Friday, August 17, 2007

This Jackass's Thoughts

Economists typically get bombarded with criticism for being arrogant, dispassionate, unrealistic, wishy-washy, abstract, misguided, and a whole list of other things, some of which I cannot list here. But usually economists have a strong reputation for being pretty smart guys and gals. Now, journalist Lou Dobbs has called economists "idiots" and "jackasses." How does one argue with someone so steadfast in his convictions that he categorically dismisses an entire field of science? Let me try.

First, let me apologize for the stooge who likened labor migration to trading apples. Clearly human beings are not to be treated as objects, but this was not the point of the comparison. The point was that when Factors of Production (machinery, workers, or other "stuff" that's used to produce the "stuff" households consume) move, society gains in a way that is similar to the way society gains when we are able to trade goods freely (both within our own borders and with other countries). The comparison was in the nature of the gain to society, not the ways in which they should be treated in a political, social, or moral sense. Economists are rational to a fault, and often ineloquent.

Mr. Dobbs asks, "Are there any empiricists among these idiotic economists?" Yo. Right here. In fact, the vast majority of the policy recommendations are based on careful empirical research that gets scrutinized by the sharpest minds in economic theory and statistical methodology before they see print. Trade (and movement of labor and capital) has two impacts: Aggregate gains and distributional consequences. When there is a change that lifts the restrictions placed on Rational Individuals, markets tend to function better and on average countries experience net gains. The net gains from trade are generally pretty big. But, some argue, trade is bad for labor and can lead to a loss in jobs. Still, if we count up every job that would be lost in the sectors dessimated by import competition, the average cost of US trade restrictions was estimated to be around $50,000 per job saved in 2000. The gains from immigration inflows has been estimated to be quite a bit smaller at around 0.25% of GDP per capita, but they are gains nonetheless. That means the median household (middle class American) is better off by $125 per year because of immigrants already here. War on the middle class? Hardly.

However, some individuals and groups will lose in the short run, and their transition to greener pastures in the long run may be a rocky path. Economists are not ignorant of that. Take for example Jim Richardson at Syracuse. He actively advocates for stronger Trade Adjustment Assistance programs that would include wage repacement stipends in addition to education credits.

Speaking to immigration specifically, Dobbs argues that since we have the strongest and best-funcioning economy, suddenly every person from a poor country will flood through our borders. Now who's being arrogant?!? First of all, immigration is difficult and costly (financially and socially), and there are a lot of people living in poor countries who simply cannot afford to come here, even if they wanted to do so. Second of all, not everyone wants to live here! Not only that, but almost one million illegal immigrants leave every year voluntarily! So let's not make up a number like, "4.8 billion people" that would suddenly flood our border once the gates open.

Finally, immigrants who come here looking to work and toil for a better life make our country richer and greater. To enact legislation that is largely designed to protect certain US labor interests at the expense of immigrants who are even poorer than the working poor here (not to mention to the detriment of the majority of native-born US citizens) is nationalist bigotry. It feeds on our basest prejudices against "outsiders." But even more than that, it is poor public policy. It is a lazy man's solution to a complicated problem. Immigration, like trade can benefit us all. Unfortunately, change causes socio-economic displacements that cannot be ignored, are difficult to solve, but must be addressed head-on rather than haphazardly. The solution to an infected papercut is not to chop of the entier arm.

Thursday, August 16, 2007

Argh, Lou Dobbs is Mad, Again

Perverse Effects of Sanctions

It can be amusing how an idea that sounds so very sensible in the world of politics ends in precisely the opposite effect that may have been intended. A Reuters article appeared Monday in the Washington Post in which British officials called the embargo of the Palestinian authority in Gaza "counterproductive." An embargo does have a substantial negative impact on a country, especially if that country is small and lacks sufficient allies to make the threat of cooperative retaliation tangible and credible. But the punitive effect of the embargo is no "free lunch"-- countries that impose the sanctions will also experience a small loss in welfare.

These welfare effects for the sanction-imposing countries aside, do the punitive effects lead to the desired effect? In rare cases they may, but there is not much evidence that shows sanctions to have any effect than to lead the offending country to dig in its heels and become more belligerent. It seems that in the cases of most of the usual suspects (Iran, Iraq, North Korea, Libya, Cuba, the Palestinian Authority), the demagogues in charge of these areas managed to use the embargo to rally support around them.

