28 November 2015

Sugar? Yes, sugar is killing you.

I just watched That Sugar Film, an Australian documentary in the tradition of "Supersize me" (McDonalds will kill you) and "Superhigh me" (marijuana will not).

[I just saw that this film is coming to theatres in Jan 2016; I saw a festival copy]

In the film, Damon eats 40 teaspoons (160g) of sugar a day, the average for an Australian. He doesn't ingest sugar via sweets, soda or ice cream, but via "healthy foods" like yogurt, granola, juice (oh the juice!), and so on.

The results after 60 days are startling: he gains 8kg (on 75 kg start), moves from a healthy liver to a "fatty" liver, and exhibits the highs and lows of a pre-diabetic.

This film captures the "new knowledge" that sugar -- not fat -- is probably responsible for the epidemic of obesity, diabetes, etc.

The conventional wisdom of "fat makes you fat" is wrong. The idea that "all calories are the same" (a favourite of the sugar industry, which uses science and lobbying in exactly the same way as tobacco companies) is wrong.

Sugar is rare in nature, so our bodies are not evolved to cope with it compared to fat and protein. Thus, when we eat sugar, we get a rush of energy. Our livers release insulin to tell cells to mop up the sugar, stop burning fat, and (this is the killer) convert excess sugar into fat that will be stored in our livers, guts (men) or rumps (women). It's those rushes that leave us depleted after the high as well as lacking energy (because it's getting stored rather than used).

By coincidence, The Economist has articles on sugar's bad influence on health this week (soda and tax it). For more information, check with government health sites: USA, Canada, UK, and Australia. (There are MANY sugar industry sites with "health" information. Don't believe them.)

Should the government tax sugar? Yes, if you think that "sin taxes" are appropriate as a means of reducing harm to citizens and public health costs. Diabetes and obesity cost Americans $245 and $150 billion, respectively, per year in direct and indirect costs (that's $1300/person!)

Bottom Line: I give this file FIVE stars for its entertaining (sometimes terrifying) glimpse of the harms we risk from sugar. Sure, have some in small doses (fruit, milk) but not in large or concentrated doses, e.g., juices, sweetened products (pasta sauce!), Vitamin Water, etc. Home cooking can avoid many of these problems. Coca cola, Pepsi and Mountain Dew (27 tsp in one bottle!)? You're better off without those.

27 November 2015

Friday party!

Run! Swim!

View post on imgur.com

Carbon market mechanisms matter for Paris COP

Liza (email) graduated from LUC last year (she's now at Edinburgh University). I asked her to write a little about her bachelor thesis since her topic is so relevant to the upcoming climate talks in Paris. -- David

The table below summarizes four case studies discussed in my bachelor thesis “Market mechanisms for greenhouse gas emission control: carbon tax vs. cap-and-trade”. Market mechanisms for GHG emission control are currently not widely used, but they hold great potential.

In the literature, there are various arguments for preferring either a carbon tax or a cap-and-trade scheme, but they usually boil down to the tons of CO2 reduced and the revenue produced. Cap-and-trade is usually preferred because CO2 emission reductions can be set as the aim, while a carbon tax is preferred because it will raise higher (and predictable) revenues. From the table above it can observed that cap-and-trade schemes reduce more tons of CO2 per year, while carbon tax schemes have higher annual revenues. These observations correspond to the arguments that are found in the literature, meaning that to an extent practice does follow theory. However, the success or failure of a particular market mechanism cannot be attributed to only these two factors. For example, Australian carbon tax raised high revenue and reduced CO2 emissions, but it was revoked due to a lack of political support for the scheme.*

NB: Alberta's proposed carbon tax might raise the price of gasoline by 5 cents. Current prices are CA$88 cents/litre (US$2.48/gallon)

Furthermore, the use of revenue is very important for the success of a market mechanism, particularly for carbon taxes. The Australian tax was revenue positive, which meant that the revenue raised went into the national budget from where it was very hard to follow spending. The BC tax on the other hand, was revenue neutral. The revenue was used to reduce other taxes on citizens and corporations. Cap-and-trade schemes also often fund sustainability projects. Citizens tend to support market mechanisms that recycle revenue into sustainable development, thereby strengthening political will to keep the mechanisms going.

Businesses don’t like cap-and-trade schemes because under them, the price they pay for carbon is uncertain and their ability to plan long-term is hampered. In order to get businesses on board with cap-and-trade schemes, governments often give away initial permits for free. Both the EU’s ETS and California’s cap-and-trade schemes had this feature. Free permits may raise business compliance, but they also mean lower initial revenues. Free permits have to end at some point, of course, if one wants businesses (or consumers) to face price incentives to lower their emissions.

