2010

Year: 2010

Handing out the Goodies

No, this isn’t a post about the goodies at this-coming Monday’s Econ TeaBA (where, rumor has it, Professor Galambos will explain the competitive market model to Professor Corry in 15 minutes.  Whether he can make good on this promise remains to be seen.  In either case, please, no wagering at the TeaBA).

This is a post about who will benefit and who will lose from the climate legislation.  We have been talking about the distributional issues in Economics 280 for a couple of weeks, that there are many ways to get the same “quantity,” but who wins and who loses can vary radically.  The projected shares are a big key to determining political feasibility — businesses like free permits much more than auctioned permits, and certainly much more than (egads) paying a tax.  On this front, we will be reading a paper called “Carbon Geography: The Political Economy of Congressional Support for Legislation Intended to Mitigate Greenhouse Gas Production” in our political economy course next week.  The basic idea here is that representatives from states with high per-capita carbon emissions are less likely to support costly carbon restrictions. (Actually, I haven’t read the paper yet, but I would have bet a dollar that’s what it says. That is, I would bet a if I hadn’t discouraged wagering in the previous paragraph).

As for the distribution front, Ted Gayer from Brookings has some preliminary estimates on who is going to capture the value of freely-allocated and auctioned permits over the first 20 years of the program.   The program will start with about 75% of the permits being handed out and more than half of the value of those permits accruing to electric utilities.  Less than 10% of the revenue will flow to deficit reduction or to offset other taxes.   Between 2026 and 2027, however, the percentage of auctioned permits jumps and ascends from 20% to a full 100%.    And, if you believe that is a credible commitment, I would encourage you to sleep it off and rethink your position tomorrow.  Consumer relief — that is, higher prices reduce consumer benefits — stays steady about 10% throughout.  Believe him or not, Gayer’s short brief is worth reading precisely because he hits the heart of the environmental policy debate.

OTC Genetic Tests Are Coming…

Well, that’s not quite accurate because over-the-counter genetic tests are already here.  That is, if you consider that in the time it takes for me to type this post, I could, with an internet connection and a credit card, procure any number of genetic tests from www.23andme.com or a bunch of other companies.

Just don’t try to sell the kits at Walgreens.

Now obviously we’re not talking about your garden-variety paternity tests, which are available on pretty much any street corner these days for about thirty bucks, we’re talking the big test, the one that will tell you your predisposition for Alzheimer’s, obesity, or a physical attraction to Larry King.

Anyway, here’s the scoop:

Pathway Genomics announced Tuesday that its saliva swab would be on Walgreen’s shelves later this month, offering millions of Americans the chance peek into their genetic code for signs of inheritable diseases like Alzheimer’s.

But within 24 hours the company’s plan was met with stiff response from FDA regulators who said the products may run afoul of federal laws governing medical tests. On Wednesday, the FDA posted a letter to Pathways online, indicating the San Diego-based company never submitted its product for federal review, a requirement for medical devices.

I put my face in my hands at least three times while reading this article.   We have a very curious regulatory state indeed.

The Grim Climate Change Arithmetic

Der Spiegel, a widely-read German publication, lays out the bad news this week with “How China and India Sabotaged the UN Climate Summit.”  I’m not sure I agree with laying the blame at the feet of the developing world (I thought it was doomed form the get-go).   Even so, the article quotes Chancellor Merkel, in a lucid moment, who puts things in perspective:

“Let us suppose 100 percent reduction, that is, no CO2 in the developed countries anymore. Even then, with the (target of) two degrees, you have to reduce carbon emissions in the developing countries. That is the truth.”

We talked about climate arithmetic a bit in class this morning in Econ 280. It’s very difficult to imagine a scenario where the US reduces its CO2 emissions enough even to stabilize “our share” of atmospheric concentrations.  That is, reducing carbon emissions on the order of 50-80% of current levels.   Of course, to stabilize global concentrations, the entire world would have to fall in line with such a strategy, and Der Speigel piece points out that this isn’t going to happen.

In other news…

Cap n Tax, Continental Style

A few weeks ago, Povolny Lecturer and funnyman Yoram Bauman stood up for the “cap and tax” proposal.  He didn’t literally propose a tax, but emphasized that the higher price associated with the cap was the incentive to reduce energy consumption.

