Wednesday, July 23, 2014

Supply Creates Its Own Demon (SCIOD): The Serial!

Enough is enough!

Erik Brynjolfsson and Andrew Mcafee wrote
This view – that automation and other forms of technological progress in aggregate create more jobs than they destroy – has come to dominate the discipline of economics. To believe otherwise is to succumb to the 'Luddite fallacy.' So in recent years, most of the people arguing that technology is a net job destroyer have not been mainstream economists.
To Brynjolfsson and McAfee's credit they point out that the theory and evidence for this argument are "less solid than they initially appear." What they don't point out -- and possibly don't realize -- is that the theory and evidence were discredited roughly 80 and 140 years ago.

"In economics," Paul Samuelson wrote and I quoted a short while ago, "it takes a theory to kill a theory..." But it doesn't have to be a better theory or a newer one. In fact, the surest way to kill a theory in economics is with a previously-deceased theory, as the same Samuelson demonstrated in another recent post.

It turns out that bringing the dead back to life has been a recurrent theme among economists -- most literally in the case of Andrew Ure's experiments with Galvanism just a few months after publication of Mary Shelley's novel, Frankenstein (see episode 10).

As I've been trying to point out, the "will automation take our jobs?" motif is neither new nor interesting. Well... maybe it's interesting in a kind of morbid fascination way. But it's not interesting in the sense of "can we learn anything new from this?" The question has shuffled off this mortal coil. A more interesting question would be why does the anachronism persist?

I've got a 10,000-word draft, consisting of most of the projected twelve episodes of "Supply Creates Its Own Demon" (henceforth "SCIOD") in which I explore the extraordinary afterlife of a dead idea. I have scheduled two episodes a week, to be posted on Thursdays and Tuesdays at 5:00 p.m EST. Links will become active as the scheduled episodes are posted. Here are the episodes titles:
  1. Pantin's Pantomime coming July 24
  2. The Automatic Left-handed Loom July 29
  3. Chariots of the Luddites July 31
  4. Paradox Laws August 5
  5. Supply Creates Its Own Demon August 7
  6. A Trick! of the Clumsiest Description! August 12
  7. The Frankenstein Factory August 14
  8. The Secret Basis of Glut August 19
  9. This Magazine of Untruth August 21
  10. The Fund-a-mental Thing's Supply As Time Goes "Bye!" August 26
  11. Continuation of Brassey by Chapman August 28
  12. Weighs Like a Nightmare, Sinks Without a Trace September 2
Why do defunct ideas persist? Hypothesis: they fit into a multi-faceted repertoire of beliefs and behaviors in which they "make sense" because they legitimate and rationalize those beliefs and behaviors. It's no use refuting the wrong idea without directly confronting its repertory context.

Teasers:  Previously I have drawn on material from episodes 7, 8 and 12 for posts subtitled You Don't, Say!Marc Andreessen and "Textbook Luddism" and Say's Law sank without trace.


Tim Worstall on the Alleged Benefits of Corporate Inversions

There is a wonderful debate on why inversions matter. Tim Worstall knows the technical side of tax law:
A tax inversion changes the way that profits made outside the US are taxed by the US, this is entirely true. But such a tax inversion, in and of itself, doesn’t change the way that profits made inside the US are taxed at all.
He’s talking about the Walgreen proposed inversion:
So, what happens when Walgreen’s does a tax inversion (by merging with or taking over Boots etc)? The taxation of those profits that Walgreen’s makes by doing business in the US doesn’t change … What does change is that Walgreen’s profits made outside the US have moved from being US domiciled to being non-US domiciled. And as those outside the US profits are neither US resident nor US domiciled then they’re not taxable in the US.
I guess Tim has not read the Walgreen 10-K as it is a domestic retailer. There are just not that much in the way of foreign based profits. OK, there are for AbbVie and for Medtronic. In fact, AbbVie has allocated over 87% of its profits abroad. Abbvie’s concern is this repatriation tax, which the Republicans want to get rid of anyway. Medtronic does not pay a repatriation tax as it permanently defers its foreign sourced income – which is just say of 60% of its worldwide profits. Tim tries to dispute a claim made by David Cay Johnston (and others) that these inversions will lead to more sourcing of income abroad:
There are, it is true, other things that the newly merged company could do to move such US profits out of the US tax net. They could, for example, sell the patents on drugs that they market in the US to some nice offshore subsidiary in, say, Bermuda. That Bermudan subsidiary then charges the US unit for the use of those patents and this moves profits outside the US tax net into Bermuda’s no tax net. That’s certainly possible although we’ve no news at all that leads us to think that they are planning this. So we might be able to say that a tax inversion opens the possibility to future movement of US profits offshore. However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards.
Tim is referring to section 367(d) which says migration of IP requires that the original owner of the IP be compensated at fair market value. Tim assumes that the IRS is incredibly effective at enforcing this sensible requirement. I guess he has no clue that most of these transfers occur at something like 10 cents on the dollar of what the market suggests is the fair market value. Fortunately for us, Kenneth Thomas understands how this works in practice. Of course, I still have one wee problem with this being discussed in terms of the AbbVie inversion. With over 87% of their profits being sourced abroad even before the inversion, hasn’t the horse already left the barn?