When a market mechanism is introduced as a policy, it usually already has a long-term plan of how the policy will work and how it aims to affect emissions; this is done with trajectories. Both EU ETS and British Columbia have trajectories – the former with how the cap decreases over time and the latter with how the tax grows over time. Trajectories can give a sense of security to those worried about impacts over several years. However, their correct establishment can be very tricky, particularly when it comes to carbon dioxide, because there is much scientific uncertainty about the “tipping point of emissions” and there is no consensus on who is responsible for the impact of emissions (and how much).

When it comes to worldwide cooperation for GHG control, it is not a question of which nations emit because they all do. The question is – how high are the emissions relative to each other and with regards to the potential threshold of devastating consequences. If only a number of countries act to control their carbon emissions, and these countries are not the big emitters, then the effect on the global carbon emissions will be very small. Also, if only a few countries establish market mechanisms for carbon emission control, there is always the potential for “leaks”. This is to say that businesses will try moving their activities to countries that do not regulate carbon emissions – lowering their emissions on paper (in the regulated nation) but not globally. For this reason, it is advised that if market mechanisms are to be used, they have to be created everywhere worldwide. And depending on which market mechanism is used the price or the cap has to be synchronized around the world. This will limit the number of “leaks” in the different systems and potential spillovers will be avoided.

The synchronization of the price/cap does not mean that the different systems need to be linked in a global market. Taxes might be easier to impose on a national level, without connecting as it ensures that the revenue raised is used locally (and revenue neutrality can be ensured). Cap-and-trade systems on the other hand, could be linked together. This is already happening by California’s scheme being linked with Quebec’s; and it is likely that more cap-and-trade systems will be linked together later on.

Which system should a country choose? A carbon tax “bites” (generates revenue) immediately and can be enforced a lot more quickly (as seen in the table above). Cap and trade (assuming a low enough cap) makes it easier to harvest “low hanging fruit” at a low business and political cost. The choice is not as important as making a choice, as the first priority is to get nations around the world to impose some downward pressure on carbon emissions.

Bottom line: The theoretical character of a carbon tax or cap and trade will not determine if it succeeds as much as implementation and use of revenues. I therefore have hope that the delegates meeting in Paris can find ways to implement market mechanisms that will reduce carbon emissions within domestic political constraints.

* On Australia’s failed tax scheme: Prime Minister’s in Australia change more often than Defense Against the Dark Arts professors at Hogwarts, and the last change happened back in September. While the ruling party did not change, the new PM has promised to revisit (and potentially change) Australia’s climate policies; however, it is unclear what exactly this means and if it will include the renewal of the carbon tax. Greens have recently conducted some modeling, to provide data in support of the carbon tax. They find that re-instating the carbon tax will produce just as much revenue as changing the GST, while costing households a lot less. If the main concern of the Australian government is to increase their budget while making sure that the general population can afford it, it appears that re-introducing the carbon tax would be the way to go.

26 November 2015

Globalization, growth and adverse health outcomes in sub-Saharan Africa

Dilara writes*

In the 1980´s economic globalization has been largely taken up by international monetary organizations like the IMF to the newly independent states in the post colonial ear in the form of trade liberalization, growth and poverty reduction programs. These programs were often set out as conditional loans to be given to developing countries with the terms of a restructuring in domestic policies particularly on the grounds of domestic economy. The loan programs also known as structural adjustment (SALs) are applied when cuts in government spending, privatization of government enterprises, and promotion of free trade, foreign investment and ownership were introduced. Since 1985, application of conditional loans has increased and had varied impacts on the economies of some of the states. A very common critique towards the SAL/SAPs has ben its limitations to civil well-being Zimbabwe for example, experienced a radical growth in the mid 1980s and was used an an example of successful implementation of SALs by the IMF.

Despite Zimbabwe’s financial leap, social sectors like health and education deteriorated, mostly due to cuts in government spending between 1991-1996. With the introduction of the cost-sharing system, healthcare expenditure increase and limited proper access for low-income populations. This impact was not only limited to Zimbabwe´s case but also to counties like Tanzania where healthcare turned into a commodity rather than a right [pdf]. The crippling of the healthcare and education systems was problematic especially because caused stagnations in state development. One could argue that implementation of Structural Adjustment Loans/Programs were driven by economic growth but lowered the social well-being which had an adverse outcome on the overall development of the state.

