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 It’s been a pretty darn good research week, and so there hasn’t been the time to think of something with real economic content. So, instead, something close to my heart. Tito’s claims to make the best vodka in America. Based on fairly extensive research, I agree. It’s also half the price of other premium vodkas.

 It is a puzzle to me exactly why one vodka is better than another (my tongue certainly agrees). The claim is typically made that the purer the better. Tito’s tells us that the secret to their vodka is the precise control offered by their pot still (a batch production process), the fact that they run it through the still 6 times, and their charcoal filtering.

It happens that I know a very good chemical engineer (my father, to be precise). He tells me that if you want incredibly pure flavorless alcohol, getting to it on an industrial level is not very hard: you run down the street to a your local oil refinery, borrow their fractioning column, and get as precise a cut as you want.

In fact, one feature of the pot still used by the vaunted small batch vodka producers is that the temperature rises a bit from one end of the run to the other, and so some things can get through. In the end, it seems likely to my consultant and I that the key to a really good vodka is in fact having some good stuff survive the process. This can happen, because some flavor components have boiling temperatures near those of the right alcohol, and so will survive even multiple distilings. Even charcoal filtration, which only absorbs some flavor components, can leave some of this behind.

In any event, though, Tito’s is incredibly good. Our guess: very pure ingredients, meticulously clean equipment, and lots of attention to temperature control and cut off points.

The sandwiches at the Kellogg cafe come with a choice of homemade chips or an apple. Perhaps reflecting an overdose during my summers picking fruit in the Okanagon valley, the apple typically ends up sitting un-eaten. 

There are better and worse home-made potato chips, but even the worst of them push many of my buttons. It thus marks a true culinary achievement that when I choose the chips, I typically eat a couple of them, and then throw the rest away. And, it turns out, I derive a lot of pleasure from this! It makes me feel all self-controlly and healthy.

Given a choice between not eating something you will feel guilty about, and not eating something that suffuses you with a feeling of virtue, I strongly recommend the second.

I am atingle to think what I shall non-consume next.

Let me begin by saying that I’m with the new Keynesians on the central issue here. I believe real world markets break down. A stunning point for me is the juxtaposition between the fact that much of modern macro began by trying to incorporate micro foundations into their models, but in the end, many of the proponents of the extreme version of fresh-water economics have ignored 30 years of micro that is pretty specific on all sorts of ways that markets can fail to clear.

That said, one can argue about the role of government on many levels. I take a variety of positions on these issues. I’m a deficit hawk, but a big believer in well-timed intervention. I’m in sympathy with the comment from our treasury secretary that we need to pay serious attention to the deficit, just not this year. I sure as heck hope he means the second part, though. The long chain of budget deficits forecast by the CBO scares the heck out of me.

Today, however, I want to make two reflections on the right form of stimulus.

The first is an easy one. In talking about the purported wastefulness of direct stimulus spending, I think it is well worth noting that very few people would argue that this country has been spending too much on infrastructure. Clearing up a lot of deferred maintenance seems like a fine idea to me, and getting our transportation system back up to something approaching the quality viewed as normal in much of the developed (and developing) world a pretty good idea too. For much the same reason, I get less worked up than many about “pork-barrel” spending; sure, it would be nice to have a more transparent process, and maybe doing a little better on allocating scarce resources on the margin, but we seem so far from a sensible amount of public goods in this country that I’m doubtful that much of the spending is truly a waste.

Now to my second, and maybe less trivial point about stimulus spending. One theme that has recurred in left-of-center blog land of late is that if only we could have another round of “real” stimulus, we wouldn’t need to be doing back door stuff like cash for clunkers and the tax subsidy for home purchasers. I disagree! If one wants to stimulate economic activity at reasonable cost, this seems like a good way to go. Why? Because it is pulling exactly the right lever if you think hard about why spending has fallen in the first place.

One reason, of course, is because some people have less money. Extending unemployment insurance benefits seems a good idea in this context. State governments, many of which have mandatory budget balance mechanisms, are also in the class of entities to which  a direct cash transfer is likely to stimulate spending.

But, the bulk of the reduction in spending, by both firms and consumers, is not “we have no money to spend, or nothing worth spending it on”. Rather, they are properly exercising option value in a setting of wildly increased uncertainty. In the months after the financial meltdown, a new TV suddenly needs to meet a much higher hurdle: the question is not “do I think the flow of services from the TV over the next 8 years is more than worth the cost”, but “do I expect to derive enough value from owning this TV now instead of 3 months from now that I wouldn’t rather wait a bit, and see how the situation develops.” If things look less apocalyptic in three months, one can always buy the TV then, having foregone only a few months of HDTV heaven. On the flip side, if in three months the situation has shifted for the worse, then one has avoided being saddled with a TV/car/house/factory that does not make sense in the new environment.