The Loathsome Timothy Taylor

I was composing a piece in which for some reason I referred to "the loathsome Timothy Taylor." But then I paused and asked myself "why loathsome?" Shortly after I read this comment by Owen Paine at Economist's View: "Timmy Taylor is a loathsome lamprey like creature..." referring to a piece by Taylor, "Are Labor Markets Exploitative," Mark Thoma had linked to. I have to credit Taylor with answering my query.

Taylor's schtick was to cite a long piece from a pro-slavery essay that also referred to labor markets as exploitive.

"Of course," Mr. Taylor demurs, "the fact that a point of view has some appalling allies doesn't make it incorrect." Of course, his whole point in citing the passage was to insinuate the very conclusion he disavows.

But what of Mr. Taylor's allies? I won't stoop to the sweeping generalities that he did but will here confine myself to the "lump-of-labor fallacy" crowd of professional detractors against shorter work time. Taylor, as I have pointed out, wrote a piece titled "Dept of Misunderstandings" reciting the bogus fallacy claim.

Well, there is a history to that claim (that I happen to have researched) and one of the more despicable documents I encountered was "An Arbitrary Workday" published in 1903 by Smith and Walmsley, one of the first commercial public relations firms to set up office in Washington D.C. The "report" by Robert H. Watkins is loaded with the same kind of sappy Horatio Alger uplift schmaltz that Taylor admires but, also this:
The passage of the bill would indeed in its clumsy way go far toward engrafting the system of eight hours a day throughout the United States, but to contemplate what that would mean is to think of nothing less than a national folly. In my humble opinion, if the bill should pass and every manufacturing concern in the country and every employer of labor should consent to and adopt the eight-hour system, it would instantly mark the decay of the splendid prestige of the United States as the richest and most powerful country on earth. As I have already said, I believe the measure an assault upon the liberty of both the employer and the employee. I do not wish to see the day when American manufacturers and American workmen should not have all the chances they desire with the manufacturers and workmen of the rest of the world. The arbitrary rule of eight hours would make men machines that would surely rust, and would discourage individuality of effort and purpose. It would subject us to a competition with foreign producers with which we could not possibly cope. Civilization has not yet reached the period of impossible felicity when multitudes of men may every day, year in and year out, quit work and go to improving themselves with idleness. The notion that the employer, finding he can not get as much out of his men by only eight hours, will be obliged to employ more men to complete the job, will not do to consider in these days. Under that system manufacturing in America will go backward and employers grow less. As line after line of production is abandoned the crowds of idle will be correspondingly increased. 
Having lived for some years in a Southern State which has made remarkable progress in manufacturing, especially in metal production and in mining, I contemplate with dread the effect there of a possible eight-hour system for labor. A great proportion of Southern labor is negro labor. To turn loose every day the hordes of negroes that would be idle so much of the day as the eight-hour system would give them would visit on the South nothing short of calamity. The negro problem is grave enough at best. It is vexing the calm of our greatest statesmen and baffling already the efforts of our most strenuous intellects. Who is going to provide entertainment, profitable and wholesome entertainment, for our negroes in their hours of ease? Who is going to guarantee that the passions of the blacks -- the millions of blacks -- will conform themselves to the invocations of the lyceum and the library? It is a matter of record that the towns and urban communities throughout the South show that there is most crime among negroes on days on which they are not at work, their few whole holidays and their once-a-week half-holidays. The eight-hour system would give them some holiday every day and the race would either degrade every community in the South or have to be exterminated. 
The negro is not the only human creature to whom enforced or optional idleness is a bane. The best gift of our institutions is in the chance of manful, self-reliant independence. The law should foster it and not hamper and degrade it.
The eight-hour crusade, once having enlisted the aid of the Congress of the United States, would be as stupendous and deplorable an absurdity as was the crusade of the fanatical children of the middle ages.
Now I'm not saying that Timothy Taylor is an advocate of racialist extermination. I'm simply pointing out the odiousness, the loathsomeness of his style of insinuated ad hominem guilt by association. Yes, indeed. The loathsome Timmy Taylor.

"A more despicable belly crawler is inconceivable," Owen Paine concluded in his comment on the Taylor blog post.

Tuesday, July 22, 2014

"Will Automatons Take Our Economists' Jobs?"

