Does it pay to recycle? Reconsidered

Recent figures for New York peg the cost of Recycling a ton (US) of waste at $284, compared with $267 for dumping it. This may not completely account for the costs households incur due to mandated recycling, but let's suppose that if you count all the happy vibes people get from doing "good" against the time they spend rinsing cans, bottles, and glass, it's a wash.

A reader points out that glass recycling saves 315 kg per ton (US) of glass recycled compared with making the same ton of glass from scratch. The UN suggests a carbon tax of about $30 per tonne (metric), so the conversion is simple: The added environmental cost of the new glass is about $9.50 per tonne (metric). A metric tonne is about 1.10231 US tons, so divide $9.50 by that equals about an $8.60 per US ton tax on virgin glass. That means the margin for comparison for dumping vs. recycling is about $7.40. In other words, if it were $7.40 per ton cheaper to recycle or $7.40 more costly to dump, recyclying would not only be the warm fuzzy thing to do, it would be the profitable thing to do.

Interval estimates of the harm done by 1 tonne of CO2 is about $20-$50, so if we take the high end of the interval, we get an environmental cost of $15.75 per tonne, divided by 1.10231 is about $14.30 per US ton, and that makes the margin about $2.70 per ton of glass before unsubsidized recycling would be economically profitable (with a high-end carbon tax).

One problem of course is that households aren't benefitting for the effort they put in. You cannot force people to want to recycle. If they could benefit, say be receiving a rebate on their trash removal for the amounts they recycle that might incentivize the whole thing a little better. What irks me most though is the mandating the effort without more careful consideration of other costs. I bike to work, I take short showers, I try to conserve energy used to heat and cool my home, so I'm not trying to advocate for the senseless raping and pillaging of the earth. But, when people say stuff like "we could recycle almost everything we throw out" my first instinct is to think, "sure we could, but at what cost?"

Environmental Dogmatists

This is silly. You don't win the environmental crisis by saying "we gotta recycle everything" or making it a war of convictions. Those of us who don't share Andy Posner's convictions are left to deal with the tradeoffs of the real world and really do live the environmental crisis on the margin.

Oh, and by the way, things like recycling and environmental regulations aren't free lunches. Recycling glass for example, uses more energy than just manufacturing it, and is therefore less of an impact on the atmosphere and resource use. [CORRECTION: RECYCLING GLASS DOES USE MUCH LESS ENERGY AND IS A HELP TO THE ATMOSPHERE. THE TOTAL ECONOMIC COST (INCLUDING LABOR COSTS) IS STILL GREATER THAN PITCHING THE GLASS. I ALSO APOLOGIZE FOR NOT DOING BETTER CHECKING.] And environmental regulations and trying to impose sanctions on poor countries who don't yet see the environment as much of an immediate concern as, say, eating today is paternalistic and unethical. Maybe instead of preaching "the margin" I should make my point in more drastic and judgemental terms (like the lunatic fringe does):

ENVIRONMENTALISTS WANT THE POOR OF AFRICA AND ASIA TO DIE OF STARVATION.

Less (and less) bad is good because it is progress, and before long the inverted environmental "U-curve" will eventually begin to let environmental damage wane.

Can they Crap Petrol, Too?

Environmentalists want to ban plastic bags. Maybe there's a smarter way to solve the problem than a knee jerk response that inconveniences the entire population.

Flutter Power

On July 21, Depken was worried that wind won't work because of the size of turbines and the fact that they are sensitive to the direction of wind flow. Of course, it is well known how efficiently turbines can convert wind into usable energy, and we've nearly hit that known peak. How about this:

Flutter Power

Remember - it rolls DOWNhill

Make sure you hook up the pipes correctly when you install this space- and water-saving device:

Blog Notables Roundup

"Best Sentences I've read Today" by Art Carden at Division of Labor.

...people do not understand the economy very well. And what do stories like Gosselin’s tell us? That most journalists don’t either.

"The Cost of Aviation Security" by Freakonomics

"Make Office 2007 look like Office 2003" by Heavy Lifting (to actually do it try here)

"Drive 70 and Freeze a Yankee" by Krugman

The ongoing debate over "Immigration and Wages" by Marginal Revolution

This week in The Economist

More wind from a gas company blowhard. T. Boone Pickens wants to go to wind for lighting our homes and gas for transportation. Do we really need to transition to natural gas for our cars or will we be clever enough to make the transition once to electric?

Measuring poverty. Federal poverty line: 20,444 for a family of four, which has been relatively stable in real terms since 1968. Proposed level for New York City using a new methodology: 27,138. That means 23% of New York's population is poor, up from 19%. I don't have any real thoughts on this - changing the numbers doesn't do much to change the problem.

Teachers' Unions. Sure, teachers' unions can be part of the solution, but will they and should they? Teachers' unions fight for higher wages and equal for their people and oppose anything that would make it easier for the boss to cut employees loose. The result is social pressure not to try too hard and make your peers look bad, and mediocre teachers being the most vocal folks in union meetings. But that's some of what education in America needs - more pay for good teachers and less job security for bad ones.

China's Economic Constitution. I'm a little cynical, but this will probably be like the contract law for workers' rights - it'll hit the books but no one will enforce it, and few among the public will even know about it. For those of you saying "contract law for worker rights in China?"... exactly.

Eleven Reasons Journalists Should Know More Economics

This article comes courtesy of Agnes. It's basically a poorly-written, off-target rant about how our society has become scarcely better than socialism. Well, besides the fact that income has diverged over the period in question, the government also actually provides fewer public services, does less for the poor, poses less of a burden on businesses (sometimes to a fault), has generally been measured to have moved to the right ideologically, and if there has been a move in the way the government directs economics, it has been rightward towards fascism (favoring special private business interests) rather than to the left (favoring direct state control). Other than THAT, let's try to be fair to this guy's "11 reasons."

1. "Dumber than a fifth grader with cognitive dissonance" He explains that this just means that we've become ideologically narrow-minded. This one's just funny because the guy obviously idolizes Milton Friedman and Ronald Reagan and dare I say, exhibits the "cognitive dissonance" he's accusing us of.

2. "Where did all the leaders go with their moral character?" Basic idea: "Absolute power corrupts absolutely." Problem is, that quotation comes from the 19th century. So, I guess this guy was around in the 1800s, and can testify to the moral character of Thomas Jefferson (diddling houseservants), Andrew Jackson (murdering a guy over a woman), or Alexander Hamilton (getting killed in a duel)?

3. "Fed and U.S. Treasury adopted Enron accounting tricks" Here he just starts making stuff up, like that the Man "dumped" Bear's Fannie's & Freddie's liabilities "onto the taxpayers' 'balance sheet'." I think this is just his "grumpy old man" coming out, but he's showing a total lack of understanding of what happened with the loans extended to help keep these companies from going under. But Reagan was this guy's hero - didn't Reagan get us into the deregulation, Savings & Loan mess and other misadventures in malfeasance. Be fair. Are you on the rolls of NewsCorp?

4. "Deregulation creating new socialist housing system" Raise your hand if you know what this means. I don't. Deregulation did a lot of horrible things to make the mess we're in, but it didn't creata a socialist anything. In fact most of the foreclosures and price bubbles (which have begun popping) were on those lower-value homes. So, thankfully for the author, those beneficiaries of the socialist housing policies are again renters in miserable slums. Chalk one up for the rich old white guys.

5. "Trade deficits outsourced more of America's wealth than jobs" This is just false. At best he has the tail wagging the dog, and the initial culprit of both was an unusually strong dollar (based on so-called fundamentals. The theoretical causal relationship between trade deficits and outsourcing in a flexible exchange rate economy is that the trade deficits will eventually depreciate the currence, thus turning investment inward and retaining both wealth and jobs domestically. A handful of other policies by the US Treasury, Fed, and IMF kept the dollar high and the normal correction process for trade deficits was stifled.

6. "Banking system in meltdown, minting penny stocks" He starts with something off-point about Shumpeter and "creative destruction, and then, to quote, "You don't have to be smarter than a fifth grader to figure out that our leaders are clueless about the reality of our crumbling banking system, with many banks trading as penny stocks, while the Fed still panders to conservative pre-election politics rather than getting serious about inflation." Really? Ever had a conversation about finance with a fifth grader? And Meltdown? Ok, times are tough but I would propose that our banking system has seen worse times, and the JP Morgans of the system manage to survive. Also, banks aren't the ones issuing these "penny stocks." If they are then I have even less of a clue what he's talking about.

