Monday, April 23, 2007

New Blog

A friend of mine, Chris Fox, and I are starting a blog "Good Morning, Economics" (hey it's better than this name). The focus is largely the same , but I'm going to be blogging with Chris, so I think I will probably be updating primarily if not exclusively that blog. Wordpress seems like it is a better service, and I suspect that it gets updated more frequently than Blogger.

Saturday, April 21, 2007

Taxpayers Should Not Pay For Undersea Tunnels

Russia and former Alaskan governor Walter Hickel want to build a tunnel between Siberia and Alaska. The U.S. government does not appear to be very interested in paying for such a tunnel to be built, but the Russian government does and so do several Russian companies. A similar tunnel is proposed between Spain and Morocco, which would physically link Europe and Africa together. Spain and Morocco want the European Union to pay for building the tunnel.

Building such tunnels might be a good idea, or it might be a gigantic waste of money. The best way to tell if such tunnels are a good idea is to figure out if someone can make money from building a tunnel. Nothing would be gained by involving governments paying for tunnel building; there are no significant externalities, and there is no potential monopoly because private tunnels will compete with many other forms of transportation. Privately owned infrastructure is nothing new, some airports, including Auckland International Airport, are privately owned, and the English Channel tunnel (Chunnel) was the biggest infrastructure project ever to be wholly privately funded.

It is not clear that building large tunnels makes economic sense. Eurotunnel, who owns the Chunnel has not been able to make enough money to pay the interest on the 10 billion in loans it used to build the tunnel. It is encouraging that some private companies in Russia are interested in the Siberia-Alaska tunnel. I hope that governments leave tunnel building to private money, and leave taxpayers around the world out of it.

Friday, April 20, 2007

106 Years of Gold Prices

Supporters of the gold standard because of gold's stability should look at this plot of the real price of gold over the last hundred years. In the last hundred years, the price of gold has fluctuated a lot, sometimes very fast and unpredictably.

More about long term commodity prices here. Thanks to Institutional Economics.

Wednesday, April 18, 2007

The Constitution Game

A constitution does two things: it establishes the structure of a government, and it establishes some of the overarching principles the government is to operate by. Constitutionalism is important to principled government because it enforces governance by consistent principles over time.

Here's a game I play a lot:
If a new country were being founded and you had some say in shaping it's constitution, what features would it have?

The easiest way for me is to think of changes to the American constitution. I have a lot, but here are a few:

1) I would replace the single executive with a small executive council. I think an executive council would limit the policy setting influence the president currently has by limiting the charismatic influence the executive has.

2) I would make it easier to challenge the constitutionality of legislation and executive policy. Specifically, I like the mechanism where a small minority of legislators can send any bill, passed or unpassed, for constitutional review.

3) I would establish a rule against government keeping keeping secrets about policy. The recent scandal about extraordinary rendition was the event that led me to come up with this. Government should be allowed technical secrets, such as where exactly they rend prisoners to, when the situation demands it, but government should not be allowed policy secrets, like that the government rends prisoners to different countries in the first place.

What are yours?

Sunday, April 15, 2007

Government and Smart Choices About Natural Disaster Risks

Libertarians like to argue that for most problems people make the best decisions for themselves because they have more knowledge about their own values, circumstances and options than anyone else and because they have productive incentives, so that forcing them to choose specific actions is bad. This is certainly true to an extent, but in some recurring cases, people have unproductive biases or have the poor information about their circumstances and options relative to others. For example, on the issue of natural disasters and insuring assets against damage, asset owners often have both limited knowledge and biases against buying appropriate insurance. To use the example of New Orleans, residents are unlikely to have good information about the risks they face from hurricanes, the costs and likelihood of a hurricane striking. In addition, people have a well known bias against events with small probabilities. When performing conscious or subconscious cost analysis, people tend to discount the importance of low probability events, which can be a serious problem if there are high cost but low probability events, so New Orleans residents will make less than good choices about insuring their homes and other assets against hurricanes.

What is the role of government in evaluating these risks and insuring against them? Producing information about certain common risks is surely a public good and one of the proper roles of government, but should government, as part its social contract, correct for well-known, widspread biases? On the issue of natural disasters this means forcing the purchase (through taxes) of insurance against low-probability, high-cost events.

