Asymptosis

I’ve long lauded Jim Manzi for his cogent and convincing arguments against carbon taxes. He’s the antithesis of the “1998 was really hot! Look: it’s cooler now!” school of head-in-in-the-sand self-delusionists. Rather, he takes the 2007 IPCC report as the best available consensus scientific knowledge we have, and uses it to think through a clear-eyed, long-term cost-benefit analysis of carbon taxes/cap-and-trade. Anyone interested in this subject should read this article (and note that it’s published in the regular “In-House Critics” column of the  decidedly lefty New Republic, which speaks volumes about which side of this debate is willing to tolerate and consider — and yes, publish — strongly argued dissenting views).

When I consider arguments in favor of climate legislation, Manzi’s thinking is what I measure those arguments against. Here’s his argument in small (my emphasis for easy skimming):

• “the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.”

• “hedging your bets and keeping your options open is almost always the right strategy. Money and technology are our raw materials for options. … the loss of economic and technological development that would be required to eliminate all theorized climate change risk (or all risk from genetic technologies or, for that matter, all risk from killer asteroids) would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Yes, he addresses the uncertainty/risk/probability issues of global warming — notably those from Harvard’s Martin Weitzman.

It’s a compelling argument: given the risk scenario painted by the IPCC in 2007 — and its uncertainty — our best response is to promote economic and technological growth and development, so we have the resources to address problems in the future, when we have a clearer picture of what the problems are.

But the counterarguments are also very strong. If Manzi incorporated them into his thinking, I think he would come to very different conclusions. Respondents at The New Republic have offered several of them; I will steal from them unabashedly, and add a few of my own.

• The 2007 IPCC report is getting long in the tooth — it’s based on the best research from four to six years ago. Recent research is (almost uniformly) far more alarming. Two examples: 1. “The area of summer sea ice remaining during 2007-2009 was about 40% less than the average projection from the 2007 IPCC Fourth Assessment Report.” 2. One report posits a circa 5% chance that large portions of the planet will be rendered uninhabitable — including the eastern U.S..

• The 2007 report specifically did not make projections for sea-level rise. The modeling of ice-sheet behavior was considered too difficult at the time. The economic costs from rising seas could dwarf all others combined. A cost-benefit analysis that doesn’t include those costs doesn’t tell us much.

A 6%-of-GDP insurance policy against those eventualities starts to sound more reasonable. But even the 6% estimate has serious problems.

• Manzi assumes that carbon taxes will add to, not replace, other taxes. Economists agree that consumption taxes and “Pigovian” taxes — taxing negative externalities — are more economically efficient (they result in greater economic growth and prosperity) than many of our current taxes, like those on income, corporate profits, etc. A carbon tax is a Pigovian consumption tax. If our tax base shifts in that direction, the result is more economic efficiency, yielding the very result — faster growth and development — that Manzi champions.

• He assumes the need for a global taxing regime, ignoring the benefits to the U.S. of a unilaterally imposed carbon tax. The long-term savings in national defense and security from reduced fossil-fuel consumption are darned hard to predict, but even most righties will acknowledge that we wouldn’t have invaded Iraq if there was no oil over there. That war will cost us trillions, all told — somewhere north of 25% of U.S. GDP for a year. And that’s before even considering the fuel that it poured on the fire of global jihad. That was one damned expensive insurance policy to ensure future oil supplies.

• He ignores the threat that global warming poses to U.S. national security, as detailed by those left-wing nut jobs at the Pentagon in their Quadrennial Defense Review for 2010 (PDF): ”climate change could have significant geopolitical impacts around the world, contributing to poverty, environmental degradation, and the further weakening of fragile governments. Climate change will contribute to food and water scarcity, will increase the spread of disease, and may spur or exacerbate mass migration.While climate change alone does not cause conflict, it may act as an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”

• He ignores the truly horrific, potentially even apocalyptic human impact of global warming, and a “mere” 3% decline in GDP, especially outside the developed world. (Quite resoundingly demonstrating Jonathan Haidt’s findings about libertarians’ lack of compassion.) As Nate Silver has pointed out (H/T Bradford Plumer) we could eliminate 43% of the world’s people and only reduce world GDP by 5%.

As I said, I greatly admire Jim Manzi’s thinking. But I have to say that his failure to include these points in that thinking gives the strong impression of confirmation bias.

Asymptosis Economics, Energy Independence, Foreign policy, Global Warming, Politics, Uncategorized

Lane Kenworthy has updated his Best Inequality Graph with the latest data (through 2007):

Hidden in the fine print, you’ll find proof positive that trickle-down works: middle-class incomes have risen by 1% a year since 1979! And poor people’s incomes have gone up by 0.4% a year.

How can you argue with that kind of rampant, precipitous prosperity growth?

(Note that these are post-tax, post-transfer incomes.)