7. "Ideologues preach savings, but still push spending" This is a fair point, but that's just politics - politicians run on 2- to 6-year election cycles and savings really doesn't do much in the short term to get them reelected. But is this guy actually proposing a "President for Life" like they have in Zimbabwe? And is this anything new? Nixon ... NIXON said, "we are all Keynesians now," but that's not even the best part - the original quotation that ran in Time in 1968 (?) comes from (wait for it) ... MILTON FRIEDMAN, or author's other hero!

8. "Warning, the market's under 2000 peak, losing money" Yeah. I checked the data and he's not wrong about this, but he is being a jackass. The facts he cites hasn't a damn thing to do with the current market, banking crisis, or so-called recession. Two major crashes hit that were waaaaay worse than this one but nobody really got out of whack: 1. 9-11, and; 2. The invasion of Afghanistan. Since the invasion of Afghanistan the market's up about 40%, even with the current turbulence. In a volatile climate you can usually pick your reference point and find a way that you can scare people. Good one, buddy. He goes on to compound his douchebaggery by exaggerating inflation: he says that the 10% drop was more like a 50% drop, inflation-adjusted. Uuummm, sorry, the prices have not nearly doubled in the last 8+ years.

9. "Inflation and dollars: Is Zimbabwe the new model for the U.S.?" First, I'm surprised if you're still reading. Second, I hope you're not my mother. Comparing the two countries, he says, "Things may be worse in America, psychologically." I don't think there's any words for this other than "ARE YOU FUCKING KIDDING ME?" This is even douchebaggier than the previous nonsense about the DOW.

10. "Free-market health care failing 47,000,000 Americans" I don't get it. He laments the fact that America is becoming "socialist," but he almost sounds like he's calling for the governmnet to get its mitts in the health care sector. Or, maybe he's just bitching and moaning.

11. "Conservative free-market policies inflated oil 300%!" I'm not sure where he's going with this. While it is market forces that are driving the rise in oil, most of it is demand side, some of it is supply-side, some of it is market structure, some of it is political risk (Venezuela, Iran, Iraq), some of it is speculation, and it has little to do with conservatism. A smart conservative would notice that certain gaps in the regulatory structure have been exploited (smartly) by speculators - but these speculators will get theirs when (not if) the price falls again in real terms (which, by the way, I've already called and is already playing out).

Basically all I can conclude from this is that this dude belongs on his porch drinking PBR and yelling at the g.d. kids running across his lawn. His facts are often wrong, his analysis is often off-point, and his writing style is poor (and if I can tell you that you know it's bad...).

Question of the Day for Lou Dobbs

Something just struck me. How is it that there are no unskilled jobs for hard working Americans because of FDI and "offshoring" by US firms, and yet there are so many unskilled jobs that it attracts a couple million unskilled and semi-skilled immigrants each year (to subsequently steal the jobs away)? Could there be a logical fallacy being made by the d-bag who accused economists of being "idiots" and "jackasses" who don't do any empirical analysis?

Presentation is Everything

Sometimes it takes very carefully-chosen words to get your point across.

Today's "I Told You So"

I really hope Ani reads this because he doubted my hunch that a combination of factors might lead to a sharp decline in the price of oile & gas over the next few months, definitely in the next year.

Check out this NPR "All Things Considered" interview with Phil Flynn. 2:15 in he talks about the fact that oil quantities are as high as they've ever been (relative to demand) for this time of year. Partly this is because consumers are making small changes to their habits (a handful more people taking the bus/metro, a few taking bikes, and a lot of people canceling that summer car trip). The other part is that the oil market is rife with speculation. This speculation comes from certain people who think the price of oil can only go up (and are wrong) and certain other people who are buying commodities to hedge the downside risks in the stock market. He discusses this second aspect of the market 3:00 into the interview.When I heard the interview driving, I thought I heard some numbers on the surplus between supply & demand, but they don't seem to be in this take of it.

On the demand side: don't forget Clive Granger's prediction of a harsh fall for China after the olympics.

More on Guns

I wanted to take a moment to clarify yesterday's post. Information isn't a problem when selling a gun in all markets. For example, in a lot of rural markets, most sellers know most of the people around, and most of them know to whom they should not sell, and most of them even abide by the rule of thumb of not selling to the one crazed lunatic drunk in town, and have no more than one or two degrees of separation between themselves and everyone else in their market.

Problems arise in larger markets, because it's hard to know the entire market you're serving. Problems also arise when these smaller markets are preyed upon as havens for unscrupulous thugs who take them back to cities to commit (second or third) gun felonies. That is the point that (mostly libertarian-minded) New York has made about Southern States, including Virginia, whose lax regulations have allowed felons to obtain guns (by mostly legal means) without coming subject to a background check.

Having these background checks as mandatory keeps the local Bubbas from entering a "prisoner's dilemma," or negative-sum strategic game where, even though some would prefer to check buyers' backgrounds, they are trapped by the fact that competing against rivals who may not. As a result even the best-intentioned vendors in these localities are caught in a race to the bottom. Another advantage of making these checks mandatory is that it mandates federal, state, and local governments to show better diligence in keeping "do not sell guns to this man" lists up-to-date, and therefore lowering the monitoring and information-gathering costs of those honest and well-intentioned distributors.

Gun Shows and Market Failure

Since the VT shooting, firearms, public health, and emergency preparedness have become a serious and important issue for the State of Virginia (N.B.-I know, it's the "Commonwealth" of Virginia, but it's fun to irritate the redneck aristocracy 'round these parts). Measures in two important areas were considered: (1) reform of the mental health system, most of which ended up being a Criminal Justice-oriented compromise, but a net improvement in many cases (page 2, bottom; page 3, top); (2) stricter rules on background checks for the sale and purchase of firearms, which was killed ("Carried Over"; page 3, middle).

My focus, for the moment is on the Kill Bill on the measure attempting to close the "Gun Show Loophole" on criminal background checks. Basically, there are about a half-dozen loopholes at various state levels that circumvent the federal laws requiring background checks for people purchasing firearms. Admittedly, Cho, the shooter at VT, did not purchase his guns through any such loophole, but that does not mean the argument for closing the loophole is closed. Cho did get his bullets from one such "loophole dealer, which reminds me of this:

Chris Rock Bullet Controll

Anyway, both sides bring strong moral arguments to the table on the broader issue of gun control, so I will try to take a more market oriented approach. Suppose that we meet in a market and we exchange corn for shoes. Better yet, we meet and I buy corn from you for the "social contrivance" Paul Samuelson called money. There is nothing that you really need to know about the corn or that I need to know about how you intend to use it that affects my expected profit from selling the corn or has any externality on any third party. In jargony terms, there's no real market failure in the form of informational asymmetry, moral hazard, or externality.

Now consider a few examples of so-called market failures starting with the used car market. Georg Akerlof used this market to describe the market for "lemons." Basically, only sellers know for sure if their product is a lemon, and this informational asymmetry drives down the price that all sellers are able to obtain, thus crowding out "good" used cars, leaving only lemons. In this example there was some very important information that the seller had that the buyer did not, thus worsening the quality of the market. Similar models by Joseph Stiglitz and Michael Spence use information asymmetry to describe employers' efforts to screen "ability" and "effort" of their employees in labor markets.

We can also consider the auto insurance market. In this case, buyers are "adversely selected": only the buyer knows if he is a bad or reckless driver. The result? One result might be that it drives up the cost for users who are good and careful drivers, or good drivers are not insured (insured drivers are "adversely" selected). Alternatively, this type of market can have an equilibrium in which good drivers are not "overcharged," but they separate themselves from the "bad" drivers by choosing to "under-insure," and only "bad" drivers get full insurance. A similar argument has been applied to health care.

I think that in their best moments, advocates for stricter background checks are really just trying to address these simple market failures. Basically, the best way to protect the gun-ownership rights of honest, law-abiding citizens is to take steps to ensure that those who buy guns (be it at gun shows, estate auctions, or other "loopholes") are not "adversely selected" due to some informational asymmetry, because the potential harm to third-parties (externalities) are so immediate and severe. I

Person Joseph Stiglitz

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Fake Economic News

Is it me or does this article from the Onion eerily similar to something ("economic" advisor to Hillary Clinton - quotes indicating the fact that he has no degree in economics whatsoever) Gene Sperling would say?

