When gas was $2 a gallon, someone suggested a $1.00 tax at 10 cents per year phased in over 10 years. Didn't think that would really have an effect on behavior. In fact, in today's WaPo:
When gas hit $2, and even when it reached $3, car dealers saw little change in their monthly tallies. People grumbled, but they still bought cars and let their fantasies govern their decisions. If they wanted something that would dominate the road, they dug a little deeper and took out a loan.
When you want people to respond to incentives, the incentives have to be binding.
Sunday, June 29, 2008
Why is there so little infrastructure investment?
Mark Thoma wonders why fiscal stimulus packages don't include infrastructure spending -- or infrastructure spending does not seem to be part of any stimulus package:
If we had included, say, infrastructure spending as part of the initial stimulus package, then the effects would kick in on a sustained basis over time rather than as a one-time hit as with the tax cuts. Thus, this type of spending could have provided the continuous stimulus Shiller is calling for. And if we are wrong and there is no recession, how big a problem is that? Well, what's so bad about building new infrastructure repairing what we already have, don't we need to do that anyway? With a stronger economy, wouldn't it be easier to pay for it? Insurance that also has investment value seems like a good bet to me. But we didn't include infrastructure spending, or any other type of sustained stimulus in the initial package, and while I'd like to see more infrastructure investment in any case, short of an obvious and sharp downturn in the outlook, there doesn't appear to be much chance of any new tax rebates, or spending on infrastructure or anything else anytime soon.
Can pork barrel projects be considered fiscal stimulus? Or what about my wild plan for telco competition? Particularly interesting would be to consider the whether an increase in maintenance and repair such as McGrattan and Schmitz in a DGE models can generate sustained growth and whether this view can be supported by the data. This is identical to the argument on whether public capital is productive. See for instance, early work by Aschauer, Mary Finn who argues that some spending such as highway spending is productive, and Evans and Karras who find that only educational inputs are productive.
If we had included, say, infrastructure spending as part of the initial stimulus package, then the effects would kick in on a sustained basis over time rather than as a one-time hit as with the tax cuts. Thus, this type of spending could have provided the continuous stimulus Shiller is calling for. And if we are wrong and there is no recession, how big a problem is that? Well, what's so bad about building new infrastructure repairing what we already have, don't we need to do that anyway? With a stronger economy, wouldn't it be easier to pay for it? Insurance that also has investment value seems like a good bet to me. But we didn't include infrastructure spending, or any other type of sustained stimulus in the initial package, and while I'd like to see more infrastructure investment in any case, short of an obvious and sharp downturn in the outlook, there doesn't appear to be much chance of any new tax rebates, or spending on infrastructure or anything else anytime soon.
Can pork barrel projects be considered fiscal stimulus? Or what about my wild plan for telco competition? Particularly interesting would be to consider the whether an increase in maintenance and repair such as McGrattan and Schmitz in a DGE models can generate sustained growth and whether this view can be supported by the data. This is identical to the argument on whether public capital is productive. See for instance, early work by Aschauer, Mary Finn who argues that some spending such as highway spending is productive, and Evans and Karras who find that only educational inputs are productive.
Thursday, June 26, 2008
Speculation versus fundamentals: Oil versus wheat
What are the differences? What are the similarities?
In the recent debate about whether the rise in the price of oil is due to speculation or fundamentals, I'm in the a bit of both camp. This puts me into J. Hamilton's camp. Mark Thoma has a nice summary of the debate so far and has even responded to the question: Why isn't there a similar argument on speculation in agriculture here. (Older posts by Brad Setser and Econbrowser here.)
Much of the arguments have been centered on why there hasn't been any increase in inventories and whether there are alternate ways of hoarding without us seeing a rise in inventories. The other part of the argument is if speculators foresaw an increase in demand why did they not speculate on the price earlier, i.e. why did prices rise now rather than earlier? Speculators hence would have played a role in damping the price increases.
I've been trying to digest this post on the reason for the rise in global food prices and have been wondering whether it is part of the explanation for oil as well:
1. The increase in wealth has made consumers less willing to substitute away from the good that has risen in price.
2. A series of unanticipated supply shocks has also decreased global supply of the good.
3. There is no speculation because shocks were unanticipated.
4. Inventories are drawn down thus increasing pressure on demand as consumption stays the same because of high inelasticity of demand as wealth increases.
5. Since demand continues to be strong prices continue to stay high.
This argument is persuasive but seems to be an argument as to why prices stay high but does not explain the daily volatility of the good. Nor does it explain why the price keeps rising in the apparent (?) absence of any news of supply shocks.
In the recent debate about whether the rise in the price of oil is due to speculation or fundamentals, I'm in the a bit of both camp. This puts me into J. Hamilton's camp. Mark Thoma has a nice summary of the debate so far and has even responded to the question: Why isn't there a similar argument on speculation in agriculture here. (Older posts by Brad Setser and Econbrowser here.)