CapntaxOn the other side of the pond, there actually is a cap & trade system in place, and it is really all over the price.  Carbon prices have ranged from €8 to €30, and the volatility can stymie long-term investments.  In other words, there is likely to be an inverse relationship between carbon prices and the payoff to greener (or at least lower-carbon) energy sources.  If investors don’t believe that carbon prices will be high, then green investments simply won’t be as attractive.

Enter the British Conservative Party, which has proposed a “Cap and Tax” of its own.  The basic idea is that because of the tendency for carbon prices to bottom out, a carbon tax would kick in if permit prices went below a certain level.  This would provide some stability to the market, as well as a potential revenue source.

That’s pretty clever.

Now, getting a government to make a credible commitment to a long-term tax is another story.

“HU-OOGE Paper Sellers Coming Through Here”

There seems to be some difference in the moment-to-moment intensity of an auction theory class and that of an actual auction.  Especially when the S&P is amidst an epic tank.

As evidence of that proposition, here is the highly-recommended audio from an auction pit in Chicago.  Sounds pretty exciting listening to a trillion dollars in wealth evaporate. So exciting, in fact, that I just set the “79s are trading” part as my ring tone.

I guess the LSB Chicago trip made it there a day late for this mayhem.  I look forward to hearing all about it.  Was there blood on the floor?

And, speaking of the Chicago trip, what is there to say about the level of awesomeness of the LSB program at this point? To quote Ben Lichtenstein from our audio clip, “Stop it, it’s got to hit a limit.”

(Picture taken from the Brokers with Hands on Their Faces blog).

Review of Invention of Enterprise

GerardoA few weeks ago, despite its substantial girth, I added the new Kaufmann Foundation volume, Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times to the black hole that is my reading list.  The reason for my excitement was the extra-ordinary group of volume editors.  David Landes is a pioneer in entrepreneurship and development, having written the highly-regarded The Wealth and Poverty of Nations. Joel Moykr is the author of a classic in the economic history of technology, The Lever of Riches. And William Baumol has written the seminal article on productive and unproductive entrepreneurship, as well as The Free Market Innovation Machine. Those of you embroiled in our burgeoning I&E curriculum will certainly hear from these gentlemen.

So, with these three pulling together a volume on entrepreneurship for the Kaufmann Foundation, this seemed like a can’t-miss deal.

But, according to Reuven Brenner, it missed.

It doesn’t take much time for him to find fault, either.  He starts out:

Carl Schramm, who wrote the Foreword to this book, and who, through the Kauffman Foundation, paid for it, states clearly that the book is about “entrepreneurship” as people — entrepreneurs in particular — understand the term: Someone who creates a business that, in some respects, differs from existing ones.

Yet, just two pages later, William Baumol writes in his Preface that the book is about both “redistributive” and “productive” entrepreneurship, the former covering warfare, crime, bribes, lobbying — any innovative ideas. Since this covers just about everything from Napoleon and his Code to Robin Hood, and from Muhammad, the merchant and one of the very few of Heavens’ intermediaries on this Earth to 35,000 registered lobbyists in Washington — it is little wonder that most of the 18 chapters, written by 18 different academics are all over the map, and provide little illumination on Schramm’s targeted subject matter.

Continue reading Review of Invention of Enterprise

Weber Grilled

A Ph.D. student at Harvard is taking on Max Weber (pronounced VAY – burr) over the whole Protestant work ethic thing. Davide Cantoni uses several hundred years worth of German data and finds no effects on economic growth. Here, I’ll let him tell it:

grillbabygrillMany theories, most famously Max Weber’s essay on the ‘Protestant ethic,’ have hypothesized that Protestantism should have favored economic development. With their considerable religious heterogeneity and stability of denominational affiliations until the 19th century, the German Lands of the Holy Roman Empire present an ideal testing ground for this hypothesis. Using population figures in a dataset comprising 276 cities in the years 1300-1900, I find no effects of Protestantism on economic growth. The finding is robust to the inclusion of a variety of controls, and does not appear to depend on data selection or small sample size. In addition, Protestantism has no effect when interacted with other likely determinants of economic development. I also analyze the endogeneity of religious choice; instrumental variables estimates of the effects of Protestantism are similar to the OLS results.

So, for the econometrically challenged amongst you, that means he ran a lot of regressions a lot of different ways, and the religion variables don’t ever seem to matter.

Scratch that one off the Freshman Studies reading list.

Of course, we here at LU know a thing or two about the economics of religion.  Just come by for TeaBA some time and we’ll tell you all about it.