Bottom Line: While SAL/SAPs were aimed to promote economic globalisation in developing countries through liberalised, trade and conditional loans to reduce poverty, it crippled healthcare systems through cuts in government spending. This had an adverse effect on the well-being of the civil society.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Wrong Questions. Wrong Answers. Wrong Policies.

Samuel writes*

In 2009, Joseph Stiglitz, Amartya Sen and a team of economists established that we need to measure ‘quality of life,’ given the limitations of measures such as GDP and HDI. ‘Quality of life’ should be partially subjective. They suggested that surveys are conducted, focusing on people’s evaluations of their life, and their prevailing emotions. Ideally, after aggregating with other approaches, they would end up with a number: your ‘quality of life.’ We can use an example to investigate their approach.

Take a ‘strict’ Buddhist village in Myanmar. The village could be based around a temple. The village would only trade where necessary and could strive towards self-sufficiency, consuming only basic foods. Due to many monks, unemployment would be very high. Villagers would also need to travel for education or health services. We would conclude that the village’s GDP/capita is exceptionally low, due to lack of production. IHDI would be low due to lack of education opportunities and health provisions. Here, Stiglitz et al.’s ‘quality of life measure’ should extrapolate on what GDP overlooks.

Say, hypothetically, villagers are asked ‘how would you evaluate your personal achievements,’ with the options ‘v. high, high, moderately, low, v. low.’ A Buddhist could be more inclined to answer low, due to ontological disagreements with ‘personal’ achievements. The same findings could exist for relationships and occupations. Buddhist villagers could also, due to a low intensity lifestyle, be much less likely to experience very positive emotions. Due to low life evaluations, simplistic goods and a lack of positive emotions, we would conclude that the village had an exceptionally low quality of life. The village would be in dire need of development.

However, a contextual analysis of the village, investigating both the discourse and culture, could show contentedness. More importantly, it could show different development needs, such as better transport to hospitals in other villages, which would potentially not affect ‘quality of life’ responses. The problem is not, necessarily, that Stiglitz et al. picked the wrong measure for quality of life; the problem is broader. Through quantitative research, we cannot understand development. Development needs rich contextual understanding, and this cannot be either numerically coded or aggregated. When we aggregate and code, we lose valuable information about what development is, what it means to different communities and how aid can be provided. Stiglitz et al. establish that the subjective dimension is important, but they use closed-ended questions; only open-ended questions could have provided us with useful information about the village.

Quantitative measures are attractive for policymakers for the same reason that they are flawed: they make the complex, simplistic. And, potentially, global development is not a simplistic, aggregate-able concept. It may be time to consider more mainstream macro-qualitative research, at least in the form of triangulation, in development studies.

Bottom Line: We are trying to condense and simplify development for policymakers. However, in most cases development is not simple, nor can it be aggregated. Oversimplification results in improper measures and improper measures result in striving for the wrong goals, with the wrong policies.
* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Beyond Capitalism: A Natural Progression?

Brian writes*

There is no doubt that the natural progression of Economic evolution has led us through varying orders. As Friedrich Hayek asserted in his work “Law, Legislation And Liberty”, our social structures or any structure above “the simplest atoms” is the result of an evolutionary process. This includes economic thought and structures. (Hayek 1973, 158) Capitalism is a jungle of competition. Full of rent-seekers that are defined as money-makers achieving their gains through political connections. A fairly common occurrence. (economist.com 2014)

Perhaps this is not an inherently negative manifestation of human civilization. Instead, it is simply a beacon of our current economic and social order that serves us in a capacity most befitting the natural progression of events and culture leading to here and now. (Hayek 1973, pg. 158) Douglass North corroborates the idea of this natural progression through his proposal of three social orders undergone (still being unraveled in some) by most national social orders. The first of which is referred to as the primitive social order in which we tended to our caves, sharpened stones and bashed each other’s skulls in for personal gain. (North 2006, pg. 4) The second of which commonly referred to as the “Limited Access Order” or “Natural State” includes the privileged rights of some to resources, often dominated by elites whom are incentivized to maintain order to keep this income flowing. There are many states still dwelling here. (North 2006, pg. 29) Finally, there is the order experienced by most of the Western world. This is the structure in which competition instead of elitist rents are used to maintain social order. Of-course open access societies are still inhabited with rent-seeking behavior. Just less of it. (North 2006, pg. 36-37) This evolution of human economic orders is of great intrigue. But, perhaps the real question of today should be the search for where we are headed. Are we evolving to inhabit our fourth economic order? Are we already questing to transcend the open access order marked by our capitalist drive for competitive dominance? Is there a last chopper out of Saigon?