Thursday, April 12, 2007

Grays Harbor Logging Truckers Strike

It looks like margins on logging in Washington are getting small. A large fraction of logging truckers in Grays Harbor county have been striking for two weeks now because of low wages and hauling rates (more here, here and here). The truckers, who mainly truck for Weyerhaeuser, say that rates have not changed since 1984 (I assume they mean real wages, otherwise real wages have fallen by half). The truckers have started to lobby the state legislature for regulation and some sort of wage floor.

I suspect some of this is exaggeration, but I am still surprised that the long term labor supply market is so inelastic. This situation would make more sense if there had been a recent fall in wages or a spike in costs, because labor supply is usually much more inelastic in the short run than in the long run, but this does not seem to be the case. I am disappointed that the truckers are asking for minimum wage regulations. I hope the legislature does not give in to the pressure, especially because I don't think regulation will get the truckers what they want. First, Weyerhaeuser seems happy with not hiring them. Second, minimum wage regulations typically increase unemployment in the medium to long term instead of increasing worker welfare. This second point means some of this must be Weyerhaeuser's fault; instead of accepting higher wages and choosing to log only more profitable stands, the company has chosen to bear a strike and a lot of bad press. I am not completely sure what is going on in this situation, but I strongly suspect this problem has arisen because one or more parties are being more stubborn than is rational.

Monday, April 9, 2007

Marginal Costs of CO2

I've been investigating the marginal costs of CO2 emissions. This is the best paper I have found so far on the matter; it summarizes 88 different marginal cost estimates for CO2 emissions, and discusses the problems associated with the estimates. The aggregated estimates have very large uncertainties because the original estimates differ a lot and because most estimates had very large uncertainties themselves.

Atmospheric scientist Richard S. Lindzen has an article questioning how much we know about the net effects of global warming. The two most interesting quotes from his article:
There is no compelling evidence that the warming trend we've seen will amount to anything close to catastrophe.
the impact of carbon on temperature goes down—not up—the more carbon accumulates in the atmosphere
It is interesting that Lindzen claims we don't know enough about the net effects of global warming even as marginal costs are estimated. Both the summary paper and Lindzen note that climate change has both positive and negative effects, depending on location, which makes the net effects difficult to estimate and may explain the difference.

The second statement almost means that marginal costs are downward sloping. The marginal effects of increased temperature may still be increasing, but if this is true, then at some CO2 concentration we should not try to limit CO2 emissions any more.

From Environmental Economics I have found out about the Wall-Street Journal Energy Round-Up blog which seems to be very useful in finding out what's going on on energy related environmental matters. Some of the other blogs the WSJ hosts also look promising.

Legislator Pay

Tim over at the Adam Smith Institute blog suggests Brits overpay Parliament Members (MPs). Tim writes:
Demand in this case is fixed, there are 646 constituencies, so that is the number of MPs we require. There were some 3,500 people putting themselves forward for those more limited number of positions. Indeed, many of those paid £ 500 out of their own pocket in electoral deposits to have even the chance of applying for the job.

At first sight then we are paying too high a price for our MPs, as many more are willing to do the job than we have space for. However, shouldn't we be looking at the quality of such candidates? Making sure that we attract those fully qualified? Well, that's the nice thing about democracy. By definition, all and any of us is indeed qualified. So at second sight we are also over-paying our MPs.
Now, it might be true that MPs are overpaid, but as always, there is a trade off. Most constituents are qualified to apply for the job of legislator, but the qualification of applicants to actually be a legislator is determined by voters. The effect of reducing legislator wages, ignoring rent capturable as a legislator, is to limit the applicants to those who value their time less than the wages and fringe benefits offered. There is a trade off between taxes going to legislator pay and the overall quality of applicants. It is important to find an appropriate wage level.

There may be one novel benefit to reducing legislator pay. High pay may attract professional politicians who fake high qualification well, but will be poor agents for voters. Lower pay may limit applicants to those that get value from being good agents for voters.

Hayek on Liberty

I have been (slowly) reading The Constitution of Liberty by F.A. Hayek and I particularly like this quote explaining the value of freedom:
The value of freedom consists mainly in the opportunity it provides for the growth of the undesigned

Saturday, April 7, 2007

Pigouvian CO2 Taxes or Cap-and-Trade?

Now that the supreme court has ruled that the EPA's mandate includes regulating CO2 emissions (link), I have been asking people what sort of regulation they expect; traditional regulations, CO2 taxes, cap-and-trade or something else? From the limited responses I have gotten people expect a cap-and-trade type of regulation to emerge.

