Economics – Page 178 – artdiamondblog.com

Creative Destruction Brings Triumph of Brain Over Brawn in the Labor Market

(p. 435) . . . , the inexorable growth in the proportion of our GDP that is conceptual, especially technological, has increased the value of intellectual power relative to the value of human brawn many times over many generations. I am old enough to remember when physical prowess on the job was the source of legend and reverence. A large statue of Paul Bunyan, the mythical logger, still oversees the northern Minnesota lake country. Stevedores of a century ago were extolled for their brute strength. Today, the activities once carried out by stevedores are often run by young women at a computer console.

Source:
Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007.

Hoosiers Were Right to Be Behind the Times

I am a Hoosier by birth and upbringing, and I am not ashamed to admit it, in spite of the fact that “hoosier” is a pejorative in some circles.
Until recently, in Indiana we swam against the tide, in rejecting Daylight Savings Time. It never made sense to me that in order to take advantage of sunlight, the government needed to mandate that the clocks be changed twice a year.
Why couldn’t those who want to use the hours of sunlight differently, simply adjust their own schedules, for example, by getting up earlier or later?
Well the article quoted below, suggests that us Hoosiers may have been wiser than we knew.

(p. D1) For decades, conventional wisdom has held that daylight-saving time, which begins March 9, reduces energy use. But a unique situation in Indiana provides evidence challenging that view: Springing forward may actually waste energy.
Up until two years ago, only 15 of Indiana’s 92 counties set their clocks an hour ahead in the spring and an hour back in the fall. The rest stayed on standard time all year, in part because farmers resisted the prospect of having to work an extra hour in the morning dark. But many residents came to hate falling in and out of sync with businesses and residents in neighboring states and prevailed upon the Indiana Legislature to put the entire state on daylight-saving time beginning in the spring of 2006.
Indiana’s change of heart gave University of California-Santa Barbara economics professor Matthew Kotchen and Ph.D. student Laura Grant a unique way to see how the time shift affects energy use. Using more than seven million monthly meter readings from Duke Energy Corp., covering nearly all the households in southern Indiana for three years, they were able to compare energy consumption before and after counties began observing daylight-saving time. Readings from counties that had already adopted daylight-saving time provided a control group that helped them to adjust for changes in weather from one year to the next.
Their finding: Having the entire state switch to daylight-saving time each year, rather than stay on standard time, costs Indiana households an additional $8.6 million in electricity bills. They conclude that the reduced cost of lighting in afternoons during daylight-saving time is more than offset by the higher air-conditioning costs on hot afternoons and increased heating costs on cool mornings.
“I’ve never had a paper with such a clear and unambiguous finding as this,” says Mr. Kotchen, who presented the paper at a National Bureau of Economic Research conference this month.

For the full story, see:
JUSTIN LAHART. “Daylight Saving Wastes Energy, Study Says.” The Wall Street Journal (Weds., February 27, 2008): D1 & D4.

Searching for Curb Parking Causes 30% of Central Business District Congestion

(p. A19) MOST people view traffic with a mixture of rage and resignation: rage because congestion wastes valuable time, resignation because, well, what can anyone do about it? People have places to go, after all; congestion seems inevitable.
But a surprising amount of traffic isn’t caused by people who are on their way somewhere. Rather, it is caused by those who have already arrived. Streets are clogged, in part, by drivers searching for a place to park.
Several studies have found that cruising for curb parking generates about 30 percent of the traffic in central business districts. In a recent survey conducted by Bruce Schaller in the SoHo district in Manhattan, 28 percent of drivers interviewed while they were stopped at traffic lights said they were searching for curb parking. A similar study conducted by Transportation Alternatives in the Park Slope neighborhood in Brooklyn found that 45 percent of drivers were cruising.
. . .
If cities want to reduce congestion, clean the air, save energy, reduce greenhouse gas emissions and improve neighborhoods — and do it all quickly — they should charge the right price for curb parking, and spend the resulting revenue to improve local public services.

For the full commentary, see:
Donald Shoup. “Gone Parkin’.” The New York Times (Thurs., March 29, 2007): A19.
(Note: ellipsis added.)

