Do airlines favor socially optimal flight resumption times?
In the standard price-quality model, suppliers internalize the gains from higher product quality — in this case greater flight safety — through their ability to charge a higher price. When the alternatives are "fly" vs. "no fly," however, enough days of "no fly" mean the end of the firm. That causes the airline to favor flight resumption before it is socially optimal to do so. The safer outcome — not flying — doesn't involve higher revenue, as it often does, such as when the roller coaster manufacturer puts in seat belts to assuage nervous parents and thus boost demand.
The "no-ash-generated-crash" outcome probably involves higher reputational benefits for the industry as a whole than for any individual firm.
On the other side of the ledger, I suspect the regulators won't let the airlines charge market-clearing prices for the first week of resumed flights (so far, airlines are telling people that the next week of flights is reserved for stranded customers). That makes the airline insufficiently willing to resume flights, from a social point of view.
I believe that the first effect predominates here, but that is an intuitive judgment, not based on hard evidence.
Accounting for Carbon Offsets
Highly complex, difficult to value assets are being evaluated by a handful of firms with strong ties to the financial corporations whose job it is to market those assets to investors around the world. Sound familiar?
It's not mortgages but carbon offsets and not only are the issues related many of the same players are involved. Harpers has a good piece (subs, try also here (pdf)) with more details than I have seen elsewhere on how the market works. It's not all bad, as the author, Mark Schapiro shows, the measurement infrastructure that has been created is actually quite impressive, but not enough effort has been put into monitoring. Here's one good bit:
In this highly specialized new industry, perhaps
a thousand people really understand how
onsite measurement of CDM projects works,
and there is a serious potential for conflicts of
interest. It is not uncommon for validators and
verifiers to cross over to the far more lucrative
business of developing carbon projects themselves–
and then requesting audits from their
former colleagues. Schneider points out that
young university graduates entering the field
commonly spend several years learning the
ropes at DOEs and then “go to work for a carbon
project developer, where they make three
times the salary doing more interesting work.”
These developers–which partner with local
businesses and governments to set up offset projects–
are by and large funded or owned outright
by multinational firms, particularly financial
houses such as JP Morgan Chase, which owns
the biggest developer in the world, Eco-Securities; Goldman Sachs, which has a significant interest in the largest U.S.-based developer,
Blue Source; and Cantor Fitzgerald, which owns
CantorCO2e, another major player….
Is current unemployment all about aggregate demand?
Christie Romer basically says yes, Arnold Kling dissents.
I don't expect Romer to turn a speech into an academic debate and in this sense I don't fault her. Nonetheless I did not find her account very persuasive.
I would start with the fact that output has bounced back more robustly than employment has. AD theories per se do not explain that differential. One simple possibility is that better management and better measurement have allowed us to identify (and fire) hundreds of thousands of low-wage people who just weren't producing much of value. That's a real shock, even if it does not qualify as a sectoral shift in the traditional sense.
It's also the case that the rate of new job creation has been especially low. Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements. Tell stories as you may, but it's hard for me to see that as exclusively an AD problem.
I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage. I'm all for behavioral economics, but I don't buy the necessary story here.
I don't want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor. Those are real factors too.
I also see that wages, and the job market, are more flexible today than in a long time, with so much service sector employment, so much flex-time and part-time, and such a low rate of unionization. In most AD theories that implies the job market bounces back relatively quickly yet that is not what we observe.
A separate question is what Romer believes the major AD shock to have been. She clearly repudiates the Scott Sumner story that monetary policy was too tight. Is it all from the collapsed bubble in the housing market? Keep in mind those are paper values and that the real services from the country's housing stock haven't declined. Again, you can tell behavioral stories about the asymmetric perception of losses vs. future gains (for many people, buying a future home is now much cheaper, though perhaps they don't notice the positive wealth effect), but is that going to drive the whole cycle?
To be sure, AD is a major factor in this recession but it is not the entire story by any means. In major recessions usually it is AD and AS forces together.