For some reason, economists think it's a good idea to keep asking the same hackneyed question over and over again and keep giving the same hackneyed answers.

"Will automation take our jobs?" is a perennial favorite. The answer, of course is "technology creates more jobs than it destroys," "a cheap market will always be full of customers," "supply creates its own demand" and "CREATIVITY!" All of which is bullshit (or parrot droppings).

The real answer is that waste and war and immiseration can always be counted on to keep people toiling away no matter what. Hooray for waste and war and immiseration!

My question is a little different. What will it take to automate economists's jobs? It was observed long ago that one could teach a parrot to say "supply and demand." Here is my answer that doesn't require the frequent changing of the newspaper at the bottom of the cage:



Congenital ironists might want to note that the textbook lump enunciated by the "Keynesian" Samuelson is the self-same "supply creates its own demand" version of "Say's Law" of which Keynes remarked:
Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.
The "vitally important chapter of economic theory" that Keynes referred to was, of course, "the theory of employment to be worked out in the course of the following chapters..."

To Kill a Theory

Paul Samuelson once wrote, "In economics, it takes a theory to kill a theory; facts can only dent the theorist's hide."

Specifically which theory was he talking about being "killed" and which other theory was doing the killing?

Sunday, July 13, 2014

Maybe Luhansk Rather Than Lugansk After All

Awhile ago I forecast here that the outcome in Eastern Ukraine would be a Transniestria-like situation with the self-declared peoples' republics achieving de facto independence, backed by Russia, but not de jure.  This became symbolized by whether western media would call the capital of the more eastern one "Luhansk" (Ukrainian) or "Lugansk" (Russian), and I declared that it would be "Lugansk," (some western media, such as the Washington Post have called it both names at different times).

Well, it seems that world-dominatrix Angela Merkel has gotten to Vladimir Putin and he now seems not to be backing the rebels there, even though their two main leaders, Igor Strelkov and Alexander Borodai, are born-in-Russia Russian citizens. They are now complaining of a lack of support from Putin, and they have been denounced in Russian media as "wreckless" and other such not favorable descriptors, apparently reflecting Putin's lack of support from them.  Crimea is enough to chew on for him, it would appear.

The real bottom line, of course, is on the ground, and there the formerly hapless Ukrainian military seems to have gained the upper hand, driving Strelkov out of his stronghold in Slovyansk.  An ultimate showdown in Donetsk appears to be in the works, and this may be over soon, especially if Putin continues his current attitude.

A curious aspect of this is how a number of progressive folk, including British economist Alan Freeman and British computer scientist sometimes economist, Paul Cockshott, have fallen for the line that the rebels are great progressives.  Maybe, but Strelkov has been an open supporter of monarchism, and the Putin regime is not remotely progressive.  It is true that there are neo-fascist elements in the Ukrainian leadership, but identifying the entire Ukrainian government as "fascist" and attempting to invoke World War II in all this has simply been a ridiculous propaganda ploy,  I think these people should be embarrassed that they have fallen for such nonsense.

Barkley Rosser

Friday, July 11, 2014

The Climate Misconceptions Series: Complete

The last post has been posted, and I've also gone back and revised the intro post, The Road from Carbonville, to include links to the whole shebang.

Done.

A Non-Misconceived Agenda for Combating Climate Change

The main purpose of this series has been to identify a number of misunderstandings that have grown up around the topic of policy to mitigate climate change.  There are a lot of them, so it’s been a big job.  It would be sneaky, however, to duck out at the end without saying a few words about what a better approach might look like.  What follows is a quick sketch of the main items.

1. The most direct and flexible way to limit fossil fuel extraction is by requiring anyone doing this to obtain a permit, and then restricting the number of permits according to an appropriate carbon budget.  In this series I’ve used the IPCC carbon limits as a matter of convenience; naturally, before committing to any specific number, there should be careful consideration of the risks in both directions—picking a target that’s too loose and doesn’t remove enough risk of catastrophe, or one that’s too tight and gives us too little extra security for the added cost.

Perhaps the hardest part of the target-picking problem is not distilling what we know today into a specific emissions cap, but setting up a dependable system for revising it as new knowledge comes in.  One possibility is to set up a semi-autonomous body, weighted toward science, which periodically reviews carbon targets and modifies them as needed.  Think of the carbon equivalent of a central bank.  Ultimately any such body is subject to political control, but it should have at least some discretion to make adjustments on its own.

Ideally the scope of a permit system would be global, but that’s unlikely to happen, at least at the start.  If several national partners are available, it could begin on a club basis, as described in the previous post, but it could also encompass just a single country.

