Climate update

• NPR explains cap-and-trade with a fun story about limiting use of the word "dude".
  
• Alan Durning of Sightline explains why he (mostly) loves Waxman-Markey.
  
• The Breakthrough Institute folks explain why they don't.
  
• The U.S. has restarted a pilot project for CCS (carbon capture and sequestration).
• And House speaker Nancy Pelosi comes back from China with a worrisome thought about a climate change trap:

Ms. Pelosi found herself greatly encouraged by the dialogue but deeply afraid that the two countries would fall into an old trap: hiding behind each other so that neither would have to do anything difficult or expensive.

• Finally, a good reminder from the fisheries world that caps can be changed too.
  

Elasticities and monopoly pricing

David Pogue talks about what he calls the App Store Effect:

The App Store Effect says this: if you cut a software program's price in half, you sell far more than twice as many copies. If you cut it to one-tenth, you sell far more than 10 times as many. And so on.

In other words, buyers are very responsive to price changes, i.e., the price elasticity of demand is less than -1. In these situations cutting prices will increase revenue, and for a product like software that has zero marginal cost, an increase in revenue means an increase in profit.

The question is whether this is really true, or whether it's just Pogue's wishful thinking, as with the Laffer Curve.

Health care update

Big debate about having a "public option", and bad news from a Congressional Budget Office review of health care proposals.

More depressing articles on the budget

The federal government is trying to bring back budget rules that embody some sort of common sense:

Mr. Obama announced he was sending legislation to Congress to restore the 1990s-era “pay as you go” law, known as Paygo. The law, in effect from 1990 to 2002, required that tax cuts or new entitlement spending — like the health care overhaul that Mr. Obama hopes will be a signature domestic achievement — be paid for through budget cuts or tax increases.

But that will only stop the hole from getting bigger... and the hole is already plenty big. No wonder there's talk about legalizing (and then taxing) marijuana.

PS. Supposedly the Democrats are also near consensus on a health care plan.

Wiki editing battles and economics

A funny NYT article on the "long tail" articles on Wikipedia that become the disputed ground in edit battles (hint: think Scientology) has a link to a Wikipedia entry on "lamest edit wars", and guess what's featured?

Nobel Prize in Economics

Should this article (and other articles and templates that mention this award) use the common name of the award, the official name, Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, the even more official name, Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne, or perhaps a compromise name, Nobel Memorial Prize in Economics? The ignoble debate has involved endless discussions, requested moves, revert wars, blocks, and strangely, two (N/n)obel Prizes.

Laughter: 10-16 million years old

According to Wired magazine. (Hat tip to AP.)

Efficient market hypothesis under attack

Note how this article confuses two "definitions" of the efficient market hypothesis:

• You can't beat the market.
• The market is "rational".

I don't even know what the second definition really means, so it's not surprise that I subscribe to the former definition. So does the author of the article:

Unless you’re Warren Buffett, an index fund is where you should put your money. Even people who don’t follow that advice know they should.

Health care v. climate change, continued

Health care is winning, according to the NY Times:

On a flight to Trinidad aboard Air Force One in April, Obama called [Senate Finance Chair Max] Baucus to his cabin — along with Charles Rangel, Baucus’s counterpart in the House — to talk health care for a half-hour or so. “He just turned to me and said, ‘This is my No. 1 issue,’ ” Baucus recalled. “He wants meaningful, comprehensive health care. He doesn’t want to pass something where everybody gets flu shots.”

Climate stand-off: U.S. versus China

The NY Times reports on the heavyweight battle, comparing it to "cold-war arms control negotiations".

As a measure of how far apart the two nations are, China says the United States should reduce its greenhouse gas emissions by 40 percent below 1990 levels by 2020. The bill before Congress, which could be further weakened, now calls for less than a 4 percent reduction over that period.

Highway trust fund in trouble

Sen. George Voinovich, R-Ohio, said it's clear that Congress must raise the federal gas tax, which is now 18.4 cents per gallon.

Citing the lack of inflation indexing for the gas tax and a decline in gas consumption (the EIA says that motor gasoline consumption is down from 61 million gallons per day in March 2003 to 51 million in March 2009), the NY Times reports that the federal Highway Trust Fund will run out of money in August. Not sure that much is going to happen, though:

Two congressionally mandated commissions have called for an immediate increase in the gas tax. The first commission, which issued its report in early 2008, recommended a 40-cent per gallon hike. The second panel, which issued its report earlier this year, recommended the tax be increased 10 cents per gallon for gas and 15 cents per gallon for diesel, and that both be indexed to inflation.

Government revenue stability

The NY Times writes about state budget woes:

Hardest hit on the income tax collection front was New York, where revenues were off 48.9 percent compared with the last fiscal year. Corporate income taxes plummeted most in Oregon, down 44 percent, while sales taxes fell most in Washington, down 14.1 percent.

The Gates Commission says (p. 25) that short-run tax elasticities are as follows:

• Sales and use taxes: 1.4 (i.e., a 1% increase--or decrease---in GDP produces a 1.4% increase---or decrease---in sales taxes revenue)
  
• B&O tax: 1.4
• Property tax: 0.2
• Public utilities tax: -0.2
• All taxes: 1.2
• Income taxes: The appendix estimates an elasticity of 2.0 for flat personal income taxes, and the main report says that "the sales tax, although volatile, is less volatile than a graduated personal income tax. There is no evidence that a flat rate personal income tax in Washington would be less volatile than the sales tax. The B&O tax is not as volatile as a corporate income tax."
  

Interest rates and government debt

Too many government borrowing too much money threaten to compete with private borrows, driving up interest rates and slowing down economic growth, says the NY Times.

Auctions and Medicare

A NY Times op-ed suggests using an auction to save money on Medicare.

The White House budget director, Peter Orszag, has highlighted regional variations as a key source of overspending on health care. Such wasteful spending by Medicare and by private insurance could add up to as much as $700 billion a year — enough to provide insurance for everyone who doesn’t have it now.

To realize some of these savings, Medicare could use an approach called a reverse Dutch auction to set up competition for doctors in oversupplied regions.

Choices are bad

Gail Collins writes about student loan rip-offs:

Hell hath no fury like a middleman scorned. The lenders have been rallying the troops, waving the banner of choice.

Health care is eating up the economy

So says Timothy Noah, citing the Council of Economic Advisors.