How did Copenhagen Fail Thee? Let Me Count the Degrees…

Bad news on the climate front according to Joeri Rogel and colleagues in their pessimistic new article in Nature, “Copenhagen Accord pledges are paltry.”  Their bottom line is that even if we were to gird up our loins and somehow comply with the agreements of the recent Copenhagen accord, we’re still looking at 2C+ increases in global mean temperature.  (And for those of you who think those accords will actually be met probably could stand a splash of cold water in the face).

Taking a look at the figure on the right, you can see that the authors have done a probabilistic analysis of likely scenarios, with the 50% percentile being the “expected” or “best guess” case. As you can see, that is somewhere north of 2C, with 3C not being out of the question within 90 years.

If you have been paying attention I doubt you will find this all that novel of a conclusion.  In the recent Povolny lecture, Yoram Bauman expressed pessimism on the climate front.  The emerging tigers like China and India aren’t going to curb emissions and potentially hamstring economic growth.  Rich countries are rich and can afford to take adaptive steps.  Poor countries can’t adapt, but also are too poor to do anything but see how the experiment plays out.

That seems about right to me.

“We deal with them by ignoring them until they happen, and then overreacting”

That’s the answer.  The question is from a nice piece at Slate.com is:  How do we deal with low probability, high consequence events?  And the source of the quotation in this case is John Harrald from George Washington University.

The article is a pretty nice profile of what I would call risk regulation. I am pretty certain risk regulation is somehow different than regulating externalities, but I’m not sure exactly how and I’m not certain that there’s always a bright line. So, I’m asking my political economy class to figure this out for me.

One reason, of course, is that damages are determined in terms of expected values.  Regulating low probability events with highly-uncertain outcomes and benefits is problematic indeed.  Homeland security measures are notoriously difficult to even frame, let assign a “net benefit” to.  How many incidents have our securities regulations discouraged or prevented?  What bad things would have happened? What benefit would we have assigned to them?  See, for example, this paper by Farrow and Shapiro on the analytical tractability of this problem.

So that gets us back to the original question, which is, should we think about the regulatory framework for the current oil spill fiasco in terms of regulating some sort of risk or internalizing an externality? And, does it make a difference which approach we take in terms of the types of regulations we would want?

All that said, I’m not sure we always wait until bad things happen and then overreact.  In many cases, I would think there is excessive ex ante precaution that mitigates the intrepid adoption and diffusion of new technologies.

The good news is that these are exactly the sort of issues we grapple with in the Political Economy of Regulation course.  The bad news is, I’m not sure how far we get with these problems.

Natural Resource Damage Assessment

It is too bad that as we begin looking at benefit assessment in my environmental and regulatory classes that we have this gusher gushing up the Gulf Coast providing us with such a vivid real-time example.  So how do we go about valuing environmental benefits? Well, here’s a recycled piece from Slate.com, here’s Trudy Cameron at at The New Palgrave Dictionary of Economics, and here’s the guys over at www.env-econ.net with some estimates of lost fishing value.  That should get you started.

As you know (or should know), there are a couple of ways of doing this.  One is through market-type valuations, and another is through “contingent” valuation methods.  We economists typically prefer watching what people do rather what they say they would do in some hypothetical situation, but sometimes we get what we get.

And for those of you who think this is no big deal, it would appear that you are wrong.

Internship related to Sports Economics

The opportunity below must surely be one that you devotees of sports would salivate over.  The WSDC seeks a student to do an economic impact study of the Badger State Summer Games to be held in the Fox Cities.  If you are interested, please contact Jackie Jensen (no relation I assume to the former Boston Red Sox right fielder) and let me know.

Wisconsin Sports Development Corporation has an opportunity for a student or class to gain real-world experience in conducting an economic impact survey of the 2010 Badger State Summer Games held in the Fox Cities during the weekends of June 18-20 and June 25-27.

Wisconsin Sports Development Corporation (WSDC) is a nonprofit 501(c)(3) charitable organization devoted to fostering participation, competition and memorable experiences through our events and programs that promote health, active lifestyles and a sense of community.  WSDC’s marquee event is the Badger State Games.  The philosophy of the Badger State Games is that everyone plays regardless of age or ability. The Games embody the values of participation and good sportsmanship. BSG is Wisconsin’s only Olympic-style sports festival and is truly a grassroots organization that relies on the dedication of thousands of volunteers and the support of corporate partners.

