Monday, March 24, 2008

Obama Gets It

Previously, I presented the argument that improving national security and defeating terrorism requires reducing the demand for terrorism and the supply of terrorists. This detailed look at Obama's foreign policy suggests that he understands this fundamental point:

This ability to see the world from different perspectives informs what the Obama team hopes will replace the Iraq War mind-set: something they call dignity promotion. "I don't think anyone in the foreign-policy community has as much an appreciation of the value of dignity as Obama does," says Samantha Power, a former key aide and author of the groundbreaking study of U.S. foreign policy and genocide, A Problem From Hell. "Dignity is a way to unite a lot of different strands [of foreign-policy thinking]," she says. "If you start with that, it explains why it's not enough to spend $3 billion on refugee camps in Darfur, because the way those people are living is not the way they want to live. It's not a human way to live. It's graceless -- an affront to your sense of dignity."

During Bush's second term, a strange disconnect has arisen in liberal foreign-policy circles in response to the president's so-called "freedom agenda." Some liberals, like Matthew Yglesias in his book Heads In The Sand, note the insincerity of the administration's stated goal of exporting democracy. Bush, they observe, only targets for democratization countries that challenge American hegemony. Other liberal foreign-policy types, such as Thomas Carothers and Marina Ottaway of the Carnegie Endowment for International Peace, insist the administration is sincere but too focused on elections without supporting the civil-society institutions that sustain democracy. Still others, like Kenneth Roth of Human Rights Watch, contend that a focus on democracy in the developing world without privileging the protection of civil and political rights is a recipe for a dangerous illiberalism.

What's typically neglected in these arguments is the simple insight that democracy does not fill stomachs, alleviate malaria, or protect neighborhoods from marauding bands of militiamen. Democracy, in other words, is valuable to people insofar as it allows them first to meet their basic needs. It is much harder to provide that sense of dignity than to hold an election in Baghdad or Gaza and declare oneself shocked when illiberal forces triumph. "Look at why the baddies win these elections," Power says. "It's because [populations are] living in climates of fear." U.S. policy, she continues, should be "about meeting people where they're at. Their fears of going hungry, or of the thug on the street. That's the swamp that needs draining. If we're to compete with extremism, we have to be able to provide these things that we're not [providing]."

This is why, Obama's advisers argue, national security depends in large part on dignity promotion. Without it, the U.S. will never be able to destroy al-Qaeda. Extremists will forever be able to demagogue conditions of misery, making continued U.S. involvement in asymmetric warfare an increasingly counterproductive exercise -- because killing one terrorist creates five more in his place. "It's about attacking pools of potential terrorism around the globe," Gration says. "Look at Africa, with 900 million people, half of whom are under 18. I'm concerned that unless you start creating jobs and livelihoods we will have real big problems on our hands in ten to fifteen years."

Obama sees this as more than a global charity program; it is the anvil against which he can bring down the hammer on al-Qaeda. "He took many of the [counterinsurgency] principles -- the paradoxes, like how sometimes you're less secure the more force is used -- and looked at it from a more strategic perspective," Sewall says. "His policies deal with root causes but do not misconstrue root causes as a simple fix. He recognizes that you need to pursue a parallel anti-terrorism [course] in its traditional form along with this transformed approach to foreign policy." Not for nothing has Obama received private advice or public support from experts like former Clinton and Bush counterterrorism advisers Richard Clarke and Rand Beers, and John Brennan, the first chief of the National Counterterrorism Center.

The Obama foreign-affairs brain trust balks at the suggestion that what it's proposing is radical. "He said we'd take out al-Qaeda's senior leadership in the Pakistani tribal areas if Pakistan will not. That's not, to me, a revolutionary policy," Rhodes says. "Watching him get attacked on the right is absurd. You've got guys who argued for a massive invasion and occupation of a country that had nothing to do with 9-11 criticizing him for advocating the use of highly targeted force to kill Osama bin Laden!"

Rhodes is referring, of course, to John McCain, the presumptive Republican presidential nominee, who recently asked of Obama, "Will we risk the confused leadership of an inexperienced candidate who once suggested invading our ally, Pakistan?"

Sunday, March 23, 2008

More discussion of financial markets

Mark Thoma has assembled a nice set of links discussing the break down of the markets and what might be necessary to rectify the problems.

Saturday, March 22, 2008

Money buys happiness when ...

... you give it away:

Spending as little as $5 a day on someone else could significantly boost happiness, the team at the University of British Columbia and Harvard Business School found.

Their experiments on more than 630 Americans showed they were measurably happier when they spent money on others -- even if they thought spending the money on themselves would make them happier.

Friday, March 21, 2008

What's likely to kill you?

Here's a (useful?) table of the odds that something will kill you.

Thursday, March 20, 2008

A different explanation

Here's an alternative explanation for the current financial mess that I discussed in class yesterday:

Credit Crisis for Kindergarteners, by Steve Waldman: David Leonhardt notes that it's pretty hard to explain what's going on in the financial world these days... Here's how I'd tell the tale to a child:

Alice, Bob, and Sue have ten marbles between them. Whenever one kid wants another kid to take over a chore, she promises a marble in exchange. Alice doesn't like setting the table, so she promises Bob a marble if he will do it for her. Bob hates mowing the lawn, but Sue will do it for a marble. Sue doesn't like broccoli, but if she ... promises a marble...

One day, the kids get together to brag about all the marbles they soon will have. It turns out that, between them, they are promised 40 marbles! Now that is pretty exciting. They've each promised to give away some marbles too, but they don't think about that, they can keep their promises later, after they've had time to play with what's coming. For now, each is eager to hold all the marbles they've been promised in their own hands, and to show off their collections to friends.

But then Alice, who is smart and foolish all at the same time, points out a curious fact. There are only 10 marbles! Sue says, "That cannot be. I have earned 20 marbles, and I have only promised to give away three! There must be 17 just for me."

But there are still only 10 marbles.

Suddenly, when Bob doesn't want to mow the lawn, no one will do it for him, even if he promises two marbles for the job. No one will eat Sue's broccoli for her, even though everyone knows she is promised the most marbles of anyone, because no one believes she will ever see those 17 marbles she is always going on about. In fact, dinnertime is mayhem... Mom is cross. Dad is cross. Everyone is cross. "But you promised," is heard over and over among the children, amidst lots of stomping and fighting. Until recently, theirs was such a happy home, but now ... no one trusts anyone at all. It's all a bit mysterious to Dad, who points out that nothing has changed, really, so why on Earth is everything falling apart?

Perhaps Mom and Dad will decide that the best thing to do is just buy some more marbles, so that all the children can make good on their promises. But that would mean giving Alice 19 marbles, because she was laziest and made the most promises she couldn't keep, and that hardly seems like a good lesson. Plus, marbles are expensive, and everyone in the family would have to skip lunch for a week to settle Alice's debt. Perhaps the children could get together and decide that an unmet promise should be worth only a quarter of a marble, so that everyone is able to keep their promises after all. But then Sue, the hardest working, would feel really ripped off, as she ends up with a much more modest collection of marbles than she had expected. Perhaps Bob, the strongest, will simply take all the marbles from Alice and Sue, and make it clear than none will be given in return, and that will be that. Or, perhaps Alice and Bob could do Sue's chores for a while in addition to their own, extinguishing one promise per chore. But that's an awful lot of work, what if they just don't want to, who's gonna force them? What if they'd have to be in servitude to Sue for years?