The government now owns most of GM

I've got a bad feeling about this.

PS. I have a much better feeling about the United Auto Workers union owning 18% of GM (and 55% of Chrysler). It's what economists call "selling the store": if management and labor have trouble working together, one solution is for the managers to sell the business to the workers. See also this analysis by Daniel Gross.

To provide the retirement and health care benefits its members want, the working man will have to become "the Man." If, indeed, there is an unending war between labor and capital, with one trying continually to screw the other, then it's a Pogo moment for the United Auto Workers. They've met the enemy, and it is them.

Middle East jokes

Thomas Friedman writes about swapping Middle East jokes with President Obama. Friedman's joke is pretty good:

There is this very pious Jew named Goldberg who always dreamed of winning the lottery. Every Sabbath, he’d go to synagogue and pray: “God, I have been such a pious Jew all my life. What would be so bad if I won the lottery?” But the lottery would come and Goldberg wouldn’t win. Week after week, Goldberg would pray to win the lottery, but the lottery would come and Goldberg wouldn’t win. Finally, one Sabbath, Goldberg wails to the heavens and says: “God, I have been so pious for so long, what do I have to do to win the lottery?”

And the heavens parted and the voice of God came down: “Goldberg, give me a chance! Buy a ticket!”

Obama's joke? Not so good:

“We have a joke around the White House,” the president said. “We’re just going to keep on telling the truth until it stops working — and nowhere is truth-telling more important than the Middle East.”

Individual optimization?

Part I: "Man to police: I wasn't masturbating, just carrying weed".

Part II: A crash on southbound I-5, and then another on northbound I-5 as a motorcycle rider "was looking over at the southbound crash before slamming into the ambulance. He was also wearing headphones in both ears attached to an iPod, which is illegal while riding."

Zach Galifianakis

The NY Times says that he's "his generation’s great white comedic hope".

Advertisers using data??

Advertisers are beginning to sound a lot like behavioral economists according to the NY Times.

Health care

An MD complains about the referral system in medicine and argues for "a single payment that would cover all physician services and hospital care for any one patient." In that case, of course, the question is whether that patient will get good care for said payment.

Bad news for nukes

Amory Lovins and others say that nuclear power has gone from being "too cheap to meter" to being "too expensive to matter". They may be right.

Inelastic short run supply

California's dairy farms are suffering.

A case to watch

I'm at the Three Degrees conference on the law and human rights at UW. Steve Berman (the force behind the tobacco lawsuits) just spoke about a case he's working on involving a town in Alaska that is threatened by climate change. So the town is suing Exxon et al. The suit was filed in February 2008 and the defendants have all filed motions to dismiss. These motions have all been granted in the few previous cases of this sort, and that may happen again here. If not, Steve says that they'll gain access to more materials like this from groups like the Global Climate Coalition.

Today in Slate

An interesting article about Craigslist's "sex services" and one about how Americans aren't saving enough.

Work-life balance

A good article about labor economics in the NY Times.

[I]f you’re a teenager or college student trying to decide what to do with your life, you at least may want to start thinking about [this] question.

UW Climate Action Plan

The University of Washington just released a draft Climate Action Plan. This post focuses on a small part of it: air travel, which the UW says (see graph on p9) is only 10% of emissions. I think they're probably off by a factor of 2. Here's why:

• The draft says (p. 30) that "air‐travel miles are estimated from costs using a constant conversion factor ($0.25/mile)". Details below on where this number comes from, but its iffiness can be seen from some simple estimates. San Francisco is about 700 miles from Seattle, so a 1400 mile round-trip at $0.25 per mile would total $350. (Orbitz is currently offering 5 direct flights for less than $200 each.) New York is about 2400 miles from Seattle, so a 4800 mile round-trip at $0.25 per mile would total $1200. (Orbitz is currently offering 5 direct flights for less than $400 each.)London is about 4800 miles from Seattle, so a 9600 mile round-trip at $0.25 per mile would total $2400. (Orbitz is currently offering 5 one-stop flights for less than $1400 each.) Beijing is about 5400 miles from Seattle, so a 10800 mile round-trip at $0.25 per mile would total $2700. (Orbitz is currently offering 5 one-stop flights for less than $1200 each.) PS. You can get travel distances from Wolfram Alpha!
  

So on that basis alone it seem reasonable to halve the cost/mile estimate, which would produce a doubling of the CO2 emissions from air travel.

We can also trace the history of the $0.25/mile number, and it's not encouraging:

• The number appears to come from the 2005 Inventory of Greenhouse Gases Ascribable to the University of Washington (also linked from here), which has this citation for the $.25/mile figure in a footnote on p33: "American College and University Presidents Climate Commitment, Implementation Guide, v. 1.0, September 2007, p. 15 (05-153)." The footnote goes on to say this: "The U.S. Bureau of Transportation Statistics maintains a national average revenue per passenger-mile, which was 12.22¢/passenger-mile in 2003, the most recent year available (see 05-098). However, the national figure is strongly influenced by budget and recreational travel that is atypical of the professional travel induced by a university."
• In turn the ACUPCC Implementation Guide (also linked from here) gives $0.25/mile, citing (on p. 15) "Huang, S. (2000). An Analysis of Air Passenger Average Trip Lengths and Fare Levels in US Domestic Markets. [Working Paper] Institute of Transportation Studies, University of California, Berkeley.
• As far as I can tell, that paper by Huang says nothing about 25 cents per mile. Where the 25 cents/mile figure comes from is a mystery to me.
• What the Huang paper does say is "For most coast-to-coast operations with trip lengths between 2200 and 2800 miles, the average cost per mile is only about 10 cents, since the fixed costs for these trip lengths ranges are a much smaller part of total costs." Indeed, looking at Huang's Figure 5 shows that for trips of 800+ miles (e.g., anything farther than San Francisco) the average cost is much closer to $0.15 than $0.25. An average cost-per-mile of $0.25 would have to feature a disproportionate number of short trips (of about 300 miles or less one-way) and this is almost certainly not a good estimate of UW professional travel.

Maybe a UW student can get a better estimate as a capstone project...

Climate goings-on

The NY Times says Yes to the Waxman-Markey bill. The Economist says No. And before the bill has even passed there are attempts to game the system, e.g., by redefining renewable energy.

