A New Blog

I've set up shop with my very own blog, Twenty-Cent Paradigms. It will be mostly macro- and international stuff. I've got a few posts up there now, and I'm hoping for a steady state rate of 2 or 3 a week once the semester starts (but we'll see how it goes...).

The Low Cost of Fighting Global Warming

In an article titled "Climate Change Debate Hinges on Economics," the Washington Post's Steven Mufson reports on the costs of reducing carbon emissions:

Here's the good news about climate change: Energy and climate experts say the world already possesses the technological know-how for trimming greenhouse gas emissions enough to slow the perilous rise in the Earth's temperatures.
Here's the bad news: Because of the enormous cost of addressing global warming, the energy legislation considered by Congress so far will make barely a dent in the problem, while farther-reaching climate proposals stand a remote chance of passage.

Enormous cost?

The potential economic impact of meaningful climate legislation -- enough to reduce U.S. emissions by at least 60 percent -- is vast. Automobiles would have to get double their current miles to the gallon. Building codes would have to be tougher, requiring use of more energy-efficient materials. To stimulate and pay for new technologies, U.S. electricity bills could rise by 25 to 33 percent, some experts estimate; others say the increase could be greater.... Measures taken by the world's governments to reduce greenhouse gases could cost 1 percent of world economic output, according to a report commissioned by the British government and written last year by former World Bank chief economist Nicholas Stern. But Stern said the cost of not taking those steps would be at least five times as much, hitting the developing world hardest...

Considering what's at stake for the future of the human race (and cute polar bears, too), a 25%-33% increase in electricity bills seems a small price to pay. Sign me up! But some folks in Washington seem to think their constituents have a very narrow view of their self-interest:

"I sincerely doubt that the American people are willing to pay what this is really going to cost them," John D. Dingell (D-Mich.), chairman of the House Energy and Commerce Committee, said in a recent C-SPAN interview, adding that he intended to introduce legislation that would impose a carbon tax "just to sort of see how people really feel about this." He said his proposal would boost the gasoline tax by 50 cents a gallon and establish a "double-digit" tax on each ton of all carbon-dioxide emissions.

Carbon-tax supporter Greg Mankiw commented on Dingell's proposal. Here's the transcript of Mufson's chat with readers. If this seems a bit familiar, an article in The Economist which reached a similar conclusion was blogged here in May.

Fair Taxes?

The federal tax system is a very confusing hodgepodge: the income tax has different rates for labor and capital income, and has all sorts of deductions and credits (giving tax breaks appears to be the preferred way of making social policy these days); for many people payroll taxes (social security and medicare contributions) are larger than income taxes; and corporations pay some taxes too, the burden of which ultimately falls on their owners and customers. The Congressional Budget Office (CBO) has performed a very useful service in calculating the effective tax burden faced by people at different places in the income distribution. In the NY Times, Greg Mankiw writes up the CBO's study. He writes:

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

He goes on to say that "Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy." Mankiw discusses the fairness of the tax code in terms of the thinking of John Rawls and Robert Nozick, though Brad de Long argues that he mischaracterizes them.

Economist Smackdown!

Harvard's Greg Mankiw comments on his "friend," Princeton's Alan Blinder (for those of you who aren't familiar with the academic world, pointing out that something is not in a refereed academic publication is actually pretty harsh, since the peer-review process of journals is how the profession validates quality).

Lifting the Resource Curse?

In the NY Times, Tyler Cowen writes about the "resource curse" that afflicts many low-income countries:

It is unfortunate that economists have to debate whether natural resources are a blessing or a curse for a developing nation. Minerals, diamonds or oil may appear to represent automatic wealth but resource-rich countries usually become mired in corruption. High oil revenues, for instance, allow a government to maintain power and reward political supporters without doing much for its people. The government of Nigeria has taken in billions from high oil prices, yet the average person was probably better off 40 years ago. The easy-to-reach wealth of a resource also encourages coups, and thus political stability is problematic.

He goes on to describe a potential solution.