Almost whatever happens, the trading of chores, so crucial to the family's tidy lawns and pleasant dinners, will be curtailed for some time. Perhaps some trading will occur via exchange of actual marbles, but this will not be common, as even kids see the folly of giving rare glass to people known to welch on their promises. It makes more sense to horde.

A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It's less a matter of SIVs than ABCs.

Wednesday, March 19, 2008

ECON 260: Comment Thread for 3/21

Do you think that forms of social consumption (or consumption with limited intrinsic value) are actually "worthless" (i.e., they don't lead to lasting improvements in welfare/happiness)? In particular, do you think these types of consumption play an important (perhaps necessary) role in facilitating and maintaining social relationships (something we know produces lots of happiness/welfare)?

Tuesday, March 18, 2008

Happiness Follow-up

Here are several items from the archive that relate to our happiness discussion:

An overview of happiness and choice
-- including some recommendations from an article called "The Tyranny of Choice" on how to manage choices and be happy:
1) Choose when to choose -- We can decide to restrict our options when the decision is not crucial. For example, make a rule to visit no more than two stores when shopping for clothing.

2) Learn to accept "good enough" -- Settle for a choice that meets your core requirements rather than searching for the elusive "best." Then stop thinking about it.

3) Don't worry about what you're missing -- Consciously limit how much you ponder the seemingly attractive features of options you reject. Teach yourself to focus on the positive parts of the selection you make.

4) Control expectations -- "Don't expect too much, and you won't be disappointed" is a cliche. But that advice is sensible if you want to be more satisfied with life.
Here are several additional popular articles by Dan Gilbert.

It's the struggle to obtain the goal, not obtaining the goal that people enjoy.

Does satisfying your preferences make you happy?

How to by happy with you housing choices.

Choice maximization and job satisfaction.

Monday, March 17, 2008

ECON 260: Comment Thread for 3/19

If you had one wish, what would you wish for (no wishing for other wishes)? How does your answer differ from what you might expect the typical person to wish for (if at all)?

NYTimes on Sustainability

A keen eyed student noticed that the NYTimes opinion page decided to publish something that should be very familiar to you all -- a discussion of obligations to future generations.

Sunday, March 16, 2008

What's Avoiding Asthma in China Worth?

Not much:
what is it worth to reduce the incidence of asthma in China due to air pollution?

Well I'm glad you asked.

I am currently working on revising a paper titled: CONTINGENT VALUATON AND THE ECONOMIC VALUE OF AIR-POLLUTION-RELATED HEALTH RISKS IN CHINA*. The paper is part of a student's (Xiaoqi Guo) dissertation and is joint work with Jim Hammitt at Harvard. In it, we find that residents of Chengdu, China are willing to pay approximately 13,685 yuan (US$1711) for pollution reductions per case of asthma avoided. We further find that the implied value of a statistical life due air pollution related mortality is 189,960 yuan (US$23,745).

For those not familiar with value of statistical life computations, that's pretty low.

Is Consumer Surplus Arbitrary

If our willingness to pay for items moves around almost arbitrarily is it a useful metric for determining social welfare? This article describes an experiment in which simply thinking about the last two digits of your SSN dramatically changed individuals' willingness to pay for items.

"Now here we have a nice 1998 Cotes du Rhone Jaboulet Parallel," said Drazen Prelec, a professor at MIT's Sloan School of Management, as he lifted a bottle admiringly. Sitting before him were the 55 students from his marketing research class. On this day, Prelec, professor George Loewenstein of Carnegie Mellon University and I had an unusual request for this group of future marketing pros. We asked them to jot down the last two digits of their Social Security numbers and tell us whether they would pay that amount for a number of products, including the wine. Then we asked them to actually bid on these items in an auction.

What were we trying to prove? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: Although initial prices can be "arbitrary," once those prices are established in our minds, they will shape not only present prices but also future ones (thus making them "coherent"). So would thinking about one's Social Security number be enough to create an anchor? And would that initial anchor have a long-term influence? That's what we wanted to find out.

Saturday, March 15, 2008

ECON 260: Comment Thread for 3/7

Discuss the fundamental question in Chapter 11 -- is more really better? That is, does more income/consumption lead to higher welfare (and thus should we place a high value on maintaining economic growth)?

In addition to the chapter, here are several additional sources to consider:

A nice overview of the economics of happiness -- including a good description of the Easterlin Paradox

British economist Andrew Oswlad has written alot recently arguing that economic growth doesn't increase happiness. Here's one of his popular articles.

Here are several nice links.

Daniel Kahneman describes his research on the topic and why he's changed his mind.

Will Wilkerson's whole blog largely centers around these topics.

Some extended thoughts from economist Tyler Cowen.

Robert Frank argues that we shouldn't confuse happiness and welfare.

Ok ... I am tempted to post a lot more, but that's probably enough.

Tuesday, March 11, 2008

ECON 365: Should Schools be Run by Local Govt?

In the past several weeks we've discussed both optimal fiscal federalism (which functions should be handled by which level of government) and we've discussed the role for government in education. Matt Miller tackles both topics in this article in the Atlantic. He argues that nationalizing education (at least to a greater extent than we do today) would likely improve education.

Here's a sample (where do these arguments fit in the framework for determining local government functions we discussed in class?):

Why is local control such a failure when applied to our schools? After all, political decentralization has often served America well, allowing decisions to be made close to where their impact would be felt. But in education, it has spawned several crippling problems:

No way to know how children are doing. “We’re two decades into the standards movement in this country, and standards are still different by classroom, by school, by district, and by state,” says Tom Vander Ark, who headed the education program at the Bill and Melinda Gates Foundation from 1999 through 2006. “Most teachers in America still pretty much teach whatever they want.”

If you thought President Bush’s 2001 No Child Left Behind legislation was fixing these problems, think again. True, NCLB requires states to establish standards in core subjects and to test children in grades 3–8 annually, with the aim of making all students “proficient” by 2014. But by leaving standards and definitions of “proficiency” to state discretion, it has actually made matters worse. The Proficiency Illusion, a report released in October by the conservative Thomas B. Fordham Foundation, details how. “‘Proficiency’ varies wildly from state to state, with ‘passing scores’ ranging from the 6th percentile to the 77th,” the researchers found:

Congress erred big-time when NCLB assigned each state to set its own standards and devise and score its own tests … this study underscores the folly of a big modern nation, worried about its global competitiveness, nodding with approval as Wisconsin sets its eighth-grade reading passing level at the 14th percentile while South Carolina sets its at the 71st percentile.

The lack of uniform evaluation creates a “tremendous risk of delusion about how well children are actually doing,” says Chris Cerf, the deputy chancellor of schools in New York City. That delusion makes it far more difficult to enact reforms—and even to know where reforms are needed. “Schools may get an award from their state for high performance, and under federal guidelines they may be targeted for closure for low performance,” Vander Ark says. This happens in California, he told me, all the time.

