Saturday, December 20, 2008

first crack at transport cost impact

I recently read Marc Levinson's The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, and was reminded of a task on my to-do list that I have yet to cross off: I want to create one of those fancy maps I love where distance represents transportation cost/time. I'm still not sure of the details. Perhaps I'd take each major market and then have all the other countries orbiting around the market, with distance based on transport cost and country size based on GDP.

Unfortunately, I haven't gotten to that point because it's proven damn difficult to get anything near comprehensive data on the subject. Levinson has a few nuggets:

Being landlocked, one study calculated, raises a country's average shipping costs by half. Another study found it cost $2,500 to ship a container from Baltimore, on the U.S. Atlantic coast, to Durban, in South Africa - and $7,500 more to haul it by the road the 215 miles from Durban to Maseru, in Lesotho.
I checked the bibliography and snagged the source PDFs online. One of them, Infrastructure, Geographical Disadvantage and Transport Costs, has some interesting data on African country transit costs, albeit from 1999.

I threw the data into Excel, popped in the current GDP (PPP) per capita, and below is the result. In the original paper linked above, the transport cost for US to Germany was 1.0. I created a "large market" proxy transport cost by averaging the transport costs from each city to the US, Germany, and Japan.

*Oil-rich country, transport costs for non-oil products may be underestimated

In the bubble chart below, bubble size is proportional to GDP per capita, with the Transport Cost on the Y-axis, countries sorted by GDP per capita (lowest to highest) along the X-axis.

When I sorted by transportation cost, three countries stood out to me as having some of the lowest transportation costs yet only average GDP per capita: Senegal, Togo, Gambia

Further down on the list, three more countries stood out with average transportation cost rates associated with much higher GDP (e.g., $2,000 range) than they achieved: DRC, Guineau-Bissau, Sierra Leone.

I don't know a ton about the countries besides violence, but thought I'd bring them up in case an African aficionado happened to have something to offer.

For my part, I make no conclusions. This is just the first attempt at exploring transportation costs. I'm still on the lookout for better data, but for now, I'll leave you with conclusions from that 1999 paper.
Our main results are, first, that infrastructure – both own infrastructure and that landlocked countries’ transit routes -- is a significant and quantitatively important determinant of transport costs and of bilateral trade flows. For example, improving destination infrastructure by one standard deviation reduces transport costs by an amount equivalent to a reduction of 6,500 sea km or 1,000km of overland travel.

Second, being landlocked raises transport costs by around 50% (for the median landlocked country compared to the median coastal economy). However, improving the infrastructure of the landlocked economy from the median for landlocked economies to the 25th percentile reduces this disadvantage by 12 percentage points, and improving the infrastructure of the transit economy by the same amount reduces the disadvantage by a further 7 percentage points.

Third, combining estimates from transport cost data with the trade data we are able to compute the elasticity of trade with respect to transport costs; it is high, at around –2.5. This means that the median landlocked country only has 30% of the trade volume of the median coastal economy.

Improving infrastructure to the 25th percentiles raises this to over 40%.
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Tuesday, December 9, 2008

stay loyal to principles, skeptical of means

Once we've acknowledged the potential for regulation to improve the functioning of a market, the next task is to determine the likelihood that regulation will indeed accomplish its stated goal. Just as our market skeptics are right to point out that we need to judge 'capitalism' by it's real-world performance, we must judge government action by the same. And our pluralistic democracy, for all its strengths, does a remarkable job of turning the most noble of causes into dismal and destructive regulation.

The more we break down 'regulation' into its specific components, the better we are able to assess the respective likelihood of attaining stated aims and creating additional negative externalities. Only then can we weigh the likely effects of our darling regulation with the likely effects of inaction. Presumably, at the end of such an exercise, support or opposition of 'regulation' would be less broad and more tailored to specific types of interventions in specific instances.

For example, the appeal of government subsidies for investment in alternative energy is clear. It's become a proxy battle for those who support a large commitment to reducing carbon emissions and those who oppose it. Those that support this large commitment, however, should be more circumspect, and allow for the possibility that they might support the principle of carbon abatement, but still oppose subsidies because of what the regulation will look like at the end of the day.

Ezra Klein has said as much:

"One more time: 79 cents of every dollar the federal government invests in renewable energy goes towards corn ethanol, a heavily subsidized boondoggle that is little better than gasoline. Which is why I worry about targeted investment strategies. It's not impossible to conjure up massive investment strategies that would make a tremendous impact on global warming. Gary Lipow does a nice job of it here. But it's hard to imagine such an initiative entering the United States Congress and not emerging as pork encrusted in corn. The incentives are too poorly aligned."
Klein goes on to briefly mention the idea of a cap-and-trade system, before again agreeing with skeptics that "so much will be exempted and rebated and set aside that it will, in practice, be nearly as bad."

He finally allows that a straightforward carbon tax may indeed be the best option (sidenote: supported by Al Gore and Ralph Nader, among others).