Economist Makes Correct but Insensitive Remark... and it Makes News

I found a link to this Amity Shales editorial on Division of Labor. Anyway, let me preface this by saying it is highly unlikely that I would ever vote for McCain, and only Hillary's darkest wishes would bring that into consideration. Hell maybe I'll go for Barr. Who knows?

Still... Amity's got it right. Most of what Mr. Gramm had to say last week was correct. At the same time, what he said was collossally stupid. It was kind of a John Kerry "study hard or you'll get sent to Iraq" moment. True, but politically fatal.

Phil Gramm: "Mental Recession... Nation of Whiners"

Some people paint this as a battle between "campaing econ" and "real"
economics, but I think it's a little broader than that. No one seems to
be calling the media or pander-happy politicians out on the fact that
they have been exaggerating this so-called recession for months. Let me
rephrase: WE ARE NOT CURRENTLY IN A RECESSION. That doesn't mean that there will not BE a recession, it just hasn't arrived yet. This is the first regard in which Mr. Gramm is correct. The other is in the fact that the US economy has enormous potential, especially if it puts its ingenuity to work towards innovating clean alternative fuels to take us through the next century.

But here's where Mr. Gramm was wrong and where he was collossally stupid: He underestimated the pain that's been caused by some of the real disruptions in the housing market, and in job losses, and he really underestimated the inequities that have cropped up over the last 8 years between the rich and the poor. While aggregate and per capita income has generally risen over the last 1, 2, 8 years, the MEDIAN income has fallen. That means that the lower 50+ percent of the population has measurably less than it did 8 years back, while the rich have benefited quite a bit.

The distributional consequences of economic policies (which may be symptoms of other "frictions" in the economy that slow efficient resource allocation) are not just banalities of "campaign econ." They actually have long-term consequences or the sustainability of economic liberalization. If you need an extreme example, go visit Russia, or Brazil, or Argentina. That is what we face with trade policy now. Ramming trade policy down the throats of a reluctant middle class might be a bad idea if it means that there will be backlash against it that leaves our doors slammed shut more tightly than they had been before. Furthermore, the fact that some people lose needs to be appropriately addressed by governments that make reforms that change the "social contract" workers midway through their careers may have entered into when they began working. That, in a nutshell is what some economists and some candidates are advocating.

Big Mac Housing Index

So, weird title... Got to THIS on Calculated Risk via Krugman's conscience. A lot of conservatives (some of whom I know well as friends and relatives), whose convictions are sometimes unencumbered by inconveniences like facts, like to blame huge million-dollar McMansions and yuppies getting in over their head for both the housing bubble and the POP. The rationale is that the high-end houses had more money chasing them, and at the same time had farther to fall, and it was a fairly logical argument.

But there are convincing theoretical rationales to suggest the exact opposite, and in fact the Data for LA and Minneapolis suggest the opposite. Lower-quintile housed seemed to have a larger proportional increase AND a larger proportional decrease during the crash. Basically, what was happening on this end was that complicated loan scheems that perpetuated the bubble, and led to the subsequent forclosures and crash, were almost exclusively offered (and accepted) by lower-income borrowers who otherwise couldn't afford to buy.

An example is the Payment-Option ARM - Borrowers got their ARM with an option EACH MONTH (not at the outset of the contract, but EACH MONTH) to pay: the normal amortization payment; the interest-only payment, or; the "negative amortization" payment, which kept adding on to the principle. Holy SH..neikkies! This didn't just give people one chance at a bad desicion, but a seemingly neverending sequence of monthly opportunities to display their inexperience with finance.

Ted Kennedy's Brain

Here's a thoughtful post from Freakonomics. So, on first blush it would seem that the social cost of Ted Kennedy's treatment may be very high because it is crowding out resources from more routine medicine that may benefit more people. But I'm not sure this stands the test... unless you're a staunch republican (but, ironically, if you ARE a republican you have to honor and respect the Kennedys' right to choose to receive such treatments, even if they do bid up the cost). It's clear from the principle of "revealed preferences" that the private cost benefit to Mr. Kennedy (and his family) favors vigorous treatments. The implication of the article is that that treatment is the type of low-success-probability procedure that may tend to drive up costs for the rest of us. But, since Ted Kennedy is highly productive and employed in the service of the public, it is possible that extending his life and allowing him to continue is legacy of championing health care and other public-good initiatives like social insurance, his extensive treatments may still create a net gain to society. It's unlikely that this is entering the calclulus, but it is food for thought.

Cow Farts

Do we really think that this is the main cause of global warming?

Defending Sweatshops

Along the lines of Recycling...

Penn & Teller: Defending Sweatshops

Recycling

Where does Depken find this shit? Where did Penn & Teller find these morons?

Penn and Teller Recycling Test

Sounding Black versus Sounding Red

An interesting post from the Freakonomics blog: Blacks who "sound black" earn about 10% less than blacks who "sound white;" whites who "sound black" earn 6% less than whites who "sound white," and; it's almost as "bad" for your wages to "sound southern" (redneck) as it is to "sound black" (even if you live in the south). I wonder how much it costs to sound foreign?

It sort of reminds me of Levitt's (author of Freaconomics) articles on "name discrimination." Some have suspected that people with "distinctively black" names, a trend that began to emerge in the 1970s, earn less. Levitt (and coauthor Fryer find no such discrimination, which is interesting in light of the finding that voice distinctiveness does lead to discrimination.

In turn, this reminds me of my own job application process. My last name is Bang. It's a Danish name, but I'm frequently confused (on paper) with being Korean (in person, my Scandanavian heritage is clear at 6'3" with relatively fair skin). Once, after I had actually obtained a job and had been working a couple months, my employer confessed his own initial misgivings about hiring me to teach for fear of a possible accent or language barrier (on account of my Korean name). At a conference, I was about to meet a Korean colleague for breakfast (he had invited me blindly), and he was surprised that when he met me I was white (he still paid, but I think his intent was to help out a "countryman"). I also get loads of junk mail from Korean Air.

In an unrelated story my last name (Bang) was initially rejected by a social networking site for being "fake" and "inappropriate."

RE less than C

It's all about the costs. The key reason renewable energy hasn't hit yet is not feasibility or technology, it's cost. Biofuels ("chemurgies") have been in production since the 30s by Henry Ford. But, The whole key is that it 'R'-enewable 'E'-nergy's cost be less than 'C'-oal's, RE<C. Now, it turns out that wind might be meeting that condition - IF coal's emissions are priced according to current UN recommendations. Right now coal costs about $0.05 per kilowatt; wind costs $0.08. With the carbon dioxide cost of $30 per ton, coal's total cost would be about $0.08.

Please, recognize that a credit to wind to bring its cost DOWN to 0.05/kw would not be equivalent. It would push down the net cost of consuming all energy, including coal-based sources, and would not achieve the dual objective of finding new energies and reducing total emissions now.

Orient Depress

I've said for a while that to keep net exports in surplus, China would have to do some pretty crazy things to keep from accumulating stockpiles of undervalued dollars and prevent speculation on the fixed yuan. Inflows of paper currency recently surpassed FDI inflows as the main offsetting factor to China's Current Account (trade) surplus. Here's some recent evidence.

So, basically they're: (1) forcing banks to hold almost twice their usual reserves, in dollars so that the CB doesn't pile them up (contractionary), and; (2) print more yuan to meet demand and curb speculation (expansionary/inflationary). Add fuel prices and price controls into the mix, and we've got a nice recipe for stagflation.

My Own "Spot that Economist" Story

This week, economists are meeting in Waikiki. Needless to say the local "tweed jacket to flower shirt" ratio is as high as it's been in a while. So, anyway, there was a lot of elevator activity at around 8:45pm and I turned to one of my elevator companions and said, "Well, 9:00. Time for the economists to turn in." My wife asked how I knew he was an economist. It was after hours and miraculously we had both remembered to take off our badges indicating our registration in the conference. He pointed to his forehead as if it may as well be written on our foreheads.

In a related story, getting off the shuttle from the airport, my wife and I were laying odds on whether the guy checking in in front and behind me were economists attending the conference. I saw both later at the sessions.