Stunted R&D. Local control has kept education from attracting the research and development that drives progress, because benefits of scale are absent. There are some 15,000 curriculum departments in this country—one for every district. None of them can afford to invest in deeply understanding what works best when it comes to teaching reading to English-language learners, or using computers to develop customized strategies for students with different learning styles. Local-control advocates would damn the federal government if it tried to take on such things. Perhaps more important, the private sector generally won’t pursue them, either. Purchasing decisions are made by a complex mix of classroom, school, and school board officials. The more complicated and fragmented the sale that a company has to make, the less willing it is to invest in product research and development.

Incompetent school boards and union dominance. “In the first place, God made idiots,” Mark Twain once wrote. “This was for practice. Then He made School Boards.” Things don’t appear to have improved much since Twain’s time. “The job has become more difficult, more complicated, and more political, and as a result, it’s driven out many of the good candidates,” Vander Ark says. “So while teachers’ unions have become more sophisticated and have smarter people who are better-equipped and -prepared at the table, the quality of school-board members, particularly in urban areas, has decreased.” Board members routinely spend their time on minor matters, from mid-level personnel decisions to bus routes. “The tradition goes back to the rural era, where the school board hired the schoolmarm and oversaw the repair of the roof, looked into the stove in the room, and deliberated on every detail of operating the schools,” says Michael Kirst, an emeritus professor of education at Stanford University. “A lot of big-city school boards still do these kinds of things.” Because of Progressive-era reforms meant to get school boards out of “politics,” most urban school districts are independent, beyond the reach of mayors and city councils. Usually elected in off-year races that few people vote in or even notice, school boards are, in effect, accountable to no one.

Local control essentially surrenders power over the schools to the teachers’ unions. Union money and mobilization are often decisive in board elections. And local unions have hefty intellectual and political backing from their state and national affiliates. Even when they’re not in the unions’ pockets, in other words, school boards are outmatched.

The unions are adept at negotiating new advantages for their members, spreading their negotiating strategies to other districts in the state, and getting these advantages embodied in state and sometimes federal law as well. This makes it extraordinarily difficult for superintendents to change staffing, compensation, curriculum, and other policies. Principals, for their part, are compliance machines, spending their days making sure that federal, state, and district programs are implemented. Meanwhile, common-sense reforms, like offering higher pay to attract teachers to underserved specialties such as math, science, and special education, can’t get traction, because the unions say no.

Financial inequity. The dirty little secret of local control is the enormous tax advantage it confers on better-off Americans: communities with high property wealth can tax themselves at low rates and still generate far more dollars per pupil than poor communities taxing themselves heavily. This wasn’t always the case: in the 19th century, property taxes were rightly seen as the fairest way to pay for education, since property was the main form of wealth, and the rich and poor tended to live near one another. But the rise of commuter suburbs since World War II led to economically segregated communities; today, the spending gap between districts can be thousands of dollars per pupil.

But local taxes represent only 44 percent of overall school funding; the spending gaps between states, which contribute 47 percent of total spending, account for most of the financial inequity. Perversely, Title I, the federal aid program enacted in the 1960s to boost poor schools, has widened the gaps, because it distributes money largely according to how much states are already spending.

ECON 365: The Need for Social Insurance

Mark Thoma provides an argument for why, in capitalist systems, government needs to provide social insurance:

Economic systems differ in their ability to provide goods and services and in the level of economic risk faced by a typical household. Socialism is a low mean, low variance economic system. With a planned economy, cycles in unemployment do not occur unless mandated by planners. Worker income, though low, is not subject to substantial variation over time. Other economic risks, such as access to housing and risks related to healthcare are also very low since these services are provided by the state. Economic risks for workers are low in such a system, but so is average income.

Under capitalism the average level of income is much higher, but economic risk is higher as well. In a capitalist system, workers can be involuntarily displaced as new products are invented, new production techniques are implemented, production moves outside the country, or inevitable business cycle variation occurs. These are shocks that affect workers independent of their own behavior. A worker who has shown up to work every day and worked hard to support a family can be suddenly unemployed for reasons unrelated to anything connected to his or her own behavior.

As the U.S. entered the 20th century, important social changes arising from industrialization were becoming increasingly evident and exposing the high degree of economic risk under a capitalist system. Migration to cities and the resulting breakup of the extended family, reliance on wage income as a primary means of support, and increasing life expectancy resulted in increased economic risk for the typical worker relative to the more agrarian economy that existed prior to industrialization.

In an agrarian economy, economic security is provided by extended family relationships coupled with the largely self-sufficient nature of farms. On a farm, a recession is a bad harvest, but it generally does not mean a total lack of income. Times can be tough, food can be very scarce and there can be hunger, but generating a subsistence level of income from the farm is usually possible even in the worst of years. For a worker dependent solely upon wage income, the consequences of a recession are much more severe. A recession means a total lack of income, not just hard times. Without the help of others or the existence of some type of social insurance program, abject poverty is a real possibility (see Life After the Great Depression for descriptions of the misery that followed the Great Depression).

Retirement also takes on a different character. On the farm, retirement meant gradually, if often reluctantly, letting the children take over responsibility for the farm, but it did not mean a total loss of income. Children provided for parents. But an aging worker in a city, perhaps disconnected geographically from their children, faces a different circumstance upon retirement. Such a worker may face a complete loss of income, and disability from age is not always an event that occurs according to plan. Even a worker who has diligently saved for retirement can suddenly become impoverished due to events such unexpected health costs, or even a much longer life than expected.

As industrialization progressed, 1920 marks a benchmark year where, for the first time, more than half of the population lived in cities. When the Great Depression hit around a decade later, it exposed the social changes the U.S. was experiencing and the need for new ideas regarding the government’s responsibility for the economic security of its citizens became clear. The Great Depression made it evident that in a capitalist system, where the whimsies of the marketplace can wreak havoc on people’s lives, the government has an obligation to provide economic security. It was also evident that the private sector did not provide the needed level of insurance and that government intervention was required to overcome this problem (due to both moral hazard and asymmetric information problems in the private insurance market).

It is important that the economy be allowed to change with new technology and changing preferences, but the consequences for innocent workers affected by such changes is a social responsibility that needs to be addressed. In addition, as extended family relationships are hindered by geography and the social contract between parents and children breaks down, the elderly need a way to avoid poverty. Programs such as Unemployment Compensation, Medicare, and Social Security arose as a means to mitigate these economic risks under capitalism using the least amount of society’s valuable resources.

Drawing a rough analogy, socialism is like investing in T-Bills. Low risk, but low return. Capitalism is like the stock market. There is a higher average return accompanied by higher risk. Financial theory tells how to insure against such risks and there is no reason why this cannot be applied in the social insurance arena to smooth variations in income.

There is a need for social insurance under capitalism.

[See also: Social Security is about insurance, not savings.]

Monday, March 10, 2008

ECON 260: Comment Thread for 3/12

Please read this brief debate between Kerry Smith and Frank Ackerman/Lisa Heinzerling regarding the use of cost-benefit analysis in determining environmental policy.