The permits should not be time-dated.  Since the goal is to limit the accumulation of greenhouse gases and not necessarily their emissions in any single year, it should be possible to move permits backward or forward through time, leaving the total unchanged.  In theory this could be accomplished by markets alone: the entire stock of carbon permits over the period from the present to, say, 2050 could be auctioned off at once, and anyone thinking of using one would compare the value of extraction today to their expected future value if they are saved.  It’s a standard economic result that, under various conditions, the time profile of carbon extraction resulting from such a market would be optimal, in the sense that it would not be possible to increase the value we get from allowable fossil fuels by shifting their exploitation to different time periods.

In practice that's a big risk to take, however.  Markets go awry for a number of reasons: insufficient competition, herd effects, perverse incentives (especially associated with default risk), and so on.  It would be  advisable for the permit issuing body to withhold a large portion of the undated permits, so that markets are allocating only the remainder.  There could be periodic releases of withheld permits as markets demonstrate their ability to allocate them reasonably.

Permits should be issued specifically for the introduction of carbon into the economy, at the mine, wellhead, port or pipeline.  This maximally upstream location enables the economic response to be as flexible as possible, it’s easily enforced, and it’s comprehensive—unlike end user controls.

2. All permits should be auctioned, with no exceptions.  All revenues should be rebated back to the public on a per capita basis, but with two provisos.  First, a portion should be set aside for international transfer payments, to be discussed in a moment.  Second, a small amount may be set aside for specific domestic populations that are exceptionally vulnerable to the price impacts of the permit system.  These latter funds should have a remedial aspect to them, such as relocation subsidies for people who live in areas with unavoidably high fossil fuel demands or retraining subsidies for workers in the fossil fuel sector.

As for the international transfers: there are two ways of doing this.  One is to have separate national systems that auction carbon permits, and then have the higher income country set aside some of its revenues for the lower income one.  The other is to pool the permit system, so that there’s a single revenue stream, and per capita rebates automatically result in a richer-to-poorer transfer.  From a pure theory perspective, the second approach is preferable, especially since it targets the transfers more precisely (on the basis of income rather than location) and is less subject to interference.  But suppose that our club consists of the US and Brazil.  It’s not hard to imagine that the amount that a pooled system would transfer would make the program unacceptable to a large part of the US public, because their rebates would be too small to make up for much of the cost of energy price increases.  For practical reasons, then, it might be better to either set up a partial pool or have an explicit system of transfers.

For purposes of visualizing such a system, suppose that 20% of carbon revenues were set aside for global transfers and 5% for domestic subsidies.  This would leave three-quarters, enough to indemnify, at least initially, something like the bottom half of the income distribution and moderate the impact on the rest.  Indeed, the bottom deciles might well see net income gains, since their per capita share, even discounting 25%, exceeds their extra direct and indirect fuel expenses.  In other words, done right, climate policy can also be a form of progressive income redistribution.

3. The club of countries participating in the carbon permit system can be expanded primarily through the use of revenue transfers, either explicit or by pooling.  To qualify for a transfer, a low-income country would have to join the club.  On the other hand, the exports of countries outside the club would be subject to tariffs designed to offset as accurately as possible the production cost differences attributable to cheaper fossil fuel prices.  The idea is to prevent leakage, such as when production sites are relocated to take advantage of policy-driven energy cost differentials.

4. If someone develops a genuinely reliable system for long term carbon sequestration, new permits will be issued equal to the amount of sequestered carbon and given (not auctioned) to whoever does the sequestering.  They can sell them, and this provides the right level of subsidy: the value of carbon restrictions avoided.

5. As fossil fuel costs begin to rise, it should be possible to create support for a substantial shift in public spending in the direction of energy-saving technologies, renewable energy subsidies, and research and development to improve non-carbon technologies.  The money to pay for these things could come from redirecting existing spending, additional taxes, and increased public borrowing if depressed macroeconomic conditions persist.

6. Regulations may need to be introduced to minimize the perverse effects of otherwise desirable carbon incentives, such as the restrictions on conversion of food crops to fuel crops, as discussed in a previous post.

7. Adaptation is largely beyond the scope of this series, but that doesn’t mean it doesn’t matter.  In addition to all of the above, considerable sums will have to be spent protecting people from current and near-future climate impacts.  It is especially urgent the upper-income countries support this work in poorer regions: the better-off benefited from the use of fossil fuels in the past which are responsible for today’s climate forcing.

Climate change is about the planetwide relationship between “people” and “nature”, but it also exposes enormous and deeply unfair inequalities between those disproportionately on the causing and receiving ends of the problem.

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Climate Misconception #19: Unless all countries agree to act on climate change, any national action is useless

What gives many of these misconceptions legs is their partial claim on truth, and this final instance offers another example.  Climate change is a global problem, caused by the accumulation of greenhouse gases in a single atmosphere all of us share.  If one country emits a million tons of carbon less and another a million more, the net effect is no change at all.  Every coal plant in China affects the future climate in North America, just as every coal plant in North America affects China.