WSDC wishes to ascertain the economic impact the Badger State Games has on the Fox Cities area.  In order to do this the following steps will need to be accomplished (see attachments):

  1. Review past processes, tools, timelines and reports
  2. Revise, update or create new processes and tools
  3. Create a timeline for implementation
  4. Recruit and train volunteer staff as needed to implement the study
  5. Collect and analyze appropriate data
  6. Prepare reports and deliver presentations to various stakeholders – eg: BSG staff, board of directors, funding sources, and other constituents.

If you have a student or a group of students who would be interested in taking on this task, please contact Perron Nicholas at pnicholas@sportsinwisconsin.com or (608) 226-4780, ext. 238, for more information.

Jackie Jensen, SPHR

Director of Administration

Wis. Sports Development Corporation

(608) 226-4780, ext. 222

(608) 226-9550 – fax

Economics TeaBA returns

As we have just seen, there is a lot going on around Briggs second these days.   We’ve got the attention of the University with the This is Lawrence video, there is the upcoming Chicago weekend, we are in the midst of class registration, and the Entertainment Industry Summit is on the horizon.

That means there is no better time than now to join us for the Economics TeaBA in Briggs 217 at 4:15.  You never know who’s going to show up. Last week we were joined by visiting Scarff professor and Povolny lecturer, George Wyeth, as well as comic genius and fellow Povolny lecturer, Yoram Bauman.  This week, perhaps it will be all-time hockey great, Henri Richard.

Well, perhaps not, but it promises to be a good time. As ever, the menu is subject to the department income and changing relative prices.

See you after class.

LSB Getting its Props

This week’s This is Lawrence video gives a big shout out to the Lawrence Scholars in Business program, spearheaded by the intrepid, semi-fearless and always venturesome, Professor Adam Galambos.

Here is the video!!!

Can you believe all the talent on display? I spotted trustee and LSB champion Bob Perille, LSB-Scholarship winner and I&E reading group member Katelin Richter, Tyler Vane, Suzie Kraemer, Colin Smith, Murtaza, Professors Galambos and Finkler, and many others. Make sure to send it to your parents and friends. And your friends’ parents. And your parents’ friends. It’s simply the best This is Lawrence video in memory.

Speaking of LSB, the Chicago trip is coming up. That should be educational and entertaining. Don’t miss it.

And, speaking of entertaining, the Entertainment Industry Summit is coming in May.

Could LSB rock any harder?

Freshman Studies Thought for the Day

“It was a good idea to get science and democracy from the ancient Greeks. It’s not such a good idea to get fiscal policy from the modern Greeks.” — David Boaz from The Cato Institute

I’m guessing Professor Wulf would find this amusing.

Speaking of Professor Wulf and Freshman Studies, it is shaping up to be awesome this fall, so I encourage you to enroll as a Freshman to take advantage.

Entrepreneurship at TED

The Educated Entrepreneur blog has tipped us off to 10 TED talks for entrepreneurs. “ideas worth spreading.”    Their conferences and gatherings tend to host blockbuster talent, and this list of 10 talks is no exception.   I suggest you listen to what Alex Tabarrok has to say.  He argues that “free trade and globalization are shaping our once-divided world into a community of idea-sharing more healthy, happy and prosperous than anyone’s predictions.”

Let’s hope so.

EconTalk of the Town

Several blogs that I read have pointed to Russ Roberts’ new essay on the financial crisis, Gambling with Other People’s Money.   This from the Executive Summary:

I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

Roberts, of course, is the voice of EconTalk, a principal at Cafe Hayek, and one of the brains behind the Keynes v. Hayek video.  So, my guess is that this will have some elements of a “government failure” story.

Where Can the Answer Be Found?

Well, the Department of Interior finally got around to approving a wind farm off Cape Cod.   This seems to be an executive branch move, though I suppose Congress could rescind it legislatively (if it could override a veto) or cut funding to Interior for implementation. The long-running, and I do mean long running, standoff pitted on the one side former Senator Ted Kennedy and like-mined people living there who think windmills are something of an eyesore. Others, such as Kennedy’s nephew, Robert, call them a financial “boondoggle,” that will cost Massachusettsians a lot of money in additional energy costs.

On the other side is an odd coalition of business and environmental groups.  Businesses like money and environmental groups like wind, so there you have it.

Obviously, the monied interests will not throw in the towel after fighting this for nine years — they are going to sue sue sue.

Such is the regulatory process.