Much of the arguments have been centered on why there hasn't been any increase in inventories and whether there are alternate ways of hoarding without us seeing a rise in inventories. The other part of the argument is if speculators foresaw an increase in demand why did they not speculate on the price earlier, i.e. why did prices rise now rather than earlier? Speculators hence would have played a role in damping the price increases.
I've been trying to digest this post on the reason for the rise in global food prices and have been wondering whether it is part of the explanation for oil as well:
1. The increase in wealth has made consumers less willing to substitute away from the good that has risen in price.
2. A series of unanticipated supply shocks has also decreased global supply of the good.
3. There is no speculation because shocks were unanticipated.
4. Inventories are drawn down thus increasing pressure on demand as consumption stays the same because of high inelasticity of demand as wealth increases.
5. Since demand continues to be strong prices continue to stay high.
This argument is persuasive but seems to be an argument as to why prices stay high but does not explain the daily volatility of the good. Nor does it explain why the price keeps rising in the apparent (?) absence of any news of supply shocks.
Wednesday, June 25, 2008
Why No means Maybe
After reading and blogging about Gift of Fear I begin to see why there may be a culture where "No" means "Maybe".
1. From young whenever our kids say No to something, we would counter with something like: Why don't you try it first? You'll never know until you try.
2. We try to teach cooperation and compromise until it becomes a habit. A No means no compromising which we teach them to be something possibly rude or selfish.
How should we teach our children when it's okay to say no, how to differentiate the situations where it is okay to say no, and importantly how to say no. Only when they feel that saying anything other than No would threaten their safety? But safety of the body or the mind or both? I can say no because saying yes might make me uncomfortable even though I may not feel threatened - aggressive panhandlers along my usual route for instance. If I say no they may become aggressive. If I say yes and give them a dollar they might ask for more. Is it okay to say no in this case? I might be uncomfortable saying both yes and no.
1. From young whenever our kids say No to something, we would counter with something like: Why don't you try it first? You'll never know until you try.
2. We try to teach cooperation and compromise until it becomes a habit. A No means no compromising which we teach them to be something possibly rude or selfish.
How should we teach our children when it's okay to say no, how to differentiate the situations where it is okay to say no, and importantly how to say no. Only when they feel that saying anything other than No would threaten their safety? But safety of the body or the mind or both? I can say no because saying yes might make me uncomfortable even though I may not feel threatened - aggressive panhandlers along my usual route for instance. If I say no they may become aggressive. If I say yes and give them a dollar they might ask for more. Is it okay to say no in this case? I might be uncomfortable saying both yes and no.
What influences inflation expectations?
This post made me wonder:
" ... according to Professor Eric Johnson, may be the frequency with which consumers are seeing higher prices. “Things that you buy more frequently and that have large percentage increases will weigh more in people’s perception of inflation,” Johnson was quoted as saying.
He elaborated in the article with the following example: a person paying an extra $25 to fill up the gas tank is reminded of that cost once a week, or more often if you count the times he or she sees a $4-per-gallon price in giant numbers on a sign. In contrast, a rent increase of $100 would only happen once a month but would have the same financial impact."
It seems like this should be easy to test:
Volatile components of the CPI should have a larger effect on inflation expectations.
The data for CPI consists of food, energy and all other items less food and energy (the assumed less volatile components).
Food and/or energy should have larger "impacts" on inflation expectations.
In a regression of inflation expectations on change in food, energy and all other prices, the coefficients of food/energy is expected to be larger than the coefficient on changes of all other prices. (I think this is correct. I realize that the size of the coefficient does not always imply that the effect is larger but in this case it should work because all the right hand side variables are measured in the same units - percent change.)
To be more precise, it is not the size of the coefficient but the average effect as measured by the coefficient multiplied by the average changes in food, energy and all other prices that gives the size of change.
At the risk of further embarassing myself since I haven't engaged in any real econometrics in years here are some results:
I use non-seasonally adjusted data on CPI from FRED and inflation expectation from Michigan's Survey of Consumers.
The following plots the mean and median expectations of percent changes in inflation with the percent change in food.
Inflation expectations are of several orders of magnitude larger than actual percent changes in prices. Surprisingly changes in all other goods excluding food and energy are more variable than changes in food prices (mean percent change is 0.34 versus 0.31).
What about the results from an estimated regression equation? The mean percent change in each of the price indices multiplied by its regression coefficient is summarized below - the estimate is the middle line while the 95% confidence intervals are the top and bottom of the bars:
Surprisingly, (if my naive estimates are correct), changes in food and energy prices have smaller effects on consumer expectations of inflation than changes in all other prices.