On top of that, the relative quantities of carbon emissions are shifting from the industrialized to the developing world, as China, India and other countries begin to catch up in the per capita size of their economies.  This is entirely justified, since low and moderate income countries need the boost that fossil fuels provide much more than upper income countries do.  There won’t and shouldn’t be a global agreement in which every country cuts its carbon emissions at the same rate.  In fact, by all appearances the world is far from any kind of meaningful agreement at all.

Nevertheless, if activists in countries like the US succeed in bringing about serious carbon policies, it will have a global impact, for three reasons.

First, at the present time the wealthier countries are responsible for about half the new carbon being introduced into the carbon cycle.  (They are also responsible for the vast majority of previous additions that have contributed to today’s greenhouse gas accumulations, but this can’t be undone.)  If they can begin making big cuts, they will still be big on a global scale, at least for the first decade or so of cutting.  It’s worth doing.

Second, the US plays a pivotal role in the global politics of just about everything.  It possesses the world’s second largest economy (if you lump the EU together as a single entity, which, politically, it's not), the world’s pre-eminent military force, and the world’s most aggressive ruling elite.  At present the US is at the center of resistance to mandatory controls on carbon.  Even the NSA has been enlisted to make sure that other countries follow the US script in climate negotiations.  If US policy were to change significantly, it might have a galvanizing effect on enough other countries to make a global framework achievable.  To be honest, we don’t know how large this effect would prove to be, but it is surely worth a try.

Finally, international cooperation does not have to be universal to be meaningful.  If the US, the EU and Japan, for instance, were to jointly set up a serious carbon tax or permit system without the initial participation of any other countries, they would constitute the nucleus of a global regime.  Additional participants could be attracted with various inducements and penalties.  In particular, as I will argue in the next post, side payments can be offered to less affluent countries that join the club, while tariffs can be placed on imports from countries that don’t limit carbon emissions, based on the cost advantages their non-policy gives them.  If forestalling catastrophic climate change is a primary goal of foreign policy—and why wouldn’t it be?—there are forceful but mostly cooperative tools that can be used to get there.

Cynicism and defeatism are never very attractive political attributes, but they are even less tolerable when voiced by citizens of a country like the United States that uses every available means to get what it wants for far less noble objectives.

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Climate Misconception #18: All we need to do is put a price carbon; the rest of the problems will take care of themselves

On one end of the spectrum we have people who think that climate change can be fought without the use of either carbon caps or taxes.  Some of them think that direct action can get the job done, others that investing in green technology provides a near-painless path to global nonwarming.  There are a few on the other side, though, who think that a carbon tax or something like it would be sufficient policy.  Maybe it’s not exactly a crowd, but we should still tak a moment to see why taxes and permits alone will not be enough.

First I have to admit, however, that in a technical sense a high enough tax or strict enough permit regime would be a complete mitigation strategy.  If by using a tool like this we could keep most of the carbon now in the ground securely in the ground for decades to come, we’d have the greenhouse gas problem under control.

The difficulty is that we are not interested in minimizing climate change because we have some general aversion to change, but because we want to safeguard the well-being of present and future generations.  Simply keeping carbon in the ground and not dealing with any of the other consequences will result in immense social and economic costs, to the point where the political feasibility of the carbon price becomes inconceivable.

The main reason is that, without ancillary investments in renewables, energy conservation, alternative ways of meeting human needs that are less carbon-intensive, and research in all these areas, we will be forced to forego more and more goods and services year after year until even a climate disaster might look like the better alternative.

Take one obvious example, transportation.  The United States is primarily car- and truck-dependent for commuting, shipping and other transportation needs.  In nearly every case the fuel is petroleum.  Switching all of them over to electric power would cause a surge in electricity demand which would be impossible to meet under current technology in the absence of fossil fuels.  Now in theory you could just say “tough luck” and leave it at that, but the disruption would be so great that stranded car-owners would rise up and demand their old gas stations back.  Realistically, without large investments in mass transit, fuel efficiency, and denser living arrangements, it’s not a viable scenario.  A few research breakthroughs in renewable fuels wouldn’t hurt either.

This observation does not contradict my earlier point that investment in renewable energy and other green technologies is not the same as fossil fuel reduction.  That remains true.  The measure of reduced fossil fuel extraction is reduced fossil fuel extraction and nothing else.  Nevertheless, the policies we need to keep these fuels in the ground won’t be adopted unless the costs are relatively bearable.  It’s in this sense that I suggested that green investments should be thought of as a form of adaptation, not to climate change but to climate change policy.