Another fun game to play is to sit at a hotel bar at one of these conferences, eavesdrop on conversations, and play, "who is the most boring economist at this bar."

Dear Ole Dollar

Proposition number 1: the "weak" dollar is not something to get worried about by itself. Proposition number 2: the current trade deficit is not necessarily insurmountable or unsustainable. Check this out (from, of course, The Economist, June 2008):

Thanks in part to a weaker dollar, exports have helped prop up the
ailing American economy. But the current-account deficit has not
narrowed by as much as hoped.

So, a weak dollar is a natural and healthy economic response to a trade (current account) deficit.

Against other gauges, however, the greenback may still be overvalued. One is the fundamental-equilibrium exchange rate (FEER), which is the rate consistent with a steady economy at full employment and a sustainable current-account balance.

Not only may the "weak" dollar be healthy, but it might still have further to fall. Not only that, but the trade deficit (even if depreciation does not fully close it) is not necessarily unsustainable or even avoidable.

In a forthcoming paper, Richard Cooper of Harvard University points out
that America's relatively fast-growing population, secure property
rights and liquid financial markets make it a magnet for global
savings. The share of assets owned by foreigners is still lower than in
some other rich countries, so large trade deficits could plausibly
continue, if not indefinitely, then for many years.

The rationale for this is relatively straightforward. With flexible exchange rates, the main mechanism for offsetting a current-account deficit is through the capital account, i.e. net EXPORTS of asset claims. As long as the US has an institutional advantage towards attracting net foreign savings (and thus exporting CLAIMS against US banks, firms and public debt), not only is a current account deficit sustainable, it is almost inevitable.

At it Again

Professor Borjas took so much time off it I hardly noticed he was at his shut the door rants again. Citing a report from the British House of Lords, he sums it up as:

Let's see: (1) the net benefits from immigration to the pre-existing population are trivially small and (2) immigration redistributes wealth, and low-skill workers end up on the losing end.

So, let US see: (1) there ARE positive net BENEFITS to the pre-existing population on balance (Professor B. always likes to gloss over this fact or trivialize it); (2) the benefits to those who emigrate are NOT trivial they are positive, and; (3) natives in countries that send emigrants to other countries also benefit. No one denies certain distributional consequences, but the GLOBAL benefits from free migration. While those who lose in the US tend to be on the low-skill, low-wage end of the scale, please bear in mind that the ones benefitting from the other side of the border are from even more meager circumstances.

Maybe we should think of managing the distributional consequences in a more nuanced way instead of killing the golden goose (or shutting the "golden door").

Confidence.

Has anyone told consumers we aren't really in a recession, and that unemployment was worse from 2002-3 than now? While they're at it maybe they should tell the media so they'll stop giving people a distorted picture of how things are going?

Profits and Poppies?

Economically, it's difficult to understand why opium crops are so substantial in Afghanistan. The classical explanation would be that it's the most profitable use of that land and of those farmers' time. But, there's some research, summarized by The Economist, suggests that ain't so.

Recent research suggests that greed on the part of farmers, at least in
this part of the country, is actually a fairly minor factor in the
decision to plant poppy.
David Mansfield, a researcher for the Afghan Research and Evaluation
Unit, a think-tank, has produced statistics showing that Nangarhar
poppy farmers are rarely the richest people in their communities. Their
profits from poppy are often barely higher, and sometimes lower, than
those from legal crops, particularly where they have to use petrol
generators to pump water to their crops.

So what gives? One clue is that illegal smugglers might be the only ones filling a hole in the capital market and provision of public goods (adequate transport).

Smugglers would visit farms to buy opium. They made loans against
future production ahead of the planting season. Dry opium keeps for up
to two years, so farmers can save it as capital and sell when the
market looks favourable.

Hmmm. Interesting...Basically smugglers are making contracts with farmers for future delivery (futures markets), and the storability of poppy helps make up for the risk involved with poor roads and the inability to get your crop to morket before spoiling.

Reform Model

Instead of letting more models in, why not just more plastic surgeons? Or maybe our immigration policy should be to let more people in with some scrutiny instead of letting fewer people in arbitrarily.

When You Can't Have What You Want, It's Time to Start Wanting What You Have.

It turns out, we actually like something better once we have it. It's called the endowment effect, and it explains my cluttered office. Check it out.

This is Hilarious

Different folks are gonna laugh at this for different reasons: check it out.

The Beginning of WSJ's End

Media bully Rupert Murdoch has begun the dismantling of the Wall Street Journal's center-right pro-market staff and replacing it with his right-fringe pro-business (which is not the same as pro-market) henchmen, much as he did at the Sun. The talented and objective Greg Ip has moved from WSJ to the Economist. Cancel your subscriptions before he renames the WSJ "FoxNews Print Edition."

You Heard it here first

I dunno, maybe someone else has already gone out on this limb, but have a look at this. I'm to cowardly to make it a prediction, but I would not be shocked one bit if gasoline is back to $3.00 within the next year.

Mark it, dude.

June 20, 2008:
............Reg.....Mid...Prem.
Curr. Avg..$4.075 $4.326 $4.482
Yesterday..$4.073 $4.325 $4.481
Month Ago..$3.807 $4.043 $4.188
1 Year Ago.$2.996 $3.181 $3.297

Those Enlightened Europeans!

Before you start thinking the Europeans are all enlightened, read these articles from yesterday's and today's New York Times, and you'll realize just how xenophobic the continent can be. The EU's European Parliament, which is basically set up to manage issues such as trade policy, immigration, and capital flows in and out of the EU, as well as other union-wide policy issues, has decided that it's OK to detain illegal immigrants for up to 18 months. I mean the economic BENEFITS of immigration aside, this is extreme. Many immigrants to European countries never get the right to vote or be citizens, and simply want to earn some small amount of money to send back home. Don't let Lou Dobbs see this story! He'll think it's a new great idea for making use of Gitmo!

It's All about the Children!

This is hilarious:


Study Finds Most Children Not In Favor Of Children2019s Healthcare

Enjoy!

I Told You So

Anytime my students hear me say something that doesn't affirm their bent for supply-sider cowtowing, they think I'm being a biased liberal political stooge, so this post goes out to them.

The Economist is considered pretty objective (this week's cover: "Iraq Starts to Fix Itself"), if not a bit rightish on economic issues. About a dozen times, when asked or when discussing an issue, I emphasized that there is often some ambiguity about the aggregate impacts of specific policies, and even if a policy is more efficient than the competing proposals it is not always the one that stands the test of democratic election cycles. So here are a few snips from an article on the competing proposals, as summarized by the Economist:

On June 9th Barack Obama began a two-week tour to battlefield states, his first as his party's anointed leader, with a big speech on economic policy. He accused John McCain of favouring George Bush-like profligacy by proposing tax cuts he can't pay for. Mr McCain shot back with a speech of his own next day, saying that Mr Obama will raise taxes and unwisely renegotiate trade agreements. Strangely, both of them may have a point.

So, as I've said, neither party has a monopoly on bad economics. The article concludes:

Mr McCain hopes he can avoid crushing deficits with mysterious spending cuts, while Mr Obama relies on varied measures his campaign claims would somehow raise almost a trillion dollars over a decade.
The figures are debatable, but there is one clear difference. Mr Obama's plan would redistribute cash to lower- and middle-income Americans, while Mr McCain's would skew benefits towards the wealthy. That's something voters may find it easy to take a view on.

In other words, the question is much more one of distrubution of economic benefits, not which are going to be greater on the balance of things.

Conscious Rap

I found this a pretty interesting audio from The Economist's "Democracy in America:"



I'm not sure what my take on it is, but it is funny to hear the British host use "gangsta" jargon in parts.

Pension and Protection

This Economist blog got me thinking about the differences between the US workforce in my generation vis a vis the last one.

So, I'm wondering how the change in how we save and contribute to our employer-sponsored tax-sheltered (kinda) retirement annuities affect the politics of trade protection. Maybe it's a stretch but a large part of the argument against trade agreements are thinking of the fifty something worker, many of whom have "defined-benefit" retirements - pensions - vest only after 5 or more years and are based on the tenure of service in the company (often times with 5- or 10-year "milestones" at which the monthly benefit takes a discrete jump). A fair case could be made that these are the folks most affected by the structural shifts brought by trade.

