A New Paper

I recently read what I think is a great paper. The paper is "On Amenities, Natural Advantage and Agglomeration" by Doug Krupka. The abstract reads,

A prominent feature of economic geography in America is the positive correlation amongst local incomes, housing costs and city population. This paper embeds a “black box” agglomeration economy within a more neoclassical general equilibrium model of local wages, rents and population to assess the ability of various conceptual models to predict this cross-sectional variation. I use exogenous changes in housing supply to induce changes in population and examine whether the changes in rents and wages move in the same direction under neo-classical assumptions, agglomeration economies in production, congestion in production, or urbanization economies in consumption. On their own, none of these urban scale effects generate the observed pattern. All urban scale effects generate a negative correlation between rents and population. Combining natural advantage with the urban scale effects improves the models’ output. It generally predicts positive correlations amongst the three variables, although some of these effects are ambiguous in the production agglomeration model. If natural advantage and housing supply constraints vary more-or-less independently, the results suggest a better fit of the data is provided by either the congestion in production or the agglomeration in consumption models. The micro-economics of such consumption-oriented agglomeration economies have received less attention than production-oriented agglomeration economies. The results of this model thus suggest that consumption-oriented agglomeration and congestion should receive more attention in the future.

Doug brought it to my attention. The title of the paper should appear as

On Amenities,
Natural Advantage and
Agglomeration

A perfect haiku! In addition to the poetic title, the paper is good.

Washington Mutual

Here's ago, my wife and set up our first joint bank account with Washington Mutual in Sacramento California. Now that bank is on the verge of failure and federal take-over in the states. This would be (in nominal terms at least) the larges bank failure in U.S. history and will have effects across the entire economy.

We still have $209.34 in our account. I hope it's safe.

Canada and the Housing Crisis in the U.S.

There is increasing concern among Canadian economists regarding the effect of the U.S. financial crisis and ensuing bailout on the Canadian economy. Over the past weekend, I attended a meeting of the Canadian Institute for Advanced Research which was attended by both David Dodge and Mark Carney (the latter attended only for a short period, having the crisis to deal with).

One of the biggest concern is in regards to the effect of the crisis on Canadian exports to the U.S. Of particular concern is the exports of Canadian lumber which is a prime input in the U.S.'s struggling housing market. As reported by Bloomberg:

"The current situation poses particular problems" because it affects "areas that matter most for Canada," such as demand for cars and lumber, Carney, 43, said in a speech today at the Canadian Club of Montreal. Policy makers had already identified tighter credit conditions "as the main risk to a modest U.S. recovery next year" and recent events make that possibility "more probable," he also said.

As a result, many economists expect the financial crisis in the U.S. to result in a strong slow-down in Canadian economic growth:

LEVIS, Que. — Canada's economy faces a long period of stagnation as several risks, including softening housing construction and a tougher credit market, will force a quiet and slow recovery, says a Desjardins Group economist.

The firm's projections for Canadian economic growth were trimmed from one per cent to 0.6 per cent this year, and from 1.8 per cent to 1.3 per cent next year.

"With economic projections this low... we are clearly going to see a long period of quasi-stagnation, especially given that there are several major downward risks looming," chief economist Francois Dupuis said in a note Tuesday.

"The recovery will be slow and progressive, with no fireworks."

Dupuis pointed to "fragile" consumption in the United States and a U.S. housing market that shows no signs of recovery as two factors that have impacted Canada's exports.

He coupled that with weakening housing construction in Canada, tough credit conditions and a deteriorating labour market as factors that are taking a toll of the local economy.

"Along with government spending, personal consumption is the only factor that is allowing Canada's economy to keep its head above water," he said.

"With confidence at a low ebb, the hope of avoiding a recession is holding on by a thread."

The report noted that oil prices which skyrocketed throughout the year were fairly devastating to the world's economy.

Desjardins predicts that the global economy should advance by about 3.7 per cent this year, down one percentage point from 2007.

Federal Funding of the Arts

I just wanted to note on a couple of things going on locally and federally with regards to funding for the arts.

Here in Calgary, there has been a big push by the mayor to get increased provincial funding for law enforcement. A recent letter to the editor in the Calgary Herald ("Get Tough" September 19 2008) states one view on the issue:

Overhaul the justice system so it no longer hugs a thug and starts treating criminals like criminals. They gave up their "rights" when they broke the law, so treat them the way they have treated the good people of our country. Build more jails and get the criminals in them faster and for much longer periods of time. How to pay for that? No fancy bridges, no high-dollar art in government buildings. Funnel all the money that is spent on art, culture and other non-necessary things. In some Caribbean countries, there is no leeway -- you break the law, you go to jail and you serve hard time for a long time. The penalties are too harsh to even consider breaking the law. We need a federal leader who will grow the backbone to seriously shake up the justice system. Come up with a budgeted, realistic and believable promise to do this, and you'll get my vote.

The view espoused here (to put it somewhat mildly) is that the arts should come second to other public goods. Some of this debate (and I believe the piece the author is referring to) has developed with the arrival of "A Device to Root Out Evil" in Calgary.

One of the questions raised by this debate is "What is the benefit of public funding of the arts?" Many have argued that funding of the arts is essential for preserving and developing a group or nation's idea of identity. In this sense, support for the arts supports Calgarians' sense of identity or pride in their city. (As a note, the Canadian Institute for Advanced Research research group on Social Interactions, Identity, and Well-Being thinks that discussions of identity are often missing form policy debates and economic analysis. Issues of identity have been important in the Council of Europe's research on social exclusion.) Evidence from psychology and economics is that a shared sense of identity can increase cooperation, well-being, and more generally, social capital. In terms of public policy, increases in feelings of shared identity or community could reduce some criminal activity (through increasing the concern individuals have for others or reducing individuals' desire to eschew the law) and increase the productivity of public goods (by reducing the extent of free-riding problems).

Below is a video which takes aim the cuts to arts funding that have occurred under Stephen Harper's government. The message in this video is, I think, one of the importance of arts in preserving (here) Quebecois culture. A couple of notes on the video:

1. Michel Rivard is a a Quebecois singer-songwriter. He is one of the founding members of Beau Domage.
2. The French word for "seal" (the animal) is "phoque". It is pronounced f*ck.

The Marginal Cost of Eggs

Over the weekend, I had breakfast at Chris' Cafe in Coleman, Alberta. The two-egg Denver omelet cost $7.75. The three-egg version costs $7.95. That's $0.20 for the marginal egg. At that price, you're losing money not getting the third egg!

Harper's proposed tax cut

Mr Harper yesterday proposed a reduction in the excise tax on diesel fuel, of 2 cents per litre, to be implemented at some point in the next 4 years, at a cost to the treasury of approximately $600m. It is hard to think of a good reason for such a tax cut, except for a political one: the Prime Minister wants to be able to compare a program of tax "cutting" with the Liberal proposal of tax increases on carbon-based fuels. Of course, a tax cut on diesel just means some other tax cut that can't be implemented.

This proposal is a sad example of the triumph of politics over policy in a campaign.