Life, liberty, and the pursuit of happiness

Ross Douthat ponders the apparent decline in women's happiness. And Washington State registers the first assisted-suicide death from the Death with Dignity law passed by voters last year. (Washington and Oregon are the only two states to have such laws.)

First they gave permits to... (with no disrespect intended to Martin Niemöller)

First they gave permits to the utilities, and I didn't speak up because I knew that higher energy prices would be hard on the utilities.

Then they gave permits to the carbon-intensive industries, and I didn't speak up because I knew that higher energy prices would be hard on carbon-intensive industries.

Then they gave permits to the automakers, and I didn't speak up because I knew that higher energy prices would be hard on the automakers.

And then... they tried to give permits to me, because higher energy prices are going to be hard on the average American family... but by that time there were no permits left to give.

PS. Yes I know the original poem was about the Holocaust, and no I'm not trying to make analogies. I'm just trying to express my frustration with the Democrats for putting corporate interests ahead of the average American family. And I think it's not going to work.

Five possible outcomes of Waxman-Markey

Pick your favorite outcome for the climate bill:

1. There will be a backlash once middle-class voters find out that energy prices are going up and there's no tax relief to show for it.
2. There may or may not be a backlash but who cares because middle-class voters aren't important, it's really industry that has political power.
3. There will not be a backlash because middle-class voters care enough about climate change to bite the bullet.
4. There will not be a backlash because the bill will have enough loopholes to keep permit prices down, i.e., the policy will be ineffectual.
5. The bill will fail.

Time will tell... but I think it will be either #4 or #5. I hope it's not #1 or #2, and #3 seems totally unrealistic to me.

Nothing left to give away

From the NY Times on the Waxman-Markey climate bill:

[T]he energy legislation passed on Thursday still faces a tortuous path through several more House committees before it can be brought up for a vote later this year. In the Senate, leaders say they lack the votes to pass the bill as it is now written.

The (correct) view of the Republicans:

“This is the biggest energy tax in the history of the United States,” [Michigan Representative Mike] Rogers said.

Finally, the pathetic attempt by the Democrats to buy off support:

In weeks of closed-door negotiations with [coal-state and other hesitant] Democrats, Mr. Waxman doled out billions of dollars worth of free pollution permits, known as allowances, to cushion any price shock caused by imposing a cap on emissions of heat-trapping gases.

In the end, 85 percent of all pollution allowances were given at no cost for various purposes, including compensating energy-intensive industries, state governments, oil refiners and low-income households, at least in the early years of the program...

The truth is that it is not possible to "cushion" the "price shock" for everyone, and as it now stands the losers are... the middle class. Not promising in my opinion in terms of political viability.

Meanwhile, at the state level there was a rally yesterday at which Ecology head Jay Manning said that the state has been far ahead of Washington, DC, in making significant progress (in my opinion this is not true) and the enviros were joined by a small but vociferous group of vegetarian-promoters. Sigh.

Weekly Standard doesn't get economics

For the past year, many believed businesses would have to purchase the allowances at an auction, driving up their costs and energy prices for consumers. [Virginia Democrat Rick] Boucher negotiated an agreement that would dramatically reduce these costs by giving away a large percentage of these initial allowances for free.

So says Gary Andres of the Weekly Standard, the only trouble being that it's wrong. The whole point of economic instruments is to drive up the cost of carbon emissions, so either the measure is not going to work or somebody's costs are going to go up. If businesses get allowances for free then consumers are going to be on the hook.

Suicide

From the obituary of Edwin Shneidman, founder of the country's first suicide prevention center:

“People were calling us and literally saying, ‘I’m just about to make a suicide attempt. Do I have to take these pills or jump off a building before I can talk to you? Or could I shortcut it and come in directly?’ ”

“Dying is the one thing — perhaps the only thing — in life that you don’t have to do,” he once wrote. “Stick around long enough and it will be done for you.”

CA budget crunch

Bill Maher mock folks who want something for nothing:

Obama should solve global warming by working a little harder in his secret White House lab and coming up with a car that runs on seawater and emits gold doubloons.... This is why our founders wanted a representative democracy, because they knew that if you give the average guy the chance, he'll vote for a fantasy world with no taxes and free beer.

Whether representative democracy is any better than direct democracy is an open question---see, e.g., Medicare Part D, the prescription-drug benefit that was added in 2003 without any funding source.

More on cap and trade

There's lots of excitement about cap-and-trade, so here's a note of caution:

Democratic leaders want to bring the bill up for a full House vote by August.

The legislation would then be sent over to the U.S. Senate, where there is much stronger opposition. The full Senate may not take up the bill until early next year.

PS. As the bill currently exists I'm leaning towards being opposed to it. It pains me to say that, but this bill is presumably only the first step on a long road to dealing with climate change, and providing giant dollops of corporate welfare at the expense of middle-class voters does not seem like a good way to start out.

Cap-and-trade all the rage

The news is full of cap-and-trade thanks to the Waxman-Markey bill. Paul Krugman likes it, Greg Mankiw does not, and the NY Times has a somewhat hagiographic Sunday article on the history of the approach, which it notes is "is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts."

The question I have is whether there are enough permits to go around to please everyone. Reuters has a breakdown of the proposed permit allocations:

• 15 percent of the carbon permits will be auctioned off (proceeds will go toward helping low- and moderate-income families)
• 35 percent for electric utility sector, including 30 percent for distribution companies and 5 percent for privately owned coal companies
  
• 15 percent for carbon-intensive industries, such as steel and cement, in 2014 (reduced by 2 percent every year)
  
• 10 percent for states for renewable energy and efficiency investment from 2012 to 2015 (reduced to 5 percent between 2016 to 2022)
  
• 9 percent for local natural gas distribution companies (reduced to zero between 2026 and 2030)
  
• 5 percent for tropical deforestation projects
  
• 3 percent for automakers toward advanced technologies through 2017 (reduced to 1 percent from 2018 and 2025)
  
• 2 percent for domestic adaptation to climate change between 2012 and 2021 (increases to 4 percent between 2022 to 2026, to 8 percent in 2027)
  
• 2 percent for international adaptation and clean technology transfer from 2012 to 2021 (increases to 4 percent between 2022 to 2026, to 8 percent in 2027)
  
• 2 percent for carbon capture and storage technology from 2014 and 2017 (increases to 5 percent after 2018)
  
• 2 percent for oil refineries from 2014 to 2026
  
• 1.5 percent for programs helping home heating oil and propane users (reduced to zero between 2026 and 2030)
  
• 1 percent for Clean Energy Innovation Centers for R&D funding
  
• 0.5 percent for job training from 2012 to 2021 (increases to 1 percent after 2022)

By my count that 64% for private companies. The rest is not bad--in particular, 15% to offset impacts on low-income households is the number that lots of folks talk about--but what about the middle class? I see five possible interpretations/outcomes:

1. The bill will fail.
2. Middle-class voters care enough about climate change to bite the bullet.
3. Middle-class voters aren't important, it's really industry that has political power.
4. There will be a backlash once middle-class voters find out that energy prices are going up and there's no tax relief to show for it.
5. There will be no backlash because the bill will have enough loopholes to keep permit prices down, i.e., the policy will be ineffectual.
   

