Wednesday, January 31, 2007

One Billion Chickens

Yesterday I read the Kompas daily headline on the impact of avian flu. I came across the statement made by an official from Coordinating Ministry of Economy as follows:
"At the moment, the production of chicken poultry reaches 1 to 1.2 billion chickens per year, or around 300,000 to 400,000 chickens per one cycle of breeding (three to four months). Due to avian flu, the consumption drops by 50-60 percent of that number".
One billion chickens! For one who doesn't fancy eating chicken, like myself, that's a flabbergasting number indeed.

But first, regardless of the validity of those numbers, can you spot something funny in above mentioned statement? Yes, 1.2 billions chicken (in a year) divided by four (one cycle) would never equal to 300,000. But let's just assume that he's been misquoted.

Now, check the one billion chickens production number.

From googling, Indonesia Poultry and Products Annual Overview - August 2005, released by US Department of Agriculture, Foreign Agricultural Services, reported that the estimate number of broiler chicken production in 2006 is 672,000 tons. Broilers consist of 60 percent of total chickens produced, the rest is local-breed variety. Combine the two, we have 1,120,000 tons chickens. Now, assuming average chicken's weight is 1.4 kg. So the number of chicken is 800,000 million. Not bad, we have 200 million chickens lost in calculation.

Next, 50-60 percent plunging consumption is a very big drop indeed, if that's the real case. In 2005, the avian flu human death announcement led only to 25 percent decline. I wonder why this year has bigger impact.

Furthermore, as the cost of production is IDR 8,000-8,500 per kg:
"... the minimum selling price is IDR 9,000 per kg. It's in a normal condition. (But) now to sell at IDR 3,500-4,000 only is already hard. As such, the loss might reach IDR 1 trillion. That's only taking account the direct impact to chicken farm, not yet the indirect one to restaurant, hotel, and traders".
OK, let's do simple math again. Let's say, the loss per chicken is IDR 5,000 (IDR 8,500 production cost minus IDR 3,500 actual selling price). If we put the total loss at IDR 1 trillion, it implies that we are talking about 200 million chickens. So the government assumes that they can contain the avian flu within less than one breeding cycle. The question, can the government do that?

To be fair, the one trillion IDR loss is, however, only half of the story because consumers will substitute chickens to other products --fish, meat, vegetables, instant noodles, etc--. There must be some gains in the latter's' business.

This, however, does not discard the fact that avian flu is a problem. A serious one.

Sunday, January 21, 2007

Talking Nonsense #278

Café Salemba is proud to present its third album: Regulation. Unlike the previous albums, Tax the Dead Birds and I Didn’t Shoot Milton, this one comes with more fusion and a little hard rock. It has five compositions: Got a Nobel? (featuring Jeff Sax), Indonesia Bangkit, Non-Farmer Can Also Be Poor, Screw the Market (composed by me), and Price Is Like Oxygen (featuring H. Chavez).

Hope you like it.

Tuesday, January 16, 2007

(Film) Industrial Policy, the UK Way

So the Hollywood dominates the world film market. British film is declining. What should Britons do? The standard economics would be letting the competition goes on. Let lousy films with funny accent perish, if they can't cope with the market force.

Probably the Britons can no longer stand losing their cultural supremacy against their ex-colony. As Prime Minister Hugh Grant1 once said:
We may be a small country but we're a great one, too. The country of Shakespeare, Churchill, the Beatles, Sean Connery, Harry Potter. David Beckham's right foot. David Beckham's left foot, come to that.
And his Chancellor of the Exchequer (a.k.a: Minister of Finance in case you are not familiar with this term) Gordon Brown --no, he's the real Tony Blair's Chancellor—announced in September, 2004:
I shall hereby declare that small budget films entitled tax relief 20 percent of production cost, and 16 percent for films costing more than £20m.2
And the result, as claimed by UK Film Council, is --for the money spent for film-making:
Statistics from the UK Film Council reveal that £840m was spent last year, up by 48% from the £569m spent in 2005. Studios are also coming to Britain in greater numbers - inward investment increased by 83% to £570m.3
Yeah, right. So much for the free market idea.

Now move to Indonesia. We want to have strong film industry, producing not only money-making but also good quality films. The ala UK tax break proposal seems attractive. But how can we be sure that taxpayers money going to the film makers, instead of building the schools or rice subsidy to the poor, would produce the industry boom like in UK –and, I would like to add, not the likes of crappy local films we often find in cinema nowadays? If we insist for the plan, we’d be better sure that, first, the economic benefit (multiplier effect on income and employment) coming from the plan exceeds the cost for tax break (or subsidy). Second, the produced films are competitive vis-à-vis Hollywood ones, which usually come from the quality of the product. And third, the mechanism to prevent discrimination in selecting the recipient is in place and well enforced.