This just seems to be another case where trade gets perversely tangled up where it has no business being drug in. My rules for public policy are simple: (1) achieve your goal; (2) minimize unintended consequences. In most cases trade-related solutions are second-best at best.

Wednesday, August 15, 2007

Rule #1 of Public Finance

Here in Virginia, there has been much ado about so-called "bad-driver fees" that get added on to your normal fines if you commit certain types of driving offenses like wreckless driving, or if you are a repeat offender for normal offenses like speeding. The idea behind the law is to raise the approximately $65 million needed to help fund the repair and construction of roads and bridges in Virginia. Other states such as Michigan, New Jersey, and Texas have similar fees. The catch for Virginians is that out-of-state drivers are exempt from the fees.

Is it Constitutional? Challengers to the bill are claiming that this violates the equal protection clause and the 14th amendment of the US Constitution. The law has been alternately struck down and upheld by various appellate courts, and was most recently reported to be upheld in Tuesday's Washington Post (Tim Craig, Virginia Bad Driver Fees Upheld, Aug. 14, 2007 p. B-01).

Is it Safe? In the short run, it may make roads safer because it raises the cost of bad behaviour. In the long run, the impact on safety is less certain. According to Craig's article, "Michigan judges are calling for repeal of the program because they are seeing an influx of motorists cited for driving on suspended licenses." What it doesn't add is the fact that many of these unlicensed motorists are also likely to be uninsured.

Is it Fair? Taxing in-staters does seem to make sense on the basis of the benefits received principle--Virginians do tend to use Virginia's roads and highways more than out-of-staters. However, groups that advocate for low-income households are concerned about the impact it may have on the basis of the ability to pay principle. The Post article relates the story of an 81-year old lady getting an excessive fee slapped onto a wreckless driving citation.

Is it Politically Smart? Constitutional/unconstitutional? Safe/Unsafe? Fair/unfair? The bottom line here is that economically there are arguments that can be made on both sides, but the real reason this bill should never have been passed is that it is POLITICALLY STUPID. As a matter of politics and electoral competition, rule number one of public finance is: ALWAYS TAX THE OUTSIDER. Why? Because she doesn't vote in your district/state. This law disproportionately taxes the people that can legally vote in Virginia. Pack your bags, Virginia House.

On the other hand, Kansas City decided it would throw public dollars at the owners of the Chiefs to make a few hundred million in renovations to Arrowhead Stadium so they could host a Super Bowl. Let me say first that there is no worse public finance blunder than to throw money into a sports stadium. Check out Division of Labor for a series of good rants on this. But I absolutely love the way they decided to pay for it: They added a $4 fee to car rentals. It's beautiful. Locals almost never rent cars, and if they do, they can probably avoid the fee by renting from an office in the 'burbs (which is where most locals likely to rent cars live). Plus, there's no statutory bias in how or to whom the fee applies. An article by Rick Alm and David Helling in the Kansas City Star (July 18, 2006) cites a study by William Gale and Kim Reuben (2006) that says the fees are inefficient, that they disproportionately tax certain groups, etc, but least politically they got it right in KC. For AGES we've been taxing the outsider to gain revenue-- hotel taxes, higher sales taxes in touristy areas, etc. This is nothing new. At least POLITICALLY it makes sense, which is more than I can say for Virginia's bad driver fees.

Tuesday, August 14, 2007

Green Energy

Here's a continuation of yesterday's topic. So, if you read yesterday's post it may seem that I'm not too motivated for "alternative energy." Nothing could be further from the truth-- I just want to find the most appropriate alternative. First, I feel we need to make sure our resources are focused on alternatives best address the issues of sustainability and affordability but also minimize the negative consequences of our energy use, namely global climate change. An editorial appeared in the Saturday New York Times (Energy Surge, Staff Editorial, Aug 11, 2007) that I think accurately reflects the interdependence between energy policy and climate change, and the need for energy policy that has complementarities that help address both ills simultaneously.

