Wednesday, January 31, 2007

The Tourism Trap

A great deal of the Atlantic Canadian economy is now based on tourism. Tourism has been heralded by governments in the region as the next source of economic growth and prosperity now and in the future. This transcends political party and placement on the political spectrum.

The “now” part I can believe. When it comes to the future; we’ve been sold a bill of goods. Economic growth cannot come directly from tourism. It cannot come from any industry which relies on direct personal interaction or personal experience. Meaningful economic growth is an increase in the material standard of living. There only two potential sources for such growth. 1) An increase in the relative price of the output we produce. This would require the price of things we export to increase and the price of things we import to remain the same (this is a simplification but the idea is the same). 2) An increase in the amount we are able to produce with a given level of resources; ever increasing volume.

We can apply these facts to the tourism industry to understand how it is impossible for tourism to be a source of long term economic growth. Tourism is effectively an export. Consider the increase in relative price first. This would mean a continued increase in the price of tourism services. Assume it is now more expensive to vacation in Atlantic Canada than it has been in the past. Most tourism operators will tell you this means significantly fewer customers. Think about the increases in the value of the Canadian Dollar and the increase in the price of gas. Tourism is a highly competitive international industry. We are competing against areas all over the world. Dramatic increases in the relative price of tourism in Atlantic Canada would cause most tourists to vacation elsewhere. This is particularly true within the region. Increase the price of a Moncton vacation and people will go to Halifax instead. No source of growth there.

The other possible source of real economic growth is the ability to produce more with the same level of inputs. Now its time to think about what tourism is. We’re talking about people experiencing something. There are two way to increase productivity in tourism industries. First, increase the volume of people served at once without increasing other inputs – ie staff, displays, etc.(Disney is actually really good at this, but I can’t see it working for Fortress Louisburg – it is actually impossible if you’re talking about eco-tourism, you’ll destroy what people are coming to see) The other way is to bring people through faster. There is an upper limit to how quickly people can experience something and still be willing to pay for it. This will also mean ever increasing numbers of tourists.

Tourism is already a major industry in the region. People are making decent livings in this industry. Tourism has helped offset the economic losses of declining employment in natural resource extraction. No question. The problem is that we’ve gotten about as much out of tourism as we’re likely to get. The same applies to call centers. Given the nature of the industry, if we continue to invest in tourism as a source of economic growth we’ll be increasingly left behind the rest of the country in our economic standard of living.

We need to re-think most of our economic growth strategy in this part of the world.

Monday, January 29, 2007

Pants of Fire?

I’m starting a new research project with a member of the psychology department here. The idea came to me while watching TV. It’s a very basic question; are people more effective liars when they have something to gain or something to lose. A little bit of looking failed to turn up anything remotely close to what I wanted to find out. It just so happens that one of the psychology faculty does work on lie detection and polygraphs. With a little bit of planning we’re off to the races. Here’s what I’m thinking about.

Subjects are brought into the laboratory and hooked up to a polygraph, and then the polygraph is calibrated. Now here’s the fun part. Half the subjects will be told that they will earn an extra dollar every time they can fool the polygraph, ie lie and get away with it. Later in the experiment the situation will change. Subjects will be told that a dollar will be subtracted from their total earnings if they’re caught in a lie. Subjects are all paid a $5 or $10 show up fee so that they can’t go in the hole, and maybe bonus marks for a class as well. The other half of the subjects will have something to lose first, and something to gain second. This will allow us to figure out if order maters. We can now find out if the subjects are better at lying when they have something to gain or when they have something to lose.

Motivation: Most economic theory treats potential gains and loses of the same magnitude the same way. This is starting to change, as this makes it impossible why somebody would voluntarily buy both insurance and lottery tickets. We’re getting a sense, in part from the kind of neuroeconomics I talked about earlier and from more basic experiments, that people actually treat potential gains and losses very differently, with a potential loss having more impact. If the two possibilities are dealt with in different areas of the brain there is no reason to assume the impact on decision making to be the same.

Here’s the set up. Assume lying effectively (fooling the polygraph) has a relatively constant cost in terms of effort. If potential losses are more powerful than potential gains, subjects will be more effective liars when facing a loss of funds vs when they can gain.

The potential for application is significant. Just think about law enforcement. People who have something to gain by lying should be easier to detect than those who have something to lose. This also has broader implications in terms of personal motivation. It means the stick is more powerful than the carrot. Scary thought. It might be interesting to look at the issue as short term vs long term. It may be that potential losses are more powerful motivators in the short terms, but potential gains are more powerful over the long term. I’m still trying to figure out a way to get at that question.