The generation that has followed them, saves for retirment in "defined-contribution" plans. These plans vest sooner, and usually do not require service with a single company over an entire lifetime to make a good retirment. The former plans are designed for liftime service to a company - the latter are designed for a mobile and flexible labor market. Workers who have pensions have a strong incentive to invest heavily in firm- and industry- specific knowlege and skills. These plans encourage worker loyalty, but also create the types of interest groups that would oppose changes to the economy that would render their industry skills less valueable.

I don't mean to say this in a way that "blames" workers because I feel for what their dilemma. They essentially entered into an implicit contract with their firm, industry, and town to keep their job viable while they work towards a pension that they've been promised. It may be stretch, but we've lived to see a decline in the political clout of unions as union membership has declined. As workers become more self-reliant for retirement, maybe there will be less lobbying to put up stumbling blocks to trade.

Consumption Smoothing and "Irrational" Savings

I'm just going to post a link to this, dedicate it to a certain special someone I know (who happens to feel strongly and differently about personal finance) and say nothing more than, "I'm not the only one out there who thinks this way."

Do What you Want to do and Excel at it

There's an old (bad) joke bout statistics (especially averages): They're like bikinis - what they reveal is interesting, but what they conceal is essential.

Statistics reveal that Engineering majors earn more (on average) than Economics majors, who earn more than Business, and Philosophy majors, respectively. But what these statistics conceal is that the choice of major is not random - not everyone has a knack or interest for engineering. In fact the sorting is pretty one-dimensional. As my undergraduate Money and Banking prof used to say, "theres people who can do calculus and people who can't."

That's not the news. What is, as Free Exchange points out, new research shows that individual differences in ability within each major explains most if not all of the difference. After all, an exceptional student in philosophy can go on to a great career as a lawyer.

Here's the bad news for the artsy-fartsies: the research underlying on which the post is based long-run lifetime earnings. So, if you're a philosophy major, be patient. You'll be surpassing your business major classmates around the time your kids are following in your footsteps as philosohpy majors.

Prohibition, the War on Drugs, Zero-Tolerance Laws, and Abstinence

The world is full of perverse unintended consequences in response to government attempts to eradicate markets, even when there is a well-intended reason for attempting to do so (usually to "save the children"). Fewer children drinking, using, driving under the influence or being sexually promiscuous is clearly a good thing. Does that mean that we should advocate for a monolithic policy of prohibition or should we take a more nuanced approach?

We certainly learned this lesson the hard way during prohibition. The prohibition of alcohol led to more crime, and while some individuals may have done without, significantly more folks simply used and produced alcohol more recklessly than they ever would have before prohibition.

There is also considerable dissent against the stupid war we are waging against drugs. This policy has driven the price of narcotics through the roof, created a monopolistic cartel market structure that has introduced an incentive to engage in violence to capture profits and other rents, and created entrenched bureaucracies in government that distort information and lobby for higher budgetary allocations and/or rights to retain money and property seized in raids. (A nice paper on this is Benson, Ramussen, and Sollars, “Police Bureaucrats, Their Incentives, and the War on Drugs,” Public Choice 83 n. 1, 21-45, 1995.)

Zero-Tolernce and lowering absolute thresholds in DUI laws also doesn't work. Under 0.10% BAC laws you've got a window of about 3 drinks before you're over. Basically, it has a divergent effect on use: a few more drinkers will abstain knowing that if they drive at about two drinks they're over the limit, but it raises the BAC levels of other social drinkers who drive after a party because being over the limit at 3 drinks is not much different from being over the limit t 5 drinks once you're caught. My friend Darren Grant has a neat forthcoming paper in Economic Inquiry on this.

If that weren't enough, check out this article from the Economist. Basically, Britain is trying to get kids to drink less by forbidding it, and forcing pubs to show more diligence in enforcing the 18 or older law on drinking. As a result, more teens are abstaining, but their volume of use is on the rise! As it turns out, for kids who were sidling up to the bar at 17, 16, 15 years of age, the old drunks and bartenders actually did a pretty good job of keeping an eye out and keeping them from obliterating themselves. Neat!

Growth, Emerging Economies, and the Leverage in the WTO

From the PBS NewsHour (click the picture to link to video).

Having your Cake and Eating it Too

I'll just post the link. Make your own judgements – I'd like to simply think about it in terms of opportunity costs.

Lou Dobbs, Hoax Victim

He's actually sunk to reporting urban legend as if it is fact. Thanks, Lou, needed more fodder! Check out these mythbuster articles by actual journalists: Seattle Times; Interntional Herald Tribune; The Economist. Wheeeeeeeee! (See Below):

"NO BOUNDARIES" to Sweet Lou's Gullibilitiy

Making the Grade

As it turns out, getting good grades in college is not a tricky empirical question. There is a simple formula:

1. Be smart;
   
2. Work hard.
   

Studies by James Michaels and Terance Miethe (1989, Social Forces) and William Rau and Ann Durand (2000, Sociology of Education) show a convincing relationship between time spent studying and working on classwork and grades. They also show that things like class rank/high school GPA/SAT scores/other preexisting characteristics have a strong effect.

One thing I found interesting is this: verbal SAT scores (satv) may have a stronger impact than math SAT (satm). Check it out (data analyzed using STATA):

Variable Mean Std. Dev. Min Max
gpas 2.797741 .368208 1.787 3.555
satm 584.1852 42.62034 484 730
satv 573.4815 38.59501 507 668
satc 1157.685 67.05358 1008 1330
------------------------------------------------------------------------------
. reg gpas class satm ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 12.71
-------------+------------------------------ Adj R-squared = 0.3986
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.125275 .0250027 -5.01 0.000 -.5486035
satm .001759 .0010401 1.69 0.097 .1894219
ecbu -.1364445 .0820951 -1.66 0.103 -.1812849
_cons 253.4883 50.38878 5.03 0.000
------------------------------------------------------------------------------

. reg gpas class satv ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 16.97
-------------+------------------------------ Adj R-squared = 0.4749
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.1028173 .0248065 -4.14 0.000 -.4502567
satv .0033683 .0010379 3.25 0.002 .3962096
ecbu -.0308692 .085759 -0.36 0.720 -.041014
_cons 207.4469 50.09281 4.14 0.000
------------------------------------------------------------------------------
. reg gpas class satm satv ecbu [aw=n], beta
-------------+------------------------------ F( 4, 49) = 12.98
-------------+------------------------------ Adj R-squared = 0.4748
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.0999089 .0249782 -4.00 0.000 -.4375205
satm .0010047 .0010068 1.00 0.323 .1081956
satv .0030886 .0010751 2.87 0.006 .3632994
ecbu -.0250653 .0859596 -0.29 0.772 -.0333027
_cons 201.1831 50.48664 3.98 0.000

Based on this, a one-standard-deviation increase in verbal SAT (about 38.6 points) increased these students' semester GPAs by about 0.13 points; math SAT was insignificant. Your choice of major does not seem to have a substantial impact, except perhaps on your salary when you're finished.

Finite Simple Group (of Order Two)

For no particular reason, something I got about a couple years ago that needs some new life.

Farm Programs and the Poor in LDCs

Last week there was a good article on farm programs and their focus as part of the Doha Round. I think it's an interesting question – The farm programs are bad, but mainly from the standpoint (in LDCs) that they are second-best solutions to their hunger problems. Export controls, etc. do lower the domestic price and may lead to more affordable staples for the world's poorest, BUT they are by far the second-best way to go about helping those who are hungry and in poverty. In addition to the usual reduction in output and economic distortions, these programs sometimes lead to producers in these countries hoarding of crops to try to hold out against the government and pressure for assistance, as has been the case in Thailand. Therefore the trade negotiations tread a fine line: Removing the trade restrictions is good on average, but doing so without replacing the trade controls with more sensible and direct ways of helping the hungry and poor could hijack what small measure of political support for trade liberalization we may have built over the last 20 years.

Beeronomics and the Terms of Trade

When Mark Thoma was in high school the price of a sixer was $1.25 and the price of gas was $0.25/Gal, so the relative price of beer to gas was 5. Now, the price beer of gas is $4/gal and the beer Prof. Thoma drinks these days is $5.50. I susupect what he drank in high school (Old Style, PBR) is more like 3.60 these days, so I'm going with that here, so now the relative price of beer to gas is about 0.90.

