There’s been quite a bit of discussion here and elsewhere about the cost of large (60 per cent or more) reductions in CO2 emissions. A lot of people are intuitively convinced that since everything we do uses energy, large reductions in energy use can only be achieved at the cost of large reductions in living standards. Economic analysis says the opposite. Typical estimates of the cost of such reductions are in the range 1-3 per cent of income for the world as a whole. Australia is more energy intensive, and ABARE (by no means biased low on this kind of thing) gives a range from 1.7 to 3.4 per cent for plausible scenarios. Only by rigging the game could ABARE get the high estimate of 10 per cent, quoted by Howard a while back. And even a 10 per cent reduction in income, by 2050, would not actually be noticeable against the background noise of macroeconomic and individual income fluctuations. On plausible projections, it would mean average income would increase by 110 per cent instead of 120 per cent.
Category: Economics – General
Can economists save the planet ?
I’ve given this presentation a couple of times in the last week so, to potential economics students and to UQ alumni. I meant to get a modified Superman T-shirt to use as a prop (‘E’ instead of ‘S’) but saving the planet is time-consuming work. Anyway, the Powerpoint (2 Mb download) is over the fold.
Survivor (also at CT)
The question of disciplinary boundaries is a perennial, and Brian Weatherson’s CT post on Richard Gott’s Copernican principle provides yet another instance. Gott, an astrophysicist, is interested in the question of whether you can infer the future duration of a process from its present age, and this issue seems to received some discussion in philosophy journals.
It may be beneath the notice of these lofty souls, but statisticians and social scientists have actually spent a fair bit of time worrying about this question of survival analysis (also called duration analysis). For example, my labour economist colleagues at ANU were very interested in the question of how to infer the length of unemployment spells, based on observations of how long currently unemployed people had actually been unemployed. The same question arises in all sorts of contexts (crime and recidivism, working life of equipment, individual life expectancy and so on). Often, the data available is a set of incomplete durations, and you need to work out the implied survival pattern.
Given a suitably large sample (for example, the set of observations of Broadway plays, claimed as a successful application of Gott’s principle) this is a tricky technical problem, and requires some assumptions about entry rates, but raises no fundamental logical difficulties. The problem is to find a distribution that fits the data reasonably well and estimate its parameters. I don’t imagine anyone doing serious work in this field would be much impressed by Gott’s apparent belief that imposing a uniform distribution for each observation is a good way to go.
Land and house prices
Over at Club Troppo, Nicholas Gruen has a nice piece on what is driving the growth in house prices. He’s correctly sceptical of the view that restrictions on land releases on the urban fringe are to blame.
The crucial economic test here is the location-price gradient, measuring the rate at which prices increase as you move from the rural fringe to the inner city. I haven’t got numbers but it’s pretty clear that this gradient has become steeper over time. This is most obvious in Sydney where the Southwest was the last area to boom and the first to bust.
Sticking with supply constraints, Nicholas goes on to mention resistance to urban consolidation, an effect which works in the right direction. Still, it seems to me that this resistance has been much less effective recently than in the past.
It seems clear that the primary motive for the boom is increased demand. Of course, if the supply of land, skilled building workers, materials and so on were perfectly elastic, higher demand would not increase prices. But supply is never perfectly elastic.
Looking at policy, the obvious thing to change, if you want to make it easier for people to buyer houses is to remove taxes on entrants, like stamp duty, and replace them with taxes on incumbents, by removing the owner-occupier exemption from land tax. The fury with which this suggestion is invariably rejected makes it clear that, as a community, we don’t really mind high house prices.
The myth of “The Myth of the Paperless Office”
The “paperless office” is one of those catchphrases that gets bandied about for a while, only to disappoint and eventually be used in a purely derisive way. As Wikipedia says, it has become ‘a metaphor for the touting of new technology in terms of ‘modernity’ rather than its actual suitability to purpose’. The death of the phrase was cemented by a 2001 book, by Sellen and Harper “The Myth of the Paperless Office”. This book wasn’t a snarky debunking but a fairly sophisticated analysis, pointing out that a sensible analysis of task requirements could allow a significant reduction in paper use. Here’s a good review from Kirk McElhearn. But it was the title that stuck. No one would ever again refer to the paperless office with a straight face.
Six years later, though, looking at my own work habits, I find that I have virtually ceased to use paper, in all but a couple of marginal applications.
The euro and the dollar
The appreciation of the euro against the dollar has taken the currency close to its highest value ever around $1.35. By contrast, the rate estimated as Purchasing Power Parity by the Penn World Tables International Comparisons Project (ICP) is around $1.00 for most eurozone countries (It’s 1.10 for Italy, 1.05 for France and Germany, 0.96 for the Netherlands. The price differential between eurozone countries is interesting in itself, but that’s another post).
A gap of this magnitude between market exchange rates and estimated PPP values raises all sorts of problems. For example, using the Penn numbers, income per person in the Netherlands is about 75 per cent of that in the US, and this number is often quoted on the assumption that purchasing-power parity means exactly what it says. But using exchange rates, as would have been standard a couple of decades ago, income per person is a little higher in the Netherlands than in the US. Which of these comparisons, if either, is valid?