The human species is one of perpetual advancement, change and evolution. It is said that we are on the verge of becoming a type 1 civilization in accordance with the Kardashev scale. This would indicate a great leap in scientifically founded technological advancement. Especially centered around sustainable and renewable energy resources. (Wikipedia.com) Perhaps not an indicator of a change in economic ordering in and of its self, but a definite reinforcement of the idea of a perpetual evolution in the development of new systems and better orders for the sake of our survival and advancement. A recent Time article referenced the increasing trend of Artificial Intelligence and technology that is consuming our jobs. Predicting that this is a trend that will continue into the foreseeable future. As this AI improves, prices will be driven down and a wider range of people will have access to products and services. At the same time, new jobs will continue to unravel. (Time.com) It is high time we considered how technological evolution will shape and change humanity’s economic orders as they stand. One of these potential order evolutions has been proposed by a concept dubbed The Venus Project. This proposes the possibility of a resource-based economy in which resources would be considered “the common heritage of all inhabitants”. Though an unfeasible alternative at first glance considering the basic concept of scarcity. It is an economic system entirely reliant on a high level of technological advancement as humanity’s savior. An advancement we are experiencing now. (Thevenusproject.com) Perhaps this order is one of many possible future progressions in economic evolution.

Bottom Line: In a world still riddled with violence, scarcity, rent-seeking and a host of inefficiencies and shortcomings… perhaps it is high time we consider where we are going instead of what is trapping us in an order that is arguably nearing a date for withdrawal of our occupation.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

  • "Kardashev Scale." Wikipedia. Wikimedia Foundation. Web. 2 Nov. 2015.
  • North, Douglass, John Joseph Wallis, and Barry Weingast. "A Conceptual Framework for Interpreting Recorded Human History." National Bureau of Economic Research (2006): 1-80. Print.
  • "Resource Based Economy - The Venus Project." The Venus Project. Web. 2 Nov. 2015.
  • "Capitalism in America." The Economist. The Economist Newspaper, 27 June 2015. Web. 16 Nov. 2015
  • Hayek, Friedrich A. Von. Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy. Chicago, Ill.: U of Chicago, 1973. Print.
  • "Robots Will Take Our Jobs-But We Will Adapt." Time. Time, 15 Sept. 2015. Web. 16 Nov. 2015.
  • "Welcome to the Jungle." Nation States. 11 Aug. 2014. Web. 16 Nov. 2015.

25 November 2015

Why is popcorn sold at the price of gold at movie theatres (and how the obvious answer is inaccurate)

Juliana writes*

Cinemas make 85% profits on overpriced soda, candy and popcorn. Some Americans consider cinema popcorn as the biggest rip-off, since it is on average sold for nine times its cost of production. In fact, in recent events, a citizen from Michigan, even sued a cinema owner for overcharging spectators 5$ for a portion of popcorn. Since then, numerous theater directors and economists have argued that it was simply the result of microeconomic tendencies and that it’s entirely right to sell overpriced popcorn. The question is, can such prices be justified? Why is popcorn so expensive at the movie theater? And how come some clients are still willing to buy popcorn from these stands?

The obvious answer is: popcorn is abnormally expensive in movie theaters, because once inside, the owner has a monopoly. This allows him to decide on the prices he wants to sell his products (price maker) rather than adapting to the market (price taker) simply because he has no competition. Therefore if he wants to charge a bag of popcorn or nachos for 10$ and finds a client, he can sell it for 10$.

Still, there are no too strong incentives that justifies buying popcorn at exorbitant prices. So what is it? The first explanation is price discrimination. Expensive popcorn finds costumers because ‘popcorn lovers’ are actually willing to pay popcorn (whatever the price) because they esteem it will improve their time at the theater. Spectators come to the cinema because of the reasonable or low price of the tickets but ‘popcorn lovers’ increase their entertainment by consuming costly popcorn. “Popcorn lovers value the trip to the theatre more than other people and thus, via the popcorn pricing strategy, they pay a higher price.” (Richard B. McKenzie)

The second explanation is that movie theaters make up for their loss in revenues with the sales of secondary products. Indeed, up to 70% of the ticket price geos to cinema studios. And in order to be able to project their movies (since they have such high demands) have strict requirements which forces the owner to project their movies a certain numbers of time over a certain period, even when the number of spectators is negligible. The forced projections are non rentable (costs of exploitation) which means that the cinema owner is losing money. Instead of raising their prices, which isn’t appealing and uncompetitive, they raise the price of popcorn and emphasizes on advertisements that make it seem that popcorn is inseparable from cinema experience.