Time will tell...

Ronald Reagan and Alan Greenspan

My new joke: Who thought it would be a good idea to put the economy in the hands of the man who "saved" Social Security in the 1980s?

From Ronald Reagan's remarks on signing the Social Security Amendments of 1983:
This bill demonstrates for all time our nation's ironclad commitment to social security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future. From this day forward, they have our pledge that they will get their fair share of benefits when they retire... [Y]ounger people can feel confident that social security will still be around when they need it to cushion their retirement.

And now before I sign this legislation, may I pause for a moment and recognize just a few of the people here who've done so much to make this moment possible... [including] members of the Commission... [a]nd their Chairman, Alan Greenspan.

Everything that man touches turns to gold :)

Cap-and-trade progress (?) federally

The Waxman-Marley bill advanced out of one committee. It's clearly a Christmas tree bill (932 pages!) but maybe something is better than nothing. Maybe. One warning sign:

Experts said that billions of dollars would go to local electricity providers, oil companies and energy-intensive industries to blunt the impact of pricing carbon for years to come. Low- and middle-income earners would also get protection, but many economists said consumers would have been better served by simplifying or cutting taxes. Some groups also said that the opportunity to get credit for reducing emissions abroad could mean that there would be little to no new incentives for reducing emissions in the United States.

I'm not sure what all that means exactly: giving money to oil companies is not a clear way to "blunt the impact of pricing carbon", and from an environmental perspective you don't want to blunt the impact... the whole point is to raise prices!

Money multiplier (warning: adult content)

Econ sit-com

Econpoint had a contest to come with up an econ sit-com. My favorite response (and one of the top vote-getters) starts like this:

William is an economics professor at a small university in Pennsylvania. He specializes in taxation, but has been having trouble getting published. Unfortunately, the theoretical knowledge of the impacts of taxes was of little use in practice. He made a few critical mistakes on his taxes forms and got in some legal trouble.

William's friend, Paul, is another professor at the university. He mostly teaches law, but also teaches a course in Austrian economics. Due to Paul’s background in law, William decided to bring him along for the hearing.

This decision turns out to be costly for William. Paul sees a chance to strike a blow against the government. Instead of simply explaining how William made a mistake and getting him off with nothing but an obligation to pay his back taxes, Paul gives a lecture on the anarcho-capitalist’s view of taxation. He starts off with a rather dry explanation of dead-weight loss and perverse incentives, but his passion escalates as he characterizes taxation as a form of theft whose existence persists only because of the state’s monopoly on force. He finally reaches a fiery crescendo and calls William a warrior for freedom for standing up to the state.

Read all the entries here, and see the voting here.

Carbon and entitlements

Dealing with climate change and with entitlements (especially health care) are the two big items on the agenda for this generation. Paul Krugman says that China has to get on board with climate, but I'm not even optimistic that the United States will get on board anytime soon... partly because Obama will be preoccupied with health care. And David Brooks says that his promises to cut costs are looking shaky.

Bad bad bad.

Health care v. climate change

Health care is winning: "Mr. Obama has made it clear that health care is his top legislative priority" says the NY Times's David Leonhardt, who says that unfortunately Obama is $90 billion short of the money he needs. If climate change was an equal priority he might look to get some money there, but... no.

Meanwhile, the clean coal crew is running ads (e.g., on Slate) opposing the climate change legislation currently in the House of Representatives.

What's funny about the CBO director

From the bio of the new director of the Congressional Budget Office:

Among Doug Elmendorf’s publications are these: "Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?" in the Journal of Monetary Economics (January 2006), with Karen Dynan and Daniel Sichel.

Maybe there should be a follow-up called "Can Financial Innovation Help to Explain the Increased Volatility of Economic Activity?" It could be a one-word paper: "Yes."

PS. Another gem (sorry for picking on you, Doug):

"Social Security Reform and National Saving in an Era of Budget Surpluses," in Brookings Papers on Economic Activity (Fall 2000), with Jeffrey Liebman.

Ghost of entitlements past

The top graph is from the 2009 Trustees report, the middle graph from 2004, and the bottom graph from 2003. Two observations:

1. The outlook has actually improved a bit since 2004.
2. The big change has been from 2003 to 2004, with the addition of Medicare Part D (prescription drugs). It's worth remembering that Part D was pushed by (Republican) President George W Bush.
   

Carpooling in Jakarta

Drivers hire "jockeys" to ride with them so they'll qualify for the carpool lane:

Angga, an 11-year-old boy who puts in time as a jockey after school, had just returned from his first ride, beaming. He had earned just under $1 and paid less than 20 cents to return by bus to his starting-point.

A nice application of the Coase Theorem. And a little bit like the casual carpooling phenomenon in the Bay Area and DC, except in those cases the riders actually want to get to the same destination as the driver. In Jakarta they just hop a train back to their starting point.

Bad bad bad

The new report from the Social Security and Medicare Trustees is out. The graph above is from the summary.

David Reiley to Yahoo!

David Reiley is leaving Univ of Arizona for a permanent position at Yahoo! Research, where he's currently working to "measure the effects of display advertising on advertisers’ sales." Apparently he's also leaving Magic (not to be confused with the super-cool paper on revenue equivalence from his dissertation that got published in the AER [85:1063-1080, 1995]) to live in the Berkeley Hills.

A day in the life of a supply-side economist

By Samuel K. in McSweeney's. The whole piece is worth a read, but here's the highlight:

8:47 p.m.