Asymptosis Economics, Politics

If you’re like me, you hear your friends say this a lot about America: “we need to start making things again.” It seem intuitively correct, but there’s a pretty standard economic response: if we’re getting all the profits based on our knowledge and innovation, even though we’re not doing all the work, what’s the problem? Sounds kinda great, actually. Apple pulls a 60% margin on the IPhone 4, spending only $6.54 on assembly costs in China for a $600 item. (!)

It’ll all trickle down, right?

I’ve struggled with my thinking on this a lot; there are obviously lots of problems with the trickle-down idea (some of which I’ve discussed many times), but it’s hard to argue with the phenomenal prosperity (or at least profits) that the Apple model delivers.

Andy Grove’s new Bloomberg article does a lot to help me sort out that thinking, and adds another nail to the coffin to which “trickle down” is increasingly (finally!) being relegated.

His central point, cutting the Gordian knot: as the manufacturing ecosystem disappears in America — along with the jobs — we lose the ability to innovate. I think of the decades-long culture in my home town, Seattle, which has its roots in generations of Boeing machinists and engineers bringing up machinists and engineers. It’s a self-perpetuating culture from which innovation springs.

Grove’s article is brief and concise (and well worth reading in full), so rather than summarizing it I’ll just pull some choice morsels for you. All emphasis is mine.

… our own misplaced faith in the power of startups to create U.S. jobs. …

Startups … cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. …

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs. …

American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering. …

what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed? …

Simply put, the U.S. has become wildly inefficient at creating American tech jobs. …

…the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today. …

Whoever made batteries then gained the exposure and relationships needed … U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up. …

a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. …

we broke the chain of experience that is so important in technological evolution. …

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system …  we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries … These countries seem to understand that job creation must be the No. 1 objective of state economic policy. …

these economies turned in precedent-shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries. …

Long term, we need a job-centric economic theory — and job-centric political leadership — to guide our plans and actions….

… our pursuit of our individual businesses … has hindered our ability to bring innovations to scale at home. …

Losing the ability to scale will ultimately damage our capacity to innovate. …

The first task is to rebuild our industrial commons. … Levy an extra tax on the product of offshored labor. … Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

I fled Hungary as a young man in 1956 to come to the U.S. … I witnessed first-hand the perils of both government overreach … there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive. …

If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Grove understands what the rabid Norquistista free-marketers seem incapable of comprehending or acknowledging:  there is an invisible hand, but there is also a tragedy of the commons.

He only makes one real policy proposal: taxing offshore work and using the money to encourage onshore employment. There are many others (Robert Frank had some great suggestions in last Sunday’s Times), all rooted in central economic planning by the federal government. I’ll just mention my favorite once again, without further discussion: greatly expanding the Earned Income Tax Credit, and increasing its “salience” by delivering it on weekly paychecks.

And then there’s infrastructure, of course. I just rode the TGV from Paris to Avignon and back — at 200 mph. A great experience, and the prosperity it’s delivered to southern France is incalculable.

China is currently building 42 high-speed rail lines. We have one that we’re sort of, kind of, working on.

I’m sure this is because China is foolishly engaged in centralized economic planning.

And we — obviously far more clever than they — are not.

Asymptosis Economics, Foreign policy, Politics

I’m going to start this post with a proleptic response:

No, nobody is suggesting a Maoist cultural revolution, forcing executives and professors to muck shit on collective farms.

But I feel compelled to share the results from my latest, comparing income inequality to prosperity and prosperity growth in the fifty states.

Contrary to the supply-sider narrative, income inequality appears to have almost no correlation with prosperity growth (.05). What correlation it does show is the opposite of what the supply-siders would have you believe.

This suggests — also contrary to all-too-commonly received wisdom — that there is not in fact an inevitable trade-off between equity and efficiency. That it’s a false choice. That we can in fact have more of both.

Asymptosis Economics, Politics

Commenters on my cross-post over at Angry Bear have asserted among other things that real GDP/capita growth has been steady for more than a century.

See? This proves, they assert, that the policy differences between Republicans and Democrats don’t really affect anything.

My response was to point out how hard it is to eyeball important changes in this graph — it looks like a straight line with blips for the Depression and WWII. It’s very hard to see what in fact constitute important or even profound changes in our well-being.

In particular, look at growth from 1820 to 1929, and consider how the trend compares to post-war (i.e. post-New Deal) performance:

Growth moved above trend starting the 60s, and has continued doing so since. (You could move the trend line down a little without departing the facts — passing it through the center of the pre-1929 movements rather than the ’29 top — making post-war growth look even better by comparison.)

We can say at least this with complete certainty: the disastrous long-term results predicted for (and contrafactually attributed to) New Deal policies did not occur.

Asymptosis Economics, Politics

Just following up on my recent post showing that progressivity in state taxes seems to have no significant relationship to prosperity:

These findings suggest to me that the supposed tradeoff between equity and economic efficiency is a false choice (by this measure, at least). More equitable states (far more equitable) are just as prosperous, at least in aggregate, as states with wildly draconian tax regimes.