So what am I talking about? Are we better off, worse, or about the same as back then? Indubitably, most of us are better off. Real income has risen, and even more goods can be purchased in the typical household bundle now than was possible in 1971 (partly because many goods didn't exist then). Many households in the US today are 2, 3, or more car/TV/computer households, we eat more more and better foods than we did, proportionally fewer folks worldwide are poor, poverty is less severe, there's less war and other conflict, lower crime rates... you get the idea.

So... on average we have more income to spend on more and better things and we still bitch and moan about a few bucks a week on gas. So now, prices are going up, wages are stagnating, and things are starting to hurt more, but some people are better off, namely those of us who drink beer but almost never drive as a bike-rider, and occaisional beer drinker with a steady job, I'm pretty ok with the changes (my terms of trade have improved as a consumer), considering that the prices of some other things are not also rising rapidly. THE MARKET IS GIVING A CLEAR SIGNAL HERE (for those of you out there who are bitching and moaning but still claim to be pro-market) -- DRINK MORE AND DRIVE LESS (especially after drinking)!

The bigger danger is that fewer farmers are planting hops in favor of corn and other grains - this must be stopped to keep the price of beer down; I think we should get the government to intervene.

Blogging

This link's for you, Atin (and anyone else who wants). It follows along with the ego-hypothesis of blogging (with correlary 1: economists are egotistical pricks).

Ethanol, Food Prices, and More Bullshit

Virginians love to BM&G about how the corn conspiracy and ethanol subsidies are driving up the price of a steak and driving down demand for other locally-produced commodities from beef to coal. I say let 'em - they're just flat wrong.

There's a new study out on the increased food prices we're seeing, as summarized by the NYTIMES (the official summary of the OECD/UN report can be accessed here). The overall impact of ethanol on food price increases seen recently is about 2-3%. So, that loaf of pound of hamburger that went up by about a quarter at the grocery store had about a penny to do with ethanol. Anyway, as it turns out the reason food prices are rising is not this complicated, general-equilibrium of energy, housing and ethanol, but one of simple supply and demand (mostly just demand) in the food market alone. Basically, the reason food prices are rising is because people around the world are busting out of poverty and can now afford higher quantities and quality of food (which, by the way, is a GOOD thing). See, most of the corn in the US goes to cattle feed. Therefore as people get richer and consume more protein, badda-bing! Higher corn prices, which leads to higher plantings of corn relative to non-feed grains (soybeans, wheat, etc.) and those prices rise accordingly.

If you're looking to goat the government for grain prices in the US, look first at sugar policy. Sugar policy affects corn prices much more than ethanol for one simple reason: After feed grain, the highest end-use of corn is high-fructose syrup. Understanding this requires a pretty high-tech econometric techinique: Drink a Coke (you COULD drink a Pepsi and reach the same empirical conclusion, but I wouldn't recommend it), then look at the label. Then, go to Europe, and repeat. The second ingredient on the US can (after H2O) is high fructose CORN syrup; on the European can it is SUGAR. Ever wonder about this? Everywhere else it's cheaper and to put sugar in as the main sweetner in most things, but here it's not because the in the 1930s the us put a quota on sugar imported to the US, mostly to keep CUBA friendly (see how well that worked???).

Now the Sugar quota has a second, indirect effect on prices. You see, sugar isn't just a better way to sweeten drinks, IT'S ALSO MORE EFFECTIVE FOR MAKING ETHANOL! To make ethanol you need to start with SUGAR! In the US, guess what the main ingredient used to make the sugar for ethanol is! CORN (NOT actual SUGAR)! Ever wonder why Brazil is making and using ethanol more efficiently and with fewer subsidies? BECAUSE THEY MAKE IT SMARTER THAN WE DO!

Recycling is Still Garbage...For Now

I've always kinda liked this old article, entitled "Recycling is Garbage" from the NYTIMES on recycling. There's plenty to dispute in such cocktail-napkin calculations of such important stuff, but it hits it head-on (apply directly to the forehead): Recycling is no free lunch. In fact taking into account land prices, alternative uses of resources, and energy burned in recycling, it is usually more costly (even in environmental terms) to recycle than it is to pitch things like glass and plastic. Paper and aluminum usually do better in terms of cost-effectivness and energy use. In fact, given the higher energy use and carbon footprint of recycling we might be shooting ourselves in the proverbial foot.
But, in a long-run sense, maybe doing all that recycling earlier is beginning to pay off. Technologies for actually doing the job are improving and the NYTIMES now touts: "In Economic Terms, Recycling Almost Pays" (keyword: almost). Anyway, it teaches us to: 1. be sceptical of the "free lunch", and; 2. think dynamically and long-run, not short run. (Similar arguments can be made for ethanol, by the way: Initially we were burning more energy to make ethanol than we were getting out of it, now we've tipped that, and it's beginning to pay for itself. However, in the case of ethanol, who are we really kidding to think that it is a best long-run solution?)

Wire Hangers and Rubber Rooms

Sooo, I always like to cite a couple of back-of-the envelope calculations (as well as harder-core ones) about the gains from trade. 6-8 years ago there was something floating around about the gains from trade that put it at about $50-60,000 per job saved. So we could have levied a small non-discriminatory consumption tax on all goods sold (regardless of country of origin), redistributed every cent to those "hard working ... American" (wink-wink) that would have been laid off by the "great sucking sound" and we'd all have a little more than we did with the trade restrictions.

Another story has to do with rubber rooms. Because of labor obligations, most US-located assembly plants for US-label cars "employ" a certain number of workers in rubber rooms, where they essentially drink coffee and... (???).

But check this one out. In the US wire-hanger industry about 250, er, Americans are currently employed, facing competition (mostly from China) and are protected by a tariff. The Economists blogging staff estimates that the cost of the tariff to US dry-cleaning firms is about $212,000 per job saved.

The Energy (Sub)Burble

Check this out from Krugmania... Keep in mind this is about Sydney, not Dallas, but it tells us a lot about the problems of urban planning in the US. Then there's this article about Los Angeles... Sooo, it got me thinking about an energy-economics article from a few years ago in the Quarterly Review of Economics & Finance (I have it in my office but I'm on the road now) that basically said that we are almost completely unresponsive in our long-term capital investments to the current price of fuel, but more responsive to the real historic high price. We only hit historic highs for gasoline a few months ago, so sometime in the next 10-15 years we might be beginning to reorganize our lives to manage the prices we're seeing now (and that's the good news...).

Cool It!

Just when I thought I was saving the earth by taking most of my news from online sources instead of getting print subscriptions to most things, I had to see this article. I hate it when being well-informed about things makes you think carefully and comprehensively about them. There has to be some quick easy free-lunch out there like a gas holiday that will make all of our problems go away...

Canary in the Coal Mine

It's always good to be on our toes and be in this economic struggle of scarcity, but let's not lose our heads. I've been saying it for a while. In Malthus' time of writing his Essay on the Principle of Population, it was that we would run out of the ability to feed our growing population. Then, it was that we would run out of coal in the late 1800s and that we would run out of oil in the 1970s. Now, we worry about Oil and Food, and this week the Economist Magazine urges us to study history more carefully and not go nuts. There is no imminent danger of running out of oil; there is no imminent danger of running out of fuels to run our economies; there is no imminent danger of running out of food. There is a greater risk from climate change than from either of these problems, and we can probably even come up with clever ways of managing through that with some innovations in technology.

Life is good.

No Monopoly on Stupid

Once upon a time there was a debate between certain Republicans and Democrats about a handful of barrels of oil. One side puffed its populist chest out and claimed how much it would help the honest workin' man by lowering the price at the pump. The other side took a careful look at the proposal and keenly pointed out that it would make almost no impact on the world price of oil. Both side seemed to have ulterior political motives at heart. Heard this story before? It took place in 2000 and the debate was over the opening of ANWR in Alaska to drilling for oil. George W. Bush on the one side claimed that releasing the reserve to drilling would push the price of oil down and help good ole workin folks; Al Gore on the other side claimed that it would have little or no effect on oil. Bush was receiving money and political support from the oil lobby who stood to gain from the deregulation of drilling and the subsidized pipeline; Gore was receiving money and political support from environmental lobbies who opposed all forms of environmental damage.