I am also reminded by Jim Hamilton that time varying volatility might be present in the dependent variable. (In fact, it looks like it's present in all the series but I don't know how to handle this.) I reestimated the above assuming a GARCH(1,1) and find that the results do not change substantially. (I haven't plotted the coefficients yet and maybe at some point I will update this post with the plots.)
" ... according to Professor Eric Johnson, may be the frequency with which consumers are seeing higher prices. “Things that you buy more frequently and that have large percentage increases will weigh more in people’s perception of inflation,” Johnson was quoted as saying.
He elaborated in the article with the following example: a person paying an extra $25 to fill up the gas tank is reminded of that cost once a week, or more often if you count the times he or she sees a $4-per-gallon price in giant numbers on a sign. In contrast, a rent increase of $100 would only happen once a month but would have the same financial impact."
It seems like this should be easy to test:
Volatile components of the CPI should have a larger effect on inflation expectations.
The data for CPI consists of food, energy and all other items less food and energy (the assumed less volatile components).
Food and/or energy should have larger "impacts" on inflation expectations.
In a regression of inflation expectations on change in food, energy and all other prices, the coefficients of food/energy is expected to be larger than the coefficient on changes of all other prices. (I think this is correct. I realize that the size of the coefficient does not always imply that the effect is larger but in this case it should work because all the right hand side variables are measured in the same units - percent change.)
To be more precise, it is not the size of the coefficient but the average effect as measured by the coefficient multiplied by the average changes in food, energy and all other prices that gives the size of change.
At the risk of further embarassing myself since I haven't engaged in any real econometrics in years here are some results:
I use non-seasonally adjusted data on CPI from FRED and inflation expectation from Michigan's Survey of Consumers.
The following plots the mean and median expectations of percent changes in inflation with the percent change in food.
This is a plot of the same expectations with percent change in energy:
And the following is with percent change in all other prices:
Inflation expectations are of several orders of magnitude larger than actual percent changes in prices. Surprisingly changes in all other goods excluding food and energy are more variable than changes in food prices (mean percent change is 0.34 versus 0.31).
What about the results from an estimated regression equation? The mean percent change in each of the price indices multiplied by its regression coefficient is summarized below - the estimate is the middle line while the 95% confidence intervals are the top and bottom of the bars:
Surprisingly, (if my naive estimates are correct), changes in food and energy prices have smaller effects on consumer expectations of inflation than changes in all other prices.
I am also reminded by Jim Hamilton that time varying volatility might be present in the dependent variable. (In fact, it looks like it's present in all the series but I don't know how to handle this.) I reestimated the above assuming a GARCH(1,1) and find that the results do not change substantially. (I haven't plotted the coefficients yet and maybe at some point I will update this post with the plots.)
Two SF books that had near term predictions
1. David Brin's Earth
2. Stephen Baxter's Manifold Time
David Brin's book published in 1990 was far sighted in the sense that it predicted the effects of climate change long before it became mainstream public discourse. I especially liked the look into the future where a new "religion" based on environmentalism was formed - NorAChuGa - the North American Church of Gaia. He also notes that most of Miami is under water and a hazardous occupation using divers to go through the under water cities to find valueable items had emerged. Landfills have become full and now 50 years later were proving to become sources of raw materials that have now become scarce and a new venture of landfill mining had emerged. Most of Greenland had warmed and was now open of emigration. Some had also begun seasteading. The ozone layer has been depleted and skin cancer was on the rise. The population mostly wore goggles that double as a video recorder to record crimes and hats. A splinter group called RaRa rebels against this and instead embraces the sunlight. Insights like these were quite amusing and interesting. At over 650 pages though it did make for slow reading and the pace doesn't pick up until about page 400. One blemish was naming one of the characters Sepak Takraw.
Stephen Baxter's book was not as massive and is an interesting exploration of the evolution of the universe and causality violation/multiverses. Both books take place in the near future - Baxter's in 2010-2012 and Brin's in 2030 or so. It's too tempting to prove them right and wrong so I'll do that here.
Both are overly optimistic and overly pessimistic at the same time. The scale of disaster brought on by war, population growth (of Malthusian proportions) and environmental degradation seems a little overstated although Brin still has the luxury of time on his side (30 years more or so) to be proven right. Both authors used an artifact called a "softscreen" which I assume is to be some kind of computer/laptop with foldable/rollable screen. As nice as it sounds I think that this may be a little far off still (but again, Brin has time on his side). (Brin also forsees an interface using thought which sounds interesting. See this entry for some possibilities.) As long as manufacturers continue to concentrate on processor speeds things like energy consumption, battery life, user interfaces and idea as to what constitutes a computer takes a back seat. However, I should also contradict myself by saying that Intel/AMD have also focused on energy consumption of their chips because of laptops (although not fast enough for me) and touch-screen interfaces are being used (again not as fast as I'd like to see) and Apple has been in the forefront with design with Mac Air -- not quite what I imagine a softscreen to be. In order for this to happen both user interface and design have to converge.