What do you think? Is cost-benefit analysis a useful tool for informing environmental policy? To what extent is it useful? I.e., should policy makers be forced to conduct them before making policy? Should they be forced to follow the results of the analysis? If they don't have to follow their conclusions, how should they be used?

Here an additional reading from the "pro" side that you should also read -- several big shot economists on "Is there a role for cost-benefit analysis in environmental, health, and safety regulation?"

Sunday, March 09, 2008

ECON 260: Comment Thread for 3/10

No new question for Monday. Since we haven't discussed the threads from Wednesday or Friday yet, feel free to post in either of those. Alternatively, respond to any of the other posts or post a question you'd like to discuss in this comment thread.

Also since some of you have been asking, here's a further clarification of the blog post participation grading. On the day you turn in your take-home quizzes (e.g., next friday), I will count up the number of specific "ECON 260: Comment Thread" posts that I posted in the previous two weeks. This number becomes the denominator. Then, I will add up the number of posts that you posted any response to -- not just the specific comment threads, but any post I made (that is, you can essentially substitute response to other posts for responses to the comment threads). This number is the numerator. When I divide numerator by denominator, I am expecting that I will get a number higher than 0.6.

ECON 365: Higher Pay for Teachers

On Thursday, we discussed various ways schools might improve performance. One of the hypotheses we discussed was higher teacher pay. A school in NY is going to (sort of) test this hypothesis:

A New York City charter school set to open in 2009 in Washington Heights will test one of the most fundamental questions in education: Whether significantly higher pay for teachers is the key to improving schools.

The school, which will run from fifth to eighth grades, is promising to pay teachers $125,000, plus a potential bonus based on schoolwide performance. That is nearly twice as much as the average New York City public school teacher earns, roughly two and a half times the national average teacher salary and higher than the base salary of all but the most senior teachers in the most generous districts nationwide.

It's unclear to me exactly what kind of evidence this will provide. I think the school will be successful in attracting high quality, motivated teachers. However, I don't see how this will inform the policy community. There are, to me, two important questions relating to teacher pay: will boosting teacher pay lead to better performance from existing teachers and will boosting teacher pay lead more people with the potential to be great teachers to choose teaching? I doubt this effort will provide meaningful answers to either of those questions.

Here are some more links related to these points:

Here's one discussion and here's another discussion of the decline in teacher quality overtime (due to improved labor market opportunities for women).

Here's a hodge-podge of links to a variety of education related papers -- including a paper on improvements in teacher quality from pay-for-performance and paper that argues that school accountability programs lower high-ability students performance in college.

Saturday, March 08, 2008

More on Economics and Terrorism

Building on the post below, here are the thoughts I presented to my Social Economics class on economics and terrorism back in April of 2006:

Economics provides a great deal of insight into the problem of terrorism. The decision to commit a terrorist act is just that ... a decision. As such, we can identify the relevant tradeoffs and design policies that should reduce the probability of terrorist acts.

Terrorism has its roots in group level hatred. The suppliers of group level hatred are frequently the demanders in the market for terrorist acts (though they needn't be the same people), and the people who demand hatred are usually the people who end up actually carrying out (or supplying) terrorist acts. The whole thing is further confused by the fact that frequently demanders and suppliers of terrorism are the same people.

As such, if we hope to be successful in our "War on Terror", we need to focus on policies that dramatically change either the supply or demand of terrorists. And this ultimately requires reducing the supply and demand of hate.

To begin, focus only on the market for terrorist acts. A key component in our current strategy is negative deterrence. Gary Becker's classic model of criminal behavior suggests that criminals tradeoff the expected benefits (probability of success * value of success) of a criminal act against the expected costs (probability of being caught * penalty). Much of our current terrorism policy is designed to increase the probability of detection and increase the penalties associated with participating in terrorism. This effectively raises the price of terrorist acts by shifting the supply curve up.

The effectiveness of supply side polices is limited, however, by the amount of substitution available in the terrorism production function and the low price of terrorist acts. If we raise the price of attacking a government building, terrorists can attack shopping malls; if we profile all middle-eastern looking men, terrorists can recruit people who look different. Ultimately, the biggest cost faced by terrorists is probably the lives of any suicide attackers. Reducing the supply of suicide bombers would likely making committing terrorism more difficult. However, consumers of terrorist acts have done a good job of convincing their "employees" that there are substantial eternal rewards for their sacrifice. But even reducing the number of willing suicide bombers won't make a huge impact. Killing people in public places is unfortunately cheap. Benn Steil and Robert Litan estimate:
...acts of terror are cheap to carry out. The truck bomb used at the World Trade Center in February 1993 cost $400. The cost of training and support of the 19 individuals who participated in the 9/11 airline hijackings is estimated at only $500,000. Terrorist operations since 9/11 have been even cheaper: the October 2002 Indonesia bombings cost $50,000; the November 2003 Istanbul attacks cost less than $40,000; and the March 2004 Madrid bombings, carried out with dynamite and cell phones, cost less than $10,000. As Defense Secretary Donald Rumsfeld admitted in a memorandum leaked to the press in October 2003, "The cost-benefit ratio is against us! Our cost is billions against the terrorist cost of

(Source) Ultimately, there is not a whole lot that we can do to make the price of terrorist acts prohibitively high.

Even if we were successful at increasing the price of terrorist acts, the reduction in the equlibrium quantity of terrorist acts depends on the elasticity of demand. Peter Boettke and Christopher Coyne argue in their paper "Liberalism in the Post-9/11 World" that the demand for terrorist acts is highly inelastic (this approach is similar to Becker, Murphy, and Grossman's work on the failure of the "War on Drugs"). As such, supply-side policies are unlikely to reduce terrorist acts.

Reducing terrorism, then, requires fundamentally changing preferences for terrorist acts and prompting an inward shift in the demand curve. Unfortunately, this is extremely difficult. Some of the policies Glaeser outlines in the "Political Economy of Hatred" (e.g., increase ties between groups, promote hating the haters, etc.) will likely have some effect. However, it is important to note that blanket prescriptions like reducing poverty and increasing education are not likely to automatically improve things (Krueger and Maleckova document no relationship between income and education and individual decisions to be terrorists and only small relationships between country level poverty and education and terrorism). Indeed, some rich dude can always set up and fund his own terrorist group (see Al Queda and SPECTER).

So how does the war in Iraq fit into all of this? Initially, it was about reducing the probability of attack by raising the price of engaging in terrorism. The fear was that Saddam Hussein would provide WMD to terrorists, so we needed to intervene in order to "raise the price" of this type of terrorist attack. At the same time, we would "shock and awe" other states who might be willing to sell weapons to terrorists. Thus further raising the price of terrorist activities.