Lack of Legal Status for Poor Keeps Them “In Constant Fear”

The passage below is quoted from a WSJ summary of an article in the July 16, 2007 issue of Time:

(p. B5) Writing in Time magazine, Ms. Albright, former U.S. secretary of state, and Mr. de Soto, a Peruvian-born economist who heads the Institute for Liberty and Democracy in Lima, say that about half of the world’s population work in shadow economies. They generally lack birth certificates, legal addresses or, crucially, deeds to their shacks and market stalls. “Without legal documents, they live in constant fear of being evicted by local officials or landlords,” write Ms. Albright and Mr. de Soto, who co-chair the U.N. Commission on Legal Empowerment of the poor. As a result, the poor are unable to invest or even plan for the future.

For the full summary, see:
“The Informed Reader; Poverty; Lack of Strong Legal Identity Helps Keep Down World’s Poor.” Wall Street Journal (Fri., July 6, 2007): B5.

The Free Market Works

The story quoted below tells how outsourcing high-tech jobs to India has bid up the salaries of high-tech Indian engineers, thereby reducing the appeal of further outsourcing. Marvelous how the market works!
Another lesson from the story applies to forecasting: mechanical extrapolation of current trends is inferior to prediction that takes account of predictable changes in prices (in this case, salaries).

(p. A15) Around the century’s turn, when U.S. companies first began flooding to India for its cheap labor, pundits warned that the subcontinent could increasingly rob the U.S. of high-end white-collar jobs. Debate was especially sharp in Silicon Valley, then in a slump, because India annually turns out nearly 500,000 engineering graduates.
. . .
Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India’s computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India’s software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it’s closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody’s Economy.com.
Rafiq Dossani, a scholar at Stanford University’s Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers’ wages remain low — an average $5,000 a year for a new engineer with little experience — the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. “For the top-level talent, there’s an equalization,” he says.

For the full story, see:
Pui-Wing Tam and Jackie Range. “Second Thoughts: Some in Silicon Valley Begin to Sour on India; A Few Bring Jobs Back As Pay of Top Engineers In Bangalore Skyrockets.” Wall Street Journal (Tues., July 3, 2007): A1 & A15.
(Note: ellipsis added.)

Non-Market Health Care Pricing Results in Health Care Shortages

(p. A22) When my Labrador retriever became acutely lame, we were able to locate a veterinary orthopedic expert in Atlanta within 48 hours who was able to repair a ruptured tendon within one week. But my prospects of identifying an endocrinologist who can care for my daughter’s diabetes when she turns 18 are much less promising.
The limited number of endocrine specialists is a not a consequence of limited demand — everyone is aware of the epidemic of diabetes we are facing. There are also shortages of generalists and other specialists, and the reason is the absence of market signals — i.e., market-based prices — for influencing the supply of physicians in various specialties.
The roots of this problem lay in the use of administrative pricing structures in medicine. The way prices are set in health care already distorts the appropriate allocation of efforts and resources in health care today. Unfortunately, many of the suggested reforms of our health care system — including the various plans for universal care, or universal insurance, or a single-payer system, that various policy makers and Democratic presidential candidates espouse — rest on the same unsound foundations, and will produce more of the same.
. . .
One important lesson of the 20th century is that, while markets are far from perfect, more choices are available when people are able to use free markets to interact with each other. Markets may not get the prices exactly correct all the time, but they are capable of self- correction, a capacity that has yet to be demonstrated by administrative pricing.
It tells you something when the supply of and demand for specialist veterinary care is so easily matched when the prices of these services are established on the market — while shortages and oversupplies are common for human medical care when the prices of these services are set by administrators in the public sector. Will health-care reformers — and American citizens — get the message?

For the full commentary, see:
Robert A. Swerlick. “Our Soviet Health System.” Wall Street Journal (Tues., Jun 5, 2007): A22.
(Note: ellipsis added.)

Market Prices Send “the Right Signal to the Customer to Save Energy”

In the passage quoted below, the “commission” refers to China’s “National Development and Reform Commission.”

(p. A6) The commission estimates China’s energy efficiency is about 10% below that of developed countries because of obsolete technology. But many experts say Beijing’s policy priorities are a bigger obstacle.
Worries about social unrest and inflation led Beijing to put the brakes on pricing overhauls, at tremendous cost to state refiners PetroChina Co. and China Petroleum & Chemical Corp., known as Sinopec.
“Market prices are a very important and key issue because they send out the right signal to the customer to save energy,” said Yang Fuqiang, vice president of the Energy Foundation in Beijing.

For the full story, see:
David Winning. “Why Energy Efficiencies Prove Elusive in China.” Wall Street Journal (Tues., Nov. 6, 2007): A6.

