Saturday, October 3, 2009

"Locavorism" and the Environment

"Buying local" is not necessarily buying green:
...lamb raised on New Zealand’s clover-choked pastures and shipped 11,000 miles by boat to Britain produced 1,520 pounds of carbon dioxide emissions per ton while British lamb produced 6,280 pounds of carbon dioxide per ton, in part because poorer British pastures force farmers to use feed. In other words, it is four times more energy-efficient for Londoners to buy lamb imported from the other side of the world than to buy it from a producer in their backyard.
Nor is knowing the producer necessarily good for the community:
Historically, such personalized economic transactions were the norm, but they were inherently fraught with risk and tension. In colonial America — a place I’ve studied in some depth — all markets were initially driven by face-to-face interaction. It should come as no surprise that things could get, well, personal. Markets were intensely competitive and exclusive. Everyone knew everyone. And that was often the problem. The court records of colonial New England are replete with personal market transactions gone awry.
Food for thought, so to speak. Trade is good.

Thursday, October 1, 2009

Bayes' Rule and Dick Cheney's One Percent Doctrine

I was teaching Bayes' Rule this week, and there's an example that has to do with lie detectors and stealing. The story is that you have employees, of whom 10% are stealing. You also have a lie detector that is 80% effective (i.e. P(positive test given stealing) is 0.8 and P(positive test given not stealing) is 0.2, etc.). So, if you apply Bayes' Rule, you learn that given a positive test (i.e. the lie detector says you are lying/stealing) is just 0.308!
So, what about Cheney's "One Percent Doctrine" for justifying torture? Even worse! Let's suppose that there is a 1% chance that a detainee has information about a terror attack. Now suppose that torture is 90% effective in the sense that if that detainee is conspiring with terrorists he "confesses" and gives information about it with probability 0.9, but also confesses (with whatever made-up details he can think of) with probability 0.1 if he is innocent. (This, I think, is being generous to the effectiveness of torture!) Then, GIVEN a confession, the probability that there was really a plot is just 0.009/(0.009+0.099) = 0.083 - less than 10%!
The conclusion here is that the one percent doctrine logically fails when there is even a small chance of getting false positives from your intelligence-gathering resources and methods. It seems from what you hear that torture leads to sufficiently many false positives that it probably isn't helping, and is probably HURTING our security by leading our enforcement agencies on wild goose chases! Food for thought!

Made up Statistics

Nate Silver accuses Strategic Vision of cooking its books on poll "data" it releases.

Alex Tabarrok Tells Reiterates all the Good Stuff about Globalization

Another Ted.


Intrinsic Motivation vs. Extrinsic Motivation (a.k.a. "Incentives")

From Ted Talks.

More Financial Innovation that Doesn't Suck

For the last couple of years unbanked Kenyans have been using their mobile phones as mobile banks, which has proved invaluable as a means for small savings and remittance transfers for poor households.

Wednesday, September 30, 2009

Sunday, September 27, 2009

On the Wages of Clergy and Accountants

Cap and Trade Basics

If you care to be informed about the impact of cap and trade, read this. Here are the important points:
1. Think of the benefits to the private sector from pollution. ... it’s cheaper ... to produce goods if you don’t worry about whatever emissions result as a byproduct.
2. A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting.
3. The cost to the economy of this limit is the benefit the private sector would have gotten by emitting more than is allowed under the cap.
4. The creation of cap and trade means that emission permits command a market price, and the value of these permits ... (a growing fraction over time) would be captured by the government through auctions, and ... in effect, recycled to consumers.
A couple of notes for those who don't want to read the original: 1. the costs in (3) are not very big - they are a deadweight loss triangle, not the total market value of the permits (which is what some guesstimates of the costs say); 2. the current and future environmental benefits of the cap may or may not outweigh the losses to firms; 3. assuming that the "cap" does a good job of balancing firms' losses with environmental gains, an auction is more efficient than a Pigouvian carbon tax which is more efficient than the current system of "cap and regulate," which is in turn more efficient than subsidizing emission-reducing investments (*see below); and 3. the effectiveness or fairness of how the government is able or willing to "recycle to consumers" the revenues generated is something we can have a fair debate about.
* Note on policy options: Cap and trade and a carbon tax both have the advantage of allowing the firms for whom it is most expensive to cut emissions to emit more if they are willing to pay, whereas those for whom it is least expensive have an incentive to make more cuts. Firm-by-firm regulations do not achieve this, and subsidies have the unintended long run side-effect of leading to higher consumption of the very things whose production results in emissions. In theory, an auction does a better job of "getting the price right" for a given desired quantity. One thing that might tilt in favor of a tax over an auction would be setup costs - designing an auction that gets the price right is a difficult problem in theory and in practice.

Using Derivatives for Good Instead of Evil

This excerpt Robert Pozen's "Too Big to Save? How to fix the US Financial System" points to a good use for derivatives (HT: Marginal Revolution):
The Danish model has another critical and innovative feature.  Holders can retire their own mortgages by purchasing the same face amount of mortgage bonds at the prevailing market price.  To prepay a mortgage by purchasing bonds, the home owner must give advance notice of several weeks to the MCI [mortgage credit institutions], which designates by lottery the specific bonds to be purchased.  Thus, if rising interest rates or other factors cause mortgage bonds to trade at a discount, home owners can reduce the principal or retire the whole mortgage by purchasing an appropriate mortgage bond at a discount.
This is an example of innovation that would make markets more robust help prevent foreclosures, rather than the types of innovations we've seen in the US, which are mostly meant to subvert regulations. The fact that this has not evolved in the US makes me think two things: One, that the balance of power IS tilted in favor of banks and against the consumer (maybe due to lobbying power, which Adam Smith and other "classical" market economists warned against); and two, that the regulatory framework has created some degree of moral hazard and/or regulatory capture (i.e. banks are taking risks and doing things way beyond what they would normally do because they do not face consequences from the market, i.e. bailouts, or the regulators, i.e. bureaucratic corruption) over the last 30 years.