Semester Kickoff

New semester has just started. I am teaching Microeconomics for undergraduate and graduate levels. And the hard work continues. This time I have lowered my expectation. Even though I'm assigned to teach advance microeconomics, I'll be taking the liberty (or lack thereof) to drill the basics once more. What's the point of forcing advance analytical tools while the basics are lacking? Why the need? Because in these past two semesters teaching environmental economics, I came to realize, most students simply have no idea what the key principles are. Central of the problems is the vague understanding of price. So, we'll labor a lot on that issue.

Welcome, unctuous expressions. I hope we can learn something. And have fun.

Repatriation?

[At the outset, let me state my position: I'm not that pessimistic considering our recent economic dowturn. The whole thing has root on the hiking oil and gas prices. The key problem is that, the country has no access to benefit from this incentive. The price movements are simply blocked. We see here and there some positive development, though: people are talking about alternative sources of energy, about the need of better technology, and of course about efficiency. Even officials (and yes, some legislatives) have started to welcome the elimination of subsidy; gradually, but that's ok for now, considering the likely social and political resistance.]

(Having said that) I'm not too excited with this whole idea about export repatriation.

Think about your home. What happens if you close the door? You can't go out, and .... neither one can come in. How to close the door effectively? Use the best lock. Otherwise, hire the best guard in town. My point is, repatriation will lead to reciprocity. And besides, monitoring costs are high.

Reshuffle?

Somebody asked my opinion on the possibility and feasibility of SBY's cabinet reshuffling due to poor performance. The media widely covers this issue of firing the President's economic team. My take is, reshuffle will send a good signal of strong determination by the President. In markets, signal is key. And the market has yet to see an decisive president since the last election: that's not good. However, recent circumstances provide justification (see my next post, above), not to do the reshuffle until at least, the general business cycle shows a more predictable direction. I would say, give them one more year. When the time comes, fire the coordinating minister for the economy, central bank governor, and minister of finance. Dissolve the national development planning agency and assign its current chief to a new post, that is the coordinating minister for the economy. in the meantime, the minister of trade should continue her work on reducing trade price distortions.

Hey, you asked me to opine.

Thank you, high oil price!

Nobody explains it better than Jay Hancock why we should thank hiking oil and gas prices. (The link brings you to Baltimore Sun website and it might ask you for free regsitration. But the points are):

The very high oil and gas prices have led to:

1. Billions of dollars invested in petroleum production. Supply will increase.
2. Chevron, Marathon, and many others are opening millions acres for drilling.
3. Oil and gas explorations create jobs in Rusia, Angola, China, Algeria, Britain, India, Canada, Azerbaijan, Nigeria, Poland, Malaysia, New Zealand, and Trinidad-Tobago.
   
4. The number of exploratory rigs around the world hit record high level since 1986.
5. Companies in South Korea, China, Singapore, and the US are building new hardaware to address drilling-rig shortage.
6. Chevron is expanding its refinery in Mississippi by 25 percent.
7. Kinder Morgan and Sempra are going to spend $3b on pipeline delivering natural gas from the Rockies to the Midwest and East.
8. Valero and ConocoPhillips are improving their ability to process sour crude that is cheaper than sweet crude.
9. Thai Oil is spending $1b on new ouput capacity.
10. Brazil in planning to increase processing capacity by 20 percent.
11. Florida is building 750MW-worth of wind-powered electricity generation.
12. China and India have doubled their refining capacity.
13. Everywhere people reduce unnecessary driving and encouraging fuel efficient cars and public transportation.
14. Sales are soaring for hybrid vehicles.

In short, incentives are all out there now for efficiency and better technology. We, too, can benefit from this situation, only as long as we free the prices.

Wife Attack!

I have heard many economists are frustrated in delivering their messages. Not that people can not follow the logic, but because economists are bad explainers. I usually tell my collegueas: "Don't blame those who don't understand you. Blame yourself who fail to explain". That advice applies to ... me, too.

And this one case is special. My very own wife is "attacking" me. To avoid endless debate -- see, I am a bad explainer -- I suggests her instead to read my regular columns in this magazine.

Economic Principals is no blog -- it should not

Dave Warsh says it all. We all have benefitted from the blog revolution. But as a regular EP reader, I don't want it to follow the euphoria. Warsh's column is special and no blog can beat it: professional journalism as well as well-researched arguments. Warsh doesn't hold an Econ Ph.D., but that does not bar him from being better than Krugman sometimes -- many times -- in economic analysis.

Keep up the good work, Dave!

Unfair Diplomas

Different?

I recently raised a concern to some collegues. On examining two master's thesis defense, I was surprised by the huge gap of quality between the two. Yet, both passed. Why so? I was told, because one student was from "regular" program, while the other one from "executive" program. "So the executive program should not be as tough as the regular program". Fine. But I was curious: would they hold identical certificate? To my surprise, the answer was: yes.

I usually don't care with how people gets their jobs. If two persons with different quality end up in the same workplace, do the same thing, and get paid the same amount, I say: none of my business.

But this one is a slightly different problem. It involves maintaing the standard quality of our graduates. I would feel bad to let students leave unprepared for job market. In addition, I don't want the market to perceive that we produce graduates with low quality.

It's happening, unfortunately. I hope this is not simply because we desperately need to raise money and have to sacrifice quality.

Thinking about it a little further, this situation is not only harmful to the department/university itself, but also to the students, and to the employers. A prospective student of the regular program would think twice: why should I work harder than some other students, if we would all get exactly the same labels? Below is a brief explanation of the effect to the hiring company (see graph above):

Think about a company seeking for two employees with master’s degree in economics. Assume that two of our graduates fill in the application. The company doesn’t want graduates from other university. Our two graduates hold the same diploma. But their quality differs. Graduate L has low probability (P) of failing his assignment, while H has high probability. Both alumnae’s utility curves are shown accordingly. Note that C is “coverage”, or think about wage; and d is “premium” or, for that matter, effort required from the employee. Don’t over-interpret “effort”. It simply means, “If you are not good enough, then you should work harder to be in par with the other – if you demand equal wage”.

The company system goes like this: the more likely you are to fail your task, the more effort you should undertake, and we will pay you accordingly. Obviously from employee’s point of view, less d and more C is preferable – hence the shape and the direction of the utility curves.

If the company can clearly separate between the “low-risk” and “high-risk” employees, it can require different effort levels. For a given wage level, therefore, the equilibrium is A for the good graduate and B for the worse graduate. However, many times, companies fail to identify which one is which – especially when their diplomas are identical. So, since both types prefer A to B, the former will be chosen by both. In this case, the company will make zero "profit" with L-type and negative profit with H-type. If the company wish to prevent any H-type (whichever graduate it turns out) to move to point A, and therefore implements a single rate (d*L_H), it will make profit at the cost of low-risk employees.

On the other hand, the good graduate is surely disadvantaged by the situation. With the same effort level with the worse graduate, but with higher quality, he is underpaid (or put differently, the worse graduate is overpaid).

In plain words: moral hazard is at play. And maybe adverse selection as well.