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.

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.

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.

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?

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.

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.

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.

and

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.