The bad news is that there has been little success in the US in getting the public to make an early commitment to the kinds of investments that will reduce the cost of controlling carbon.  Even Obama’s high speed train initiative, meager as it was, was largely rejected.  The good news is that once we start putting a price on carbon, it is likely that the politics of green investment will change in a hurry.  A new rail line looks more inviting if you’re shelling out $10 a gallon at the pump.  With luck the investment side of the policy can get up a head of steam before fossil fuel restriction becomes draconian.

There’s a second kind of policy adjustment that will be needed when carbon gets priced: counteracting the negative incentives this may generate in other parts of our economy.  Here’s an example.  When fossil fuels start to get really expensive, there will be an even greater demand for biofuels.  Farmers will be able to make more money by ripping out their food crops and planting fuel crops instead.  Up to a point this may even be warranted.  But we live in a horribly unequal world where many people live in luxury while millions of others starve for lack of income.  Shifting large parts of the world’s food production to biofuel crops so that the relatively affluent strata are not inconvenienced would be unconscionable.  Thus either regulations, taxes or subsidies need to be used to keep food production up and food prices at an affordable level.

Climate policy needs to be multifaceted and multi-instrumental.  It’s true, however, that one big piece has to be direct restriction, through taxes or permits, on the extraction and burning of fossil fuels.

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Thursday, July 10, 2014

More Economic Illiteracy from the New York Times

I’d have more time to enjoy life if I didn’t feel compelled to correct gross economic errors in places like the New York Times.  I try to give it a day, but if someone else like Dean Baker doesn’t stomp on it first I have to do my bit.

Today’s absurdities can be found in an article about the EU’s push to measure the underground economy—stuff like prostitution and drugs—to improve their estimates of the region’s GDP.  (They’re also switching to a reclassification of R&D expenditures, something the US has already done.)  Actually, in many of their national economies large swaths of the vice trade are fully legal, tastefully zoned, and not underground at all.

Anyway, gross error number one is the claim that, by doing a better job of measuring commercial sex and drugs, statistical agencies will give the impression that economic growth has improved—that this is even their motivation.  No, no, no!  It’s not like that at all!  There will be a footnote in the GDP tables explaining that coverage changed between one quarter and the next.  In fact, they’ll put out two tables side by side, one with the change, the other without.  That will continue for a year or two, even longer if they can’t put together a methodology to extend the new computation back in time.  Sure, some rubes will try to compare numbers from one table to another, not bothering to read the small print, but econoblogging guard dogs like me will give them hell for it.

In fact, I’ll give the New York Times hell for it if they print an article a year or two from now saying that EU GDP shot up, when it was just a change in the methodology.

Then the second blooper is the discussion in the latter part of the article about whether including sex and drugs (without rock ‘n roll, a travesty) will make GDP a worse measure of well-being.  Huh?  GDP is not a measure of well-being.  No one—no one!—in the statistical agencies goes through the expenditures item by item and screens them for whether they make the world a better place or not.  I mean, nuclear weapons are included in GDP.  (They’re entered at cost.  The demand price would be much higher—ask international terrorists or James Bond villains.)  GDP is about how much money is flowing through the economy to produce and purchase goods and services.  That’s something you might want to take into account if you’re looking at the broader picture of how a country is doing, but mainly for a sense of whether the macroeconomy is on track.  Every introductory textbook, even the bad ones (i.e. not mine), say this.

Sorry for the rant, but now the world is back in balance.  The New York Times has disseminated BS and I’ve complained about it.  Life remains normal.

Switched at Death

This switcheroo by ABC News is really something.

"Quick!  Get me footage of Israelis being bombarded by Arab terrorist rockets!"

"Sorry, there apparently isn't any.  Not much damage there.  But we do have these powerful clips of Palestinians whose houses have been destroyed by Israeli rockets."

"That's good enough.  Call them Israelis and let's get on with it."

View Page Source: "Are Jobs Obsolete?"

The other day, Sandwichman posted a passage from an interview with Google co-founder and CEO Larry Page in which he mentioned working less as a response to worries about technological unemployment. Page cited Peter Diamandis's book Abundance so I thought I would track down the source for Page's musings.

Page's source can be found in an appendix: "Dangers of the Exponentials" and is contained in an extended quotation from a 2011 CNN article, "Are Jobs Obsolete," by media theorist, Douglas Rushkoff. Here is Rushkoff in an 2011 Wall Street Journal interview, discussing the question, "Does America Really Need More Jobs?":

Climate Misconception #17: Carbon taxes are a great way to raise money for green projects

There’s gold in them thar climate laws.  If taxes are imposed on the production of fossil fuels or if carbon permits are sold at market prices to fossil fuel companies, vast sums of money will be raised.  The US, for instance, is currently responsible for somewhat over five billion tons of CO2 equivalent emissions per year.  (There are problems with the way these numbers are calculated, but the order of magnitude is OK.)  If we were to put a $50 per ton tax on them, and putting aside the demand reduction this would lead to, that comes to $250 billion: serious money.