Why We Need Some Savvy Entrepreneur to Start a Garage-Rating Business

“Henry Schneider found few competent, honest mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited below.

(p. C1) . . . , Mr. Schneider drove home to Connecticut and undertook a devilish little test.
Over the next few months, he took the Subaru to 40 garages, loosening the battery cable and draining some coolant before each visit. He even wrote himself a script and memorized it, to make sure he was telling every garage the same thing. “We bought the car recently, and we should have had it looked at before we bought it, but we didn’t,” he would say. “It hasn’t started a few times. Can you check that out?” He also asked for a thorough inspection.
Mr. Schneider was trying to answer a question that has occurred to pretty much all drivers who have ever been given the unsettling news that a car needs more repairs than they had expected: Does it really? Or is the garage just looking to make some extra money off me?
. . .
At only 27 of the 40 garages did mechanics tell Mr. Schneider that he had a disconnected battery cable, the very problem to which he had pointed them by saying his car didn’t always start. Only 11 mentioned the low coolant, a problem that can ruin a car’s engine. Ten of the garages, meanwhile, recommended costly repairs that were plainly unnecessary, like replacing the starter motor or the battery. (Tellingly, his results were in line with what the Automobile Protection Association found when it performed its experiments in Canada.)
In all, only about 20 percent of the garages deserved a passing grade. “And that’s with a pretty low bar,” Mr. Schneider told me. “I’m even allowing them to have missed a blown taillight that should have been caught.”
. . .
. . . , Mr. Schneider didn’t set out to study cars. His original goal was to examine the health care system. But he couldn’t very well give himself a heart murmur and then visit 40 cardiologists.
“It turns out it’s hard to get objective measures of people’s bodies,” as Thomas Hubbard, a Northwestern University professor who has also studied the economics of reputation, put it. “It’s a lot easier to get objective measures of people’s cars.”
. . .
Until some savvy entrepreneur starts a garage-rating business, the best solution may be the oldest one: asking for a recommendation from someone who is knowledgeable enough to distinguish between good service and bad. Just remember that a lot of people don’t know quite as much about cars — or their mechanic — as they think they do.

For the full commentary, see:
DAVID LEONHARDT. “ECONOMIC SCENE; When Trust In an Expert Is Unwise.” The New York Times (Weds., November 7, 2007): C1 & C9.

(Note: ellipses added.)

“Schneider sabotaged his dad’s old station wagon to test the honesty of mechanics.” Source of caption and photo: online version of the NYT commentary quoted and cited above.

Southwest Airline Manages Risk Through Oil Price Hedges

Source of graphic: online version of the NYT article quoted and cited below.

(p. C1) Southwest Airlines, in danger for much of this year of losing its quirky dominance in the domestic airline industry, could soon be standing, once again, head and shoulders above the competition.
Better service? Happier and more productive workers?
Not this time. The reason for Southwest’s rapidly increasing advantage over other big airlines is much simpler: it loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not.
Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years.
Other major airlines passed on buying all but the shortest-term insurance against high fuel prices, allowing Southwest executives a bit of schadenfreude.

For the full story, see:
JEFF BAILEY. “An Airline Shrugs at Oil Prices.” The New York Times (Thurs., November 29, 2007): C1 & C10.

‘A Southwest Airlines worker fueled a plane. Southwest’s chief said the hedges against rising fuel costs “bought us time to retool our company.”” Source of caption and photo: online version of the NYT article quoted and cited above.

Incentives Matter: Capital Punishment Deters Murders

Source of graph: online version of the WSJ commentary quoted and cited below.

(p. A13) Recent high-profile events have reopened the debate about the value of capital punishment in a just society. This is an important discussion, because the taking of a human life is always a serious matter.
Most commentators who oppose capital punishment assert that an execution has no deterrent effect on future crimes. Recent evidence, however, suggests that the death penalty, when carried out, has an enormous deterrent effect on the number of murders. More precisely, our recent research shows that each execution carried out is correlated with about 74 fewer murders the following year.
For any society concerned about human life, that type of evidence is something that should be taken very seriously.
The study examined the relationship between the number of executions and the number of murders in the U.S. for the 26-year period from 1979 to 2004, using data from publicly available FBI sources. The chart nearby shows the number of executions and murders by year.

For the full commentary, see:
ROY D. ADLER and MICHAEL SUMMERS. “Capital Punishment Works.” The Wall Street Journal (Fri., November 2, 2007): A13.