Friday, January 26, 2007

The Quality Issue

Education is still one of the best investments in the world today. The cost of post secondary education to the student has been increasing quickly over the last 15 to 20 years. Yet, at today’s costs, (estimated around $29,000 per year including forgone wages) a university degree has a return on investment of approximately 26%. Very few other investments in the world have so high a return with so low a risk. This is even ignoring all the other important benefits to education.
The question then becomes why are employers willing to pay so much more for someone with a university education? Economics provides two possible explanations. First, a university degree signals to employers that the job candidate has an ability to work and be productive. This is called signalling. Second, skills are developed at university that are not developed else where, including community college. These skills make the potential employee that much more productive.
These ideas suggest something very important. The return to education can only exist if the degree represents a real productivity advantage. This creates an interesting paradox for those of us in the university education game. The quality of instructors is commonly measured by student opinion surveys conducted as a class nears the end. These surveys are clearly highly subjective. In the best of all possible worlds a good teacher assessed well in this system is one that typically makes it easier for students to acquire the skills or knowledge they need to do well in the course. This often means presenting the material in an interesting way; being an easy marker doesn’t hurt either. Often the presentation of a good mnemonic helps. Basically, the standard definition of a good teacher reduces the amount of effort that students have to put in. By reducing the effort required of students we dilute the quality of the signal to potential employers of a university degree. Those who “squeak by” will be less productive than the signal previously indicated. We also diminish the ability of students to acquire knowledge and skills on their own. Will a student that has had only “good teachers” be able to learn without a “good teacher”? If not, then good teaching will drastically reduce the value of education to employers and thus to students as well. I think we should reconsider our definition of a good teacher. A good teacher is one who prepares students to learn on their own. Being an effective teacher means making yourself unnecessary to the student by end of their degree. Ideally, the student should be able to surpass the teacher. This means demanding and somewhat unavailable. It is, however, essential that the faculty member be available to students who have exhausted other avenues, just as a professional expert is available, so too must be the university professor. But being overly available creates dependence, being totally unavailable provides no opportunity for a transfer of knowledge. We must seek a balance.
The key problem is assessing the quality of an instructor is difficult. Universities around the world need to think long and hard about how the quality of their instructors is assessed. We currently do it very poorly.

Thursday, January 25, 2007

Lost in the Woods

Once again the Province of New Brunswick is examing the implications of the urban/rural division of the population. There has been a profound trend of migration from rural to urban areas over the last 50 years or more. It could even be argued that this trend dates to before the industrial revolution.

As long as I have been aware, which is either a long time or not long at all depending on who you are, governments have been attempting to stem or reverse the flow of people from rural to urban areas. There have been a myriad of plans, initiatives, studies, programs, and whatnot all intended to keep people from relocating to “The City”. Given that we’re still talking about the issue, it is safe to say that we haven’t found a workable program yet.

The current round of discussion began when it was suggested that some mills in the province be allowed to go out of business instead of receiving government support. Essentially, the proposal is to end an on-going subsidy to various forestry sectors. Those who oppose the idea have stated, rightly so, that this is equivalent to allowing many of the communities to die. This statement, of course, is designed to elicit an emotive response from the populace.

I spend a lot of time trying to teach my student to cut through rhetoric and examine issues critically. The simplest way to do this is to ask “Yeah, so?”.

Yeah, so? Why should be convinced that we need to subsidize the existence of each and every rural community in the province? Remember, I’m an economist, I see the world in terms of costs and benefits.

The Benefits:
1) Tradition and History: by preserving our existing rural communities we preserve a link to our rural heritage.
2) Way of Life: rural living has a great many things to recommend it.
3) No Relocation Costs: Moving is costly, both financially and emotionally.
4) Low Crime: there are relatively few violent crimes committed in rural areas, and population density seems to be an indicator of crime rates in North America.

These are all real benefits, though many are not financial. (Surprising that an economist can talk about non-financial benefits, eh?) The interesting thing to note is the majority of these benefits are all captured by the few people living in rural community receiving the subsidy. Very few 0f these benefits accrue to those who must pay the subsidy.

The Costs:
1) Opportunity Cost: Funds could have been used for a number of other programs. This includes popular programs like Health Care.
2) Service provision is more costly: By providing the required services to a widely scattered population we make those services more costly.
3) Environment Impact: Rural communities tend have high environmental impacts per person. By maintaining the same population in diffuse communities we increase the damage we do to the entire environment. Particularly in terms of green house gases.