Attempts standup comedy
at a local open-mike night

SUPPLY-SIDE ECONOMIST: First, they increase the systemic risk regulation of banks, insurance firms, and broker-dealers. Then they expand Big Government by increasing the transparency of financial instruments and magnifying the Federal Reserve’s oversight of major hedge funds. And, as a finale, they tighten the federal standards for mortgage lending and require executive compensation to be contingent on corporate performance. And the agent says, “That’s a hell of an act. What do you call it?” And the father says, “The Aristocrats!”

(Everybody boos.)

Look, I'm a fascist!

According to Liberty Guys.

The pursuit of happiness

From an article in The Atlantic on a group of Harvard undergrads that have been studied since 1937:

In an interview in the March 2008 newsletter to the Grant Study subjects, Vaillant was asked, “What have you learned from the Grant Study men?” Vaillant’s response: “That the only thing that really matters in life are your relationships to other people.”

Also worth noting is that "By age 50, almost a third of the men had at one time or another met Vaillant’s criteria for mental illness."

PS. Another interesting quote, from former NBA head coach Chuck Daly, who collected blue suits:

As for his interest in clothing, he said: “This is not a game where you upstage the players. This is a business like any other business. You get bored. I get bored. You do something for fun.”

CBO on cap-and-trade

CBO director Douglas Elmendorf hits all the right notes on cap-and-trade, especially this one:

Alternatively, allowances could be given away for free to certain industries. Giving away allowances is generally equivalent to auctioning the allowances and giving the proceeds to the same firms.

PS. CBO also has a paper on climate change impacts on the U.S. And this excerpt from Elmendorf's bio is worth a chuckle:

Among Doug Elmendorf’s publications are these: "Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?" in the Journal of Monetary Economics (January 2006), with Karen Dynan and Daniel Sichel.

Taxes and the middle class

Former Oregon Senator Bob Packwood writes in the NY Times that "we basically have two options: raise taxes on the middle class, or demand that federal, state and local governments spend less." But his "middle class" appears to include households making up to $250,000 a year, a figure which he took from President Obama's promise to limit tax increases to folks making more than that.

Look, everyone is allowed to have their own definition, but the Census Bureau says that in 2007 the cut-off to be in the highest income 20% of American households was $100,000, and that the cut-off to be in the highest income 5% was $177,000.

Beating the drum

From today's NY Times:

“When you actually look at that budget going out in time, the thing that is going to bankrupt us is government expenditures on health care.” -- Christina Romer, chair of Obama's Council of Economic Advisors:

The Department of Health and Human Services estimates that health spending will grow an average of 6.2 percent a year in the coming decade, to $4.4 trillion in 2018 from $2.4 trillion last year.

As [budget director Peter] Orszag has emphasized, rising health care costs are the main reason long-run budget projections look so grim. Slow the rate at which those costs rise, and the future will look far brighter. -- Paul Krugman, actually sounding upbeat for once. (Well, mostly upbeat: "I still won’t count my health care chickens until they’re hatched. But this is some of the best policy news I’ve heard in a long time.")

Get the picture? Health care: pretty key in terms of public finance (and private finance too).

Comic-in-chief

Barack Obama throws out some one-liners at the annual White House Correspondents' Association dinner, including this one about his (profane) chief of staff, Rahm Emanuel.

This is a tough holiday for Rahm. He's not used to saying the word 'day' after 'mother.'

In less amusing news, welfare in America sucks.

Mother's Day

MIT economist star Esther Duflo recommends education for girls in developing countries as a fine Mother's Day gift based on her work with Innovations in Poverty Action, a program run by Yale economist Dean Karlan. See recommendations from other commentators here and here.

The tragedy of the (media) commons

The real question is for the public, not journalists: Does it want to pony up for news?

So says Frank Rich in a column titled "The American press on suicide watch". The problem is the usual Tragedy of the Commons problem: collectively "we the public" might be better off if we paid for news, but individually we all try to get our news for free.

Polar bear update

A Sept 2007 report concluded that "Two-thirds of the world’s polar bears will disappear by 2050, even under moderate projections for shrinking summer sea ice caused by greenhouse gases in the atmosphere, government scientists reported on Friday."

The Bush Administration listed the polar bear as "threatened" but ruled that the Endangered Species Act could only be applied in the bears' immediate habitat, not to (say) a new coal-fired power plant in California. Earlier this week the Obama administration was debating whether to change that ruling so that the ESA listing had a broader reach.

Yesterday Obama decided to leave it as-is. More evidence, perhaps, of the uphill battle facing climate activists.

Carbon tax v. cap-and-trade

Eight heavyweights come out on different sides of the debate. The key economic concept comes from Harvard's Robert Stavins:

In principle, both carbon taxes and cap-and-trade can achieve cost-effective reductions, and — depending upon design — the issue of who ultimately pays for the higher price placed on carbon can be similarly resolved in both approaches.

The rest is politics... but of course politics is important. In fact, the really key argument is not "carbon tax v. cap-and-trade" but "do something v. do nothing", and right now doing nothing is way ahead.

Rational self-interest

Economists believe that people are (mostly) optimizing individuals, and most of the time we also believe that companies are profit-maximizing entities. Three examples of how useful these assumptions are:

1. George Will writes that Toyota "sell[s] its hybrid without significant, if any, profit and sustain[s] this practice... by selling about twice as many of the gas-thirsty pickup trucks that the president thinks are destroying the planet." Now, it seems like we have three options here. Option #1 is to think that Toyota is a profit-maximizing entity... in which case why would they sell the Prius for little or no profit? Option #2 is to think that Toyota is a hippie-dippie company concerned about the planet... in which case why would they sell all those pickup trucks? Option #3 is to conclude that George Will is making stuff up. I certainly don't know the bottom line about Toyota's profits, but I will confess that I have almost zero confidence in George Will. (See e.g., this lousy column about global warming, where his interpretation of this data is that "there has been no recorded global warming for more than a decade.")
   
2. A new book claims that Alex Rodriguez was "tipping pitches to friends on other teams", i.e., cheating. This strikes me as almost ludicrous: economists don't believe in conspiracy theories, which is why we think competition (e.g., in the cell phone market) will result in lower prices. And you're telling me that A-Rod had a (presumably large) collection of friends on other teams with whom he conspired until now without anybody finding out? I don't buy it.
3. Now, steroid use in baseball: whether Manny Ramirez did or didn't, that's something that makes sense from the perspective of individual self-interest, even if it doesn't from the perspective of the group as a whole.