Environmental groups have been scraping for a billion here, a billion there to fund critical programs for decades.  We need a smart grid, mass transit, subsidies for home insulation, money for R&D in energy efficiency and renewables, and much more.  Environmental investments were underfunded during the good years, and now they are falling even further behind under conditions of austerity.  Not surprisingly, when environmentalists see the possibility of a quarter trillion dollars in new revenue, they pull out their want list.

Unfortunately, while I completely agree that these investments are necessary—even more necessary than before if we get serious about carbon—carbon taxes or permit revenues are not a good source.  The main problem is that they are essentially sales taxes.  No matter where they are levied, they will be passed along to the ultimate consumer.  And this is a feature, not a bug: the goal is to change the habits of hundreds of millions of people, substantially and quickly.  In the end there are only two ways to do this, with lots of very detailed regulation or by raising the cost of carbon-intensive goods and services.  The second is preferable.  But sales taxes are regressive, since the lower your income the more of it you spend.  They provide a poor revenue stream for public investment, and green groups should not try to capture them.  As I will argue later, it is better public policy—more progressive and more politically tractable—to rebate carbon revenues on a per capita basis.

One irony in this debate is that there is no shortage of money that could be used for environmental investments.  A large part of the US budget, for instance, could readily be repurposed; this includes massive subsidies to fossil fuels and most of the farm subsidies, not to mention military expenditures of minimal (or even negative) utility.  Moreover, in a macroeconomic environment characterized by a large output gap and rock-bottom interest rates, borrowing to pay for some of these investments is not only possible but economically desirable.  These are fights that should not be abandoned.

It makes a difference not only what investments get made but also how they are financed.  This is partly a matter of social justice, but it is also important politically.  The coalition needed to advance serious climate policy in the teeth of business resistance needs to be wide and deep; in particular it has to include the majority of citizens who have low or moderate incomes.  Proposing regressive taxation to finance green investment objectives is a political divider, not a uniter.

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Climate Misconception #16: Carbon taxes are so much better than carbon permits as a basis for climate action

Because any form of carbon regulation will have negative effects on a wide range of businesses and has to overcome their opposition, the first, feeble attempts at policy have been riddled with giveaways.  That’s a long, sad story, and one I don’t want to belabor here.  The upshot, however, is that there has been a preference for systems based on carbon permits with four main characteristics: too many permits are issued (minimizing climate benefits but reducing business burdens), the permits have usually been given away rather than sold (so that businesses don’t have to pay for them but can sell them or pass the impact on to consumers), there have been carveouts for entire industries (where coverage depends on political influence rather than policy effectiveness) and various kinds of offsets are allowed (voiding the need for permits if businesses make favored investments).  This is bad policy on every score: ineffectual, opaque, and regressive.

Unfortunately, the reaction of many climate activists has been to confuse symptom and cause.  Rather than tracing these bad policies to the current balance of political-economic power, they blame permits themselves, thinking that a switch from permits to taxes will fix the problem.  The purpose of this post is to explain why they’re wrong—which can be done rather quickly—and then to make the case that, while there is a large overlap between the two approaches, if your overriding concern is the threat of catastrophic climate change you should go for permits over taxes.

First, look at how each method reflects the political economy of policy-making.  At present, business interests have predominant power, and carbon control rules have to placate them.  As we’ve seen, this takes four forms under a permit regime: too many permits, permit giveaways, carveouts and offsets.  But each has its counterpart under a tax approach: taxes can be set too low, they can be offset or rebated through reductions in other taxes, they can be applied selectively, and there can be exemptions.

Taxes set too low: No one wants to pay taxes.  Businesses in particular are in a position to do something about this.  Carbon taxes will be subject to negotiation, and when the deal is signed, if businesses have their way—which to this point they have—the taxes will be weak and there will be little reduction in fossil fuel use.

Offsets and rebates: We live in a world of many taxes.  There are income taxes, sales and excise taxes, profit taxes and all the rest.  If the government institutes a new tax on carbon, businesses will say, let’s make this revenue neutral!  Cut other taxes so that our net tax burden doesn’t go up.  Formally, this is equivalent to a carbon permit giveaway: the system does provide an incentive to reduce the use of fossil fuels (since they are taxed), but businesses don’t pay the cost.  Instead, they can pass it along to their consumers and even come out ahead on the deal.

Carveouts: Nothing says a carbon tax has to apply to all uses of fossil fuels.  Business will push hard to have the tax apply industry by industry and then push again to exempt their own.  Politicians tend to like this setup too, because more discretionary power over who pays how much tax translates into more campaign contributions, horse-trading heft and influence in general.

