Lawrence Economics Blog

Creative Instruction

Liability for Harm Versus Regulation of Safety

That’s the classic question that Steven Shavell posed 25 years ago, and the debate over whether these two are potentially substitutes continues today.

The BP catastrophe has certainly brought more than its share of discussion on the issue.  Paul Krugman weighs in on the side that the continuing spill is Exhibit A that liability is a failure the private sector needs a stern regulatory hand to guide it.  Tyler Cowen frames the argument and takes Krugman to task on one point:

There is in fact an agency regulating off-shore drilling and in the case under question it totally failed.

Point, Cowen.

Of course, not all regulation is as inept as the Minerals Management Service (MMS) seems to be in this case.  One problem is that MMS is charged both with regulating environmental and safety concerns AND is responsible for approving leases to the provide sector.

And, which do they choose? According to the Washington Post:

Minerals Management Service officials, who can receive cash bonuses in the thousands of dollars based in large part on meeting federal deadlines for leasing offshore oil and gas exploration, frequently changed documents and bypassed legal requirements aimed at protecting the marine environment, the documents show.

Emphasis is mine, though the point sort of jumps out at you, doesn’t it? But, it’s not like the appearance of financial impropriety is a new thing with the MMS.  On the heels of the spill, in fact, President Obama recommended bifurcating the agency to mitigate the clear incentive compatibility problem.

Continue reading Liability for Harm Versus Regulation of Safety

Are Patents the Engine of Growth?

Great post by Richard Langlois at the Organizations and Markets blog about the extent to which “James Watt’s steam-engine patents retarded innovation in steam technology and slowed the British industrial revolution.”

Typically, we teach that the patent is an imperfect solution to the “appopriability” or “positive externality” problem, where individuals and firms are reluctant to innovate because they cannot capture the full value of their efforts due to competitors copying the innovation.  The patent offers temporary monopoly power in exchange for the inventor disclosing technical information to the public. Watt certainly benefited from that protection.

In this case, however, some say the patents were so broad in scope that they allowed Watt to stifle competitors altogether.  There is an on-going discussion in the innovation world about this “strategic patenting,” and the Langlois piece is a nice introduction if you are interested.

Rumor has it that Professor Langlois’ book, The Dynamics of Industrial Capitalism, will be featured in this fall’s I&E Reading Group.  Watch this space.

Our Readers Respond

As you can imagine, a blog like this generates a lot of reader response.  From our post on the American Power Act, astute reader NS writes in:

Captured?

Pithy, yes.  He also sends along this piece on the flow of corporate money supporting the bill.  For those of you interested, the capture theory posits that firms often “capture” regulators, and consequently legislation &/or regulation is used as a means to redistribute resources from one group to another. I’d probably go with the Becker model on this one, but he gets an A for brevity and wit.

Also on the corporate interest front comes this great article from alert reader “Mr. O.” The “beverage lobby,” folks with a lot a stake in the soda (a.k.a. “pop”) tax, have dispensed with the niceties and are offering up cold hard cash to quash it:

Yet with the nation’s obesity burden and states and municipalities parched for new cash sources in this recession, the beverage lobby isn’t underestimating the tenacity of those who would impose taxes. So they’ve unveiled a new tact in Philadelphia: abandon the tax and the beverage industry will donate $10 million over two years to the Pew Charitable Trusts to fund health and wellness programs in this city, if Pew would accept the funds, reported BNET.com.

I kid you negative, Mr. O was laughing out loud (LOLZing, as the kids say) at the audacity of this proposal.

So, for any of you other readers out there that identify something of interest, please bring it to our attention. If it clears the bar, it might be you seeing your initials right here on the blog.

Imagine that.

Penultimate TeaBA

It’s time to get ready for the penultimate Economics TeaBA of the 2009-2010 season. As per usual, the fun starts at 4:15 Monday in Briggs 217.

The Economics TeaBA came pretty much out of nowhere and has become a centerpiece of the economics co-curricular activities at Lawrence. Dozens of students have been treated to hot beverages, high-calorie snacks, along with both casual and serious discussions with the economics faculty and other esteemed attendees. In the past few weeks, we’ve enjoyed the company of EPA Administrators, mathematics professors, professors emeriti (is that the plural of emeritus?), and visiting economists /standup comedians.

So, we never really know what the Economics TeaBA will hold. All I can say is that this week’s will be the penultimate experience.

That’s Entertainment

AC10-119 LSB Entertainment Industry Summit Poster
Click to Enlarge

For those of you grousing about looking for the whens and wheres of the Lawrence Scholars in Business Entertainment Summit, you’ve come to the right place. It is today at 4 p.m. in the Hurvis Room of the Warch Campus Center. Dinner to follow at 6, space permitting.