Most of all, the Romer essay convinces me that current economic policymakers — not to mention many bloggers — should not be so certain they understand what is going on.
Addendum: I sometimes have the feeling that commentators on the left reject the "real shocks" hypothesis because they think it implies government can't do much to make things better. That doesn't follow. Most of what government does, for better or worse, is an attempt to solve a real rather than a nominal problem. It might imply "intervention is less effective" but it also (possibly) can imply "intervention is more necessary."
Winners and losers
Hotels filled with stranded passengers are also profiting. “I spoke to a few of my students who are doing internships in hotels,” said Ms. Fleischer of Hebrew University. “They are happy. The guests don’t leave.”
Here is a bit more. Of course there's a stock-flow problem here, namely that "permanent residents" won't stay in hotels forever and people need to keep on coming.
Markets in everything
British actor John Cleese of Monty Python fame opted for a daylong cab ride halfway across Europe after the dust plume from an Icelandic volcano left him stranded.
Cleese paid $5,100 for a Mercedes taxi Friday from the Norwegian capital, Oslo, to Brussels, said Kjetil Kristoffersen, managing director of Publicom, his agent in Norway. Cleese was in Oslo to appear on the talk show Skavlan.
The article is here. Cleese and Monty Python, of course, were the original inspiration for the MR "Markets in Everything" series.
Assorted links
1. CFTC approves box office futures.
2. Linguist for $$.
3. The train that never stops at a station.
4. Favorite books of famous authors.
5. Many German authorities think there is no reason why planes cannot fly (in German).
The economics of air freight
Air freight is responsible for a quarter of the value of all goods moved into and out of the UK…
I believe that is a rough rather than exact estimate. If European air travel continues to suffer, Kenya will be one of the most immediate big losers, for reasons of tourism and agriculture and flower-shipping (see my favorite economics textbook!).
Here are some general figures on air freight around the world.
The public choice economics of spending cuts
This issue deserves more attention and I cover it in my latest NYT column:
Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. The Liberal Party, headed by Jean Chrétien as prime minister and Paul Martin as finance minister, led most of this shift. Prompted by the financial debacle in Mexico, Canadian leaders had the courage and the foresight to make those spending cuts before a fiscal crisis was upon them. In his book “In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint,” Timothy Lewis describes Canada’s move from fiscal irresponsibility to a balanced budget – a history that helps explain why the country has managed the current global recession relatively well.
To be sure, the spending cuts meant fewer government services, most of all for health care, and big cuts in agricultural subsidies. But Canada remained a highly humane society, and American liberals continue to cite it as a beacon of progressive values.
Counterintuitively, the relatively strong Canadian trust in government may have paved the way for government spending cuts, a pattern that also appears in Scandinavia. Citizens were told by their government leadership that such cuts were necessary and, to some extent, they trusted the messenger.
It’s less obvious that the United States can head down the same path, partly because many Americans are so cynical about policy makers. In many ways, this cynicism may be justified, but it is not always helpful, as it lowers trust and impedes useful social bargains.
Forces like the Tea Party movement argue for fiscal conservatism, though it isn’t obvious that they are creating the conditions for success. Over the last year, we have been treated to the spectacle of conservatives defending Medicare against proposed cuts, in large part to curry favor with voters and mobilize sentiment against the Democratic health care plan.
The column also offers up some general reasons for considering spending cuts and not just tax increases. Maybe Arnold Kling won't like this column, but when I look around the globe for episodes of successful spending restraint I see Canada, Finland, Sweden, and now possibly (probably) Ireland, which is in the midst of fiscal restructuring. I see change coming from elites and I see relatively left-wing governments (Ireland, admittedly, is harder to classify) which are trusted by their citizens. The Greek government, in contrast, doesn't operate with the same level of social cohesion and thus it is likely to fail.
I believe the "social trust" scenario for spending cuts is overlooked because it raises the relative status of groups which people who favor spending cuts do not wish to raise.