Legalize it?

California governor Arnold Schwarzenegger says we should have a debate about legalizing and taxing marijuana. And Nicholas Kristof's terrifying op-ed about teen prostitution in the U.S. comes to the conclusion that we should "stop treating these teenagers as criminals and [focus] instead on arresting the pimps and the customers — and the corrupt cops." He's not advocating legalized prostitution (and neither am I), but he does seem to be arguing that the current laws against prostitution are not helping vulnerable teens. That's priority #1.

Cap-and-trade: Temple of Doom?

Climate scientist/activist James Hansen calls cap-and-trade a "temple of doom". This much I agree with:

I get a lot of e-mails telling me to stick to climate, that I don’t know anything about economics. I know this: The fundamental requirement for transition to the post-fossil fuel era is a substantial and rising price on carbon emissions. And businesses and consumers must understand that it will continue to rise in the future.

And I know what he means when he says this:

People with the gumption to parse the 648-pages come out with estimates of a price impact on petrol between 12 and 20 cents per gallon. It has to be kept small and ineffectual, because they want to claim that it does not affect energy prices!

In fact, I saw an EDF publication the other day that said that cap-and-trade would only raise electricity prices by something like 10 cents per household per month. (I could have the number wrong, but it was a tiny tiny amount.)

Now, the challenge is whether we can actually make more progress by sailing directly into the wind with a carbon tax. Heck, I dunno... that's politics, not economics, and Hansen and I both know next to nothing about that.

PS. Meanwhile, a friend sends over a draft document from the Breakthrough Institute:

Given the technological and political realities, the primary policy focus for creating a low-carbon economy should shift from making dirty energy expensive to making clean energy cheap.

Well, okay, but how do you do that? Their answer (not mine): government action.

Climate action?

Anybody optimistic about climate action should read the New Yorker profile on White House budget-meister Peter Orszag:

[A] senior White House official told me that they were exploring an energy deal that would include a “serious” and “short-term” increase in domestic production—perhaps opening up for oil exploration places like the waters off the coast of California—that would appease the “Drill, baby, drill” crowd, while also adopting a cap-and-trade plan that could take effect one or two (or more) years after 2012, which is when Obama’s current plan would start.

Notice that one or more years after 2012 is also after Obama is or isn't re-elected. This is bad bad news if you want Obama to be serious about climate. And even if his heart and mind are in the right place (and I personally believe they are) there's the U.S. Congress to consider:

The [budget] resolution could not even mention the words “cap and trade,” because they had caused a revolt among Democratic senators sensitive to the interests of oil, coal, and natural-gas companies. “I told him at that meeting that, after talking to colleagues, it was clear to me that ‘cap and trade,’ if it was included as the President did it, we would have a very difficult time passing a budget resolution,” [Senator] Conrad said.

PS. In happier news, the New Yorker reports that Orszag uses a behavioral economics site called stickk.com (the brainchild of Yale economist Dean Karlan) to push himself toward his goals in running marathons &etc. He picks an "anti-charity" like the George W. Bush Presidential Library and commits to making a donation if he doesn't meet his running target :)

Annals of Improbable Research: new issue!

My favorite magazine, Annals of Improbable Research, just released a "special issue" on navel lint. Other highlights:

• "The effects of a joke on tipping when it is delivered at the same time as a bill", by Nicolas Gueguen, Journal of Applied Social Psychology 32:1955-63 (2002). The same author also published a paper called "Bust size and hitchhiking: a field study."
• "First names and crime: Does unpopularity spell trouble?" David E. Kalist and Daniel Y. Lee, Social Sciences Quarterly 90:39-49 (2009). (The answer is "Yes.")
  
• "Attractiveness, easiness, and other issues: Student evaluation of professors on RateMyProfessors.com", by James Felton et al, SSRN Working Paper #918283 (July 2006). "[A previous paper] demonstrated a student preference for course easiness and instructor sexiness... Results indicate even stronger relationships than previously reported."

Want to learn more? Subscribe for just $35 a year. (No, I don't get any money from them; I'm just spreading the word, in part because they published the paper that launched my economics comedy career back in 2003.)

So you want to be a comedian?

More evidence that there's nothing funny about making people laugh.

All about inflation

The news these days seems to be all about inflation (a general increase in the price level) or its dreaded twin, deflation (ditto, but with decreasing prices):

• Social Security benefits, which are adjusted to inflation through a COLA (cost of living adjustment), are not projected to go up in 2010 or 2011 because it's projected that there will be no inflation to adjust to. As a policy matter this seems fine---no inflation, no COLA---but it does add to the flames about deflation...
• ...Flames which are fanned by Nobel-winner Paul Krugman, who says that wages are falling and deflation is a threat, hence the need for more more more: "more stimulus, more decisive action on the banks, more job creation".
• On the other hand, Carnegie Mellon economist Allan Meltzer says that inflation is coming: "no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation."
• And, speaking of inflation, stamp prices are going up May 11, from 42 to 44 cents for a basic letter. The good news is that you still have a week to buy Forever Stamps for 42 cents!
  

Why California has lousy teachers

"Kids don't have a union."

So says a school district lawyer in this LA Times investigative report on how hard it is to fire teachers in California.

Look, I'm generally supportive of organized labor, but they've got to find a better balance between solidarity and efficiency. Too often the union ends up defending the bottom of the barrel, and that's not good for anyone.

RIP, Jack Kemp

In the obituary of former Republican VP candidate Jack Kemp is his statement that the country

“[is suffering from a] tax code that rewards consumption, leisure, debt and borrowing, and punishes savings, investment, work and production.”

Sounds like a great argument for a carbon tax shift, not all that different from the "tax what we burn, not what we earn" philosophy of Al Gore. (Sadly, Kemp would almost certainly not have agreed: he was keen on cutting taxes, and to heck with balancing the budget.)

PS #1: Funny exchange between Kemp and Bob Dole (some time before Dole picked his as his 1996 VP candidate):

Dole: “Kemp wants a business deduction for hair spray.”
Kemp: “In a recent fire, Bob Dole’s library burned down. Both books were lost. And he hadn’t even finished coloring one of them.”