This is the final LSB event of the year, and should appeal to folks of all stripes, from the economics majors to the Conservatory and Arts students.

Click the poster for the full report.

Who Takes the Summers Off? I&E Reading Group Announces Its Summer Selections

Given the dwindling attendance in my courses, either the weather has become appreciably better, Midwestern style, or Professor Finkler is giving another macro exam. Both are sure signs that summer is just around the corner.  That means it’s time to unveil the Innovation & Entrepreneurship Reading Group‘s summer books.

The first book comes recommended from Professor Garth Bond, who offers us Moneyball: The Art of Winning and Unfair Game.  I’ll let him tell you about it:

It’s a bit off the beaten path, but it is a great  read and certainly raises questions about innovation in a decidedly different context: Michael Lewis’s Moneyball.  If you’re not familiar  with it, it’s basically a book about the sabermetric revolution in  baseball, focusing on Billy Beane and the Oakland A’s in the early 2000s.  It is decidedly about the difficulties involved in introducing  innovation into baseball, exploring where and how new ideas arose and  how they actually came to be implemented (and ultimately copied).  I  think it might be particularly interesting because many of us have a  hard time thinking of sports as just another industry, so that it can  challenge our abstract theories by applying them to matters of the  heart.  The other nice thing about the book is that it is extremely  approachable and short.

That is a clear winner.

If you are still on the fence after that, consider that Hollywood is (potentially) making a movie version of the book that will star Brad Pitt.  Here is a review — of the book, not the movie — from the San Francisco Chronicle.

The second book is The Marketplace of Ideas: Reform and Reaction in the American University by Louis Menand.  This is a provocative piece about why although academics tend to be liberal as a bunch, but institutional change within the academy is slow going.

Menand is a brilliant writer, and the book certainly adds much to the discussion of  “how can we at Lawrence be more innovative.”  Here is the review at Slate that tipped me off to the book.

Also a clear winner.

The tentative meeting date for the faculty group will be in late July.  You should be able to find out more right here on this blog, or on our group site on The Moodle. In early July, I will begin “live blogging” and posting some associated content. As was the case with the first book, any students interested in reading should let me know so we can get together to discuss it.

Those of you not interested in the I&E Reading Group might find some of these useful.

Two Tales, One American Power Act

The American Power Act is the latest climate bill making its way through the Senate. For both of my classes this term we have talked about the tradeoffs between policies that economists like and policies that might have a chance of passing. Ted Gayer at Brookings definitely puts the APA in the latter camp:

The bill auctions only 24.8 percent of the allowances in the early years (the share devoted to auctions is highlighted in blue), the remainder of the allowances being given away to such things as electricity local distribution companies, trade-exposed industries, refiners, commercial developers of carbon capture and storage, and a National Industrial Innovation Institute. The auctioning ramps up to 79.5 percent of allowances in 2030, and then full auctioning only occurs in 2035

And concludes:

By failing to use a full allowance auction to offset economically harmful taxes and deficits, the Senate bill sacrifices economic gain for political support from interest groups.

Robert Stavins, on the other hand, seems to look up at the sky and see a different color.  Stavins is perhaps the most prominent environmental economist in the field, and he  seems pretty upbeat about the whole thing:

Over the entire period from 2012 to 2050, 82.6% of the allowance value goes to consumers and public purposes, and 17.6% to private industry. Rounding error brings the total to 100.2%, so to be conservative, I’ll call this an 82%/18% split.

I’m going to have to side with Gayer on this one.  It may well be the case that on average the “value” goes to some “public purposes,” but it sure doesn’t seem that way looking at the early splits (Here’s the blown up version for those of you preparing to squint).

Gayer Table

For the first 13 years of the program, more than half of the allowances are going to industry, it appears.  Not until 2025 do we see the industry percentage phased out (rapidly) and the auction percentage jump (also rapidly).  So, to put it another way, today’s Congress is committing the 2025 Congress to implement the tough changes that will accompany climate change. I am going to put the odds on this commitment being credible as “improbable.”

Continue reading Two Tales, One American Power Act

My heart’s on fire, OIRA

Sunstein Nudging His Students

What could be more exciting than a full New York Times expose, complete with action photos, on the new OIRA director, Cass Sunstein?

Well, how about a blistering response from University of California professor, Brad DeLong?

Here we have yet another example of why law professors should simply not be allowed to practice law and economics or moral philosophy without a license–and of how Cass Sunstein has never bothered to do the work necessary to acquire a license to practice law and economics.