Asking around has started me re-thinking about whether Pigouvian CO2 taxes or cap-and-trade regulation. I think the issue of estimating marginal costs for CO2 emissions is the most important factor for favoring one scheme or another. Pigouvian CO2 tax schemes require good estimates, while cap-and-trade schemes don't require estimates at all, but Pigouvian schemes provide flexibility and decentralized decision making in finding the optimal total CO2 emission level, while cap-and-trade schemes either don't allow changes or require centralized decision making for total CO2 emission levels. I initially favor Pigouvian taxes because they have more theoretical appeal and because of the flexibility they provide, and if good marginal cost estimates are possible then Pigouvian taxes will probably provide the most efficient outcome. If good marginal cost estimates for CO2 emissions can't be found, but, the science works out that there is an emissions limit below which emissions are relatively harmless and above which emissions are quite harmful then marginal costs spike around this limit and cap-and-trade solutions will be relatively efficient because we know enough about the marginal cost curve to set a cap level that will be quite close to the level where marginal costs are equal to marginal profits. If neither of these cases hold, then it is very difficult to say what is efficient, and the world is in quite a bind.

Does anyone know if there has been work done on creating marginal cost estimates for CO2 emissions? or if there is research that suggests an 'emissions limit'?

Friday, April 6, 2007

Semi-Informed Thoughts on U.S. Health Care

I've been corrected on a few things.

This is my best analysis of the state of the US health care system based on what I heave read. I am not going to discuss the prescription drug aspect of health care problems because I think to a large degree this can be separated from other problems, and I think it's useful to do so. I should say, my best analysis is still not wonderful because I am not an expert on health care.
First of all, it is obvious that the US health care system pretty bad. There are two main problems. First, costs are very high; health care costs eat up a much larger chunk of the GDP in the US than in other countries (15% of GDP and rising in the US vs 10% in Canada). Second, a significant minority of people in the US don't have access to health care.

As I see it, a large chunk of the excess costs comes from the way we pay for health care. US health care insurance might be properly termed health care cost insulation (here Arnold Kling explains the difference better than I can). Americans tend to over-insure their health care. Americans insure essentially all of their health care consumption rather than insuring to reduce the risk of catastrophic costs. The effect of this is that neither consumers nor doctors directly bear the costs of most health care decisions, so of course health care will be over-consumed. It is possible that there are benefits to this arrangement, but I have not been able to identify any legitimate ones. One of the reasons for over-insurance is that the insurance that employers provide to employees is subsidized by the government, but I am not sure if this explains all the over-insurance.

I suspect part of the reason why many in the US lack health care is because of lack of quality flexibility in health care regulations. The way we licence doctors and other medical professionals in the US (I admit I am not very familiar with how we do this, but here are the requirements for Washington state) means that there is a relatively high minimum quality that medical professionals have to meet in order to sell their services. Licensing in Washington state requires graduation from medical school, two years of training and passing a test. This minimum adversely affects the poor because it imposes a quality/price floor on medical care which means rather than having lower quality medical care they have none. If this were not an issue, more lower quality but lower price medical care would likely be available. I have no doubt that licensing provides a valuable public good, information about medical care quality, but I think there is a need for more flexibility in the quality of medical care and more continuous information about that quality. The public good that licensing provides is not a minimum quality assurance, but information about the quality of medical care.

I would like to explain why I am very unconvinced by systems of socialized medicine as the remedy to our health care ills. I will note that I believe some sort of mandated or government provided minimum health care insurance would likely be preferable to the situation we have now, but not ideal. The overarching reason I do not think socialized medicine will improve anything is that there are enormous organizational costs associated with health care, coming from public good effects or other factors, so the government does not have any comparative advantage in providing medical care funding. Because pre-established institutional organization is the main advantage of government, and I do not see any place where this will be useful, I am skeptical of claims that government can make health care more efficient. One particular instance of this claim is that the government can reduce the costs oh health care by consolidation and the reduction of redundant information and administrative systems. This must be true to some extent, but if there were much cost saving associated with that then there would be a trend of health care insurance companies consolidating because they would be more profitable that way. Since this does not seem to be the trend, and because free market firms should be totally capable of minimizing these costs if they exist, this argument is not persuasive.

I have two questions: one, am I missing anything about the benefits of health care cost insulation? and two, am I missing anything about the organizational nature of health care that gives government an advantage?

Thursday, April 5, 2007

Presidential Candidate Ron Paul Against the Iraq War

I don't know very much about politics, but I've heard some good things about Ron Paul (R-TX) from my libertarian friends, and Don over at The Freeman's Burden posted this video of a speech given by presidential candidate Ron Paul in congress against the war in Iraq. It is clear from the video that Ron Paul is a talented speaker, and it has been quite some time since I have had this much respect for any politician.