Now the roles are reversed as the debate rages over the strategic oil reserves. Bush is out there claiming that the price would go unaffected; democrats are making wild claims about how much halting the stockpiling of oil will save blue-collar Americans. The release of the oil (or the stopping of its stockpiling) would be mildly detrimental to the oil lobby by slightly reducing the demand for their output; passing the moratorium would give the appearance that the democrats have done "something."

Bottom line: Like I've always said, "no political party has a monopoly on stupid economic ideas." Its corollary is probably that when they stumble on a good one it's either unintentional or for the wrong reasons. When will folks realize that if oil is as scarce as some claim then higher prices are the appropriate outcome?

The Great Contrivance

I thought this article from a few months ago was interesting, and frustrating. People will lobby for anything – even the price of gold. I just don't get it. We don't back our internationally-exchanged currencies with gold because we've seen how it can, at times, put internal equilibrium on a flimsy house of cards, yet we hold gold in our vaults. Still more confusingly, we let the world gold council lobby the IMF, World Bank, and even individual governments to further their own interests and prevent the further sale of sovereign gold reserves (something that would depreciate the market price of gold) - successfully. Some of the things the World Bank and IMF did to try to bring transparency, credibility and market reforms to the countries the lent to was very helpful, but I can't imagine why anyone should give a rat's patoot about gold in a post-Bretton-Woods world.

Cases like this is what lead the "antiglobalizers" to feel as if there's a vast conspiracy against the developing world. When the ideology of the IMF and World Bank changed in the 1980s, it seems like all we really did was trade one form of corruption (one that was known) for another (that was shrouded in "credibility" and "austerity"). The strange habits of these institutions in these areas discredits unambiguously win-win reforms like trade liberalization and distorts public opinion against globalization.

Bill O'Reilly goes nuts on Inside Edition

Normally I try to post things that are more constructive than this, but I needed something fun today. Bill-O going nuts is too much to pass up.

Happy Cows and Bullshit

Seen the Happy Cow Commercials? Happy cows may create better cheese, but the ads seem to imply (no, state) that happy cows come from California, mainly because it's so much warmer on average than it is in Wisconsin (doncha-no?). Don't be fooled!

Numerous studies show that cows are happy at much lower temperatures than humans are. Ideal temperatures for cows in terms of comfort and milk output range in the 50's (the range strictly for milk output is 41-77 according to some studies like this one). Cows are much more burdened by hotter temperatures in terms of comfort because they expend a lot more energy digesting their food than humans (or even cats or dogs), which creates a lot of heat. Cows in temperatures above 80 degrees Fahrenheit produced around 25-30% less milk than cows in much cooler temperatures. On the low end of the scale it seems that the main concern for conditions that really hurts the cows and their productivity are: (1) wind, and; (2) teat frostbite (usually isn't a problem until temperatures drop below single-digits).

Better yet, this is a great example of comparative advantage. Even if cows in Collie-fornya are more productive in the absolute sense, it seems that Wisconsin or Vermont or Ohio would be better-suited for dairies anyway, on the basis of the basic Ricardian model of trade. If California and Wisconsin can both produce either wine or cheese, and California's land and labor resources are better-suited for both, that wouldn't mean that California would ideally end up producing both, or that Wisconsin would produce neither. Even if we concede the point that Cows like warmer climes (which is not clear cut at all), then we would still be better off if California did not try to promote and export its cheese, because there are higher returns for them in the wine sector. In other words, grapes are pickier about cold weather than cows are. And there you have a big bright example of comparative advantage at work.

Have a good summer, kids.

Scooped?

Sometimes it's frustrating for economists. We revel in the fact that we can pin down theoretical proposals in an airtight mathematical argument, and test them with some of the most sophisticated statistical techiniques. Even as we toil in the fuzzy world of "social" science, we push for and challenge the other social sciences to be "harder" in their scientific approaches, and we're just arrogant enough to think that we're better at what "they" (political scientists, sociologists, etc.) do than "they" themselves are. It's not surprising then that "we" get so jealous when one of "them" gets all the attention for saying what we've been saying – studying, measuring and quantifying – for quite some time.

That's why I'm jealous of Fareed Zakaria this week. His feature article this week has the indifference one would normally expect from an economist on the issue of "The Rise of the Rest." The nuts and bolts of it is that when you pose the question of rising China and India, offshoring, growth in Africa, and declines in certain manufacturing sectors of the U.S., the typical economist like myself says "So what?" I would then usually go into some boring, but well-vetted explanation of comparative advantage, non-zero-sum games, obscure empirical facts, and nearly put my audience to sleep.

Then here comes this… journalist, who has his fancy "words" (much like I have my fancy "models") and he gets the limelight. It's disgusting really. We do all the hard work, howl at the moon to anyone who might listen, and in swoops this very bright wise guy and publishes it all in a sexy multi-page spread in Newsweek. But, that's the way it goes. Bottom line: the rest of the world's rise is not our loss. In fact if the rest of the world has greater prosperity and economic freedoms, then the influence of extremist factions will probably wane, which is a win-win. But don't take my word for it – go to the library and read Mr. Zakaria's version – his way sounds better (jerk).

No Trust in the Invisible Hand

People out there seem to have the misconception that Adam Smith had a lot of faith and confidence in the self-interested actions of individuals in the free market. A more realistic way of summarizing the Wealth of Nations, as PJ O'Rourke might put it, is that Smith had even less faith in politicians and bureaucrats. In fact, from Smith's Moral Sentiments it's pretty clear that he trusted a businessman about as far as he could throw one and didn't think that businessmen should be allowed to do so much as have a cup of tea together.

So how do we manage collusion and cartels? The European model usually involved an adversarial process – the government investigates and anyone and everyone touching the misdeed is prosecuted with the full force of the law. The new model, coming from the US and what it has learned from Enron and other scandals involves protecting and helping whistle-blowers. What this may do, more than anything, is help the investigators know what exactly it is that they should be looking for when they go in, which is the lesson now being learned by British regulators.

Getting the incentives right is important, which means that on the one hand regulators need to help and give protection to the informers, but also that the pendulum not be allowed to swing too far the other way. In other markets where Consumer Protection has become involved the incentives have been skewed to the point where frivolous accusations cloud the investigative process and discredit the government's involvement in the monitoring process. Such has been the case in Consumer Protection areas from medical malpractice to spilled coffee.

Dumb and Dumber

Usually, the empirical impact of a policy proposal on relative prices or incentives has at least some bearing on its efficacy. In the case of the Gas Tax Holiday proposed by Hillary Clinton, it doesn't. Simply put, this proposal is a lose-lose. Let me explain.

If you remove the tax on gasoline for the summer, the policy will either reduce the pump-price of gasoline, or it won't. If it does, then by all accounts it will benefit average users by $70, using the most generous estimates of the Clinton campaign (which she even admits to some extent defies the estimates of the "quote-unquote experts" – and that would be spread out over all three months of the holiday). But wouldn't this contradict the other goals of Ms. Clinton's platform? Wouldn't it (among other things) make us more dependent on foreign oil, make the terrorists richer, encourage people to continue driving at their current levels, increase emissions, and create a strain on the federal budget in a time of unprecedented deficits?

But, OK. Demand for oil is pretty inelastic. Maybe it won't affect the price at all. But wait, since the price would then be unaffected, wouldn't that raise share of the end-user price that the private suppliers get, increase the record profits of gas companies, increase the revenues of oil-rich regimes that support terror, have no impact on households, and still create a strain on the federal budget in a time of unprecedented deficits?

In the end, we all lose. Another reason not to vote for a desperate lying woman who thinks she is entitled to the nomination because she stuck by her philandering husband and doesn't even have an economist heading her economic policy team of advisers.

Happy holidays.

The Gains from Trade and Migration

I've always told my class that the gains from trade are large, about ten years ago (dating myself here) people were estimating the welfare costs of trade restrictions in the United States to be about $55,000 per job saved, assuming that the short run job losses literally vanish … forever… It puts a little perspective on the trade gains and welfare losses from restricting trade.

I've always believed the gains from migration to be smaller, but still positive. For example, some studies estimate the per capita gains for native US citizens to be about 0.25%, and a fair argument could be made that migration to the US is much more disruptive to the distribution of income than trade is. What's left out of this calculus is the huuuuuuge benefit per capita to the world on the whole, and to developing countries in particular.

