We often talk about the difference between "normal" and "inferior" goods in the classroom, a distinction that depends not on product quality, but the effect of changes in income on demand. When income falls, the demand for normal goods decreases, but the demand for inferior goods increases. Typical examples include Kraft dinner (a student staple), used cars and public transit.
A couple of articles lately caught our attention. The first, from the Sep 3rd edition of the Globe and Mail, reports on the increase in sales at McDonald's and Burger King. Things are so good, in a recession, that McDonald's is increasing their dividend and Burger King is being bought out. (Click here for article)
Today an article from Reuters indicates that Jack-in-the-Box is closing 40 stores in Texas and the south-east. The reason given is that high unemployment in those regions has decreased sales. (Click here for article)
We can only conclude that Jack-in-the-Box is normal while McDonald's and Burger King are inferior.
For our money, Five Guys Burgers and Fries is still best.
Thursday, September 30, 2010
Wednesday, September 29, 2010
Green Job Creation
An article in Reuters, finds that California voters are divided on a ballot measure that would suspend a global warming law until the state's jobless rate falls to 5.5 percent for a year.
Those in favour of the suspension claim that the Global warming Act to reduce emissions will cost jobs in California. Opponents argue that the act will boost the economy and help create green jobs.
In a recent blog, passing wind, we explained that switching to green technologies can and did induce job creation in the UK. Economics 101 tells us that government investment, subsidy and regulation along with technological change can produce green jobs, resulting in a rise in the employment level. Where there is a market in going green, there is a demand for labour employed.
Germany’s renewable energy sector for example now employs more than a quarter million people. Similarly, Spain has also benefited by job creation as a result of their green sector.
It is important to know whether these new green jobs represent a net benefit to society or whether they are being created at the expense of other jobs elsewhere in the economy. Green jobs created by government intervention have opportunity costs; subsidy money or advertising money could have been spent elsewhere in other sectors. Do these green investments allow specific jobs to be created in a way that has social value?
For us, the answer is of course yes. We think policy can be a driver of innovation rather than an impediment, and it is helping to push the private sector into green job creation. Solar panels don't put themselves up. Wind turbines don't manufacture themselves.
Perhaps the Californian critics are unaware that all forms of energy are heavily regulated and often subsidized. Energy sources being developed and set up within a country is hardly the result of pure market forces, but rather a result of both private and public choices. It reflects a mix of innovation and investment on the one side, and of regulation, taxation and subsidy on the other.
Those in favour of the suspension claim that the Global warming Act to reduce emissions will cost jobs in California. Opponents argue that the act will boost the economy and help create green jobs.
In a recent blog, passing wind, we explained that switching to green technologies can and did induce job creation in the UK. Economics 101 tells us that government investment, subsidy and regulation along with technological change can produce green jobs, resulting in a rise in the employment level. Where there is a market in going green, there is a demand for labour employed.
Germany’s renewable energy sector for example now employs more than a quarter million people. Similarly, Spain has also benefited by job creation as a result of their green sector.
It is important to know whether these new green jobs represent a net benefit to society or whether they are being created at the expense of other jobs elsewhere in the economy. Green jobs created by government intervention have opportunity costs; subsidy money or advertising money could have been spent elsewhere in other sectors. Do these green investments allow specific jobs to be created in a way that has social value?
For us, the answer is of course yes. We think policy can be a driver of innovation rather than an impediment, and it is helping to push the private sector into green job creation. Solar panels don't put themselves up. Wind turbines don't manufacture themselves.
Perhaps the Californian critics are unaware that all forms of energy are heavily regulated and often subsidized. Energy sources being developed and set up within a country is hardly the result of pure market forces, but rather a result of both private and public choices. It reflects a mix of innovation and investment on the one side, and of regulation, taxation and subsidy on the other.
Monday, September 27, 2010
Update: Minimum Wage and Fiscal Policy
It has been a busy month for us. We have now passed 1000 page views and this is the 17th post this month, albeit a short one.