If I’m waiting to buy a new house because I’m waiting to see if I get tenure, this delay is economically efficient. But, if the uncertainty is aggregate and extreme, so the we all want to exercise the option value of delay, and if one believes that markets don’t always clear, then if we all start delaying economic activity because we want to see if the future is bad, the future has a decent chance of being just that.

In such a context, a tax cut, or a check from the government, is likely to have very little effect. I’m a little more flush than I was (although I’m also guessing that my future tax liability is going to be higher), but heck, I had money to spend before anyway. If the issue is uncertainty, then the right thing to do with extra money that appears is to simply stick it in the bank.

On the other hand, if the choice is “new car today at huge discount” vs. car in 3 months at normal prices, then I may well pull the trigger even if I face a moderate degree of uncertainty. Note then, though, that cash for clunkers and the housing subsidy are particularly effective precisely to the extent that people think they will end. If I am pretty sure the program will be renewed, then the original calculation is back in effect, and waiting is probably the right thing to do.

This brings us to one of the most important points made by Lucas, Phelps, and company: economic policy based on consistently fooling people is unlikely to be a great idea. Here, the problem is to avoid the temptation to go back and re-new each program as it nears expiration. If people grow to expect this, they lose their oomph.

This has been illustrated in a paper by Megan Busse, Duncan Simester, and Florian Zettelmeyer. In the wake of 9/11, GM ran “The best deal you’ll ever get.” Precisely because it had a well-defined end date, and one that seemed credible given the extraordinary circumstances, the program was extremely effective in raising sales for GM despite the uncertainty rampant that fall. But, when GM renewed it, the effect was much smaller, probably because people no longer saw the cost of delay as being large.

Well, just to get warmed up, how about something with (almost) no economic content?

Review: Avec

The 17 year old (Brian) and I ended up at Avec (615 W. Randolph) nearly at random: a last minute decision to go see Faust at the Lyric Opera, and then a scramble to find somewhere near the Ogilvie Station that had decent reviews and would let us get to the opera early.

The place looks like a nicely equiped Finnish sauna. There is a line of tables along one side of the room, and a bar along the other. If you sit at a table with your back to the wall, a line of finely clothed posteriors that forms a rythmic backdrop above your dinner companions.

Tables are communal style, with what seems like too little room per person. But, the closeness forces a certain breaking of barriers (as do the seats at a football game) that in the end we found nice. Acoustics are pretty good, and all in all the atmosphere does a very nice job of creating that “I’m safe in my cave with my tribe” feel that is part of why we like crushing ourselves together in restuarants so much (and why any decent restaurant host/hostess groups full tables together on a quiet night).

The menu is of medium length. Sharing is strongly encouraged. The restaurant seems to have a commitment to re-introducing squeamish diners to the wonders of tripe, offal, etc, and does a good job of advancing the cause. It might be difficult for vegetarians to find a lot of variety: both I and a substantial portion of our meal were in hog heaven. To add the mandatory economic theory content to this entry, I had fun trying to convince my son that precisely because offal carries a bad connotation, we should be willing to try it: after all, why would the restaurant serve something that fought our biases if it wasn’t especially good?

The highlight of the meal was probably the veal liver. Crisp from the pan, in a soubise (I had to look it up: it’s a Bernaise sauce with lots of onion, and they were careful not to drown the dish in it) with parsnips, rapini and lemon. The acidic flavors from the lemon and onion set off the sweetness of the veal liver very nicely, the rapini and parsnips added some undertone and texture, and the liver itself was kick-ass. In many ways, like a slighlty less fatty, firmer fois gras. And, of course, without any of the guilt!

The pumpkin pizza with pheasant sausage and a pumpkin also had a lot going for it. The sausage was nicely spicy and worked very well with the pumpkin, and the roasted pumpkin seeds were terrific. We disagreed on whether the pumpkin should have been further roasted (to remove some more liquid) before it was mashed up to put on the pizza. I say yes, but I quibble. It is something I’d eat again in a minute, and I think its something one could do pretty well at home. Add smoked pork product to taste.

The amberjack with mint cured bacon, garbanzo beans, preserved lemon and olives was not a favorite. On execution, the amberjack was over-cooked. But, more fundamentally, the rest just didn’t hang together very well. The mint-cured bacon had an off-taste (perhaps picked up from the fish), and the preserved lemon was too staccato. The garbanzo beans, on the other hand, were excellent.

The restaurant does not take reservations. We were there on a miraculoulsy nice November evening, and the waiting diners seemed to be having a nice time with their drinks under the gas heaters outside. This adds to the happening feel, but probably means that I would not go there at a busy time in the winter.

Faust was, of course, a blast. Who  knew that unwed sex had such dire consequences? I’m glad that like almost everyone of my generation (and, I am told, this one), I waited.

Tomorrow, perhaps some thoughts on stimulus. On the other hand, research is going pretty well, so the opportunity cost is high…

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