PS #2: Also funny (and much less hack) was Kemp's take on being a football star:

“Pro football gave me a good sense of perspective to enter politics: I’d already been booed, cheered, cut, sold, traded and hung in effigy.”

"Avoid economics!"

"Remember to speak in TALKING POINTS aspirational language about shared American ideals, like freedom, prosperity, independence and self-sufficiency while avoiding jargon and details about policy, science, economics or technology..."

That's the advice to climate activists from a group that does environmental marketing and messaging. Probably true, but it helps to know the economics even if you aren't going to talk about it :)

PS. Bad news #1, from the same article:

A Pew Research Center poll released in January found global warming last among 20 voter concerns; it trailed issues like addressing moral decline and decreasing the influence of lobbyists.

Bad news #2: The NYT Sunday magazine prints long excerpts from an interview with President Obama in which the topic of climate change never came up even once in 50 minutes. My translation: This is not a top priority for the administration, and given how hard it's going to be to pass climate legislation my bet is that we're not going to see legislative action before 2011 (and even that is optimistic IMHO). I hope I'm wrong...

Teens having sex: rational behavior?

Although it is not always easy to think of rationality in connection to sexually active high school students (currently 48% of all students, if you believe self-reporting), it may be reasonable to think that, say, sexual activity will decrease if the "cost" of sex increases, e.g., because of risk of AIDS or because of the job opportunities that may be lost due to pregnancy.

At the intersection of rationality and irrationality is this NYT article on providing sex ed via text messages, thereby giving teens a comfortable way to ask difficult questions. Hmmm...maybe someone should start a text-messaging service to answer econ questions for students who hesitate to raise their hand in class!

Climate and the economy

Paul Krugman says that the economic crisis is "an extra reason to move quickly" on climate change because it will promote business investment, and business investment will help the economy get rolling again. I'm not 100% convinced the logic is solid, but far be it for me to disagree with a Nobel laureate :)

"We're risking the planet"

On the left is economist Nicholas Stern, who headed the Stern Review on Climate Change and came to Seattle last night to promote The Global Deal: Climate Change and the Creation of a New Era of Progress and Prosperity.

Some highlights:

1. The two big issues of this century are global poverty and climate change.
2. Most climate change impacts will come because of water: floods, droughts, snowpack, sea level rise, etc.
3. The basic economic mistake from the go-slow crowd (e.g., William Nordhaus) is failing to recognize the magnitude of the risk involved: with Business As Usual there's a 50% chance of a 5 degree C temperature increase (over 1990 levels) by 2100... that would mean no snow in the Himalayas and make much of southern Europe look like the Sahara Desert.
4. To reduce that risk from 50% to 3% would require cutting global greenhouse gas (GHG) emissions to 50% below 1990 levels by 2050, which would entail cuts of 80% in Europe and 90% in the U.S. The world could do that at a total cost of 1-2% of world GDP per year.
   
5. Involving the developing world is key because 8 of the 9 billion people who will be on the planet in 2050 will live in the developing world; Stern favors cap-and-trade over carbon taxes because it provides a political mechanism for financial flows between countries.
6. "In a world of perfect certainty, these two things [carbon taxes and cap-and-trade] would be more or less equivalent."
   
7. He argued for building "a structure where people see that they can all gain." Like any good economist, he's looking for a Pareto improvement over our current situation!
8. If we're looking for 80-90% cuts relative to 1990 levels by 2050, then it's sobering that 2020 is halfway between 1990 and 2050 and the most ambitious plan that anyone is talking about aims for a 7% cut relative to 1990 by 2020.
9. The policy is pretty straightforward, it's the political will that's lacking.
10. Best joke: "Two planets pass near each other, and one says 'You're not looking so good.' The second planet says 'Yes, I've got humans' and the first planet replies 'Don't worry, they won't last long.'" Honorable mention: "The best way I know to influence politics is rational argument." :)

Median voter theorem and Senator Specter

Hotelling's Law says that two profit-maximizing hot dog vendors on a beach will both put their hot dog carts in the middle of the beach... and it also says two vote-maximizing political parties will both target the middle of the political spectrum because of what's called the median voter theorem: Whoever gets 50% of the votes plus one wins. Or, to quote the Oprah Winfrey show from September 2000:

WINFREY: You don't care what other people think about you?

BUSH: Well, I care what 51 percent of the people think about me.

The challenge for political candidates is that primary elections are usually only held on one part of the beach, i.e., Democrats on the left side of the beach, Republicans on the right; hence the desire by candidates to "move to the center" after they win the primary election. And hence the decision by PA senator Arlen Specter to switch from the Republican to the Democratic party after determining, in the words of the NY Times, that "he could not win a Republican primary against a conservative challenger, particularly in light of his vote for the president’s economic stimulus package."

The op-ed by moderate Republican senator Olympia Snowe is also worth reading.

Secretary of State speaks on climate change

Mrs. Clinton [said] that the United States would not seek to limit the use of energy in the developing world but would help make it cleaner.

“We want your economies to grow,” she said as representatives of Brazil, China, India and Indonesia listened. “We want your people to have a higher standard of living.”

Nice words, but how do you turn them into reality when coal is the cheapest form of power? The U.S. hasn't even started an internal conversation about subsidizing cleaner power oversees, and I don't see that conversation going anywhere.

Hence my one "happy story" about how we get out of this mess: The U.S. and other rich countries impose carbon pricing (through a carbon tax or cap-and-trade) and that pushes the market to develop clean energy technologies that are cheaper than coal. Then poor countries will adopt those technologies, not because they're green but because they're cheap.

It's not a guaranteed fix, but I think it's the best chance we've got. The alternatives are to put our faith in government-funded R&D or hope that poor countries put environmental priorities ahead of things like electricity and running water (and that rich countries do way more too).

Tragedy of the swine flu

The swine flu is, like the case of students, teachers, or workers with the common cold, a classic case of the Tragedy of the Commons: each individual has a strong incentive to carry on with their plans---whether it's travel or coming in to school or work---and the result is bad for the group as a whole because it results in more people getting sick. There's even a name for it: presenteeism.