So if we can have both equity and efficiency, why shouldn’t we?

Asymptosis Economics, Politics

File under: Painfully Strained Mixed Metaphors. (Unless: “with” means “using.” But still.)

The Norquististas want to make government small enough to drown it in a bathtub.

Bruce Bartlett was there when the Republicans ginned up this ideology. He participated. And he takes it down here.

In effect, STB became a substitute for spending restraint among Republicans. They talked themselves into believing that cutting taxes was the only thing necessary to control the size of government. Thus, rather than being a means to an end—the end being lower spending—tax cuts became an end in themselves, completely disconnected from any meaningful effort to reduce spending or deficits.

I would just disagree on one point: tax cutting has not been an end in itself for Republican politicians. It very quickly turned into an utterly intentional, Machiavellian political strategy to buy votes.

The Reaganomics Strategy.

It worked brilliantly, and unfortunately it still does.

Asymptosis Economics, Politics

In my peregrinations I just came across an old 2006 post by Greg Mankiw. He describes the situation of:

…a Harvard PhD in economics who left an academic job for a better-paying one in private equity. Based on the article, he seemed a bit wistful about leaving an academic job behind. At a higher tax rate on his new higher income, might he have stayed with the perks of the ivory tower? Perhaps. But, based on market prices, his talents are more productively applied in private equity, where he is filling the important role of allocating the economy’s capital stock. If he gave up that job because of a higher tax rate, the loss to the overall economy would be measured by the deadweight loss.

But Mankiw is making an assumption here: that the market pricing for equity analysts (versus professors) reflects and effects an optimum allocation of (human) assets — that if that professor becomes an equity analyst, it will increase overall prosperity.

Based on recent events (and reams of research and theory), it seems clear that this assumption is false.

1. The financial sector is far larger than is necessary to effectively lubricate and nourish the real economy — the part that produces valuable goods and services (such as … university educations).

2. It is many times larger than is necessary to set prices efficiently. Fama and French showed long ago that it requires very few players for a market to be efficient. (The same is probably true of types of securities; stocks, bonds, options, futures and shorts probably do all or perhaps far more than is needed to achieve efficient pricing.)

The size of that sector both reveals, and in a self-perpetuating cycle causes, a massive misallocation of resources by the invisible hand.

And that’s before we even consider the systemic risks of a top-heavy financial system.

Moving another smart person into that sector arguably decreases prosperity.

Asymptosis Economics, Politics

The solid line (left scale) is the ratio of financial sector wages to private sector wages.

The dotted line (right scale) is an index of financial regulation.

From: 13 Bankers In 4 Pictures

Asymptosis Economics, Politics

Short answer: Yes.

Slightly longer answer: Not very many people, and not much lazier.

Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco just released a new study of unemployment insurance and unemployment. This graphic stands out:

People who quit their jobs or are just entering the job market aren’t eligible for unemployment compensation. People who lose their jobs are. This is just the kind of great natural experiment that lets us judge, by comparison, the effects of past policies.

The money quote:

The differential increase of 1.6 weeks for job losers is the presumed impact of extended UI benefits on unemployment duration. It is straightforward to translate this increase in unemployment duration into an effect on the unemployment rate, based on their proportional relationship and adjusted for the share of job losers in overall unemployment, which was about 67% in December 2009. The implied increase in the unemployment rate is quite small, slightly less than 0.4 percentage point, indicating that without UI extensions, the measured unemployment rate would have been 9.6% in December 2009 rather than the observed 10.0%.

Job losers (eligible for UIC)  take an extra week and a half to get jobs.

So the “obvious” is true: if you pay people not to work, they will work less, in aggregate. Some people will opt for “funemployment” insurance and take the summer off. But that simplistic truism hides the truly important reality: the effect is very small — even when you throw five UI extensions into the mix.

Simplistic arithmetic based on this study suggests that any given moment, because of UIC there are about 600,000 people not working, who would be working without it. (.004 times the U.S. work force of 150 million.) That sounds like a lot, and it’s certainly enough to inflame many people’s hot-wired “cheater resentment” genes.

But the reality is, there will always be gamers, cheaters, and free-riders, in any system. (Just look east, to Wall Street.) In the case of unemployment I say get over it. They’re a tiny percentage, and in the big picture the effects are trivial.

Maybe my resentment genes are pathologically inoperative, but these numbers do a hell of a lot more to light up my compassion genes — compassion for the 14.4 million hard workers who are protected from potential economic catastrophe, a catastropohe that was none of their own doing. (I won’t even start on how the whole economy is better off as a result.)

If 600,000 people get a few weeks of extra leisure along the way — the kind of extended leisure time that I, lucky soul, have been blessed with throughout my life — I say more power to ’em.

Asymptosis Economics, Politics