Bottom line: Spectators make extensive complains about the exorbitant prices of popcorn at movie theaters. However, owners manage to keep these prices high not only because they have a monopole within the movie theater but also because the 'popcorn lovers' still are willing to pay the price. There are victims of psychologic and economic phenomena they are unconscious about.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Using private blockchains to minimise infrastructure costs

Erkki writes*

Blockchain technology was introduced some years ago as the technical cornerstone of Bitcoin. The idea behind the blockchain is to publicly record and verify transactions and balances in the Bitcoin network - a kind of public ledger if you will (more in the Bitcoin whitepaper [pdf]). Since its beginning the cryptocurrency scene has offered a steady flow of new and innovative fintech solutions. Some of these have used the Bitcoin blockchain as their base and build services on top of that. However, despite of being an immense technical innovation, Bitcoin suffers from a number of serious technical and security issues. Hence, a large number of software professionals, and hobbyists, have taken up the task of building new and improved blockchains. Originally these second generation blockchains were used to create a kind of ‘Bitcoin 2.0’ - a better version of a decentralized, and trustless, public cryptocurrency.

Private blockchains have a similar technological base as public ones. The difference is that they are only available privately. This means that anyone can implement their own currency for their organizations as a means of value transfer and data storage. These innovations have not gone unnoticed in financial institutions and industrial conglomerates which are now developing their own blockchain solutions. To further elaborate how it all works lets take a look at Mijn, a project that offers private blockchain solutions to institutions.

Mijn is based on a (public) second generation cryptocurrency called NEM. It offers multiple services on top of the NEM blockchain, from which the most important ones will be discussed next. Besides of offering a private currency, its users can create custom assets that can be linked to company equity, inventory, customer loyalty points, and many other things. To complement the assets and the currency, one can create smart contracts that can be used to automatically manage information and agreements directly on the Mijn Blockchain. Security-wise it comes with significant improvements because of its base on NEM (see NEM Technical Reference [pdf]. Some of these features include multi-signature accounts and restricted access to determined nodes - features that are imperative to hierarchically structured institutions. No doubt these improvements are technically impressive, but how can they be used to reduce infrastructure costs?

The peer-to-peer network model of Mijn offers significant improvements on traditional infrastructure. The blockchain operates in a way that it can be kept up with normal consumer hardware, reducing the hardware costs. For the same reason there are no reasons for backups or data redundancy because everything is already backed up in a distributed way. The maintenance and development of the system is also relatively simple because it is done through a simple JSON API letting the developers work on their preferable language. Ultimately, this leads to a zero-downtime system that is resistant against network failures and malicious attacks.

Bottom Line: The distributed networks of private blockchains offer new possibilities and reduce costs when it comes to structuring an organisation’s IT networks.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Social Influences on Decision Making

Lisa writes*

In the 1950’s Solomon Asch conducted a series of experiments to demonstrate the power of conformity in groups. A group of participants were placed in a room together where they were shown a line; they then had to match this line to one of the three other lines presented to them. Each participant, in turn, would then verbally announce which was the matching line. However, all but one of the participants were in on the experiment – they were told how they should respond. The idea was to see whether the participant, who was not in on the act, would change his or her answer to conform to the rest of the group’s responses. The results showed that participants would change their answer in order to conform to the incorrect group answer approximately 1/3 of the time.

So why do people discredit the evidence at hand? 1) If everyone else is saying an answer that seems to be wrong then they may have more information than me about the task at hand. 2) I do not want to face disapproval from the group so I will conform to what everyone else is saying.

These findings have been used in the fields of behavioral economics and microeconomics to analyze how individuals can be influenced or “nudged” into making certain or better economic decisions.

Officials in Minnesota orchestrated an experiment in order to change individual behavior on tax compliance. Taxpayers were given four different types of information when completing tax forms:
  1. Their tax would be going towards education, police protection or fire protection.
  2. They were threatened with the risks of punishment for noncompliance.
  3. They were given information on how to get help with completing tax forms.
  4. They were told “90% of Minnesotans already complied, in full, with their obligations under tax law”.
Remarkably the last of these interferences had the most profound impact on tax compliance. Knowing that most people complied with the tax law influenced these taxpayers’ decision-making in order to conform with the majority of the population.

In addition, such “following the herd” behavior can have a profound impact on the economy. It is believed to have “played a key role in producing the recent speculative boom and resulting financial crisis of 2008”. Robert Schiller emphasizes the role of such behavior in volatile markets. A speculative bubble, he explains, is "a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase." Public knowledge begins to spiral, demand rises and market prices start to escalate. Eventually the bubble pops.