These costs tend not to be born by the individuals receiving the benefits, but are paid by those already living in cities.

The question New Brunswickers need to ask themselves is very simple. Do we want to continue to have those in the cities subsidize those in the rural regions?

Of course this begs a larger question. Should Canadians continue doing this on a national scale through equalization payments?

Tuesday, January 23, 2007

Something Funny Going On

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Let’s assume that we have a can-opener..."
(attributed to) Paul Samuelson

I have a confession. I love economics jokes, the cornier the better. The strange part is that I’m not alone in this. There are a number of great websites full of economics jokes. A google search comes up with over 13,000 hits. The one above comes from one of the sites that helped get me through my PhD. When a group of economists get together it doesn’t take too long before somebody begins cracking jokes, we seem to need to laugh. Some are inside jokes, while others are self depreciating. The cartoon posted with Sunday’s blog entry is a great example, sent to me by another economist.

This got me thinking. What are jokes about other social sciences or scientists? I’ve never heard a sociologist crack a sociology joke, or a political scientist crack a poli sci joke before, though I've heard both crack economics jokes. Enter good ole google again. A search for +”sociologist jokes” turns up only 8 eight hits. +”political scientist jokes” jokes returns no hits, and +”political science jokes” only 10 hits. I was floored. Do members of other disciplines have the sense of humour removed in some mystic rite after their comps or defence?

Two possible, and very different, explanations come to mind. 1) Economics and economists are in such a position of comfort and security that they can make jokes about themselves without fear of “losing face”. Other social sciences aren’t in that comfortable position. (This was suggested by a colleague). 2) Economics (the dismal science) is uncomfortable with itself and is likely to be the subject of derision and scorn, thus makes light of itself as a defence mechanism.

The second explanation makes a little more sense to me. When you look at number of successful comedians out there, the vast majority come from some group that is “outside” in some way. Canadians in the states, people of Jewish faith, African ancestry, Latino, Italian, etc.

By the way, does anybody know any good jokes about other social sciences (new economics jokes are also welcome.)

Sunday, January 21, 2007

A Problem of Happiness

This one comes from something in the comment left by Sharon.
We’re seeing an increase in the focus of governments on happiness. The government of Bhutan has been using Gross National Happiness as it policy objective since the mid 1970’s. Even the stodgy British are getting into the act. The BBC series on happiness, the happiness formula, has an in depth look at happiness politically and otherwise. An increasing number of people are calling for the abandonment of traditional measures like Gross Domestic Product, and a focus instead on some sort of measure of happiness. To get a handle on this idea we need to take a look at the ideas behind GDP. We also need to have a serious look at happiness.

What is GDP anyway? Any first year economics text will tell you it’s the market value of all final goods and services produced in a geographic area during a given period of time. One of the things that almost always lost in talking to people about GDP is that it is a measure of size only. It doesn’t tell us about quality of life, it doesn’t tell us about all the important work that is done outside of formal labour markets, it doesn’t tell us about the state of the environment, or any number of other really important issues. So why do economists and others spend so much time talking about GDP?

There are a couple of really important answers to that question. First, it does capture something important, size. When we’re talking about an economy, size matters. I can think of very few people that would prefer to live in a country with a very small economy (per person). Second, GDP is conceptually easy to measure. One of the biggest problems in macroeconomics is aggregation. Any time you want to talk about an entire country you’re going to run into a problem of adding apples and oranges, and a lot worse. GDP provides a simple way to solve this problem, convert everything into dollars using market price and add. This is why so many important things are left out of GDP, like stay at home parents, as there is no market price with which to assign value.

Given the limitations of GDP, why not something like happiness? The first question is what is happiness? Happiness is really hard to define. If you’re going to focus a lot of your government policy on happiness it would be useful to have a working definition of what we’re aiming for.

Another key problem with happiness as an objective for policy is measuring it. If we’re going to focus policy on increasing the happiness of people, we need a way to tell if we’re doing it right. Without a measure, we could be making things worse and not know until the problem gets out of control. So how do you measure happiness? Typically, researchers just ask people a question like; “On a scale of 1 to 10, how happy are you?” The interesting thing about this is that self reported happiness seems to match what those close to you assess your happiness to be. So we can measure an individual’s happiness reasonably well. Now comes the hard part, aggregation. Remember we want to focus national policy on happiness. I don’t think it makes sense to do it one at a time. So we need a method to add up everybody’s happiness. This is going to cause problems. Using a simple average is going to be a real problem. If one person reports a happiness of 1 and another a happiness of 9, is that the same as two people reporting 5? Should we go eenie meenie minie mode?