Exemptions: Just like businesses can take advantage of loopholes under a permit regime if they make approved investments (for which you should consult the good people at Carbon Market Watch), they can be given tax forgiveness if they do the same things.  Anyone who thinks this is unlikely should sit down with any country’s tax code.

The bottom line is that junking permits and switching to taxes won’t do much good if businesses still have to be bought off in order to get a climate bill passed.

But political economy aside, what are the relative merits of the two approaches?  First, let’s be clear on how they’re supposed to work.  Taxes can be levied on producers or consumers at various points along the fossil fuel cycle; the idea is to reduce the use of carbon fuels by making them more expensive.  The more upstream the tax—imposing it on those who bring these fuels into the economy rather than end users—the greater its flexibility and the easier it is to implement.  Permits do the same thing, but by requiring a permit for fossil fuel use rather than charging a tax.  They are analogous to hunting and fishing permits, which are limited in supply to maintain the population of whatever creatures people are hunting or fishing.  As with taxes, the more upstream the permitting, the more flexible the system and the easier it is to monitor and enforce.

At first blush these two approaches are mirror images of each other.  Suppose the following diagram represents the demand for fossil fuels, lumping all of them together in a single market:

The initial price is P1 and the initial quantity produced is Q1.  A tax raises the price to P2, and demand then falls to Q2.  A permit system lowers the amount that can be produced to Q2, and the price rises to P2.  Under these assumptions, you can just flip a coin to decide which tool you want to use.

The biggest difference emerges when you introduce uncertainty.  Suppose you don’t really know the relationship between price and quantity demanded, especially as you move away from the current market situation.  Indeed, this is practically a given.  First let’s see what this means for taxes:

A tax sets the price, but the amount by which fossil fuel use will be reduced is unknown.  Now look at permits:

Permits set the amount of fossil fuels that can be burned, but the price that clears the market is unknown.

If you could have continuous adjustment of either taxes or permits in order to respond to unanticipated effects as they arise, you would be back at the first diagram, and all would be well.  That’s far too great a burden for the political system to bear, however.  It’s a huge deal to pass a law regulating carbon, and you are likely to be able to tweak it only rarely.  In the real world, uncertainty will stick.

From this perspective, the choice between taxes and permits is about which uncertainty you prefer to live with.  If your main concern is that carbon control regulations will be too costly, you should go with taxes: they pin down the cost and let the quantities of fossil fuels fluctuate.  If, like the IPCC, your main concern is that we will overspend our carbon budget, you should be in favor of permits, which pin down carbon introduced into the carbon cycle but allow costs to fluctuate.

It is ironic that grassroots climate activists, who claim to be dedicated to meeting carbon goals no matter what, should denigrate permits and be so attached to taxes.  My guess is that this analysis, which has been standard in environmental economics for 40 years, will be new to them.

There is a second reason why, in my opinion, permits are better suited to the specific demands of carbon policy.  Recall that, if we want to reduce the risk of runaway climate change, we need to meet a fixed carbon budget.  The constraint is not, how many tons can be extracted and emitted in any given year, but how many can be funneled into the carbon cycle over the coming decades in total.  Any extra ton you allow this year has to be deducted from future allowances if the budget constraint is to be met.

Nothing in the tax approach addresses this condition.  If too much carbon is emitted this year, there is no automatic mechanism that will make taxes rise the next; you have to do it by hand.  Permits, however, can be designed to be intertemporal from the ground up.  You could have some or all of them be undated, in the sense that they would authorize carbon extraction in general but not for any particular year.  That way, if you think that more permits are needed this year, you can move some forward from next year—a shift that automatically stays within the long run carbon budget constraint.  As we’ll see later, this could even be done by markets, without any conscious political action at all.  In practice, I expect that going on a carbon diet will result in numerous unanticipated economic crunches along the way, creating pressures to temporarily relax policy controls.  Under a tax system temporary is permanent: extra production in the near term is not made up by offsetting reductions later on.  (Remember that the point is to prevent an accumulation of greenhouse gases, not their emission in any particular year.)  Under a permit system, temporary could be temporary if the permits are designed properly.

Finally, a word about politics: pick a tool and get a discourse.  If the tool is taxes, the discourse will be about how much we want to pay for carbon control.  This brings us into the world of the social cost of carbon.  Is the tax too high or too low?  That depends on whether the benefit we get from cutting carbon a little more or less is above or below the tax rate.  Those will be the terms under which politics gets carried out.

If the tool is permits, the discourse will be about how much carbon we want to allow into the atmosphere, and therefore how much climate change risk we’re willing to live with.  This brings us into the world of the IPCC, climate science and carbon budget constraints.  Are too many permits being issued or too few?  That will depend on what our understanding of the carbon cycle and the climate system tells us about greenhouse gas concentrations.

I think climate activists should pick door number two.

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