Bottom Line: People tend to make decisions that align with what everyone around them is doing. On the positive side: policy makers can use such knowledge to nudge people into making better economic choices. On the negative side: such behavior can cause speculative fervor that overshadows any economic fundamentals.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

24 November 2015

A brief review of the new CAP reform in Germany

Cajus writes*

The idea of distributing money to poorer people to help them improve their standard of living has been proven to be a successful way to fight poverty. The organisation “GiveDirectly” claims on their webpage that they have increased earnings by 34%, assets by 58% and defeated 42% of hunger by applying this method in Kenya.

Also the EU seems to have gotten caught up on this Idea recently. The Common Agricultural Policy was introduced in 1962 to help European farmers sustain their business. This was important to secure food production and especially in this time as due to other new economic possibilities (industrialisation as a driver for example), being a farmer doesn't seem attractive for most people. (Witzke; Noleppa, 2007) The CAP has since its creation been revised many times. It is often argued, that the CAP is rather unsuccessful, especially compared to the money invested (40% of the EU budget). The EU increased incentives for higher food production, which led to a overproduction of food in the 1970-80s. Therefore, the CAP shifted from market to producer support, where price support is replaced with direct aid payments, similar to the aid payments by GiveDirectly. The European Commission claims [pdf] that this led to an “increased emphasis on food quality, protecting traditional and regional foods and caring for the environment.”

In Germany this method keeps many farmers in business. The revenue of most farmers in Germany consists of such aid payments by more then 50%. Therefore, this system does not punish inefficient farms. Also, this method leads to inequality of benefits received under German farmers and creates unnecessary incentives. Aid received correlates with farm size, while smaller farms gain less benefits, larger farms gain more. This seems reasonable as incorporated farms (and therefore larger) tend to have lower profits.

A slightly newer adjustment of the CAP introduces a budged limit to direct payments. This budged limit is at €300,000. Since smaller farms receive less benefits, this will not have an effect on smaller farms, but larger incorporated farms will partially suffer and possibly forced out of business.It creates an incentive to split up larger farms into smaller farms. (Witzke; Noleppa, 2007)

Bottom Line: Using direct payments to help farmers in Germany has its ups and downs. On the one hand, it secures food production and local farmers, but on the other it promotes an unnecessary shift from incorporated farms into smaller farms. Also it does not incentivise farmers to be productive. Since more then 50% of German farmers revenue comes from the CAP, actual performance does not make a big difference in total revenue for farmers. Therefore, this method needs adjustment to create incentives for farmers to be productive, as well as giving them an economic surplus. This surplus however may also be created in other ways such as cheaper land for example. Higher food prices in Germany would also be an option, especially as inflation German food inflation rates are the lowest in Europe. However, to prevent overproduction as already occurred during 1970-80s due to high incentives to be productive, a limit of food production for each farm maybe helpful to allocate production efficiently.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

India’s Microcredit System: A Failed Experiment?

Robin writes*

Microcredit, or the practice of extending small loans to the worlds poorest, has long been hailed as a powerful tool in the fight against poverty, even earning its founder Mohammed Yunus a Nobel Prize in 2006. Although when done right, this business model can indeed be implemented successfully, microcredit has become the subject of much criticism lately. Some of India’s microcredit providers, for example, have been behaving like loan sharks, providing loans regardless of what people plan to do with them, charging exorbitant interest rates, and using increasingly coercive tactics to collect loan payments. As a result, many of India’s poorest citizens are left with debt they will most likely never be able to pay off. There are even accounts of suicide linked to the vicious cycle of debt that microcredit schemes have incited. The entire system almost collapsed in 2010, when growing dissatisfaction led borrowers to collectively default on their loan payments. Microcredits were meant to eliminate scenarios like this one, leaving us with the question: ‘What went wrong?’

Yunus himself attributes some of the issues to a ‘mission drift’ Microcredit organizations were originally envisioned to be small, non-profit and community based, but are increasingly becoming large, for-profit companies. For-profit microcredit companies are problematic in many ways, not the least of which is that they raise their funds in international markets that are often volatile and then transfer the risks to the poor in the form of high interest rates. With this profit-maximizing strategy comes a lack of interest in the educational aspect of microcredit schemes that has made them so successful in many instances. Entrepreneurial education is a vital part of ensuring that loans generate viable livelihoods for their borrowers. The original group lending method used by Grameen Bank in Bangladesh, for example, put lenders into small groups, gave them training and encouraged peer-monitoring to help ensure that the loans were being used responsibly. This created ‘social capital’ (as well as physical capital) that India’s current predatory lenders do not (Halder and Stieglitz [pdf]).

