Tag Archives: economics

the economics of extinction

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Here are some economists tying themselves in mental knots on how you would do cost-benefit analysis on complete annihilation of humanity.

…estimating these benefits means that we need to determine the value of a reduction in preventing a possible future catastrophic risk. This is a thorny task. Martin Weitzman, an economist at Harvard University, argues that the expected loss to society because of catastrophic climate change is so large that it cannot be reliably estimated. A cost-benefit analysis—economists’ standard tool for assessing policies—cannot be applied here as reducing an infinite loss is infinitely profitable. Other economists, including Kenneth Arrow of Stanford University and William Nordhaus of Yale University, have examined the technical limits of Mr Weitzman’s argument. As the interpretation of infinity in economic climate models is essentially a debate about how to deal with the threat of extinction, Mr Weitzman’s argument depends heavily on a judgement about the value of life.

Economists estimate this value based on people’s personal choices: we purchase bicycle helmets, pay more for a safer car, and receive compensation for risky occupations. The observed trade-offs between safety and money tell us about society’s willingness to pay for a reduction in mortality risk. Hundreds of studies indicate that people in developed countries are collectively willing to pay a few million dollars to avoid an additional statistical death. For example, America’s Environmental Protection Agency recommends using a value of around $8m per fatality avoided. Similar values are used to evaluate vaccination programmes and prevention of traffic accidents or airborne diseases…

The value of life as a concept is a natural candidate for a tentative estimation of the benefit of reducing extinction risk. Yet the approach seems somewhat awkward in this context. The extinction risk here is completely different from the individual risk we face in our everyday lives. Human extinction is a risk we all share—and it would be an unprecedented event that can happen only once.

I’m not sure we want to turn over the keys to civilization’s future to these guys, who insist that their science must be values-free. In other words, they try to discern people’s values through their actions and statements, but try to make no ethical judgments independent of those observations. I think there is room in this world for ethical principles of right and wrong that are not economic in nature, and more of us need to be actively thinking every day about what those might be. Even though all 6 billion of us would certainly not agree on the details, we could certainly come to a consensus on the broad outlines. Couple this with better mental tools for understanding the complex nested systems we are embedded in, and it could really guide our choices as a civilization in a better direction.

more on recycling

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I linked recently to a Washington Post article on how the economics of recycling have been less favorable lately. Not so fast, says Philadelphia Magazine, or at least not everywhere. While it is true that Philadelphia has gone from making money on recycling to paying for it over the last year, it is still cheaper than landfilling or incineration. This article also illustrates how complicated global dynamics affect the local economics.

China (the largest importer of American recycled materials) is no longer sustaining an insane annual GDP growth rate of 10 percent, weakening demand for raw materials; the Chinese are also getting pickier about the quality of recycled materials; the cost of petroleum has been free-falling over the past year, making new plastic much cheaper to make and recycled plastic less cost competitive. There was also the nine-month labor dispute with West Coast dock workers that prevented lots of recycled materials from reaching overseas markets — costing MRFs money.

U.S. Contraction

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Economist has several reasons why the U.S. GDP contraction in the first quarter might be just temporary:

  • cold weather
  • low oil prices causing drop in oil industry activity
  • port worker strikes affecting exports
  • a strong dollar affecting exports
  • lately, the first quarter has tended to be the weakest quarter of the year, for unknown reasons

Paul Romer and “mathiness”

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Paul Romer has attacked a number of fellow economists for relying on what he calls “mathiness” rather than mathematical theory. He believes the study of economic growth and its practical applications have suffered because of this.

Academic politics, like any other type of politics, is better served by words that are evocative and ambiguous, but if an argument is transparently political, economists interested in science will simply ignore it. The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Solow’s (1956) mathematical theory of growth mapped the word “capital” onto a variable in his mathematical equations, and onto both data from national income accounts and objects like machines or structures that someone could observe directly. The tight connection between the word and the equations gave the word a precise meaning that facilitated equally tight connections between theoretical and empirical claims. Gary Becker’s (1962) mathematical theory of wages gave the words “human capital” the same precision and established the same two types of tight connection—between words and math and between theory and evidence. In this case as well, the relevant evidence ranged from aggregate data to formal microeconomic data to direct observation…

The market for mathematical theory can survive a few lemon articles filled with mathiness. Readers will put a small discount on any article with mathematical symbols, but will still find it worth their while to work through and verify that the formal arguments are correct, that the connection between the symbols and the words is tight, and that the theoretical concepts have implications for measurement and observation. But after readers have been disappointed too often by mathiness that wastes their time, they will stop taking seriously any paper that contains mathematical symbols. In response, authors will stop doing the hard work that it takes to supply real mathematical theory. If no one is putting in the work to distinguish between mathiness and mathematical theory, why not cut a few corners and take advantage of the slippage that mathiness allows? The market for mathematical theory will collapse. Only mathiness will be left. It will be worth little, but cheap to produce, so it might survive as entertainment.

aging and deflation

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This study says the relationship between aging and deflation (as seen in Japan, but possibly coming to many more countries in the future) depends on whether the aging is driven by falling fertility (which shrinks the work force in absolute terms) or longevity (which shrinks it only in relative terms).

Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
Here is another study that concludes “a larger share of dependents (ie young and old) is correlated with higher inflation, while a larger share of working age cohorts is correlated with lower inflation.” So maybe it depends to what extent the aging population is dependent on the working population, and whether the working population has additional dependents in the form of children (who will become the next working population). It’s complex, dynamic stuff that is hard to puzzle out.

environmental regulations and profitability

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If I understand this somewhat convoluted abstract from Ecological Economics correctly, empirical evidence shows that environmental regulation can actually increase corporate profitability by incentivizing innovation. The data also show that investors believe the exact opposite.