After this rationale turned out to be based in fantasy, the rationale changed to "bringing democracy to the middle east". Setting aside the question of why you would choose to promote democracy from the barrel of a gun in Iraq rather than working to increase democracy in semi-democratic places like Turkey or Egypt, the idea of reducing terrorism via democracy, I guess, works like this -- Creating a democracy in Iraq is supposed to generate more freedom and tolerance. This, in turn, should increase ties with the West and lead to less hatred of the West and more intolerance of terrorists and terrorist groups. This should reduce the supply of terrorists, reduce the demand for terrorism, and make it harder for those who do still demand terrorist acts to operate.

This is not a crazy theory in the abstract, but, in practice, there are a number of problems. The historical record for producing liberal democracies at will is not very good. Boettke and Coyne also consider this issue. They point out that of the 15 times the US attempted reconstruction efforts from 1898-1996 only four were democracies after 10 years. As they remind us, economics predicts that "conflict should not persist where gains from exchange exist." However, in most reconstruction efforts (and Iraq in particular) a number of barriers exist that prevent peaceful bargaining. I encourage you to check out their interesting arguments.

Costs and Benefits of Fighting Terrorists

Bjorn Lomborg and Todd Sandler discuss the costs and benefits of current spending preventing terrorism in this article. Here is an excerpt:
Grim-faced border guards and tough security measures at international airports provide powerful reassurance that the developed world is spending hundreds of billions of dollars to protect against terrorism. But is it worth it?

Although citizens of rich countries regard terrorism as one of the world’s greatest threats, trans-national terrorists take, on average, just 420 lives each year. So, have the terrorists succeeded in getting the developed world to invest poorly in counter-terrorism, while ignoring more pressing problems involving health, the environment, conflict, and governance?

Recently, the Copenhagen Consensus, whose purpose is to weigh the costs and benefits of different solutions to the world’s biggest problems, commissioned new research into the merits of different methods of combating terrorism. The results are surprising and troubling.

Global annual spending on homeland security measures has increased by about US$70 billion since 2001. Unsurprisingly, this initially translated into a 34 per cent drop in trans-national terrorist attacks. What is surprising is that there have been 67 more deaths, on average, each year.

The rise in the death toll is caused by terrorists responding rationally to the higher risks imposed by greater security measures. They have shifted to attacks that create more carnage to increase the impact of fewer attacks.

Increased counter-terrorism measures simply transfer terrorists’ attention elsewhere. Installing metal detectors in airports in 1973 decreased skyjackings but increased kidnappings; fortifying American embassies reduced the number of attacks on embassies but increased the number of assassinations of diplomatic officials. Since counter-terrorism measures were increased in Europe, the United States, and Canada, there has been a clear shift in attacks against US interests to the Middle East and Asia.

Spending ever-more money making targets “harder” is actually a poor choice.

Increasing defensive measures worldwide by 25 per cent would cost at least US$75 billion over five years. Terrorists will inevitably shift to softer targets. In the extremely unlikely scenario that attacks dropped by 25 per cent, the world would save about US$22 billion. Even then, the costs are three times higher than the benefits.

Put another way, each extra dollar spent increasing defensive measures will achieve – at most – about 30 cents of return. We could save about 105 lives a year in this best-case scenario. To put this into context, 30,000 lives are lost annually on US highways.

The Cost of the Iraq War

In both classes, we've discussed (or are discussing) accounting for the economic costs associated with government policy. Linda Blimes and Joe Stiglitz apply the techniques we've discussed to the Iraq war and argue that the war will cost $3 Trillion dollars:

There is no such thing as a free lunch, and there is no such thing as a free war. The Iraq adventure has seriously weakened the U.S. economy, whose woes now go far beyond loose mortgage lending. You can't spend $3 trillion -- yes, $3 trillion -- on a failed war abroad and not feel the pain at home.

Some people will scoff at that number, but we've done the math. Senior Bush administration aides certainly pooh-poohed worrisome estimates in the run-up to the war. Former White House economic adviser Lawrence Lindsey reckoned that the conflict would cost $100 billion to $200 billion; Defense Secretary Donald H. Rumsfeld later called his estimate "baloney." Administration officials insisted that the costs would be more like $50 billion to $60 billion. In April 2003, Andrew S. Natsios, the thoughtful head of the U.S. Agency for International Development, said on "Nightline" that reconstructing Iraq would cost the American taxpayer just $1.7 billion. Ted Koppel, in disbelief, pressed Natsios on the question, but Natsios stuck to his guns. Others in the administration, such as Deputy Defense Secretary Paul D. Wolfowitz, hoped that U.S. partners would chip in, as they had in the 1991 Persian Gulf War, or that Iraq's oil would pay for the damages.

The end result of all this wishful thinking? As we approach the fifth anniversary of the invasion, Iraq is not only the second longest war in U.S. history (after Vietnam), it is also the second most costly -- surpassed only by World War II.

Why doesn't the public understand the staggering scale of our expenditures? In part because the administration talks only about the upfront costs, which are mostly handled by emergency appropriations. (Iraq funding is apparently still an emergency five years after the war began.) These costs, by our calculations, are now running at $12 billion a month -- $16 billion if you include Afghanistan. By the time you add in the costs hidden in the defense budget, the money we'll have to spend to help future veterans, and money to refurbish a military whose equipment and materiel have been greatly depleted, the total tab to the federal government will almost surely exceed $1.5 trillion.

But the costs to our society and economy are far greater. ...

Alternative Energy: Inefficiencies in Ethanol Mandates

MIT's Technology review has a very interesting discussion of the complicated series of costs imposed on the economy that may result from the federal government's recent decision to mandate minimum levels of biofuel use.

Here is some of the discussion:

Mandated consumption levels break the "one-to-one link" between market demand and the adoption of a technology, says Harry de Gorter, an associate professor of applied economics and management at Cornell University: "As an economist, I don't like it. Economists like to let the markets determine what [technology] has the best chances." The new biofuel mandates are "betting on a particular technology," he says. "It is almost impossible to predict the best technology. It is almost inevitable that [mandates] will generate inefficiencies." While de Gorter acknowledges that some economists might justify mandated markets as a way to promote a desired social policy, he questions the strategy's effectiveness. "Historically, there are no good examples of it working in alternative energy," he says.

One reason economists tend to be wary of mandated consumption levels is that they can have unintended consequences for related markets. Producing 15 billion gallons of conventional ethanol will require farmers to grow far more corn than they now do. And even with the increased harvest, biofuel production will consume around 45 percent of the U.S. corn crop, compared with 22 percent in 2007. The effects on the agricultural sector will be various and complex.

Perhaps most obvious will be the impact on the price of corn--and, indirectly, of food in general. Since it became apparent that the biofuel standards would become law, the price of corn has risen 20 percent, to around $5.00 a bushel, says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University. He expects that prices will probably stay around that level for at least the next three years. Because corn is the primary feed for livestock in this country, that means higher prices for everything from beef to milk and eggs. (Less than 2 percent of the nation's corn crop is eaten directly by humans; more than 50 percent feeds animals.) High corn prices could also make it harder to switch to cellulosic biofuels, because farmers will be reluctant to grow alternative crops. With the price of corn so high, says Babcock, "who is going to replace corn with prairie grass?"