Tuesday, April 3, 2007

EPA Regulation of CO2 Emissions

On Monday, the Supreme Court ordered the EPA to revise its policy regarding CO2 emissions (NYT article). It sounds like this will lead toe the EPA regulating CO2 emissions. I can only hope that we get something similar to Pigouvian style emissions taxation as Greg Mankiw has been talking about for some time (two recent posts here and here), and that I will claim to have independently thought up. The important steps would be: 1) find some way to estimate marginal social (distributed) costs caused by CO2 emissions (yikes! that sounds hard) 2) establish some sort of method to estimate emissions by the different polluters (less hard) 3) tax those emissions based on the marginal social costs. This might take the form of taxing emissions directly, or, more likely, taxing fuel based on the CO2 emissions it will release when combusted. 4) enjoy an efficient (though local) level of CO2 emissions :)

Pigouvian taxes have many advantages over other government solutions to pollution like technology subsidies or alternative fuel subsidies. One, the government has to know many fewer technical details about the future of innovations in pollution reduction and fuel efficiency. Also, the system is much less prone to pork, corporate welfare and favoritism. The system also makes it much easier to tell exactly when the government has done enough to reduce
emissions. There are many other reasons, but I won't go into them here.

I am rather cynical about the prospects Pigouvian taxes actually being implemented, but I would love to be proven wrong.

As a side note, the
NYT website is ultra annoying because if you double click anywhere, it brings up a definition for the word you clicked on, and I have a habit of fidgeting with my mouse and double clicking everywhere.

Bush has responded to the Supreme Court ruling (LA Times reports):
But solving the problem, he said, must not cut into economic growth.
"It's going to require new technologies, which tend to be expensive, and it's easier to afford expensive technologies if you're prosperous," he said.
That sounds like subsidies to me.

South Korean/US FTA

The Bush administration, under the "fast track" authority to negotiate free trade agreements, completed a free trade agreement with South Korea on April 1st (NYT reports here). I was worried that the deal would not be completed fast enough to give congress the 90 days it needs to review the agreements and then vote without amendments on them. I get the impression that the agreement was rushed, and that it is not a terrific deal. I am somewhat worried about the relaxation of taxes on engine size which S. Korea has had to make, which seem environmental. Barriers to American agricultural products are also to be removed, which, because of American agriculture subsidies, will end up being bad for American taxpayers. The NYT article claims that 90% of all tariffs will be removed so I think this will still be a huge boon to both countries, even if there are substantial growing pains and some negative effects, I am still hopeful that congress will pass the agreement.

The Economist gives a little bit of background on the politics of the fast track authority here. The Wikipedia entry is also interesting.

I am continually annoyed at the power special interest groups have to establish protectionist policies and subsidies and to otherwise extract rent, but it seems almost inevitable that such power and influence will exist. I don't see any institutional fixes. Any ideas?

Monday, April 2, 2007

Two Shot and Killed on Campus

The Houston Chronicle reports that two people were shot and killed about 9 a.m. in Gould hall (here). Weird, I rode by Gould hall on my way to class at 9:30, and I didn't see any commotion.

Sunday, April 1, 2007

Google Launches Transit Planner

For a while I have been wondering why Google has not teamed up with city mass transit systems to provide trip planning and visualization. It seems like a very lucrative revenue stream for Google and easy outsourcing for the government. Well, it turns out that Google has been doing just that, and Seattle is on of 10 cities to be part of the system! Austin, TX is the latest city to join Google (Google blog announcement).

For now it seems that the service only suggests one bus route per trip, but I am sure with time, it will emulate the Seattle Metro Trip Planner functionality and suggest several possible routes.

CATO On Immigration

I've been reading some old CATO Unbound web issues, and I like the one on Mexican migration. Richard Rodriguez has a wonderful essay on the cultural aspects of Mexican migration (here), and Douglas Massey writes about what he has learned about mexican migration from leading the Mexican Migration Project (here).

Though I enjoyed reading Rodriguez' essay a lot, I found Massey's essay more informative. Massey suggests that increased border security has actually been counterproductive to nativist goals by encouraging migrants to stay in the US, whereas before they would come to work and then leave after some time. Massey writes, "Undocumented population growth in the United States stems not from rising in-migration, but from falling out-migration."

Massey discusses the consequences of current and past US immigration policy and suggests more sensible future policy in a paper (here).