Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

I figured I'd put this in the Beeronomics sphere as well as the Economist's Notebook as beer is one of the beverages of choice among collegge students: A new NBER paper [HT: Freakonomics] reports that drinking in college impairs performance.  From the abstract:

This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes.

Uh oh. This should come as no surprise to anyone who has ever been, or been exposed to, college students: students drinking alcohol is common and the effects of alcohol (as most college students will tell you) impedes their academic performance.

But look more closely at the abstract to understand just what it is the authors are doing in this paper, and the actual story becomes less less clear.  The authors took data from the US Air Force Academy where underage drinking is not tolerated and can lead to immediate expulsion and compared the performance of students just before their 21st birthdays and the performance of students just after their 21st birthdays.

So it is not the alcohol itself the authors are isolating, but the entire change in lifestyle and time management that happens when students turn 21. The authors claim that the USAFA data are a source of strength, but I actually see it as a major weakness.  With such a tightly controlled campus, 21st birthdays may traditionally be a moment of liberation, not just to drink alcohol but to become more social off campus and perhaps less serious on campus.  Now, I imagine that they have a control group for comparison of students who didn't drink prior to age 21 and who don't drink after turning 21, but this is not really a counterfactual because not drinking may also signal a rejection of the entire post-21 lifestyle of which I speak.  [I don't have access to NBER working papers through OSU]

This is just another problem of identifying causality that always happens with social data: is it the alcohol that impedes performance or the behaviors correlated with alcohol?  I suspect both.

Another point is that students are maximizing utility functions that include academic performance, social performance and just plain fun.  Many students recognize the tradeoffs inherent in drinking, and in socializing in general, with academic performance and make their own decisions about where their optimum point lies.  The question then is do they accurately estimate the effect of alcohol consumption on academic performance or do they not understand the deleterious effects?  If the former, than there is nothing to say unless there are significant social costs. If the latter, than we need to understand these effects and transmit the knowledge to students. Unfortunately, I don't think this paper does this.

Finally, the other important question is if there really are significant social costs.  Underage drinking has many by the way, which is why we prohibit it, but I am talking here only of the effect on academic performance.  Well, there are social returns to education so if alcohol impairs individual performance, it should also have a social impact as well, as a less well educated population is less productive.  But how significant are these costs is an important question and one we don't have the answer to.

So it is an important research agenda, but a tough causal link to uncover.

Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

Word that Roots Brewing was in trouble has been passed around for quite some time now, and recently John Foyston reported on the fact that Roots was up for sale, but it was still a bit of a shock (and quite sad) to get the word that Roots was closed for good.

But while the beer enthusiast in me is saddened, the economist in me sees this as (curiously perhaps) a sign of a very healthy beer economy in Portland.  A few weeks ago I attended Greenlight Greater Portland's annual Economic Summit and, while talking to Joe Cortright, Rich Read of The Oregonian came up and we were talking about the economy and small businesses. I was quoted as saying that it doesn't bother me to see many start-ups fail and what I meant by that is that in a healthy competitive economy many new ideas will be tried, will try to find markets and will not succeed because of other better ideas or more well-run businesses. The key is that new businesses are tried - and in a healthy marketplace only the best ones will survive.  Survival of the fittest if you will, but in economics we call this process of new and better ideas and businesses taking the place of established ones as 'creative destruction' and we view it as a good thing. [The term was popularized, though not coined, by Joseph Schumpeter] In Portland it is quite shocking to get bad food or bad service in a restaurant because there are so many great ones out there that if you don't do it very well, you won't last.  This is a good thing.  What would be bad is if we didn't see this dynamic and mediocre businesses succeeded.

Let me say straight out that Roots problems were not with the beer itself, which was fantastic, but with other aspects of the business.  My own history with Roots is troubled: the only two times I went to the pub with the intent to get a meal at lunch, I found the pub closed when it was supposed to be open.  I have bought their beer in the bottle many times, but I was one of the customers that got a bottle that shouldn't have been on the shelf, it was, quite simply, bad.  Complaints of bad service at the brewpub abound and with so many great choices for brewpubs around town, it is not hard to see why Roots quickly found itself in trouble. The point is it probably wouldn't have been in trouble in an economy in which there was not much brewing going on, so what the closure of Roots symbolizes is that, regardless of how wonderful the beer was, there is so much other wonderful beer being produced and served in Portland.  Long live Beervana, indeed.

The other thing that Roots' demise made me think of is the example of short-run and long-run shut down conditions that we typically talk about in a variety of economics classes, especially intermediate micro.  In econo-speak the short-run is any amount of time in which there are fixed costs.  Take for example a lease on a building in SE Portland: if you sign a one-year lease and you are on the hook for the lease payment regardless if your business is open or not.  In this case, it may make sense to keep the business running even if you are loosing money.  Why? Well, if you are able to cover your variable costs (labor, electricity, inputs, etc.) and part of your fixed costs (maybe one-half of your lease payment) it is better than shutting down and having to pay your entire fixed cost without any revenue.  In the long-run (a time period in which there are no fixed costs) you would shut down, because you would not renew the lease and so negative profits are a sufficient shut-down condition.

It would be great to see Roots rise again, perhaps as a commercial brewery only, but with the rapidly evolving dynamic of the local beer scene, it is hard to see Roots capturing the attention of the local beer crowd again.  Just like a chef who closes a restaurant, it may be time for Craig Nicholls to re-invent himself and his beer company.  And I think Roots will be far from the last brewery to close locally, with so many new places opening up, the forces of creative destruction will be pretty fierce.  Even though craft beer continues to whittle away at the market share of the macro-brewers, it is likely that the struggles to find shelf-space, tap handles and pub crowds will become more and more intense.  But just like the wonderful and creative food scene that has arisen in Portland, this dynamic is likely to create better and better beers and pubs.  So embrace it, I say.