A tall order indeed.

1 In Love Actually.
2 Well, not precisely, but see official guidance for UK film makers on tax-relief.
3 From The Guardian


Monday, January 15, 2007

Being Married May Not Be Like It Used to Be (Comments on: "Signaling game - a trivia" )

In a recent post, AP posed some questions about what signals would a man holding a baby at a mall be sending. Ignoring the self-absorbed nature of his question (after all, self-absorption is partly what this Cafe is all about), I will try to give some comments. The point in that post about the man wearing a certain t-shirt has been dealt with sufficiently in that post's comments and I won't discuss it here.

Being married probably sends different signals than it used to do...
In the old days, a married man would be thought of of having a stable life, an ability to make long term commitment, an aversion to risk etc. On average, marriage men would then be rewarded in the job market in the form of a marriage premium, loosely defined as the difference in wages between married and unmarried men, everything else including age, education, experience and work tenure the same. They would earn more, and accumulate wealth faster.1)

Why does such premium exist? There are three main competing explanations. The first one is the discrimination explanation. This relates to the points raised earlier about married being seen as a signal of stability. Because of that, employers may have some bias in favor of married men when they make decisions on hiring (and firing), wages, benefits, and promotions . The second explanation is the specialization within marriage explanation, that says that marriage premium is a result of actual increased productivity that comes about when married men specialize in the market activities. They are able to do this because their spouses specialize in household/non-market activities (this is partly why I said "in the old days"). This increase in productivity translates to higher wages for married men. The third explanation is the selectivity explanation, which basically says the premium is observed because some of the qualities that make men perform well in the job market (responsibility, 'people' skills, good looks 2)) happen to be the same qualities that make them perform well in the marriage market, and thus they are rewarded in both markets. These qualities are observed by both employers and spouses but unobserved by the econometrician who then attributes the difference in wages between married and unmarried men to their marital status.

Empirically, marriage premium has been declining in western societies. I'm not aware of any study using Indonesian data (please enlighten me), but I would imagine even if the premium really has existed in the past, it would be less important now than it is before, especially for the sub-sample of Jakarta white collar workers. Given the lack of empirical evidence, that statement and the following are just conjectures and may well be proven wrong.

First, marriage is probably not such a good signal for stability anymore. With the cost of marriage dissolution (monetary and otherwise) decreasing, people are entering and quitting marriages easier. At least if you believe the newspapers and infotainment. If these anecdotal evidence are anything to go by (they probably shouldn't be 3)), marriage may now signal potential instability somewhere down the road, something that employers are keen to avoid.

Second, the gains from specialization are probably not important for Jakarta white collar workers because now, even young households typically would employ maids and nannies: there is not much specialization to begin with.

In short: being observed as a married man is probably not as advantageous in the labor market today as it was before. If that is true, than it seems that there is even less incentive for a woman who is active on the dating/marriage market to look at a man holding a baby at the mall favoringly. A guy who thinks that being observed as a married man is giving out signal that says "sorry I'm not available" is simply flattering himself. The signal he will be sending is probably: "Hi there. Even if I might be available - and remember the cost of dissolving my marriage is relatively low - you might as well look for a single man since I don't command that much premium in the labor market..."

...but having a child may still signal stability
What signal does holding the baby give away? In most cases, the arrival of a baby would be associated with an increase in specialization: the mother would reduce market hours, experience career interruption and a reduction in wages. The father would respond by increasing market hours and probably earning more. No need to look further for an example, read AP's (and Juli's) own account. Whether this would turn into an advantage is not clear; the total family income may stay constant because the increase in the husband's income may be matched by an increase in the family's spending (on the child) and the decrease in the wife's income, as the empirical work by Light 4) has demonstrated.

However, having a baby may still send a strong signal about stability. Infotainment watchers probably agree with that statement. A lot of marriages of celebrities seems to hinge on these beautiful couples having an offspring. (Okay, after a disclaimer about not having empirical evidence, I got a little carried away - I am now using infotainment to support my argument!) To what extent it is really important is not clear, but having a child certainly increase the cost of divorce, monetary and otherwise.5) Although having a noisy dispute over custody seems to be a new attention-getting vehicle a la Tamara Blezinsky (sorry, can't help it).

So, if you're caught holding a baby in public, you're actually sending a mixed signal. People may see you as a s.n.a.g. (if you still need a definition, you're probably reading the wrong blog). Another signal has been suggested by some commenters: you are a pushover of a husband and are dominated by your wife. Or that you cannot afford a nanny.Or that you chose not to hire a nanny even though you could afford it just to make a point. Or maybe you and your spouse want to make a point about equal bargaining in the household, and so on.

