Tuesday, September 27, 2011
The first 10 minutes of this podcast does a great job connecting the principles of microeconomics (primarily the knowledge problem) with issues in macroeconomic theory, primarily topics related to recessions and stimulus policies.
Tuesday, September 13, 2011
Saturday, September 10, 2011
See also Type II Error Bias and the Response to Hurricane Katrina and Type II Error Bias and the FDA or for the statistical concept of type II errors see here.
Tuesday, September 6, 2011
Government and the Economy in "The Aviator"by Dirk Mateer
Rent seeking, the political pursuit of gains that would not be earned engaging in the market process, is a common theme in many films. With clips from the acclaimed 2004 film “The Aviator,” the discussion of rent seeking can be broadened to include the related concept of regulatory capture. After Pan Am leader Juan Trippe (played by Alec Baldwin) is unable to convince TWA’s Howard Hughes (portrayed by Leonardo DiCaprio) not to offer competing flights across the Atlantic, Trippe turns to Senator Owen Brewster (played by Alan Alda) to introduce a Civil Aviation Bill that would hamper TWA’s ability to compete with Pan Am. The clips illustrate the gains, in this case campaign contributions, prestigious committee chairmanship, and personal travel, that politicians can receive from pushing rent seeking legislation such as that favoring Pan Am.
Regulation | 2003| Summer
"From the claims of opponents of the new biotechnology, it would be easy to conclude that the biotech industry has vigorously fought government efforts to regulate its products. But in fact, the industry has been anything but a consistent opponent of extensive, and even unnecessary, regulation. It has lobbied for protectionism of various sorts — including public policy that makes regulatory costs excessive – and in the process has forsaken science and common sense. Since the 1980s, large biotech companies like Monsanto, Ciba-Geigy (now Syngenta), and Pioneer Hi-Bred International (now owned by DuPont), along with their trade associations, have actively and aggressively lobbied in favor of certain major regulatory or legislative initiatives that often are more restrictive even than those sought by regulators themselves. The industry’s goal is ostensibly to placate anti-biotech activists"
Regulation 1996 No 4
"There is no reason to expect environmental regulations to be immune from the economic pressures that create rent seeking in other contexts. In fact, by their very nature, environmental regulations are conducive to rent seeking, for in the environmental context, both regulated firms and "public interest" representatives stand to gain from reductions in output and the creation of barriers to entry. Regulated firms and public interest groups may not always agree on the nature and design of specific regulatory programs, but they often share a common interest."
But as the legislation’s chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 — up more than 14 percent over the same time last year.
The groups include coal companies, investment banks, wind and solar firms, state governments, auditing firms and technology companies that might be part of the proposed trading system for carbon. An item inserted at the behest of Rep. John D. Dingell (D-Mich.) would give the auto industry $1.4 billion worth of extra allowances starting in 2012 when the cap-and-trade system takes effect, according to an estimate by the Union of Concerned Scientists.
Monday, September 5, 2011
September 12, 2011
8:00 pm - 9:30 pm
Grise Hall 235(special thanks to the BB&T Center For the Study of Capitalism at WKU).
The lesson of September 11 is not that government should plan better and not that a Republican president plans better or worse than a Democrat president. The lesson of 9/11 is that central planning doesn't work and that government should not get in the way of our planning. " LINK
"I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge" - F.A. Hayek
"The financial crisis invalidated a naïve notion of "efficient markets," but the most sophisticated version is still viable. Whereas the invalidated version holds that markets never err and always adjust instantaneously, the sophisticated version, associated with the ideas of Adam Smith and F. A. Hayek, holds that markets mobilize individuals to realize gains from trade and to innovate and thereby produce generalized prosperity."
"In the 1940s, Hayek warned his fellow economists of the misleading standards of perfect competition and static efficiency in assessing the market economy. As he wrote in Individualism and Economic Order, "[T]hese adjustments are probably never 'perfect' in the sense which the economist conceives them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency" (1948, 87)"
"The great free market economic thinkers from Adam Smith to F. A. Hayek never argued that individuals were hyper-rational actors possessed with full and complete information, operating in perfectly competitive markets.... Efficient markets are an outcome of a process of discovery, learning, and adjustment, not an assumption going into the analysis."
A basic application of climate economics:
What economists must do is take consensus science into account, and approximate what the price of carbon should be to limit economic damages from CO2. This level will be achieved where the marginal cost of reducing carbon emissions is equal to the benefits of decreased damages from climate change in the future.
Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment Report) prices carbon at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, the Stern Proposal(proposed by another economist in the U.K) estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. In this case we are looking at increasing gas prices by about $1.20/gallon. (read more)
Carbon taxes and the climate change knowledge problem
The idea of pricing carbon is that given the assumption that CO2 production has a negative impact on climate change and so many goods and services are carbon intensive, if we can put a price on carbon (paid by corporations that trade carbon permits or a carbon tax) to capture the value of the negative externality, this will 'trickle down' to the mirco level, such that when you buy an ice cream cone, gasoline, or a pencil, the impact of your choice on the climate will be captured in the price you pay for it. This is the climate change knowledge problem. We have to get the initial price of CO2 correct so that the 'trickle down' economics works at the micro level and we ward off catastrophic climate change.
The correct price for carbon will balance the marginal cost of reducing carbon emissions with benefits of decreased damages from climate change in the future. As Armstrong points out, there are few scientific forecasts related to these future damages. And technological change allows us to continually respond the volatile effects of climate change. Advances in biotechnology are allowing us to produce more climate resilient crops, all the while reducing our carbon footprint in agriculture. How can we incorporate this knowledge into our calculus? When it comes to the costs of reducing carbon emissions, it isn't any easier. What are the opportunity costs of resources invested in emissions mitigation (voluntarily vs. those mandated or incentivised by government administered prices for carbon)?