Government regulations may provide a solution. At least one Indian state has implemented legislation that restricts the number of lenders that borrowers can lend from and recommendations have been made to put a cap on interest rates and regulate what kinds of companies can call themselves microfinance organizations. While these measures may be helpful to reduce predatory lending disguised as microfinancing, there is also a risk that restricting the activities of legal companies will drive borrowers into the hands of the very loan sharks that microcredits were supposed to displace. This is, arguably, even more problematic because loan sharks are infinitely harder to control.

Bottom Line: Cleaning up the microfinance industry must, therefore, be accompanied by a strategy to combat harmful unofficial lending practices, or ideally eliminate the need for them. There is a delicate balancing act to be observed.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

Common Core Standards

Jan writes*

The Iowa caucus is around the corner and things are heating up in the [US presidential] primary campaigns. Everything is on the table and the campaign teams makes sure nothing is forgotten. Education is not an exception especially since the “Common Core Standards” are under heavy scrutiny of the GOP candidates.

The Common Core State Standards (CCS) Initiative is an educational initiative that details what students should know in English language and mathematics at the end of each grade. Started in 2007, it was a bipartisan initiative and by 2010, Common Core Standards had been adopted by 45 states. Republican and Democratic states alike, adopted the standard and the initiative has grown ever since.

In 2015, the CCS have reached new areas. As of May 2015, 13 states introduced standards in the subject of science. Now kids in California, Kentucky or Vermont must know about climate change in order to graduate. As expected, this has angered right wing candidates and campaigners alike. They speak of indoctrination, a word that many find too strong, but is there a real reason to worry about centralizing the nation's curricula through common standards?

Any mechanism of centralizing school curricula is a double edged sword. On the one hand, CCS can combat the differences in quality of education of certain states compared to others but on the other it cuts the ability of teachers and schools to adapt to their students and their local realities. Indoctrination is perhaps an overreaction but school dropout might be a real concern.

Many stories of students that disengage because they are frustrated with what they are taught are coming out through the conservative news apparatus. A common claim is that the format of standardized questions is confusing to some. Also, teachers are forced to teach things they might not be fully comfortable with teaching. These arguments are often made by ill-informed journalists or based on the misunderstanding of the CCS, according to its defenders, and as such should not weigh in the debate. But the fear of the republicans are not completely misfounded.

The common core standards initiative started by focusing only on math and English language. Standards in these two subject by themselves are a centralization so light that it can barely incapacitate teachers or frustrate students. However, the initiative seems to be growing to other fields like science. If the common core standards prove to have positive feedback and grow throughout the whole curriculum, the centralization might become dangerous.

Bottom Line: The trade-off between egalitarian education for all and specialized education for most is one without a clear answer. We simply do not know at what point standardizing stops being beneficial and starts being dangerous. Heavily centralized educational systems like the Spanish show some of the highest dropout rates, but it seems clear that the completely decentralized situation in the U.S. is also detrimental. Studies are already showing that the CCS have beneficial results in some states. There is no real threat to the CCS, as still today, republicans that are not running for office still support them. The public scrutiny they undergo today might be ill-informed and misguided but nonetheless important for the future of American education.

* Please comment on these posts from my microeconomics / growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.

23 November 2015

What do university fees represent?

Feri writes*

In this blog, I will explain the possibility of an impending student debt crisis in the United States and its similarities to the 2008 mortgage crisis. Furthermore, I believe that plans to ease student debt and make universities tuition free that have been adopted by democratic candidates for president Hillary Clinton and Bernie Sanders could be very harmful.

The general idea is to make the top 1% wealthiest Americans pay for everybody else's education. This plan is badly researched as the math doesn’t simply does not add up. This is largely due to the common misconception that there is this source of taxable money that is being hoarded by the wealthiest of Americans and that once it is taxed it would create a stream of new income for the government. This notion has been disproved by the Laffer Curve.

Tackling the $1.2 trillion student debt crisis and the 7 million debtors in default in the US is essential. The idea to forgive the debt and to provide low-interest government-insured loans is only going to benefit private universities. This easy money will cause a wave of big borrowing and a resulting inflation of tuitions that will quickly swallow up the money these government programs would require. I believe the student debt bubble that has already been formed could burst if either of these popular plans are implemented.