On this basis I cannot bring myself around to the viewpoint that coal represents a worthwhile improvement. That makes me pretty unpopular in my neck of Virginia. Coal is currently plentiful in relation to its demand, but that is due in large part to the fact that about a century ago, technological change led us to an alternative that was both more abundant and cleaner-burning. At that time, Malthusian Chicken Littles cried that the sky was falling and that Coal was both too scarce and too harmful to our air. Then came petroleum, which was plentiful and clean (in comparison), and was compatible with the fabulous new internal-combustion automobiles running off Henry Ford's assembly lines. No matter how "clean" the coal industry claims their product to be, we cannot shake the reality that coal is entirely composed of carbon, which, when burned produces carbon gasses.

In the same regard, my love for alternatives such as natural gas and ethanol is equivocal at best. Ethanol and natural gas burn cleaner than some alternatives, and ethanol is good for short-run sustainability, but, as my father-in-law (a corn and soybean farmer) puts it, "it just stretches out" petroleum products-- we don't yet have technology for using ethanol as a stand-alone alternative. These options also suffer from a lack of sufficient nation-wide distribution network. Hydrogen, you say? I'm personally still a tad skittish about the possibility of this happening on my drive to work:
So, here's what's caught my eye in the alternative energy debate: nanotubes. These little guys can be used for a lot of applications and their capabilities and limitations are pretty unknown, but the early research is promising. One of their advantages is that they can be designed to work as transistors, ultracapacitors, can be designed to have photovalic, semiconducting, or superconducting (at low temperatures) properties, and I've heard that they even do the laundry and wash windows. According to Collins and Avouris (December 2000, Scientific American), certain nanotubes can carry electrical current 1,000 times denser than copper or silver. I'm no expert on these little suckers, but I'd count them among the innovations to keep an eye on for helping solve our energy policy, cure disease, and protect our troops.

Monday, August 13, 2007


I've thought a lot about energy use, begun some preliminary research on it, and come to the following conclusion: Energy Sustainability is not a very serious issue. There is sufficient oil resources embedded in the clays of Northern Alberta to keep our SUVs runnig for several decades at current rates of usage growth. Higher prices tend to make the profit margins on very cheaply-extracted sources of oil (like simply poking a hole in the Saudi desert) much higher than they had been, but it also pulls more expensively-extracted sources into the market. Paradoxically, the same scarcity that leads to the higher market price and discourages consumption to allocate oil more efficiently in the short run also helps resolve the scarcity issue by encouraging firms to exploit new reserves in the long run. Energy Affordability and Price Stability are much more salient to how we approch our energy policy.

Classical theories in economics, which focus on competitive markets, have found three trends for primary commodities such as oil: (1) stable prices; (2) a gradual, secular decline in the price, following the "Prebisch Thesis" (see, for example, Grilli and Yang, World Bank Economic Review, 1988), and; (3) little or no cross-sectional variation in prices. Empirically, many of these theoretical predictions described oil and energy markets quite well until about 1973, but none since. Many of these discrepancies have been explained in part by market structure (violations to the assumption of perfectly competitive markets) but more meaningful explanations of the current price volatility have focused on the lack of political stability in Middle East, where most of the most cheaply-extracted oil can be found.

The following article appeared Wednesday (Aug. 8, 2007) in the New York Times: Energy Has a Tough Act to Follow: Itself. It briefly addressess this issue of political stability, which has consequences for price levels and their stability. Remember what I mentioned before about higher prices? Well, I hate to bear bad news, but if reliance on oil from politically volatile countries is the problem, then low prices cannot be found in anywhere in the solution. When prices are low our own production of oil, as well as the diversity in the sources from which we import oil, are the also the lowest because these sources of oil cannot be profitably tapped. According to the times article: ''Over the long run, a premium will be paid for these assets (the Canadian Oil Sands Trust) because they are in a politically stable area,'' said Evan Smith, a co-manager of U.S. Global Investors Global Resources.

If we want to have reliable, stable sources of oil, we'll have to pay the price, and it appears as if we already do: "Gravity" models of international trade predict that the more homogeneous the product, the more likely it will be that countries import a particular prodcut from geographically convenient sources, and the less likely it will be that producers will bear the shipping costs of sending their supplies to geographically extended markets. An initial look at the data shows that much of the oil produced in Mexico, Venezuela, and even Alaska are going to places like South and East Asia.