Happiness, income and status
Lots of people (including Kevin Drum, Brad DeLong and Tyler Cowen have jumped in on this post by Will Wilkinson about this NBER study of habituation to changes in income and status. Wilkinson and most commentators focus on the findings regarding the subgroups on the right and left of the political spectrum, which I’ll come to, but it’s worth mentioning the general findings first.
Most people (in the German sample population) initially react more, as regards self-reported happiness, to a change in income than to a change in occupational status, but gradually get habituated to changes in income. This is consistent with the standard view of the happiness literature, that income changes don’t have a big effect on happiness, so that people in rich countries aren’t on average much happier than those in poor countries. Moreover, by looking at the same people over relatively short periods of time the analysis overcomes, to a significant extent, the objection I’ve made previously, that the scale on which happiness is measured is inherently relative to some notion of what is reasonable to expect.
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Zugzwang …
… is a term from chess meaning compulsion to move. Most of the time, it’s an advantage to have the next move, but there are situations, particularly in the endgame when you’d much rather it was the other player’s turn.
So it has been with climate change, at least for some players in the game. The big divide in the negotiations for the Kyoto protocol was between the more developed countries, which had created the problem and continued to produce most emissions of greenhouse gases, and the less developed, which were the main source of likely future growth. The agreement reached was that the developed countries would make the first round of cuts, reducing emissions below 1990 levels* by 2012, after which a more comprehensive agreement would require contributions from everyone.
As soon as the Bush Administration was elected though, it denounced this as unfair and said the US would do nothing unless China and India moved first. The Howard government, until then a fairly enthusiastic proponent of Kyoto, immediately echoed the Bush line. Meanwhile, not surprisingly, China and India stuck to the agreement they’d signed and ratified.
The resulting standoff suited lots of people. Most obviously, while the Bushies were denouncing the unfair advantages given to China and India, they were also pushing as hard as they could to ensure that they and other developing countries did nothing that would facilitate a post-Kyoto agreement. And of course plenty of people in China and India were happy enough not to have to take any hard decisions on the topic.
In the last month or so, this has all started to fall apart. The Australian policy debate has shifted to the point where Howard has had to announce support both for emissions trading and for the logical corollary, binding targets for emissions reductions, though he still refuses to give any actual numbers. China and India have agreed to negotiate a post-Kyoto agreement by 2009, though they are still resisting targets.
That has left Bush isolated. Only a week or so ago, the Administration contemptuously rejected a draft G8 meeting statement on climate change prepared by the Germans, who are hosting the meeting. But as Bush’s lame-duck status has become increasingly apparent, his capacity to throw his weight around has diminished. The reaction from the Germans, and the rest of the Europeans was ferocious. It became clear that the G8 meeting would be a disaster, possibly even ending with an overt statement of disagreement, although (as far as I can tell) such an outcome is viewed by those who run these events as unthinkable.
So Bush came out with a plan. As with his response to the recent Supreme Court decision requiring the EPA to control CO2 emissions, Bush came up with a plan that would have no effect until late 2008, by which time his term would be nearly finished. As Dan Froomkin observed, the US reaction showed that Bush still knows how to play the American press like a harp, but the European reaction ranged from tepid (those who interpreted Bush as offering largely meaningless rhetoric) to hostile (those who viewed him as attempting to derail the post-Kyoto process). And this gradually fed back into US coverage.
So, the pieces are moving again, and the system o mutually supportive intransigence is breaking down. It remains to be seen if anything positive can be achieved, but the untenability of Bush’s position is now clear for all to see.
* Australia held out for a special deal, allowing an 8 per cent increase, then decided not to ratify anyway.
If I were you, I wouldn’t start from here (or now)
I’ve had a quick look at the report of the PM’s Task Group on Emissions Trading. It gives a pretty good summary of the main issues, constrained by the political requirement that it should not even look at the obvious implication of an argument for participation in an international emissions trading scheme, namely that we should ratify Kyoto forthwith. The choice of 2012 (when Kyoto expires) as the target date neatly avoids the issue, as well as meeting the political imperative of not endorsing what Labor has proposed.
The main implication of the Report is that we should have got started on all this ten years ago (or at least, back in 2003 when Howard killed the idea), and that we’ll now have a more costly adjustment path than if we had acted sooner.
Something of a surprise is that the McKibbin-Wilcoxen hybrid idea didn’t get more than a couple of brief mentions. Some of the leaks I saw suggested that the Task Group might go this way, as did Howard’s rhetoric about an “Australian, practicaL” scheme. As I mentioned a while back, the big problem with this idea is its incompatibility international trading, and this is presumably why the Task Group didn’t go this way.
Heterodoxy is not my doxy
Following up on a couple of recent posts on Crooked Timber, I thought it might be useful for me to explain why I don’t think of myself as a ‘heterodox’ economist or even find the concept particularly useful. Although I’m clearly to the left of most people in the economics profession (including a fair number who would call themselves heterodox) I’m happy to identify myself with the mainstream research program in economics.
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John Quiggin 