Of course, these aren't the only carbon abatement programs in place or in consideration. We have CAFE standards, which many want to make more stringent, despite the fact that "the premise of CAFE is a little bizarre—that manufacturers are responsible for the choices of their customers and penalized if car-buyers prefer more fuel-intensive vehicles. Across the political spectrum from left to right, the more direct, logical and efficient alternative of a carbon tax has its advocates, but they remain a persecuted minority," as the Economist points out.

Unfortunately, the conversation about what to do about carbon has not allowed much room outside a broad-based support or opposition to carbon abatement programs en sum. Opposition to particular programs is seen as a proxy for half-hearted committment to the principle. Yet it's perfectly possible that Ezra believes more in the destructive power of carbon emissions than John Q, yet supports fewer of the abatement programs.

Subsidies, CAFE standards, cap-and-trade systems, carbon taxes, and gas taxes represent only some of the regulations applicable to a single unpriced externality (carbon emissions). What's more, I don't want to dismiss the potential of subsidies, for instance, out-of-hand because of their massive failure in alternative energy. In fact, I would invite those sympathetic to subsidies to refine their argument, perhaps forming a push for (and only for) 'subsidies for basic research independent of commercial applications.'

I would like to see educated debate move beyond principled support/opposition for more or less government action, and toward a pragmatic analysis of the means. It only takes a look at today's headlines of proposals for a "car tsar" to underscore the importance of differentiating between the principle (well-functioning auto industry that doesn't blow up the planet), which is the end, and the proposal itself (see: tsar, drug... tsar, terrorism), which is nothing more than an often shoddy means.

In the mean time, be just as wary of he who supports all efforts to save the world from carbon and auto bankruptcies as you are of those who make the same pledge to protect us from Islamo-fascists (what a term!) If he can't discriminate between wasteful and ineffective means to serve his principle, he probably is an irrational zealot.
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Tuesday, November 18, 2008

Gas Prices Fall as Big Oil Reduces Profits

NEW YORK -- Consumer advocates are dancing in the streets after successfully lobbying Big Oil to forego the record profit strategy agreed upon by the cartel this past summer in hopes of improving the competitiveness of the American economy (home to the greatest workers in the world) and the strength of the American family.

After a closed-door meeting this fall, the powerful transnationals agreeing to lower the Big Oil Required Set Price (BORSP) from more than $140 per barrel in June to $55 this November.

"You know, they were right to suspect massive collusion and corruption behind the soaring oil prices," said Bud Budderson, former head of Collusion & Pricing, and now VP of Smiles & Sunshine at BP. "You know who set the prices? Me. And you know how I did that? I created a formula based on how many new toys I wanted to buy that week.

"I was a bad guy. But I did some thinking, listened to Barack explain the unfairness of our windfall profits, and decided to make a change."

Along with the rest of Big Oil, BP made the difficult decision to stop selling oil at a price they now admit was completely detached from supply and demand, supported only by backroom dealing sealed with sweaty handshakes, evil cackling, and whale steaks marinated in peasants' blood.

The price reduction has in turn won over many former critics.

"The fact that Big Oil, in these tough economic times, has chosen to lower prices by nearly 2/3  for the good of America, serves as a beacon of hope for all those who believe in the essential awesomeness of America," said Tuck Tuckerson, senior analyst at MSNBC, and author of "Speculation, Gouging, and Waterboarding: A Year in Big Oil as a Super-Secret Embedded Reporter."

"We just grew tired of being so goshdarn evil," said Exxon CEO Money Monerton. "You can only read headlines like"Record Gas Prices, Record Oil Industry Profits," for so long without rethinking your decision to put excessive personal profit over the humble dreams of hard-working Americans.

"Sure, the record profit strategy had its benefits, but this time around, we made the right choice, both for our companies, and for America."
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Monday, November 17, 2008

why bet on climate forecasts?

I have long enjoyed Bjorn Lomborg's critiques of the climate change mitigation plans (e.g., Al Gore's trillion dollar 10-year plan, T. Boone Pickens' giveaway), as he has used numbers of the UN's scientific consensus to show how little sense most (not all) of the plans make.

Funnily enough, when "green" advocates see the small impact (and immense cost) of the Kyoto Protocol spelled out, they become far more amenable to perhaps a more interesting discussion on the viability of the UN's forecasts.

Furthermore, in the wake of a financial crisis brought on (partly) by a reliance on the financial community's consensus statistical modeling, it's not a bad time to question the reliability of these models in the first place.

Both financial and environmental modeling portend to predict the behavior of a complex system, where even small errors can lead to catastrophically wrong predictions thanks to the great number of feedback loops in the system.

And while the financial system saw the failure of the (Nobel winning) Black-Scholes financial model with the collapse of Long-Term Capital Management, environmental forecasters believed we were actually entering a "global cooling" only 30 years ago (quickly forgotten by the environmentalists' new Nobel-led movement).

In both cases, these massive failures are dismissed with a wave of a hand - 'oh, we have better models this time. I mean, we'd never make a mistake like that again. We just needed to add variable X that my stupid old partner missed and not pay attention to variable Y, which I always thought was wrong.'