The Porter hypothesis asserts that properly designed environmental regulation motivates firms to innovate, which ultimately improves profitability. In this study, we test empirically the Porter hypothesis and the competing hypothesis that regulation undermines profitability (“costly regulation hypothesis”). In particular, we estimate the effect of clean water regulation, as reflected in the stringency of firm-specific effluent limits for two regulated pollutants, on the profitability of chemical manufacturing firms. As our primary contribution, we contrast the effect of clean water regulation on actual profitability outcomes and its effects on investors’ expectations of profitability. Our results for actual profitability are consistent with the Porter hypothesis, while our results for expected profitability are consistent with the costly regulation hypothesis. Thus, our empirical results demonstrate that investors do not appear to value the positive effect of tighter clean water regulation on actual profitability.

planning theory

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This article in the Journal of Planning Education and Research (free for the month of February only apparently) is a nice review of planning theory. It amazes me that the profession of planning seems to be so unsure of itself, and yet has so many important theories and tools to offer to other disciplines. There is a lot of planning going on outside the small field of academically trained urban and regional planning. I like to think of planning as similar to mathematics – it’s a profession for a few, but its theories and tools are used every day by professionals across many fields. Many of us can do moderately complex math by ourselves, and we know we can call on the mathematicians and statisticians for help with the really complex stuff. Similarly, a lot of professionals like engineers and economists are entrusted with the keys to the planning machine. But often, we do it badly because we are not well trained in the theory and tools of planning.

Almost all professionals – planners, engineers, and economists at a minimum – would benefit from better education in general systems theory – what the building blocks of systems are, how they interact with their boundaries, and how their behavior over time is driven by their structure and interaction with boundary conditions, and how they can be manipulated to achieve desired outcomes. Among the professions, engineers and economists probably have the best understanding of systems today, but we tend to define the system boundaries, and the range of desired outcomes that can be achieved, much too narrowly. That is one place planners can come in – facilitating the interaction between technocratic problem solving being done by engineers and economists with the larger socio-economic and environmental context.

What I call “technocratic problem solving” here is essentially what the planners call “rational-comprehensive” planning. In my view, it works very well for the elements of systems that we understand well (managing water resources, food production, and employment, for example). Where it has come under criticism (for example, the failed “urban renewal” programs in the U.S.), I believe the problem is not in the approach, but rather applying the approach to systems we do not understand well has given us a false sense of precision and a false confidence, which has led to failure. A hybrid approach that works very well, in my experience with water resource and environmental planning, is to apply the rational-comprehensive approach to the parts of the system we understand well, and then feed the results into a stakeholder or political process that can deal with the social aspects of the system we understand much less well. Planners can play the critical role in making this process reach a functional outcome. This is how I like to think of the planning profession – as the critical glue that can hold together a coalition of engineers, economists, bureaucrats, businesspeople, interest groups, and members of the public into a coherent whole that can set a direction for our society, then continue to guide it with incremental course adjustments as we go forward.

external costs

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Here’s a clear explanation of the rationale for regulating or taxing external costs:

Environmental regulation addresses a particularly striking example of market failure. Markets are generally efficient if companies’ revenues correctly reflect all the benefits that their output bestows on third parties, while their costs reflect all the harms. In this case, maximizing profit leads to maximizing social welfare.

But if production entails environmental damage for which companies do not pay, incentives are distorted; companies may turn a profit, but they function inefficiently in economic terms. So the state “corrects” firms’ incentives by levying fines or issuing bans.

I find this elegant as long as the external costs are relatively small compared to the costs that are reflected in the market. However, what if the costs priced by the market represent only a small fraction of the total cost. Then the idea of taxing the external cost wouldn’t work.

more on oil

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Here’s an argument that oil prices are likely to stay low for awhile. Basically, the argument is that the OPEC countries will keep pumping at full capacity and allow prices to fluctuate, thereby forcing the fracking companies to cut production every time prices fall below their costs. This article puts those costs at something like $50.

the only way for OPEC to restore, or even preserve, its market share is by pushing prices down to the point that US producers drastically reduce their output to balance global supply and demand. In short, the Saudis must stop being a “swing producer” and instead force US frackers into this role.

Any economics textbook would recommend exactly this outcome. Shale oil is expensive to extract and should therefore remain in the ground until all of the world’s low-cost conventional oilfields are pumping at maximum output. Moreover, shale production can be cheaply turned on and off.

Competitive market conditions would therefore dictate that Saudi Arabia and other low-cost producers always operate at full capacity, while US frackers would experience the boom-bust cycles typical of commodity markets, shutting down when global demand is weak or new low-cost supplies come onstream from Iraq, Libya, Iran, or Russia, and ramping up production only during global booms when oil demand is at a peak.

Sounds okay except I figure demand will continue to rise, slowly but surely, and drilling technology will continue to get cheaper, slowly but surely. So maybe this will go on for awhile, but one day fracking may be as cheap as traditional oil, and/or the traditional fields may start to run out faster than new ones are being found. Or maybe renewable energy will come to our rescue – I hope so, but cheap oil and gas aren’t going to make that day come any sooner. An international carbon price putting a floor on fossil fuel costs would do it, of course, and would create predictability for everyone, but at the moment it is hard to envision the political will materializing for that.