Or, if you're like me, you just enjoy spending time with your baby daughter and couldn't care less about other signals you might be sending.

1) See papers by Korenman and Neumark (1991), Korenman and Blackburn (1994) , Hersch and Stratton (2002) for examples of empirical papers on marriage premium.
2) Here's a link to the discussion in the Cafe about what beauty can buy you in the labor market. Here's the related Slate article.
3) Note that nationally, the rate of divorce in Indonesia has actually been on the decline in the past decades (Jones 2000), largely due the increase in the age of marriage and the decline in the number of arranged marriages. Shorter term trends or among a subsample of population (urban, white-collar workers) are hard to come by.
4) Light (Demography May 2004).
5) If the child's welfare is in each parent's utility function, a divorce that may affect the child's well being will be against their own interests.

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Friday, January 12, 2007

Self Promotion #394: The Future of the Intellectual Imperialists is Not Dismal and #395: How to Improve Your Love Life

(links to the previous installments: #393 and #392)

The future of the economics, the dismal science, is not so dismal, according to this article in the New York Times. Here's a quip:
"....economists have been acting a lot like intellectual imperialists in the last decade or so. They have been using their tools — mainly the analysis of enormous piles of data to tease out cause and effect — to examine everything from politics to French wine vintages...."

"...As “The Soulful Science,” a new book by Diane Coyle, puts it, there has been a “remarkable creative renaissance in how economics is addressing the most fundamental questions — and how it is starting to help solve problems.”..."
Well, what is certainly not going to be dismal is the future of the thirteen "Economists to Watch" who were featured in the article. Andrew Leigh of the ANU calls them the young guns, although I think Leigh himself is a young gun, certainly one of the top young economists in the southern hemisphere (check out his academic website).

One of the thirteen on the NYT list is Ben Olken, who has done a number of his studies on Indonesia, and his works on corruption, social capital have been discussed in this Cafe (see the links to those discussions here).

An interesting fact about the list is that out of the thirteen economists on it, six of them are married to each other, a clear example of positive assortative mating (ah, this reminds me to do a post on assortative mating in the future).

Examples of positive assortative mating among economists are indeed abound. For my fellow economists whose partners are not really into utility maximization thing, don't give up just yet. There are ways to do it, which brings us to Self Promotion #395: How to Improve Your Love Life.

From Greg Mankiw's blog:
How to Improve Your Love Live

Having trouble satisfying your girlfriend? A reader of this blog emails me his remedy for the problem:
"...You'll be pleased to know that I managed to persuade my girlfriend (a biologist) to buy a copy of your "Principles of Microeconomics" recently here in the UK, so that we could have more informed discussions about interesting economics problems...."
Okay, that;s probably falls into the category of how not to charm your girl/boyfriend. And see also the following letter from a nerd comment in the blog:
".... I'm tempted to try this with my girlfriend. In time she can work up to Romer and Mas-Colell-Whinston-Green. Until then, our love life just won't be complete...."
Err... Oh well, the future is probably dismal after all.

Update: Arya at On Indonesia and the Economy also has a post about the young guns. According to him (I paraphrased), there isn't enough credit being given to economists whose work are as technically sound as those done by the featured economists, have more practical uses, but on topics less sexier than some of those on the list. I think I agree with him.

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Wednesday, January 10, 2007

Macroeconomics revolution in sight?

Let’s talk about macroeconomics --a subject that discusses the national output, inflation, unemployment, and the likes. If you fancy more thorough definition of macroeconomics, you can always consult the text-book, of course.

But firstly we need to imagine how a (national) economy works. And in this respect, I think the credit goes to John Maynard Keynes and his General Theory of Employment, Interest, and Money, who brought the macroeconomics into the world, as a result of his thinking on Great Depression in 1930s. This was the first revolution.

With help of IS-LM model of Hicks (1937), how an economy work, in Keynesian way, can be best described as interaction between goods market (equilibrium of aggregate demand that consist of consumption, investment, government spending, and, export import; and output) and assets market (equilibrium of money market and asset market), connected by the interest rate.

This is a powerful model, at least until the 1970s. It also gives a room for government to fine-tune the economy along its cyclical pattern of boom and bust through fiscal policy (in goods market) and monetary policy (in money market).

But in 1970s the assault of Keynesian model came from two directions, empirically and theoretically (Akerlof, 2007). Empirically, the Philips curve, one of main feature of Keynesian model, for converse relationship between inflation and unemployment didn’t hold, mainly in US. They had stagflation.