Laying the Groundwork for Inflation Targeting?

In a speech today to an NBER conference, Ben Bernanke expressed concerned that inflation expectations are not sufficiently "anchored." From the Washington Post story by Nell Henderson:

Fed officials believe it is critical to hold down inflation expectations because of the danger that they can be self-fulfilling: if consumers expect prices to rise, they may more readily pay higher prices; if businesses expect inflation to pick up, they may be quicker to raise their own prices to cover their costs.
"Undoubtedly, the state of inflation expectations greatly influences actual inflation," Bernanke said.
Ideally, if inflation expectations are very stable, or "anchored," they won't vary with swinging oil prices, economic booms or busts, employment data or other changing aspects of a dynamic economy. Bernanke said expectations are better anchored than in the past, but not completely -- they still respond to economic news.

The chairman was careful not to make any specific suggestions, but certainly one way to "anchor" expectations would be to adopt inflation targeting. Under inflation targeting, the central bank announces a specific target level or range for inflation, and conducts monetary policy with the goal of meeting its stated target. Britain, Canada and New Zealand all use inflation targeting, and it has generally been regarded as a success. However, it might constrain the Fed's flexibility under unexpected circumstances (Greenspan's objection), and it it would seem to contradict the Fed's "dual mandate" to achieve price stability and low unemployment by giving primacy to price stability (the likely objection of Congressional Democrats).
As an academic Bernanke was an advocate of inflation targeting and his speech today might be a gentle attempt at nudging people in that direction.

Misreading Adam Smith

Economists' View posted "Morality and Economics," a great commencement address by Joan Robinson from 1977. She makes the case that Adam Smith is a believer in morality after all, and those who interpret Smith an advocate of the untrammeled pursuit of self-interest are mistaken. Read the whole thing, but here's her conclusion:

I hope that the moral consciousness which has grown up in modern times in the youth of America, which has led them to protest against the unequal balance prevailing between morality and the market, will continue to prosper in this generation and that you will find that the doctrines of Adam Smith are not to be taken in the form in which your professors are explaining them to you.

An Incentive Too Far?

The New York City schools are instituting a plan devised by Harvard economist Roland Fryer to pay students for getting good grades. In a NY Times op-ed, psychologist Bernard Schwartz argues that it reflects a naive view of incentives on the part of economists. He writes:

...Unfortunately, these assumptions that economists make about human motivation, though intuitive and straightforward, are false. In particular, the idea that adding motives always helps is false. There are circumstances in which adding an incentive competes with other motives and diminishes their impact. Psychologists have known this for more than 30 years.

In one experiment, nursery school children were given the opportunity to draw with special markers. After playing, some of the children were given “good player” awards and others were not. Some time later, the markers were reintroduced to the classroom. The researchers kept track of which children used the markers, and they collected the pictures that had been drawn. The youngsters given awards were less likely to draw at all, and drew worse pictures, than those who were not given the awards.

Why did this happen? Children draw because drawing is fun and because it leads to a result: a picture. The rewards of drawing are intrinsic to the activity itself. The “good player” award gives children another reason to draw: to earn a reward. And it matters — children want recognition. But the recognition undermines the fun, so that later, in the absence of a chance to earn an award, the children aren’t interested in drawing...

The Economist's Free Exchange is more sympathetic to the idea. Jared Bernstein was prompted to ponder a broader question: "Why Are Economists' Predictions So Often Wrong?" (in doing so, he takes a swipe at Mankiw, who responds).

A European Turns the Tables

It has become conventional wisdom that the European economies are held back by "structural rigidities" - in particular, too much labor-market regulation - in contrast to the "flexibility" of the "dynamic" US economy. In an essay titled "Structural Rigidities in the US and Europe," Belgian economist Paul De Grauwe turns the tables, identifying "structural rigidities" in the US. In particular, the US lags Europe in social mobility, and that the US gets less output per unit of energy input.

De Grawe's piece is at VoxEU, a useful new website publishing commentary by (mostly) European economists.