, but it is a pretty good alternative.

Now there are some caveats: Nike's fortress mentality expressed so effectively in Beaverton would have to change.  I would hope that any potential Nike presence would be an open, accessible area welcoming to outsiders.  It would have to be given the light rail and streetcar links, I should think.

So is $80 to $140 million in incentives and tax breaks the right amount? Who knows, but it does not seem extreme given the potential benefits.  

Anyway, these are my initial reactions from afar, but I'd love to hear from others - what do you think?

On Blogs and Public Service

There are many motivations for writing a blog.  Part of it is that it is just plain fun and a bit thrilling to expose a bit of yourself to the outside world and yet still retain some anonymity.

I started this blog for three reasons: One, just for a fun hobby and to give my joy of writing some kind of outlet that felt more productive than a notebook stashed in my desk drawer. Two, I was trying to connect with students at OSU and share some of the fun I have being an economist engaged in the real world.  Three, I wanted to provide a small public service by trying my best to explain what economics has to say about policy matters that are pertinent to Oregonians.  [And yes, I know that this service is worth just about as much as it costs to read this blog]

To accomplish this third objective I have tried my best to provide sober, unbiased (or, failing that, being completely honest about my own biases) analysis.  I try not to be too dry or technical so that reading this blog does not become a chore. I try my best not to question personal motives unless it has to do with preferences, payoffs and decision making.  Most of all I try to be decent.

And I do all of this to make sure that I don't get in the way of the very service I am trying to provide.  I don't do blog ads and no one has ever once donated to this blog using the handy widget you'll see on there on the right (which confirms that, indeed, economists have you all figured out) so I have no need to drive page views with videos of kittens falling off chairs and such.  What I have found is that this tone had a wonderful byproduct: the readers of this blog and, almost to a person, the commentators on this blog are serious thoughtful people genuinely interested in the issues raised herein.  I don't have to block any comments save for the commercial trolls.

Which is all to say that my point about Jack Bog's blog in the previous post is that so much, if not all, of the potential public service of Jack's blog is undone by the tone and tenor of his writing.  Which is a shame because there is so much of value there - potentially more than all of the other blogs like mine combined.  His blog became a privileged outlet for inside baseball-type info of Portland bureaucracy and politics and, to my mind, he essentially squandered most of the valuable capital he created.  So I can imagine a parallel reality in which I would be devastated at the suspension of his blogging, while in this reality I am in fact grateful as it was getting too vitriolic and relentlessly negative - and yet I was completely and helplessly hooked, so now I have to kick my addiction.  [It is kind of like the worst of reality TV]

Now I suppose the counter-argument is that his crankiness is what drove the page views that made his blog powerful, thus his is a persona he affected and cultivated (I hope so because I can't imagine being so pissed off at everything all of the time).  But while I think and hope his on-line persona is in large part fiction, I don't buy that he needs it - what are page views if your are not being taken seriously?  If he was reporting with real restraint I think his blog would be ten times more powerful with half the page views (but perhaps not as profitable).

Finally, I complete the circle of thought with a link to this Frank Rich piece about the decline of mainstream media news organizations.  It is a terribly sad piece and makes me wonder (yet again) what will fill the gaps in the public watchdog role they once occupied?  It is precisely for this reason that I hope a new Jack or someone like him will rise from the ashes of the old and provide more service and less snark.
 

An Obituary for the Bog

Jack Bog's Blog is something of a Portland institution.  Jack Bogdanski was an early adopter of the blog format and over time, by taking a skeptical view of government, his blog quickly became an unofficial conduit of inside information, shady deals and general malfeasance.  To that end it was a valuable resource and an almost daily stop of mine.

Last Friday, Jack put his blog into indefinite hiatus as he embarks on a book writing gig. But as much as I will miss my daily visit to the blog, I do not lament its suspension/end.  His entires have become increasingly abusive and vitriolic over the years and his penchant for ad-hominum attacks makes you wonder about his mental well-being.  He seems very much like the virtual version of the world's worst neighbor: taking umbrage at every perceived offense with little or no reason and reacting viloently.  His wild accusations are generally without any real analysis and his forays into economics and economic development often showed an alarming lack of basic understanding.  It is one thing to raise questions, it is quite another to make endless accusations. And yet it cannot be denied that this was part of the draw of his blog - you always wanted to see what ridiculous thing he'd say next.