From the Capitalism Today Blog at Western Kentucky University there was recently adiscussion regarding macroeconomic equilibrium and the difficulties of knowing the micro-level equilibrium for something (seemingly) as simple as ice cream:
"They act as if not only there is equilibrium, but that they know where it is. If anyone knows exactly how many ice cream cones the US needs to produce tomorrow, please raise your hands. What no hands? No one can know the "appropriate" amount of ice cream cone production for today let alone for tomorrow. The $15 trillion US economy makes a lot more than just ice cream cones."
Some will agree that planners are no match for markets in determining prices and quantities, but because we currently have no established property rights to the atmosphere there is no 'price' for carbon. As such, there are going to be consequences if we do nothing, and the next best solution is an attempt, even if not perfect, to price carbon because it is not considered in market transactions.
Is that really the next best solution and is it true that the price mechanism totally ignores CO2?
What is carbon really? 'Carbon' in an economy manifests itself in how we heat and cool our homes, how we manufacture goods and services, how we respond to emergencies, how we travel and transport goods, how we store and retrieve information. Leonard E. Read's essay I, Pencil demonstrates the complexity involved in an economy that thrives on disaggregated information and processes with numerous feedback loops and interactions. In a complex society, carbon is no different, and while it may not be explicitly and directly priced, it is hard to believe that its role is not part of the pool of knowledge characterized by the partial bits of information held by all individuals in society.
In fact, while politicians and special interests argue over the politically optimal arrangement of regulatory protections and subsidies to 'combat climate change' markets have responded in much more meaningful ways without any bureaucratically administered price of carbon or cap on CO2.
As Dr. Don Boudreaux of George Mason University points out in a recent piece in the Wall Street Journal, in response to climate alarmists' connecting violent storms and climate change (and obviously calling for centralized solutons to combat it): (read more)
"...because of modern industrial and technological advances—radar, stronger yet lighter building materials, more reliable electronic warning devices, and longer-lasting packaged foods—we are better protected from nature's fury today than at any other time in human history."
Perhaps the innovations in green technologies in agriculture provide the greatest example of mitigating climate change:
Total decreases in carbon dioxide as a result of using biotech crops was equivalent to removing 6 million cars from the road in 2007. The carbon footprint for a gallon of milk produced in 2007 was only 37 percent of that produced in 1944. For every 1 million cows, the reduction in global warming potential from rBST supplemented cows is equivalent to removing 400K cars from the roadways or planting 300 million trees. The use of grain and pharmaceutical technology in beef production has resulted in a nearly 40 percent reduction in greenhouse gases (GHGs) per pound of beef compared to grass feeding. Intensive agriculture has actually has a mitigating effect on climate change with a reduction of 68 kgC (249 kgCO2e) emissions relative to 1961 technology. (read more)
We are not really sure how to price carbon, and what we observe in all of these instances is that despite the absence of a centrally planned price or quantity of carbon, people are making choices that optimize its use or production. Because we don't have the knowledge to price carbon, we don't know that the resources expended in 1) lobbying lawmakers to tweak the proposed rules and regulations 2) mitigating the costs of a centrally planned price or quantity, would not have higher valued uses mitigating climate change in other ways (like investment in green technologies like biotech). The best approach for dealing with climate change or any environmental problem is to develop resilient market based economies that are able to invest in the technology necessary to adapt to ever changing resource constraints.
Friday, September 2, 2011
tax increases to be highly contractionary with a negative effect on investment
Alesina, Alberto and Silvia Ardagna (2010) "Large Changes in Fiscal Policy: Taxes versus Spending" In Jeffrey Brown, 2010. "Tax Policy and the Economy, Volume 24," NBER Books, National Bureau of Economic Research.
Fiscal stimulis based on tax cuts increases the probability of future economic growth greater than spending
Carroll, Robert, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen (2000) "Income Taxes and Entrepreneurs Use of Labor," Journal of Labor Economics, 18 (2), April pp. 324-55
Increases in marginal tax rates reduce the probability of future increased hiring and are associaed with reduced growth in wages.
Gruber, Jon and Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, vol. 84(1), pages 1-32.
Finds a very elastic response for incomes over $100k, (.57) with an elasticity of about .17 for incomes < $100k.
Gentry, William and Glenn Hubbard (2000) "Tax Policy and Entrepreneurial Entry" American Economic Review, vol. 90, pp. 283-287.
Finds a significant increase in entrepreneurial activity when tax rates are less progressive.
Djankov, Simeon, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer, (2010). "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, vol. 2(3), pages 31-64, July.American Economic Association.
"our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity"
The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act Martin Feldstein Journal of Political Economy
Vol. 103, No. 3 (Jun., 1995), pp. 551-572
Estimates the elasticity of taxable income to range from about 1.0 -3.
Lindsey, Lawrence B. 1987. "Individual Taxpayer Response to Taxcuts, 1982-1984." J. of Public Economics 33 (July) 173-206
Found elasticity of taxable income by income category to be .728 for income > $50k, 1.023 for >$100k, 1.413 for >$250k, and 2.0 for > $1 million. Also derived the tax revenue responses to reductions in marginal taxes for those earning more than $200k / yr. Revenues increased by 19% in 1982, 35% in 1983, 56% in 1984.
WHY DO EUROPEANS WORK (MUCH) LESS? IT IS TAXES AND GOVERNMENT SPENDING
Economic Inquiry, 2008, vol. 46, issue 2, pages 197-207
Why Do Americans Work So Much More Than Europeans?
Federal Reserve Bank of Minneapolis Quarterly Review
Vol. 28, No. 1, July 2004, pp. 2–13
Finds that taxes, and particularly higher marginal tax rates have a negative effect on labor hours.