Earlier this month we commented on the effects of a minimum wage. (Click here for blog) In that blog, we suggested that the minimum wage actually caused unemployment among the very people it was supposed to help, and that minimum wages are favoured by trade unions as a method of increasing their own pay. We'd like to think that the NY Times reads our blog, but we doubt it. They published an article about the effects of minimum wages in South Africa that provides evidence of what we were saying. (Click here for article)
In the Quebec arena story, we attacked the efficacy of discretionary fiscal policy and it's ability to create jobs. (Click here for blog). Expansionary policy is used during a recession to fight unemployment. We took the opposite view of Paul Krugman and suggest that fiscal policy doesn't work and offered an article about Los Angeles as evidence. Yesterday, McClatchy's Washington Bureau posted an article offering more examples. (Click here for article)
Earlier this month we commented on the effects of a minimum wage. (Click here for blog) In that blog, we suggested that the minimum wage actually caused unemployment among the very people it was supposed to help, and that minimum wages are favoured by trade unions as a method of increasing their own pay. We'd like to think that the NY Times reads our blog, but we doubt it. They published an article about the effects of minimum wages in South Africa that provides evidence of what we were saying. (Click here for article)
In the Quebec arena story, we attacked the efficacy of discretionary fiscal policy and it's ability to create jobs. (Click here for blog). Expansionary policy is used during a recession to fight unemployment. We took the opposite view of Paul Krugman and suggest that fiscal policy doesn't work and offered an article about Los Angeles as evidence. Yesterday, McClatchy's Washington Bureau posted an article offering more examples. (Click here for article)
Sunday, September 26, 2010
They Hire Economists
The Huffington Post recently reported on a pending piece of legislation working its way through congress. If it passes, small-business owners can zero in on banks most likely to make small-business loans. The anticipated bill could create between 500,000 and 700,000 new jobs.
The article highlights that most large regional, national and international banks favour multimillion-dollar loans to large corporations, not small-business loans. The reason being that the fee incomes on the large loans are much greater and it allows them to hire expert in industries they want to target. They employ economists and market researchers to help them avoid lending to businesses within riskier industries. This last statement reeks of asymmetric information and economies of scale in monitoring... so for those a little rusty of your “lemons” here is a quick refresher:
Often, borrowers are more aware of the hazards of financial contracts as they know more about the risks involved in a project for which they need finance. These informational asymmetries are the underlying cause of adverse selection first introduced by Akerlof in 1970, better known as the lemons problem. A lemons problem arises in debt markets as lenders have trouble figuring out whether borrower’s investment opportunities are attractive enough compared to the level of risk involved (“good risk” or “bad risk”)
These large banks can actually choose the growth industries that are more likely to be successful. The average cost of information decreases as the amount of intermediated resources is augmented, which normally occurs when the size of the entity grows. This is one of the mechanisms to reach scale economies on information, and can be achieved by the endogenous growth of the bank or by merge.
Large banks are still required to meet the goals of the Community Reinvestment Act, which states they must lend in the communities where they accept deposits. Providing small-business loans within their community is one way to do that. But, they prefer businesses with at least two years of profitability, excellent credit scores and owners with many years of related experience. The lenders also require solid collateral to be pledged.
Small community banks however, are able to make small business loans profitably. Taking advantage of the U.S. Small Business Administration's loan guarantee programs, they then sell the guaranteed portion into the secondary market. The upfront fees paid by borrowers, points received from buyers of the guaranteed paper, and servicing fees are sources of profit for them.
The bottom line here - small banks make small loans because they find them profitable. Large banks prefer larger loans and don't usually compete with small banks. That is why the pending small-business legislation is creating a fund to lend $30 billion to community banks with favourable terms. Whether or not the banks decide to participate, and to what extent they will make loans that they would not have otherwise made, remains to be seen.
Although the small-business bill can help you get financing, good credit scores and sound underwriting will still prevail.
Perhaps we really need more personal relationships in finance and banking. The lack of the latter and the current “one-size-fits-all” approach, might well have contributed to the huge credit losses of the recent past. Mortgages have not been given according to individual judgment in a case by case decision, but based on corporate guidelines. Perhaps it is time to bring a little more personal judgment into the banking system; doing so would help to alleviate the lemons problem.
Large banks like the ones we talk about in this article don’t do this for exactly the reasons stated above. This does however leave us with the potential for moral hazard problems… a landscaping contractor gets a loan ... and the branch manager suddenly gets a new landscaped yard? Or perhaps a bank makes a series of bad loans to people with poor credit histories because they were good kindergarten buddies, or were college roommates.
All of these problems can be overcome with government regulation. Is it any wonder that Canada, with its extensive regulation of the financial markets, was the only major country to survive the 2007-2009 credit crises? Is it any wonder that top UK bankers are leaving in droves?
See also this article in the Financial Times, Departing bank CEOs. *May need a subscription, but worth the read.
Terms:
Moral hazard: The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour.