The biggest shame of it all (and why I am bothering with this post) is that in the age of the dying newspaper and journalism in general, it is quite likely that blogs like Jack's will become indispensable.  An informed electorate needs transparency and bureaucracies are not naturally transparent. And yet, in my mind he squandered that role long ago by becoming a crank and indiscriminately slinging mud and insults.  In the end then his blog was mostly unhelpful and occasionally harmful.  He did nothing to raise the level of public debate and did everything in his power to debase it.

And the biggest irony of all is it turns out he is as thin-skinned as it comes.  Perhaps this is entirely unsurprising after all - there is a name for such behavior:

Narcissistic personality disorder is a mental disorder in which people have an inflated sense of their own importance and a deep need for admiration. Those with narcissistic personality disorder believe that they're superior to others and have little regard for other people's feelings. But behind this mask of ultra-confidence lies a fragile self-esteem, vulnerable to the slightest criticism.

[Update: I was chastised in the comments for engaging in the same ad homonym attacks that I complained about earlier.  This is a fair point.  I was trying to be clear that I am commenting only on his blog persona and think that the above description fits that to a T (perhaps quite intentionally - who knows?).  How much this related to Jack himself is unknown to me and I suspect that he is quite different in person, for on a blog you can be whomever you want to be - you can even use the royal 'we' (snark).  I am sorry if this was not clear and I probably went to far, but I shan't scrub the record of my error, I think it better to recognize and apologize]

So goodbye Jack Bog, you will be missed but that is probably for the better. I hope that should you decide to return you'll take the high road - and if you do I shall celebrate your return.

Now to a more important problem: where the heck am I going to steal get blog post ideas??

The Disability Monster: A More Sober Analysis

I have a bit of a love-hate relationship with "Planet Money," the This American Life way that NPR has chosen to cover economics issues.  Taking the mannered, long-form story-telling approach to economics issues can be wildly successful: I think the 'Giant Pool of Money' on TAL (which I think launched Planet Money as a separate entity) was one of the very best pieces on the real estate melt down.  But the quirky, annecdote-y thing can get old and go way too far - at the far end of the spectrum you get things like this which are just embarrassing in their attempt to be cute (though this is a podcast so more forgivable).

Recently, TAL and Planet Money did another long form bit on the rise of disability insurance liabilities, 'Unfit for Work.'  I thought it was well done, of course, and good radio, but that it was quite sensationalist and lacked a lot of nuance and context - despite its long form.

Luckily others are on the case.  Over at Wonkblog, Ezra Klein and associates are digging deeper and the resulting story is not nearly as dramatic as you might think.  Why are the disability rolls skyrocketing?

It appears the answer is pretty simple:

1. An aging population

2. A giant recession and growing population of impoverished families, especially kids.

Here is the best bit: a long interview with a disability policy expert: Harold Pollack.  I like the bit about the link between health care reform (better medical care for lower income folks) and disability payments. With the former you get less of the latter.

Investigative Journalism as a Public Good: The ProPublica Model

Here is a video from an interesting report on ProPublica the not-for-profit investigative journalism outfit that is funded mostly by donations.  This quote by the Editor in Chief is essentially correct, but I would use the analogy of police officers and firefighters rather than symphonies and ballets:

"We look at this as what you might call a public good – much like the symphony or the ballet," said ProPublica Editor-in-Chief Stephen Engelberg. "The free market will not produce an optimum amount of investigative reporting."

There is a big difference in how society would look without the former and much less wouthout the latter. I put a free and functional press in the former category.  I love ProPublica but I worry that this is still a poor substitute for a lively press.

Here in São Paulo there are two competing dailies still and two more big ones in Rio that all have national breadth.   Plus a bunch more in many other cities like A Tarde in Bahia.  When the weekday paper arrives at my door, usually with 5 or more sections and a lot thicker than The Oregonian I am reminded of how much we have lost in the US.

In fact, I often compare today's São Paulo with the US of 15 years ago in term of thriving newspapers, magazines and bookstores.  Those were the days...I give Brazil about 10 years.

Picture of the Day: Investing in Early Education

From The Economist: