"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.