Asymmetric information: The failure of two parties to a transaction to have the same relevant information. Examples are buyers who know less about product quality than sellers, and lenders who know less about likely default than borrowers.
Source: Economics by N.Gregory Mankiw and Mark P. Taylor
The article highlights that most large regional, national and international banks favour multimillion-dollar loans to large corporations, not small-business loans. The reason being that the fee incomes on the large loans are much greater and it allows them to hire expert in industries they want to target. They employ economists and market researchers to help them avoid lending to businesses within riskier industries. This last statement reeks of asymmetric information and economies of scale in monitoring... so for those a little rusty of your “lemons” here is a quick refresher:
Often, borrowers are more aware of the hazards of financial contracts as they know more about the risks involved in a project for which they need finance. These informational asymmetries are the underlying cause of adverse selection first introduced by Akerlof in 1970, better known as the lemons problem. A lemons problem arises in debt markets as lenders have trouble figuring out whether borrower’s investment opportunities are attractive enough compared to the level of risk involved (“good risk” or “bad risk”)
These large banks can actually choose the growth industries that are more likely to be successful. The average cost of information decreases as the amount of intermediated resources is augmented, which normally occurs when the size of the entity grows. This is one of the mechanisms to reach scale economies on information, and can be achieved by the endogenous growth of the bank or by merge.
Large banks are still required to meet the goals of the Community Reinvestment Act, which states they must lend in the communities where they accept deposits. Providing small-business loans within their community is one way to do that. But, they prefer businesses with at least two years of profitability, excellent credit scores and owners with many years of related experience. The lenders also require solid collateral to be pledged.
Small community banks however, are able to make small business loans profitably. Taking advantage of the U.S. Small Business Administration's loan guarantee programs, they then sell the guaranteed portion into the secondary market. The upfront fees paid by borrowers, points received from buyers of the guaranteed paper, and servicing fees are sources of profit for them.
The bottom line here - small banks make small loans because they find them profitable. Large banks prefer larger loans and don't usually compete with small banks. That is why the pending small-business legislation is creating a fund to lend $30 billion to community banks with favourable terms. Whether or not the banks decide to participate, and to what extent they will make loans that they would not have otherwise made, remains to be seen.
Although the small-business bill can help you get financing, good credit scores and sound underwriting will still prevail.
Perhaps we really need more personal relationships in finance and banking. The lack of the latter and the current “one-size-fits-all” approach, might well have contributed to the huge credit losses of the recent past. Mortgages have not been given according to individual judgment in a case by case decision, but based on corporate guidelines. Perhaps it is time to bring a little more personal judgment into the banking system; doing so would help to alleviate the lemons problem.
Large banks like the ones we talk about in this article don’t do this for exactly the reasons stated above. This does however leave us with the potential for moral hazard problems… a landscaping contractor gets a loan ... and the branch manager suddenly gets a new landscaped yard? Or perhaps a bank makes a series of bad loans to people with poor credit histories because they were good kindergarten buddies, or were college roommates.
All of these problems can be overcome with government regulation. Is it any wonder that Canada, with its extensive regulation of the financial markets, was the only major country to survive the 2007-2009 credit crises? Is it any wonder that top UK bankers are leaving in droves?
See also this article in the Financial Times, Departing bank CEOs. *May need a subscription, but worth the read.
Terms:
Moral hazard: The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behaviour.
Asymmetric information: The failure of two parties to a transaction to have the same relevant information. Examples are buyers who know less about product quality than sellers, and lenders who know less about likely default than borrowers.
Source: Economics by N.Gregory Mankiw and Mark P. Taylor
Thursday, September 23, 2010
Efficient and Ruthless
That describes the behaviour of markets. When markets are in equilibrium, the number of units offered for sale is equal to the number of units wanted by buyers. There are no shortages and no surpluses. On those occassions when shortages or surpluses occur, market prices adjust rapidly to a new equilibrium. Incredible efficiency when markets work, and are allowed to work.
The above scenario doesn't always work when there are too few buyers or too few sellers. In the latter case, the firm(s) involved may be slow to adapt to changing consumer tastes, or to other changes in the market place. When they do not react, they face the incredibly ruthless punishment of a market scorned.
The above scenario doesn't always work when there are too few buyers or too few sellers. In the latter case, the firm(s) involved may be slow to adapt to changing consumer tastes, or to other changes in the market place. When they do not react, they face the incredibly ruthless punishment of a market scorned.