At Purdue University, Wallace Tyner, a professor of agricultural economics, has calculated how different types of government policies, including the new mandated consumption levels, will affect the economics of corn ethanol. One of his most striking findings (though one that would surprise few agricultural experts) is that the fuel struggles to compete with oil on cost, in part because of extreme sensitivity to the commodity price of corn.

Because ethanol is generally blended with gasoline at a concentration of 10 percent, its market value is directly tied to the price of oil. But Tyner's analysis illustrates the complexity of the interplay between the markets for oil, corn, and ethanol. In the absence of government subsidies or mandates, according to his model, no ethanol is produced until oil reaches $60 a barrel. But with oil at that price, ethanol is profitable only as long as corn stays around $2.00 a bushel, which limits production of the biofuel to around a half-billion gallons a year. As oil prices increase, so does ethanol production. But production levels continue to be limited by the price of corn, which rises along with both the demand for ethanol and the price of oil (farmers use a lot of gasoline). Even when oil reaches $100 a barrel, ethanol production will reach only about 10 billion gallons a year if there are no subsidies; and even then, ethanol is profitable only if corn prices stay below $4.15 a bushel. If oil hits $120 a barrel, ethanol production will, left to market forces, reach 12.7 billion gallons--still more than two billion short of the federal mandate.

In other words, the federally mandated consumption levels mean ethanol will not, for the foreseeable future, be truly cost-­competitive with gasoline. Indeed, says Tyner, setting the ethanol market at 15 billion gallons will mean an "implicit tax" on gasoline consumers, who will have to pay to sustain the high level of biofuel production. When oil costs $100 a barrel, the consumer will pay a relatively innocuous "tax" of 42 cents per gallon of ethanol used (the additional price at the pump will usually be only a few pennies for blends that are 10 percent ethanol). But at lower oil prices, the additional cost of ethanol will be far more noticeable. If oil falls to $40 a barrel, the implicit tax for ethanol will be $1.05 a gallon--or $15.77 billion for all the nation's gasoline users. "If the price of oil drops substantially, is Congress going to say, 'We didn't really mean it'?" asks Tyner. "It gets really messy."

Friday, March 07, 2008

More Responses to the CBO Carbon Tax v. Cap and Trade Report

Nat Keohane has written two very nice responses to the CBO paper on taxes and cap and trade that I linked to earlier here and here. What I particularly like about his posts is how he clearly identifies key assumptions in the CBO report and then proceeds to explain why these assumptions may be incorrect and how if they are incorrect you would reach a different conclusion. That is, he employs a structure that is similar to what I have you do on the in-class quizzes.

Here are his two main points:

Read the whole thing for the details.

Director of CBO, Peter Orzag provides a response to these concerns here.

A "Must Read" Article on Economic Impacts of Arctic Ice Melt

Tyler Cowen suggests that if you read only 5 magazine articles this year, this article in Foreign Affairs should be one of them.

Here's the article summary:
Thanks to global warming, the Arctic icecap is rapidly melting, opening up access to massive natural resources and creating shipping shortcuts that could save billions of dollars a year. But there are currently no clear rules governing this economically and strategically vital region. Unless Washington leads the way toward a multilateral diplomatic solution, the Arctic could descend into armed conflict.
And some of the details of the economic tradeoffs associated with ice melt:

The environmental impact of the melting Arctic has been dramatic. Polar bears are becoming an endangered species, fish never before found in the Arctic are migrating to its warming waters, and thawing tundra is being replaced with temperate forests. Greenland is experiencing a farming boom, as once-barren soil now yields broccoli, hay, and potatoes. Less ice also means increased access to Arctic fish, timber, and minerals, such as lead, magnesium, nickel, and zinc -- not to mention immense freshwater reserves, which could become increasingly valuable in a warming world. If the Arctic is the barometer by which to measure the earth's health, these symptoms point to a very sick planet indeed.

Ironically, the great melt is likely to yield more of the very commodities that precipitated it: fossil fuels. As oil prices exceed $100 a barrel, geologists are scrambling to determine exactly how much oil and gas lies beneath the melting icecap. More is known about the surface of Mars than about the Arctic Ocean's deep, but early returns indicate that the Arctic could hold the last remaining undiscovered hydrocarbon resources on earth. The U.S. Geological Survey and the Norwegian company StatoilHydro estimate that the Arctic holds as much as one-quarter of the world's remaining undiscovered oil and gas deposits. Some Arctic wildcatters believe this estimate could increase substantially as more is learned about the region's geology. The Arctic Ocean's long, outstretched continental shelf is another indication of the potential for commercially accessible offshore oil and gas resources. And, much to their chagrin, climate-change scientists have recently found material in ice-core samples suggesting that the Arctic once hosted all kinds of organic material that, after cooking under intense seabed pressure for millennia, would likely produce vast storehouses of fossil fuels.


The shipping shortcuts of the Northern Sea Route (over Eurasia) and the Northwest Passage (over North America) would cut existing oceanic transit times by days, saving shipping companies -- not to mention navies and smugglers -- thousands of miles in travel. The Northern Sea Route would reduce the sailing distance between Rotterdam and Yokohama from 11,200 nautical miles -- via the current route, through the Suez Canal -- to only 6,500 nautical miles, a savings of more than 40 percent. Likewise, the Northwest Passage would trim a voyage from Seattle to Rotterdam by 2,000 nautical miles, making it nearly 25 percent shorter than the current route, via the Panama Canal. Taking into account canal fees, fuel costs, and other variables that determine freight rates, these shortcuts could cut the cost of a single voyage by a large container ship by as much as 20 percent -- from approximately $17.5 million to $14 million -- saving the shipping industry billions of dollars a year. The savings would be even greater for the megaships that are unable to fit through the Panama and Suez Canals and so currently sail around the Cape of Good Hope and Cape Horn. Moreover, these Arctic routes would also allow commercial and military vessels to avoid sailing through politically unstable Middle Eastern waters and the pirate-infested South China Sea. An Iranian provocation in the Strait of Hormuz, such as the one that occurred in January, would be considered far less of a threat in an age of trans-Arctic shipping.

Thursday, March 06, 2008

ECON 260: The Domestic Cost of US Climate Policy

There was a Congressional Hearing yesterday on our current topic -- the costs of environmental regulation. Specifically, the hearing focused on the potential costs to US manufacturers from climate change policy. Daniel Hall summarizes several of the key issues discussed over at the Common Tragedies blog.

An Important Lesson

One of my favorite lines from the past several months -- "Heroes are not replicable" (supplied by Alex Tabbarok). I think this is an important lesson for people interested in producing lasting change. Here's the full post that accompanied it:

You know the plot. Young, idealistic teacher goes to inner-city high school. Said idealistic teacher is shocked by students who don't know the basics and who are too preoccupied with the burdens of violence, poverty and indifference to want to learn. But the hero perseveres and at great personal sacrifice wins over the students using innovative teaching methods and heart. The kids go on to win the state spelling/chess/mathematics championship. c.f. Stand and Deliver, Freedom Writers, Dangerous Minds etc.

We are supposed to be uplifted by these stories but they depress me. If it takes a hero to save an inner city school then there is no hope. Heroes are not replicable.