The weakest assumption is the seeming ease at which individuals are connected to the Web. Certainly in large cities this is the case but I'm not sure that there is sufficient coverage in rural areas to assume that everyone can remain easily and cheaply connected. I'm looking forward to a day when access points are available anywhere and are free.
2. Stephen Baxter's Manifold Time
David Brin's book published in 1990 was far sighted in the sense that it predicted the effects of climate change long before it became mainstream public discourse. I especially liked the look into the future where a new "religion" based on environmentalism was formed - NorAChuGa - the North American Church of Gaia. He also notes that most of Miami is under water and a hazardous occupation using divers to go through the under water cities to find valueable items had emerged. Landfills have become full and now 50 years later were proving to become sources of raw materials that have now become scarce and a new venture of landfill mining had emerged. Most of Greenland had warmed and was now open of emigration. Some had also begun seasteading. The ozone layer has been depleted and skin cancer was on the rise. The population mostly wore goggles that double as a video recorder to record crimes and hats. A splinter group called RaRa rebels against this and instead embraces the sunlight. Insights like these were quite amusing and interesting. At over 650 pages though it did make for slow reading and the pace doesn't pick up until about page 400. One blemish was naming one of the characters Sepak Takraw.
Stephen Baxter's book was not as massive and is an interesting exploration of the evolution of the universe and causality violation/multiverses. Both books take place in the near future - Baxter's in 2010-2012 and Brin's in 2030 or so. It's too tempting to prove them right and wrong so I'll do that here.
Both are overly optimistic and overly pessimistic at the same time. The scale of disaster brought on by war, population growth (of Malthusian proportions) and environmental degradation seems a little overstated although Brin still has the luxury of time on his side (30 years more or so) to be proven right. Both authors used an artifact called a "softscreen" which I assume is to be some kind of computer/laptop with foldable/rollable screen. As nice as it sounds I think that this may be a little far off still (but again, Brin has time on his side). (Brin also forsees an interface using thought which sounds interesting. See this entry for some possibilities.) As long as manufacturers continue to concentrate on processor speeds things like energy consumption, battery life, user interfaces and idea as to what constitutes a computer takes a back seat. However, I should also contradict myself by saying that Intel/AMD have also focused on energy consumption of their chips because of laptops (although not fast enough for me) and touch-screen interfaces are being used (again not as fast as I'd like to see) and Apple has been in the forefront with design with Mac Air -- not quite what I imagine a softscreen to be. In order for this to happen both user interface and design have to converge.
The weakest assumption is the seeming ease at which individuals are connected to the Web. Certainly in large cities this is the case but I'm not sure that there is sufficient coverage in rural areas to assume that everyone can remain easily and cheaply connected. I'm looking forward to a day when access points are available anywhere and are free.
Tuesday, June 24, 2008
My alternative to Kindle/Sony Reader
In a previous post, I had suggested that neither the Kindle nor Sony Reader appealed to me because of its price and limitations. Never mind that sales of Kindle seems to have taken off. See here for example. I'm thinking now that I might prefer an ASUS EEE (Never mind the funny name). Wikipedia entry here.
One review here. Prices range from $299.99 to $549.99 which was cheaper than I had proposed. Granted, it doesn't have Kindle nor does it read Sony Reader books but it has Linux with a very fast bootup, USB ports, and built in Wifi. Some models also have a built in camera and microphone. All right, no MP3 player but I'm sure it plays MP3 and its battery life is still up in the air (reviewers seem to complain that it lasts between 90 minutes to 2 hours depending with the more expensive models having longer battery life). I'm a little torn between the 7" versus 10" models - yes, the 10" models have bigger keyboards (and people have typed on smaller keyboards) but it seems to defeat the purpose of portability. Still 10" is about the size of a large hardcover book.
One review here. Prices range from $299.99 to $549.99 which was cheaper than I had proposed. Granted, it doesn't have Kindle nor does it read Sony Reader books but it has Linux with a very fast bootup, USB ports, and built in Wifi. Some models also have a built in camera and microphone. All right, no MP3 player but I'm sure it plays MP3 and its battery life is still up in the air (reviewers seem to complain that it lasts between 90 minutes to 2 hours depending with the more expensive models having longer battery life). I'm a little torn between the 7" versus 10" models - yes, the 10" models have bigger keyboards (and people have typed on smaller keyboards) but it seems to defeat the purpose of portability. Still 10" is about the size of a large hardcover book.
Subscribe to:
Posts (Atom)