Both pieces are interesting reads alongside our work in Econ 280 this week on The Stern Review and William Nordhaus’s critique of it.

Wait, what’s that?  You don’t know what OIRA is?  Well, it’s the Office of Information and Regulatory Affairs, housed in the White House’s Office of Management and Budget.  These are the folks who review agency regulations twice (!) during the federal rulemaking process. The OIRA is charge, among other things, with helping agencies to work through benefit-cost analysis — the source of Professor DeLong’s ire in this case.

So if administrative regulation piques your interest, this is your lucky day.

A Gallon of Prevention…

… is certainly worth a barrel of cure.  Instead of having these guys with big yellow boots (I thought only 4-year old boys ran around in public in galoshes out of season), perhaps it would pay to have more egghead types crunching data on safety risk.  That was the message I gave in both my classes this week, as we sat down to read Shultz and Fischbeck’s “Workplace Accident and Compliance Monitoring: The Case of Offshore Platform Inspections,” from RFF’s Improving Regulation.  In that paper, they identify a set of factors (using factor analysis and a logistic regression model) that does a pretty good job of identifying the high-risk platforms.  Pretty good compared to what?  Well, certainly much better than random chance, and also better than the Minerals Management Service inspectors who were extensively interviewed for the project.

Neither Shultz nor Fischbeck have been in the press too much, but yesterday we finally did hear from one of them here:

Data problems date back at least a decade. According to John Shultz, who as a graduate student in the late 1990s studied MMS’ inspection program in depth for his dissertation, the agency’s data infrastructure was severely limited. “The thing I regret most is that, to my knowledge, MMS has not fixed the data management problem they have,” said Shultz, who now works in the Department of Energy’s nuclear program. “If you have the data you need, the analysis becomes fairly straightforward. Without the data, you’re simply stuck with conjectures.”

Anyone interested in taking a look at the Shultz and Fischbeck is welcome to contact me, for the paper or for a PowerPoint of their work.  Anyone interested in doing research or an independent study related to transportation fuels regulation should also contact me.

There Will Be Tea

How about a milkshake?
Or perhaps a delicious milkshake?

After what is certain to be a grueling 240 exam, what better way to kick off a Monday night than a visit to the Economics TeaBA with economics faculty and students?

Remember, it’s TeaBA because, unlike other disciplines, we don’t want to lock ourselves into an inefficient technology in the event that relative prices change. In fact, given the warm weather, it might be a good time to switch to Iced TeaBA.

As always, the fun begins at 4:15 in Briggs 217.

Star-power at Lawrence this Saturday

AC10-119 LSB Entertainment Industry Summit Poster
Click to Enlarge

This Saturday the Lawrence Scholars in Business program will have its final event of the year: the Entertainment Summit. This event should be of interest not only to economics and other majors who are interested in the business of show-biz, but also to Conservatory and Arts students interested in getting into the entertainment world.

Five Lawrentians who know that world very well will be here to tell us about it: Alan Berger, Emeline Davis, Lee Shallat Chemel, Liz Cole, and Campbell Scott. Take a moment to click on those links, and marvel at the star-power arriving to campus on Saturday. Campbell Scott will be showing his new mockumentary, Company Retreat, at 7:15 pm on Friday, May 21st, in the Warch Cinema.

Please sign up in the Career Center, or by email at careercenter@lawrence.edu.

But What About the Cool ‘Stache?

It never occurred to me to ask the question: LawrenceVikings

Vikings did not wear horned helmets. According to [Cecil Adams], “contemporary Viking era artwork shows roughly half of Vikings in battle bareheaded, while the rest wear unremarkable dome-shaped or conical helmets.” The idea that Nordic invaders of the ninth and 10th centuries wore headgear festooned with ox horns developed a thousand years after the fact, when a Swedish artist illustrated them as such for a poem based on an old, Icelandic saga.

Here’s the source.

And, evidently, there’s a good reason why:

No self-respecting Viking warrior ever wore a horned helmet in battle–they weren’t that dumb. As anyone who has done any slaughtering can tell you, horns provide nothing more than a good handhold to steady your work while you’re slitting someone’s throat.

Keep that in mind next time you enter hand-to-hand combat.

What are Companies Good For?

In today’s Economix blog, Uwe Reinhardt addresses the time honored debate regarding the role companies play in an economy.  He contrasts the Neo-Classical view, with appropriate reference to Adam Smith, with communitarian views   expressed by many critics of capitalism.  He argues that simple ideological distinctions misinform rather than inform a discussion of how wealth is generated or destroyed by business.  Reinhardt writes superbly.  I encourage all to read his regular entries to the NYTimes Economics blog.

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.