What we need to save inner-city schools, and poor schools everywhere, is a method that works when the teachers aren't heroes. Even better if the method works when teachers are ordinary people, poorly paid and ill-motivated - i.e. the system we have today.

In Super Crunchers, Ian Ayres argues that just such a method exists. Overall, Super Crunchers is a light but entertaining account of how large amounts of data and cheap computing power are improving forecasting and decision making in social science, government and business. I enjoyed the book. Chapter 7, however, was a real highlight.

Ayres argues that large experimental studies have shown that the teaching method which works best is Direct Instruction (here and here are two non-academic discussions which summarizes much of the same academic evidence discussed in Ayres). In Direct Instruction the teacher follows a script, a carefully designed and evaluated script. As Ayres notes this is key:

DI is scalable. Its success isn't contingent on the personality of some uber-teacher....You don't need to be a genius to be an effective DI teacher. DI can be implemented in dozens upon dozens of classrooms with just ordinary teachers. You just need to be able to follow the script.

Contrary to what you might think, the data also show that DI does not impede creativity or self-esteem. The education establishment, however, hates DI because it is a threat to the power and prestige of teaching, they prefer the model of teacher as hero. As Ayres says "The education establishment is wedded to its pet theories regardless of what the evidence says." As a result they have fought it tooth and nail so that "Direct Instruction, the oldest and most validated program, has captured only a little more than 1 percent of the grade-school market."

ECON 365: School Vouchers

A few years ago Caroline Hoxby wrote a paper that argues that the voucher debate in Milwaukee was good for Milwaukee public schools (that is, performance per dollar spent rose). Here's a nice discussion of the paper from Crooked Timber:

She attributes the gains to the voucher program, though she doesn’t distinguish between the effects of the internal market between schools that the voucher program introduced and the effects of the political fall out on making the school district administration more accountable. She’s entitled to attribute the gain to vouchers because she compares Milwaukee Public Schools with comparable Wisconsin school districts which were similarly effected by the changes in funding wrought by the State equalization formula. There are interesting methodological questions here. For example, if you remove the 1997-8 school year data from the analysis it would look quite different, and less well disposed to choice. And the aforementioned distinction between political and market competition is significant: if the gains were entirely the result of administrators getting their acts together then there might be other, less disruptive, ways of getting the gains. So the paper is not perfect.

But I point it out for two reasons. First, it’s a wonderful paper for non-economists to read – a model of someone who can write simply and clearly, but is sensitive to numerous complexities. Second, because vouchers and choice are increasingly hard for the left in the US to dismiss. The second best objection to well-designed and targeted voucher programs is that they leave the children remaining in the public schools worse off. If that objection can be met, progressives are left only with the best objection – that they will set in train a dynamic that will undermine the principle of public schooling. But in America, where public schooling is savagely unjust in its internal workings, that objection rings a bit hollow unless coupled with a substantial and politically feasible plan for improving the public schools which the least advantaged Americans attend.

Tyler Cowen, though, still has a different objection:

I worry about how vouchers themselves will affect prices and costs. Private schools for poor urban students are cheap, in part, because the school knows the parents cannot afford much more. If the first $5000 is free, the price could go up considerably. In addition, if the schools can somehow coordinate on yet higher prices, there will be political pressures to raise the voucher amount.

Mixed public-private systems are not always cheaper than more public systems, in part because private firms are often skilled in extracting resources from the public sector. The American health care system, for instance, has considerably higher administrative costs than does the "single-payer" Canadian system, read here for a recent comparison. I don't favor national health insurance by any means, but these figures should give pause to voucher advocates.

The research of Harvard professor Caroline Hoxby suggests that increased school competition brings increased school quality. But her work does not clear up the most difficult questions about vouchers. If you imagine the system in place, on a large scale, for lengthy periods of time, and subject to pressures for rent-seeking and regulation, what would it look like? Would it truly serve parent demands for good education, or would it look more like the American system of health care, a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention?

Links to a more extensive debate on the issue between him and his co-blogger Alex Tabbarok is available here.

ECON 260: Comment Thread for 3/7

The textbook presents a discussion of effects of environmental regulation on productivity (recall -- productivity =output per worker, so improvements in technology or increases in the use of capital both might lead to productivity increases). Specifically, it presents three ways that regulation might increase productivity:
(1) It might improve "short-run efficiency of resource use."
(2) It might encourage "firms to invest more, or invest 'smarter' for the long-run."
(3) It might "reduce health-care or firm-level cleanup costs, which then frees up capital for long-tun investment."
And, it presents four ways that regulation might lower productivity:
(1) "Regulation imposes direct costs on regulated firms; these costs may crowd out investment in conventional capital."
(2) Investment in new capital may further slow "when regulation is more stringent for new sources of pollution."
(3) Regulation raises prices for "important economy wide inputs like energy and waste disposal", and these cost increases reduce investment in sectors not directly affected by the regulation.
(4) "Regulation may frustrate entrepreneurial activity."
In your opinion, which of these effects are likely most important? You may find it useful to discuss these issues in the context of a specific environmental regulation. Is regulation X likely to have positive/negative impacts on productivity? Is so, through which of the above mechanisms are these affects likely to occur?

Wednesday, March 05, 2008

ECON 365: Does Money Matter in Schools?

In class on Tuesday, I discussed the effect of an infusion of money on school performance at 14 schools in Austin. Here's the article I was referring to (once there you can also look at the rest of the book -- Does Money Matter thanks to google books).

Tuesday, March 04, 2008

ECON 260: The Federal Perspective on Cost-Benefit Analysis

Here are the guidelines that OMB provides policymakers who are engaging in cost-benefit analysis:
The OMB guidelines are divided into an introduction and three sections: (1) a statement of the need for the proposed action; (2) an examination of alternative approaches; and (3) analysis of benefits and costs. The introduction states that an Economic analysis (EA) should provide sufficient information for decisionmakers to determine:
  • there is adequate information demonstrating a need for and the consequences of the proposed regulatory action,
  • the potential benefits justify the potential costs, considering that not all benefits can be expressed in monetary terms,
  • the proposed action will maximize net benefits to society, unless a statute mandates another approach,
  • where a statute mandates a specific approach, the proposed action will be the most cost-effective, and
  • agency decisions are based on the best reasonably available scientific, technical economic and related information.
  • Click the link to see them discussed in (slightly) more detail.

    ECON 260: Comment Tread for 3/5 class

    Nearly every environmental policy debate inevitably ends up framed, at some point, as a trade off between jobs and the environment (e.g., jobs versus fish, jobs versus owls). Many, including several of my co-workers at ECONorthwest, argue that this framing is incorrect and that the discussion should be framed as jobs versus jobs (e.g., jobs for farmers versus jobs for fisherman, or jobs for loggers versus jobs for techies). We'll discuss the details of these claims in class, but here are some questions to ponder and discuss below until then:

    (1) How do you feel about the framing or focus of the debate on jobs? Does this framing lead to jobs receiving too much weight in the determination of policy? Are there consequences for policy when jobs receive an "extra" weight relative to costs and benefits?