Finally, we enter into the problem of what makes people happy. There are some common elements to studies of happiness. The first tends to be having good friends and strong family relationships. How can this be improved by government? Are we to have government mandated friendships? I can see the equivalent of the American Miranda warning: “You have the right to a friend, if you cannot make friends, one will be appointed to you.”

The pursuit of and progress toward a long term goal is another key factor. As you work toward a long term goal you get a sense of accomplishment that increases the level of happiness you report. What if your long term goal isn’t acceptable to the rest of society? How can government policy address this issue? Assign everyone a long term goal at birth?

A belief is something larger than one’s self is another factor that seems to play into reported happiness. I don’t see how anything other than enforced spirituality is going to be possible here. “You have the right a metaphysic, if you don’t have one, one will be provided for you.”

Richer does not seem to mean happier in many cases. One spin on this is that we adapt to pleasure and opportunities quickly. As our incomes or wealth increases we begin to see that standard of living as baseline rather than an improvement over how we had to live last year. This ties in to one of my beliefs about happiness. I think people are wired to receive happiness from the acquisition of things, rather than having them. It is the change in our environment that gives us joy or sadness. This is the origin of the idea of retail therapy, the rush of getting, not having. If we were to spend more of our wealth on experiences rather than things, we might be a little happier. Policy might be able to help in this regard.

Your relative place in society and peer group has a dramatic effect on happiness. If you’re doing “better” than those around you, you tend to report a higher level of happiness than if you’re doing worse. So equity seems like it might be a good idea. But it does bring up another problem. Does equity extend to what we do with our opportunities? People don’t appear to be good at making choices to improve their happiness. This may simply be that we aren’t very good at predicting what’s going to make us happy. If this is true and a psychologist, or heaven forbid an economist, has an idea should we turn over our lives to them and let them make the decisions for us?

Targeting happiness as a government’s objective brings up another frightening possibility. At what point should a pharmaceutical solution be considered. An increasing portion of the population is already medicated for a variety of “happiness” related issues. Should we all be?

Finally, what about changes that make some people better off and others worse off? Say you decide to take some money (being richer doesn’t make us happier, but poorer makes us grumpy) from one person and give it to a different person. How do we assess the net effect?

Basically, we all need to be concerned with happiness, but I don’t see any way to use it as an effective policy goal. We might do better to invest in a genuine progress index or improving GDP accounting to include some the important things that are currently left out.

Neat aside: poverty is almost always measured in terms of monetary income – not happiness.

A little bit of fun from Stuart.

Saturday, January 20, 2007


Forbes Magazine recently published an article with the title "Your Brain on Shopping" describing some joint research done by people at Carnegie Mellon, Stanford, and MIT. Basically, people's brains are scanned with an fMRI while they're shown pictures of things they might like to buy and prices. The people are actually given the chance to purchase the goods they are being shown, to be delivered later in the week. Essentially, the researchers now have fMRI scans of the brains of people shopping on line. The results show three different areas of the peoples' brains are active while they shop. This is really neat. An area typically associated with the anticipation of pleasure (getting a good), and area associated with the anticipation of pain (having to pay for it), and another area that's though to be involved with decision making, all show up as active. One of the researchers involved claims this work "challenges the orthodox economic view of consumer decision making."

I say, not really. The basis of all economic decision making (at least according to most economic theories I know of) is a comparison between costs and benefits, typically at the margin. This research actually supports this view. The anticipation of pleasure (remember the goods aren't going to be received immediately) is essentially benefit (expected benefit anyway), the anticipation of pain is cost. The third area could, in this example, be re-labelled the "economics center" as it is involved in comparing costs and benefits.

What's really interesting is that people sitting around thinking about economic behaviour long before an fMRI was even conceived, basically had it right. I expect we'll be seeing a lot of this type of research in the future and economists will have to stop treating preference structures as a "black box" and start worrying about some of those details.

The more subtle issue is going to be how more humanities-based disciplines deal with physical science approaches to what, until recently, has safely been the realm of the humanities scholar.

Friday, January 19, 2007


This is a little new to me, so hang in there. I'm hoping to use this space to vent once in a while about stuff in the media or stuff that I'm working on in terms of research. Or, if all goes really, stupidly well, deal with issues people raise in comments. I'll be posting again over the next day or two with something of content to see what happens.