In the 2008 housing bubble, we saw similar policies which proved to be very harmful. The government provided easy money leading up to the bubble: people who otherwise wouldn’t have been eligible for a mortgage were given the cheap debt they desired. Soon, housing prices rose due to an increase in demand. The bubble burst when it became clear people were not able to repay their debt and many defaulted and the debt became worthless. Exactly this could repeat itself with the student crisis.

What the "New College Compact," idea assumes is that by making it easy to go to university and burden students with a lower cost they will eventually get a high paying job and it will be easy for them to pay the loans back. What is not taken into account is that this will also lead to oversaturation of college graduates and the government has exhausted businesses with new taxes and regulations, as a result companies stops creating more high paying jobs. Meaning those graduates will get low paying jobs and won’t be able to pay back, leaving us with $1.2 trillion written off,  $350 million spent on this new plan plus the new loans that will not be paid. What is the possible outcome of this?

Boom. The bubble bursts.

We can still prevent this problem of the tuition bubble growing and bursting with, for example, a $15,000 voucher plan that will create competition between universities, which would not be able to  raise the price of education because the voucher would be valid in any state. This way universities will not waste money but will try to increase the quality of education. Students would graduate with little or no debt. This will allow for university graduates to have a purchasing power much sooner than before and help the economy grow (the money, for example, you need to move from home or create startups).

Competition will also get rid of only for-profit universities who have very low standards. This will also make great community colleges much more desired and appreciated. This idea is supported by numerous people such as economist Milton Friedman and Mark Cuban.

Bottom Line: Making tuition easy to afford, community colleges free and forgive past student loans may sound great and beneficial for students their parents and eventually the economy, but in reality, it will be much more beneficial for universities that will raise tuition while producing more graduates chasing lower paying jobs with more debt. Instead of making it easier to spend money on something and reduce completion, create more competition to improve quality at lower prices.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Tipping: Perfect Market Efficiency or Lazy Employers?

Olivia writes:*

In the Netherlands, I have often faced a moral dilemma when it came to paying the bill in restaurants. How do I tip? Back in Austria, it was straightforward: You just round up the number on the bottom of the bill, maybe add another Euro or two. But living in the Netherlands has made me used to paying by debit card – which makes the whole tipping procedure slightly tricky. Do I cross out the number on the bill and write down a new amount? Leave coins on the table? Or neither? Over time and by observing how my Dutch friends solve this dilemma, I got used to the latter option: I do not tip any more. Realizing this change in my behavior, I began wondering about apparently (one of economists' favorite topics): why do people tip in the first place? Explanations range from increasing market efficiency to the satisfying feeling of having done something good – but what I am interested in are the economic incentives for a better service based on tipping. Ignoring the studies that find that tipping is based on many other factors than the quality of service (check out Michael Lynn's research here if you are interested), what do these incentives theoretically mean for the parties involved?

The Customer

As the customer, I am the person to reward good service with a higher tip. At the cost of some extra-Euros, I (hopefully) benefit from better service. However, for a single customer it does not seem rational to give a tip: by the time you do, the service has already been performed and unless you are a frequent at the given bar, you are not likely to suffer from any future consequences. However, disappearance of tips on a larger scale could mean worse service for everyone. If there is no expectation of a reward anyways, why should the waiter or waitress bother to make a customer extra-happy?

The Waiter or Waitress

If tips are given as incentives, the quality of restaurant-service logically should decrease when costumers stop to give tips. From my two-country-comparison of Austria and the Netherlands, I have not observed any of the like – the service in both countries shows that there is a lot of variation between waiters and waitresses, which does not seem to be related to the habit of (non-)tipping in either country. Why would that be? Regardless of the whole waiter/waitress-costumer-interaction, every waiter and waitress is still employed by the restaurant owner. Like in any other job, the main incentive to perform well is to not get fired. Tipping is in that case not part of the story.

The Restaurant Owner

From the restaurant owner's perspective, tipping is great. When one of his or her employees complains about their low wage, (s)he can simply refer to tips: “if you perform better, you get more tips” – tipping is used as a bonus paid by another party, the costumers. The restaurant owner thereby not only outsources part of the costs, but also the monitoring. Instead of checking each waiter's and waitress's performance in order to then warn or punish them, the costumer takes this role for the restaurant owner. “The market of good service and costumer tips is perfectly efficient,” the restaurant owner would argue. My conclusion on the other hand is that the restaurant owner is too lazy to deal with monitoring and providing other incentives.

Bottom Line:  Customer service would be just as fine without tipping, but restaurant owners would have to monitor their employees' performance better and consider other incentives for the waiters and waitresses to perform well.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.