And theoretically, and more interestingly, some of basic Keynesian model tenets were no longer valid as a result of the discovery of five neutralities: the independence of consumption and current income, the independence of investment and finance decision, inflation stability at natural rate of unemployment, and ineffective monetary policy with rational expectation; and Ricardian equivalence.

Alright, OK, I see you raise you eyebrows. That’s OK, don’t bother too much, I just want to say that the science gave birth to its second revolution, particularly after the Lucas rational expectation theory, and called the outcome New Classical macroeconomics.

And this took places by mainly adopting the micro-foundations approach of firms profit maximising and consumer utility maximising; and lending heavy weigh on market perfection. And they believe, more or less, any government intervention and fine-tuning effort would be useless.

Afterward the works have been going on, as well as the battle between two schools of thought. By incorporating market imperfection (frictions) into the model to defend the old Keynesian pre-suppositions, the New Keynesian reacted to New Classical Model. And the newest proposal came from Akerlof (2007), in pdf, who introduces sociological term of norm into equation to nullify five neutralities championed by New Classical macroeconomists abovementioned.

But, in my opinion, the New Classical revolution and the works afterward haven’t really brought a new general model of the economy, they way Keynesian did. All are only partial assaults on the Keynesian framework, without producing a comparable great model on how the economy works.

I once emailed one of the authorities in the field, Gregory Mankiw, asking for another possibility of scientific revolution in Macroeconomics:

I was expecting that Asia crisis in 1998 brought a revolution in the field, the way Great Depression in 1930s delivered Keynesian revolution. Alas, it wasn't the case. Why?

And his answer

Good question, I don’t know.


Maybe you know the answer?

P/s: This is the extension of this old posting, adding a little methodological issue into the discussion here.

Wednesday, January 03, 2007

Signaling game - a trivia

Remember our post on signaling theorem? Here's a possible application on it. And feel free to answer this trivia.

A guy wearing Harvard t-shirt is enjoying a cup of coffee in a coffee shop in a mall with his 2-month old baby girl. The mom's shopping somewhere upstairs; but she could also be shopping somewhere in Orchard Road, no one can presume. Which kind of signaling do you think happened?

A. From the guy's perspective:
  1. I'm straight, don't bother to approach (if we're talking about Blok M Plaza, this is very relevant. Not that there's anything wrong with not being straight, as Jerry Seinfeld once said...).
  2. I'm happily married, don't bother to approach.
  3. Look at me, I'm a perfect husband and dad. Aren't I interesting?
  4. Look at me, my wife told me to stay here while she's shopping, and I do what she said...
B. From the baby's perspective:
  1. Look at my dad. He went to Harvard, so I'll go there under the legacy admission.
  2. Look at my dad. He went to Harvard. He must be rich and so must I (am I?).
  3. Look at my dad. He went to Harvard. Don't bother approac hme if you're not that smart.
  4. By the way, my dad went to Harvard under scholarships, so he's not that rich. That's why we only go to this mall.
C. From the wife's perspective:
  1. My husband's not available. Our baby is the territorialmarking.
  2. I have a submissive husband. He'd like to sit our baby while I'm shopping.
  3. Any other ideas...?

Tuesday, January 02, 2007

Marketing science

A visitor of Cafe Salemba asked: “What do economists, or at least the Cafe guys here, think of marketing – as the science, as the art, or as the source of income”. Let me take the first shot as the other guys might have different perspectives.

To be very honest, I once thought marketing science was useless and childish. It was all about creating easy-to-remember abbreviations like 4Ps (product, price, placement, and promotion – never mind the correct ordering); or finding a term that sounds similar to an already established theory and call it a ‘theory’ too (competitive advantage vs. comparative advantage is a case in point); or writing popular books with lists of how-to’s.

Of course I was wrong. Marketing science can be very useful. It includes sub-disciplines like marketing research and market analysis that involve careful steps and are very useful in analyzing market behavior for prediction purposes. It often employs increasingly rigorous techniques to minimize errors. I myself have recently adopted its techniques in choice modeling, called latent segmentation. Another thing that I like from it is its positive approach (everything/everyone is a commodity).

Furthermore, marketing science and economics seem to be getting along closer. There is even a respected co-journal for both, such as Quantitative Marketing and Economics. Some universities have department for both, such as this and some economics departments run classes that analyze the economics of marketing, such as this one at Melbourne.

As for the other two dimensions: art and source of income, I can not say as much. Except that I think some of the so-called marketing gurus are successful and rich because they can talk interestingly, regardless of whether or not they know what the science really is. They talk so interestingly, I many times confuse them with motivational speakers. But again, who needs theory if you can be rich easily?

From the Manager

Happy new year, everybody!