    (2) How should we tradeoff the jobs/incomes of one group of people versus the jobs/incomes of another group of people? E.g., in the West there are big fights over dam removal -- farmers "need" the dams to irrigate their crops, while fisherman need the water trapped behind the dams to maintain fish stocks. How should we account for job "gains" and losses to two competing users of natural resources? Furthermore, should it matter if one of the competing groups isn't currently working at these jobs? That is, often environmental protection will lead to the creation of new jobs. Should place a lower value on new created jobs than we do on old lost jobs?


    Monday, March 03, 2008

    More on Valuing Lives

    The discussion of valuing lives in the comment thread below is great. In case anyone is still struggling with the approach used by economists, Steven Landsburg (an economics professor at Rochester who also writes a column for Slate) provides more discussion and several examples in this column. He also cites some evidence that shows that lives today are more valuable than lives in the past (because we are richer):

    So, how do we find out how much a life is really worth? One of the best ways is to measure how much extra you have to pay someone to take a dangerous job. If lion tamers and elephant tamers have comparable skills and comparable working conditions, but lion tamers earn $20,000 a year more than elephant tamers, it's probably because that's what it takes to compensate someone for the risk of being eaten by a lion. And if that risk amounts to, say, an extra half-percent probability of dying on the job, then you figure that the value of a life must be $20,000 per half-percent, or $40,000 per percentage point, or $4 million.

    So, once you carry out that experiment, how much does a typical life turn out to be worth? Professors Dora Costa of MIT and Matthew Kahn of Tufts point out that it depends on exactly when you asked the question. As incomes have risen, so has the value of life. The increase is more than proportional: A 10 percent rise in income is generally associated with about a 15 percent rise in the value of a life. Between 1940 and 1980, according to Costa and Kahn, the value of a life increased from about $1 million 1990 dollars to between $4 million and $5 million 1990 dollars.

    (Other researchers, notably Harvard's Kip Viscusi, have found higher numbers. Viscusi estimates that the value of a life in 1970 might already have been as high as $8 million 1990 dollars.)

    If lives tomorrow may be worth significantly more than lives today, I think this poses some additional difficulties for figuring out what to do about long term environmental problems.

    Sunday, March 02, 2008

    The Transition of a Climate Change Skeptic

    Here's an interesting look at the transition of a well known climate change skeptic to climate change believer. Kind of an interesting read:

    Bailey has a reason to be apprehensive. He was once one of the leading skeptics of climate change. Yet in recent years he has shifted. He now believes that global warming is real, man-made, and potentially a serious problem. This stance has led him to embrace taxes as a solution.

    He must now explain himself to some of the very people whose generosity helps keep the magazine that employs him afloat.

    “It is really annoying to have to even remotely agree with Al Gore,” the lanky 6’, 5” science reporter tells the audience. And yet, he says, libertarians need to accept this and do something to respond to it. And he cannot see a free-market way to do that.

    “So, the question is, ‘What is the least bad way to regulate?’ And that is why I have come out in favor of a carbon tax,” Bailey explains.

    Co-panelist Fred Smith, president of the Competitive Enterprise Institute, a think tank that has a long history of opposition to climate and energy regulations, shakes his head. Even if we must “do something,” why must we do that?

    “Why must that ‘something’ be the increase of statist power?” he asks. “The costs of energy rationing are not trivial.”

    Tyler Cowen (who linked to the above article) follows up with some interesting thoughts and links:

    It is important to distinguish two claims. The first is that a revenue-neutral carbon tax is, in expected value terms, a good idea. If nothing else, we cannot emit accelerating rates of carbon forever.

    The second and more dubious claim is "a carbon tax is likely to solve the problem." That's not so clear. China and India may not follow suit, the oil may be pumped and used anyway, and the elasticities may be working against us. I give the carbon tax about a thirty percent probability of significantly ameliorating global warming and that is assuming that we engage China in a constructive manner. A pessimistic view, however, does not refute the case for trying.

    Addendum: Here is an interesting post on whether more information about global warming causes people to worry about it less.

    Update -- here's an excerpt from Cowen's "pessimistic" link -- wow!:
    The initiative sits comfortably within the current canon of eco ideas, next to ethical consumption, carbon offsetting, recycling and so on - all of which are premised on the calculation that individual lifestyle adjustments can still save the planet. This is, Lovelock says, a deluded fantasy. Most of the things we have been told to do might make us feel better, but they won't make any difference. Global warming has passed the tipping point, and catastrophe is unstoppable.

    "It's just too late for it," he says. "Perhaps if we'd gone along routes like that in 1967, it might have helped. But we don't have time. All these standard green things, like sustainable development, I think these are just words that mean nothing. I get an awful lot of people coming to me saying you can't say that, because it gives us nothing to do. I say on the contrary, it gives us an immense amount to do. Just not the kinds of things you want to do."

    He dismisses eco ideas briskly, one by one. "Carbon offsetting? I wouldn't dream of it. It's just a joke. To pay money to plant trees, to think you're offsetting the carbon? You're probably making matters worse. You're far better off giving to the charity Cool Earth, which gives the money to the native peoples to not take down their forests."

    Do he and his wife try to limit the number of flights they take? "No we don't. Because we can't." And recycling, he adds, is "almost certainly a waste of time and energy", while having a "green lifestyle" amounts to little more than "ostentatious grand gestures". He distrusts the notion of ethical consumption. "Because always, in the end, it turns out to be a scam ... or if it wasn't one in the beginning, it becomes one."

    Somewhat unexpectedly, Lovelock concedes that the Mail's plastic bag campaign seems, "on the face of it, a good thing". But it transpires that this is largely a tactical response; he regards it as merely more rearrangement of Titanic deckchairs, "but I've learnt there's no point in causing a quarrel over everything". He saves his thunder for what he considers the emptiest false promise of all - renewable energy.

    "You're never going to get enough energy from wind to run a society such as ours," he says. "Windmills! Oh no. No way of doing it. You can cover the whole country with the blasted things, millions of them. Waste of time."

    This is all delivered with an air of benign wonder at the intractable stupidity of people. "I see it with everybody. People just want to go on doing what they're doing. They want business as usual. They say, 'Oh yes, there's going to be a problem up ahead,' but they don't want to change anything."

    Lovelock believes global warming is now irreversible, and that nothing can prevent large parts of the planet becoming too hot to inhabit, or sinking underwater, resulting in mass migration, famine and epidemics. Britain is going to become a lifeboat for refugees from mainland Europe, so instead of wasting our time on wind turbines we need to start planning how to survive. To Lovelock, the logic is clear. The sustainability brigade are insane to think we can save ourselves by going back to nature; our only chance of survival will come not from less technology, but more.

    Saturday, March 01, 2008

    ECON 260: Comment Thread Question for Monday 3/3

    Instructions for these comment threads are in the recent email I sent regarding new rules for the class.

    Do you think it is necessary to place a value on human lives in order to make environmental policy decisions? If so, what do you think is the right way to determine the value of a life? If not, how would you suggest evaluating policies that have potential trade-offs between different sets of lives (that is, policy A might lead to the loss of some lives but the alternative policy B might also lead to the loss of some other lives)?

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