One example of this is the superior position assumed by Research in Motion with its Blackberry phone. It was the best thing on the market - just ask them. The market, however, seemed to prefer the iPhone. Blackberry didn't react. Apple pushed the technology further and brought out the iPad. RIM has now decided that maybe they should bring out a tablet as well. Have a look what the market did to the share prices of Research in Motion (RIM) and Apple (AAPL).
Another example of the ruthlessness of markets occured today when Blockbuster Inc. filed for Chapter 11 bankruptcy in the US. The details are in an article from Reuters. (Click here for article). In this case, Blockbuster did not respond to the competition from the likes of RedBox and Netflix. They tried instituting "No Late Fees", but repealed that plan and then offered no other changes to their business plan. The bricks and mortar model of video rental is finished, the market said so and the market doesn't take 'no' for an answer.
Passing Wind
Sky news reports that the world's biggest wind farm has opened off the coast of Kent and is now generating power. At a cost of £800m to build 100 turbines; it has the capacity to power more than 200,000 homes a year.
In response to the increased GHG level threat, there have been and continue to be shifts toward a low-carbon, resource efficient economy in the United Kingdom. The challenge is doing so in a cost-effective way, while also stimulating economic growth, competitiveness and job creation. The article touches on all three.
By supplying more of their own energy in the UK, they are now safer from shocks in the oil and gas markets. However, the UK is still behind in the renewable energy industry compared to other European countries. The wind farm has used Danish turbines and is run by a Swedish company, yet employs labour from Kent.
While we both agree that if the local government invested more into research and development it could deliver more jobs and a low-carbon industry by achieving a comparative advantage, there are still gains to be had from trade. Danish and Swedish companies have a comparative advantage at the moment in wind turbines. Thanks to specialization and division of labour, Kent can now use technologies and capital from abroad yet still employ UK workers. Job creation is a good thing.
Economics tells us that developing comparative advantage in a green business where none currently exists is more difficult than to exploit green advantages where comparative advantages already do exist.
Perhaps more focus should be given to understanding the drivers of comparative advantage which would allow businesses to develop green services in areas which they excel. Research we have previously looked at (while writing papers on the subject), leads us to believe that drivers influencing certain sectors to become green arise from demand side factors. These are things such as government regulation or changes in consumer behaviour. But the key which allows businesses to respond to these drivers likely lies more on the supply side; access to capital, investment in R & D, skilled labour force etc. Again, this is why the Danish wind sector does so well.
Surprisingly, there is already competition. Other developers are planning to build even bigger project close by. Case in point is the London Array site in the outer Thames estuary which boasts an expected 341 turbines with the potential to power 750,000 homes.
I would encourage anyone interested in climate change policy to carefully read Nicholas Sterns report “The "Stern Review" on the Economics of Climate Change”.
In response to the increased GHG level threat, there have been and continue to be shifts toward a low-carbon, resource efficient economy in the United Kingdom. The challenge is doing so in a cost-effective way, while also stimulating economic growth, competitiveness and job creation. The article touches on all three.
By supplying more of their own energy in the UK, they are now safer from shocks in the oil and gas markets. However, the UK is still behind in the renewable energy industry compared to other European countries. The wind farm has used Danish turbines and is run by a Swedish company, yet employs labour from Kent.
While we both agree that if the local government invested more into research and development it could deliver more jobs and a low-carbon industry by achieving a comparative advantage, there are still gains to be had from trade. Danish and Swedish companies have a comparative advantage at the moment in wind turbines. Thanks to specialization and division of labour, Kent can now use technologies and capital from abroad yet still employ UK workers. Job creation is a good thing.
Economics tells us that developing comparative advantage in a green business where none currently exists is more difficult than to exploit green advantages where comparative advantages already do exist.
Perhaps more focus should be given to understanding the drivers of comparative advantage which would allow businesses to develop green services in areas which they excel. Research we have previously looked at (while writing papers on the subject), leads us to believe that drivers influencing certain sectors to become green arise from demand side factors. These are things such as government regulation or changes in consumer behaviour. But the key which allows businesses to respond to these drivers likely lies more on the supply side; access to capital, investment in R & D, skilled labour force etc. Again, this is why the Danish wind sector does so well.
Surprisingly, there is already competition. Other developers are planning to build even bigger project close by. Case in point is the London Array site in the outer Thames estuary which boasts an expected 341 turbines with the potential to power 750,000 homes.
I would encourage anyone interested in climate change policy to carefully read Nicholas Sterns report “The "Stern Review" on the Economics of Climate Change”.