I wouldn't want to force the view that the United States will or can follow the path of these other nations. But when there is no other evidence, look to the path of what has been shown to be possible. This is a neglected point in the debate on fiscal restructuring and it suggests we are not currently on a propitious path. Right now many fiscal conservatives are looking to voter outrage to drive change and I'm just not sure there is a "there there." Here's one good post on how much conservatives like government spending.
The Timothy Lewis book, by the way, deserves far more attention than it has received. Note that the earlier sections of the book are somewhat boring but it picks up in the later parts.
Addendum: Arnold Kling comments.
Markets in everything?
London minicab company Addison Lee said it had received requests to take passengers to cities as far away as Paris, Milan and Zurich.
(But did they fill them?) Here is more. Suddenly they are saying they don't really know when this will end…
Addendum: Here is one pessimistic view, I do not vouch for it. Read this too.
Nostalgia on the high seas?
Only a few ships still make the journey, the best known being the Queen Elizabeth 2. Depending on the number of ports of call, the average trip is roughly 6-14 days, although some are longer. Ships traveling from North America depart from several cities, including New York, Boston, Ft. Lauderdale and Miami. They terminate their voyage at different locations, including Barcelona, Venice, Lisbon, Copenhagen and Genoa. In between, their stops are determined by the length of the trip and the cost. For example, you can take the Royal Princess on April 11,2000, and take a nice 19 [day] cruise to Barcelona. Your port of departure is Buenos Aires, and in between, you'll visit Montevideo, Rio de Janeiro, Recife, Dakar, Madeira, Casablanca, Gibraltar…not a bad way to get to Barcelona.
There is more here. I've also been trying to Google how planes traversed the Atlantic during the early years of WWII, although without success.
I believe that volcanoes are an underrated ecological problem and that this story still is being underreported. Events could prove me wrong in very short order, but I am reminded of the financial crisis, and the associated explanations from governments and the financial sector itself, around the time of the Bear Stearns collapse.
Assorted links
*Russia Against Napoleon*
That's the title of the new and excellent Dominic Lieven book and the subtitle is The True Story of the Campaigns of War and Peace. Excerpt:
In many ways the greatest hero of the Russian war effort in 1812-14 was not a human being but the horse. To some extent this was true of all European land warfare at that time. The horse fulfilled the present-day functions of the tank, the lorry, the aeroplane and motorized artillery. It was in other words the weapon of shock, pursuit, reconnaisance, transport and mobile firepower. The horse was a crucial — perhaps even the single most decisive — factor in Russia's defeat of Napoleon. The enormous superiority of the Russian light cavalry played a key role in denying food or rest to Napoleon's army in the retreat from Moscow and thereby destroying it. In 1812 Napoleon lost not just almost all the men but virtually all the horses with which he had invaded Russia. In 1813 he could and did replace the men but finding new horses proved a far more difficult and in the end disastrous problem.
Lieven's earlier Empire: The Russian Empire and its Rivals is one of my favorite non-fiction books.
Nate Silver wins a lunch date with Vero de Rugy
As it turns out, when controlling for state capitals and a host of other potentially relevant variables, we find that the original findings still hold…Even after taking out the money spent through state capitals, the average Democratic district receives at least 30 percent more than the average Republican district.
That's from Vero, there is more here.
Very good sentences
"Iceland's last wish: to have its ashes scattered all over Europe" — market analyst
That's from Twitter.
Not from the Onion: NYC to stop paying teachers to do nothing
The city will end the practice of paying teachers to play Scrabble, read or surf the Internet in reassignment centers nicknamed "rubber rooms" as they await disciplinary hearings, Mayor Michael Bloomberg and the teachers union announced Thursday.
The deal will close the centers, where hundreds of educators spend months or years in bureauratic limbo, costing taxpayers tens of millions of dollars a year.
This part is so 'not making this stuff up':
The nickname refers to the padded cells of asylums, and teachers have said the name is fitting, since some of the inhabitants can become unstable.
"There are fights among teachers because some teachers are nuts," said Leonard Brown, a high school teacher who spent four years in a reassignment center in Queens. "They put crazy people in with very sane people."
More here. Hat tip: Andrew.