It's easy to tell people to stay home if they're sick, but that's not going to change the incentives that make this a Tragedy of the Commons situation. Hence the logic behind mandatory quarantines at airports. Reorganizing incentives at school and work so that sickies stay home is more complicated, but definitely worth the effort...

Nicholas Stern in Seattle Apr 29

The British economist behind the Stern Review on the Economics of Climate Change will be speaking in Seattle on Wed Apr 29 at 7:30pm the Pacific Science Center. Details and tickets, which are $10-15.

Stern has a new book out called The Global Deal: Climate Change and the Creation of a New Era of Progress and Prosperity.

Three to think about

Without a fixed, long-term, durable price on carbon, none of the Obama clean-tech initiatives will achieve the scale needed to have an impact on climate change or make America the leader it must be in the next great industrial revolution: E.T., or energy technology. At this stage, I’d settle for any carbon price mechanism — cap and trade, fee-bates, carbon tax and/or gasoline tax — as long as it real and provides consumers and investors a long-term incentive to shift to clean cars, appliances and buildings.

Go Thomas Friedman!

Second is this scary article about drug smugglers building submarines that could also carry terrorists, bombs, &etc. Yet another reason to take seriously the argument for legalization that is often endorsed by economists from George Akerlof to Milton Friedman.

Last but not least is this story of illegal immigrant children growing up in permanent limbo in the U.S. I'm not sure what to do about it, but the audio slideshow is heartbreaking.

Auctions!

More evidence that auctions are important and deserve a place in the economics curriculum: the NY Times says that billions of dollars of loans linked to troubled real estate assets are being auctioned off on the web.

PS. I just did a fun gig in at the University of Arizona---thanks to Brittany and the Economics Society for bringing me to campus!---and got to meet the club's faculty sponsor, David Reiley, who works on... auctions. Here's the super-cool paper on revenue equivalence from his dissertation that got published in the AER (85:1063-1080, 1995). For the past two years David has been on leave from U of A, doing work at Yahoo! Research to "measure the effects of display advertising on advertisers’ sales."

Game theory in Pakistan (and in climate change)

“I don’t know what the Taliban’s game plan is, but what seems apparent is the [Pakistani] state has no game plan.” ---RAND's Christina Fair, quoted in the NY Times.

Sounds like only one side of this fight is thinking strategically, and it's not the good guys.

PS. Another fine application of game theory from today's Times concerns the industry-funded Global Climate Coalition. Compare the view they promoted publicly in the early 1990s with the internal documents expressing the private view of their own scientific panel:

Public statement: “The role of greenhouse gases in climate change is not well understood.”

Internal documents: “The scientific basis for the Greenhouse Effect and the potential impact of human emissions of greenhouse gases such as CO2 on climate is well established and cannot be denied.”

Sigh.

Social Security and Medicare update (or lack thereof :)

Up there with climate change on my list of major public policy concerns is the status of Social Security and Medicare. The annual Trustees Report came out in March last year but has yet to come out this year. Medicare can actually change quite a bit from year to year based on changing cost estimates, so until the new report comes out let's focus on Social Security, which changes very little from year to year.

I have a handy coloring book that outlines the major issues, but in a nutshell: Social Security is primarily based on the world's best acronym---Pay-As-You-Go (PAYGO)---meaning that it relies on current workers to pay for the retirement benefits of current retirees. Because the Baby Boomers (born between 1946 [Dolly Parton] and 1964 [Keanu Reeves]) are still mostly in the workforce, Social Security is currently running a surplus, a surplus that may or may not be accumulating in the Social Security Trust Fund. (It's tempting to focus on the Trust Fund, but it's now mostly a $2 trillion sunk cost, so don't worry about it too much :)

Here's what you should worry about: in about 2017 enough Boomers will have retired that Social Security taxes will not be enough to cover the benefits promised to retirees, and even if the Trust Fund exists there will not be enough money in it to cover all benefits after 2040, and (this is the really big thing to worry about) even after the Boomers are gone promised benefits will remain at about 5.8% of GDP, up from 4.3% today and well above payroll tax receipts. Hence the gap between the red and blue lines at the top of the graph. (The red line is expenditure, the blue line is tax revenue.) The red and blue lines at the bottom of the graph are for Medicare, which is in much worse shape... but that's a story for another day.

Earth Day status report: World population

Since the first Earth Day in 1970, world population has almost doubled, from 3.7 billion to 6.7 billion. IMHO that's mostly bad news, but one piece of good news is that mass starvation has not happened, as was predicted, e..g, by Paul Ehrlich in The Population Bomb (1968):

"[I]n the 1970s and 1980s hundreds of millions of people will starve to death."

Another piece of good news is that world population growth is slowing, and in fact the end of human population growth is likely to come towards the end of this century, with a peak of perhaps 8-10 billion people. That's a lot of people, but many fewer than Garrett Hardin feared when he wrote---in "The Tragedy of the Commons", also published in 1968---that "freedom to breed is intolerable."

Earth Day optimism?

John Tierney of the NY Times tries to be optimistic for Earth Day:

I’ll make a couple of predictions:
1. There will be no green revolution in energy or anything else... and that, believe it or not, is good news, because...
2. The richer everyone gets, the greener the planet will be in the long run.

I am reminded of John Maynard Keynes's assertion that "in the long run we are all dead."

Tierney argues that our experience with local air pollution (which got worse in the U.S. but for the last few decades has been getting better) shows what will happen with global air pollutants like carbon dioxide. Unfortunately I don't think the analogy holds: it's more likely that we'll continue to clean up local pollutants without addressing global problems.

And Tierney---who quotes economist Jesse Ausubel as saying that economic forces will drive "most of the carbon [out of our energy system] by 2060 or 2070"---appears to be unaware of similar projections made in the past by fellow optimists like Bjorn Lomborg:

[R]enewable sources such as wind and solar energy are decreasing rapidly in price... Thus, it seems plausible that renewable energy will by itself or with fairly little “nudging” be competitive before mid-century. [The Skeptical Environmentalist (2001), p285]

The truth is that there is no economic reason that renewable energy is destined to become cheaper than coal, and the low marginal costs of running a coal plant suggests that the ones we're building today will (in the absence of a carbon tax or other government policy) stay in operation for decades.

But to honor Tierney's optimism I propose that we christen the Tierney unit (a la the Friedman unit) as the 3-5 decade period in which renewable energy will magically become cheaper than coal.