Wednesday, September 22, 2010
Just Plane Silly?
The Vancouver International Airport (YVR) got some coverage in the Globe and Mail few days ago, click here for the article.
The airport will be holding landing and terminal fees at 2010 levels, while the B.C government will also cancel its aviation fuel tax on overseas and transborder flights. This is an attempt to increase growth. Airport executives were displeased with the fact that people were choosing relatively less expensive, closer substitutes in the U.S (Seattle and Bellingham, Washington). American competitors do not charge fuel taxes on international flights.
In economic terms, the net changes in utility and welfare loss are assumed to be less than the gains from the terminal and landing fees.
The idea is that by giving up the extra revenue from the landing and terminal fees, it will be able to recapture it in the form of increased traffic. (Notice how, in the article, they were careful to not comment on lost revenue specifically from the B.C gas tax, which in itself should be revenue neutral). The increased traffic through the airport will result in increased consumption of goods and services provided in the terminal and with the HST now in effect that means bigger numbers.
As economists, we know there is no such thing as a free lunch and lost revenue must come from somewhere.
So what about the government’s supposed double standards on cutting GHG emissions but yet scrapping the gas tax on international flights? Well it could be that in this case, the tax was not going to be effective. From an environmental perspective, decreased international air travel at YVR could mean a cut in GHG emissions. But if alternative means of transport emerge or shift, then these will also generate GHG emissions.
This rests on a couple of factors, such as levels of emissions released directly by air transport, level of emissions released by the suppliers, level of emissions released by other means of transport and transport related infrastructure, level of emissions released directly by the replacement activity and level of emissions released by the suppliers.
YVR officials claim this is also an effort to boost job creation. Where there is lower growth in air transport, a reallocation of resources to other areas would occur, so that the jobs lost from the decreased levels in air transport would be offset by job gains in other industries. This transfer between sectors does take time. Technologies need to be adapted and workers re-trained, which takes time and investment. Due to this shift of consumers to American airports, jobs at YVR are being lost and the capital envolved is sunk. Short term political solution? Create more jobs with the existing capital.
Note:
Transport related infrastructure here is defined as generally physically large, and inevitably expensive and largely immobile that seldom have uses beyond what it is designed for- in economic terms it can be seen as a ‘sunk cost’. See Transport economics, 3rd edition by Kenneth Button.
The airport will be holding landing and terminal fees at 2010 levels, while the B.C government will also cancel its aviation fuel tax on overseas and transborder flights. This is an attempt to increase growth. Airport executives were displeased with the fact that people were choosing relatively less expensive, closer substitutes in the U.S (Seattle and Bellingham, Washington). American competitors do not charge fuel taxes on international flights.
In economic terms, the net changes in utility and welfare loss are assumed to be less than the gains from the terminal and landing fees.
The idea is that by giving up the extra revenue from the landing and terminal fees, it will be able to recapture it in the form of increased traffic. (Notice how, in the article, they were careful to not comment on lost revenue specifically from the B.C gas tax, which in itself should be revenue neutral). The increased traffic through the airport will result in increased consumption of goods and services provided in the terminal and with the HST now in effect that means bigger numbers.
As economists, we know there is no such thing as a free lunch and lost revenue must come from somewhere.
So what about the government’s supposed double standards on cutting GHG emissions but yet scrapping the gas tax on international flights? Well it could be that in this case, the tax was not going to be effective. From an environmental perspective, decreased international air travel at YVR could mean a cut in GHG emissions. But if alternative means of transport emerge or shift, then these will also generate GHG emissions.
This rests on a couple of factors, such as levels of emissions released directly by air transport, level of emissions released by the suppliers, level of emissions released by other means of transport and transport related infrastructure, level of emissions released directly by the replacement activity and level of emissions released by the suppliers.
YVR officials claim this is also an effort to boost job creation. Where there is lower growth in air transport, a reallocation of resources to other areas would occur, so that the jobs lost from the decreased levels in air transport would be offset by job gains in other industries. This transfer between sectors does take time. Technologies need to be adapted and workers re-trained, which takes time and investment. Due to this shift of consumers to American airports, jobs at YVR are being lost and the capital envolved is sunk. Short term political solution? Create more jobs with the existing capital.
Note:
Transport related infrastructure here is defined as generally physically large, and inevitably expensive and largely immobile that seldom have uses beyond what it is designed for- in economic terms it can be seen as a ‘sunk cost’. See Transport economics, 3rd edition by Kenneth Button.
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