Last week's Economist discusses this issue, citing an article by Kym Anderson and L. Alan Winters. What surprised me was that they estimate the global gains from migration to be much larger than the global gains from trade. The authors cite models that have predicted the gains from trade to be around $300billion per year worldwide. Similar techniques estimate the gains from just 3% of the worlds workforce migrating across borders to be about $675billion per year by 2025. These numbers are mind-boggling, especially if you consider the fact that just 3% of the world population currently resides in a country other than the one in which they were born – with existing controls and restrictions on immigration. So, taking the combined gains from trade and migration, we're basically looking at welfare gains of about a trillion, or about $150 per person per year – a sum that's far from trivial for the 60% of the world's population living on less than $2 a day.

Not only that, but the article mentions that the gains from trade of $300billion may be understating things. Computational models estimate the global cost of trade restrictions to be as high as $2.5 trillion.

Getting Tanked on French Air

Boeing's steamed this week (and for that matter, since early March) over recent developments in the Air Force's contracts for new midair refueling tankers. Basically, their beef is that that the Air Force awarded a 35 billion dollar procurement contract for new tankers to replace the KC-135 (which, as it turns out my father piloted). The subtleties of their complaint accuse Airbus/Northrop (parented by EADS) of insider trading and that there were illegal actions in the procurement of the contract. There couldn't be a thicker slice of baloney in the books.

Procurement contracts for government spending are one of the most common non-tariff barriers employed by the United States and countries in Europe (ever see a state trooper driving a Honda instead of a Crown Vic?). So if they can pitch a fit and claim wrongdoing in some way, they will. I'm a little surprised, however, that they tried to be creative by alleging illegal trading practice instead of invoking the usual "American Jobs" argument (perhaps because Airbus is going to be doing most of the assembly that normally occurs in France at plants in Alabama, USA). This shows some real ingenuity in the lobbying process! What's funny is that if anyone has insider status for such contracts, it's the Boeings and Lockheeds, not the Airbuses and Embratels of the industry.

Export Taxes and Hunger

Last week I lectured on trade policy to my undergrads. I mentioned that the United States Constitution prohibits Export Taxes, and I got a predictable response. "Why would a government want to tax exports?" one clever student asked. I used it (as was my intention) to explain the concept of Lerner Symmetry, which basically illustrates that in terms of relative prices, output and welfare, an export duty is equivalent to an import tariff in the way it affects (damages) an economy. The basic idea is that both of these instruments limit trade and so it doesn't matter which end you limit it from: coming or going. A tariff de facto restricts exports as well as imports. I then gave a couple of examples of how countries use export taxes to advantages in a similar way to tariffs: for example, when the US threatened tariffs if Canada didn't limit soft lumber exports, the Canadians brilliantly achieved the limitation with a tax on exports. The net result was the same as if the US had imposed the tariff, except the Canadian government got the tax revenue instead of Uncle Sam.

The more real answer is that once a politician gets something in his (her) head that something is a good idea for accomplishing some political end, there's virtually no stopping him. No matter how noble the cause, politics can be pretty nasty about finding a way to blunder it, but it's not always their own fault. Developing countries have been applying duties for some time now on food exports, with the goal of retaining greater quantities of food for a hungry domestic population. The issue was discussed in this week's Economist. But the question is: "Does this do the job?" In short, yes, if Lerner symmetry holds theoretically. The whole point behind these policies, and behind the principle of Lerner Symmetry is that the change will not impact the world price much. In effect, in order for producers to continue exporting with the duty, the world price must be able to cover the domestic costs (domestic market price) plus the tax (otherwise, continue supplying the domestic market to avoid the tax). So, whereas taxes on imports increase the domestic price of imports, taxes on exports decrease the domestic price of the exported good. It is exactly this that policymakers rely upon when they impose such a "recipe for trouble" on the economy. Sure the adverse effects outweigh the good they do, but the duties do make food cheaper. And, conveniently for a eggheaded economist like me, they illustrate and rely upon a theorem that seems counterintuitive at first blush.

Basically, the policies boil down to a second-best solution: they do the job, but of all the options that could do it, trade taxes are among the worst. Better would be to subsidize consumption directly, perhaps by taxing non-food goods and transferring the revenues to poorer households in the form of in-kind transfers. The reason the duties are laid on, the Economist correctly points out, is political expedience, but I think that this keen observation oversimplifies the issue. Many countries have extreme difficulties collecting taxes other than those from trade, and many solutions that would be best solved by direct subsidies are often more than inexpedient; they're infeasible. In nerdy terms, there's an important political constraint that the writers at the Economist isn't taking into account. Then again who am I but a bookish economist who only knows abstract inapplicable theories?

Free Trade and the Liberal Bourgeoisies

I blogged last week about two groups cited as opposing free trade. The first were the working class of developed countries – this group is correctly concerned about their own jobs, incomes, families, and livelihoods. Although trade is good overall, it hurts some groups because the gains are uneven, and this group is the most likely to suffer in the short run.

The second group consisted of "liberal hippies" who are sort of caricatured as English professors (no offense intended to the English professors in my own college) and their idealistic young students. Their ideas are romantic, and their ends are admirable and include: reducing global poverty, saving the environment, ending armed conflict in the globe, child labor, gender and racial discrimination (er, reducing them, that is), and so on. Their means for accomplishing them on the other hand are somewhere between self-conflicting and patently stupid because they almost always include imposing trade restrictions on countries who appear to be behaving in an unsatisfactory way or tying these issues to trade negotiations. Oh, what a tangled web they weave…

Let me start though with the empirical evidence on such issues:

Poverty: With a few exceptions, trade has been found to alleviate poverty in most countries that are "open." Viet Nam is a good example, where textile industries boomed as a result of trade, which was paired with the adoption of better technologies in the rice sector and a win-win or poor families. Here's another story from NPR on China, and a complementary piece, also from NPR. It's an interesting tale of factories in China shutting down, which seems sad at first, but digging deeper, much of the jobs lost are due to the fact that labor markets are becoming more competitive, workers are seeking jobs with other firms, and wages and labor standards are increasing.

Environment: The effect of trade on the environment is tough to pin down. The only thing that can really be said is that assuming trade leads to greater productivity, higher incomes and a "growth spurt" in developing countries, then it will also lead to increased demand for energy resources, and put greater strain on the environment. There are two problems with this proposition. First, even if it is valid, liberal hippies have to concede the point on poverty to make it true. If trade leads to growth and increases household consumption of carbon-emitting fuels, then it is probably because they are less poor. To restrict trade would be to deny poor families the opportunities that greater wealth brings and we would be inflicting poverty on 60% of the world's population in an attempt to put a band-aid on environmental harm. Second, the proposition above assumes that with growth these economies will stupidly continue to use the same harmful technologies and not adopt cleaner ones. Even China has recognized that they need to resolve this issue, with an increasing number of "zero energy/zero emissions" skyscrapers being built and carbon capture technology being better investigated.

Child Labor, Social Issues, etc.: Globalization brings these issues more to our attention than anything else. These things have always been problems, but they have been greater problems in closed countries, and in poorer countries. Even the United States and Britain, when they were first industrializing, struggled with problems of child labor and various forms of wage and employment discrimination. These problems tend to be more effectively alleviated by extending economic freedom, which is what openness to trade does, not denying it, which is what restrictions do.

A good book on the "human face" of globalization is In Defense of Globalization by Jagdish Bhagwati. It should be required reading for anyone considering opening their pieholes on the topic of trade and globalization.

It's actually going to be a fun week – I see two good articles on trade and globalization in this week's Economist, so you'll get to hear my thoughts on them.

Bang

Following the Market

Prices serve their purpose! If you want people to conserve gas, let the price go up. (Further, some research suggests to let it push past historical highs if you really want changes in fixed investments like automobiles and furnaces, etc. to make the conservation behavior more permanent.)

Check this out from the New York Times. America's Biggest news publication, USA Today, has stopped following the campaign busses on the campaign trail. Which is what economists have been saying all along – if oil is truly scarce (or costly to the environment) then the price should be allowed to climb to let the market ration it to valuable users. In this case we get a double-benefit: less gas consumed and fewer voices chattering about the election! Yipee!

Bang