I greatly enjoyed Nassim Taleb's "The Black Swan" as Taleb took the financial modelers - indeed all forecasters - to task for just this arrogance and failure to admit their projections should not be relied upon.

He states that he wouldn't trust a projection over five years; for the sake of context, the climate forecasts are 100 years (!) into the future.

I should add that I believe I did read somewhere that Taleb has spoken vaguely in favor of conserving the environment as a natural resource. I won't disagree with this. I have already written on what I think makes sense for climate change (Obama's $150 billion for R&D=good, subsidies for inefficient alternative energy applications right now=bad). This post is about the scientific modeling put forth as a consensus by a community with a long history of making drastically wrong forecasts.

Taleb advises, "Learn to read history, get all the knowledge you can, do not frown on the anecdote, but do not draw any causal links, do not try to reverse engineer too much-but if you do, do not make big scientific claims."

It appears to me that not only are our forecasters drawing causal links based on highly-fragile models, but also making "big scientific claims."

Some of my few readers are likely chomping at the bit to add the comment/question: 'Sure, you can criticize the models, or whatever, but Taleb's book is all about protecting yourself from Black Swans - highly improbable events that carry catastrophic risk - how can you possibly distort his arguments into a critique of climate forecasts: you are missing the forest for the trees!'

Maybe so - only Taleb knows, as he has been uncharacteristically reserved about commenting on climate change from what I've seen - but I do not believe I am misrepresenting his logic.

Taleb writes: "Many of the prediction failures come from hedgehogs who are mentally married to a single big Black Swan event, a big bet that is not likely to play out. The hedgehog is someone focusing on a single, improbable, and consequential event, failing for the narrative fallacy ["creating a story post-hoc so that an event will seem to have an identifiable cause"] that makes us so blinded by one single outcome that we cannot imagine others. Hedgehogs, because of the narrative fallacy, are easier for us to understand- their ideas work in sound bites."

Taleb emphasizes that Black Swans are Black Swans because they are indeed unknowable -- uncertainty is just that. His advice is to "to focus on the consequences (which you can know) rather than the probability (which you can't know)... Likewise, do not try to predict precise Black Swans- it tends to make you more vulnerable to the ones you did not predict. ... These thinkers advocate the opposite: invest in preparedness, not in prediction."

Does this sound familiar? It should, because Bjorn Lomborg has advocated investing in preparedness that will pay dividends regardless of climate change (e.g., "malnutrition policies, immunization and agricultural research and development"). These proposals stand in stark contrast to the energy-exclusive solutions of people like Gore and Pickens, which will make us indeed more vulnerable to the Black Swans we don't predict.

To wrap up, I'll return to Taleb: "I do not forbid myself from using the word cause, but the causes I discuss are either bold speculations (presented as such) or the result of experiments, not stories."

Environmental forecasters have treated us to bold speculations presented as scientific fact as part of a grand narrative that ends in apocalypse -- a Mad Max end of humanity unless if not for drastic, expensive, collective action (but secretly great for our economy!) to reduce our carbon footprints -- and thereby meaningfully mitigate climate change in an environment that has undergone catastrophic changes without the help of mankind for millions of years.

Whew. Maybe that is right on target, but I hope that even believers will admit that it just oozes all mankind's cognitive biases and failings that are now well documented in behavioral economics, psychology, and indeed Taleb's work.

The ceremonial rain dance is also well documented. People observed climate change. They created a narrative whereby they were responsible for it. They used their scarce resources to participate in ceremonies that would theoretically change the environment. Even after doing it for a period of time, they were able to explain away the many failures of their efforts to preserve the narrative. At least these ceremonies didn't cost trillions of dollars.

The late Michael Crichton said, "Nobody believes a weather prediction twelve hours ahead. Now we’re asked to believe a prediction that goes out 100 years into the future? And make financial investments based on that prediction? Has everybody lost their minds?"

I'll end with some more wisdom from Taleb. We should not play the role of hedgehog, but that doesn't necessarily mean we slump on the couch and wait or a new wild theory to take root. We should take the advice of Lomborg and Taleb in maximizing our exposure to positive Black Swans by expanding R&D and allowing for the trial-and-error process necessary to innovate, while also investing in multi-use preparedness, e.g., malnutrition, disease prevention, poverty alleviation efforts, etc.

And lastly, a disclaimer: there are lots of good reasons to reduce our impact on the earth, to use resources more efficiently and expend less energy doing the business necessary to provide humans with a healthy and fulfilling life. This post is specifically criticizing the forecasts that have been coopted and the narrative they support.
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Tuesday, November 11, 2008

quigley's critique of the clerks of history

I've already posted my summary of Carroll Quigley's narrative of historical development here, and now I'll move straight to the end, where Quigley concludes the Evolution of Civilizations with takeaways for students of the social sciences to better frame inquiries into the past and present. Quigley is disturbed by the inconsistencies and contradictions running rampant in historical study, which he attributes to students focusing on knowing every detail of their area of historical expertise, while failing to carefully consider a deliberate analytical framework from which to understand their historical area.

The eager student would be slower to make bold assertions about the past if he appreciated the complexity of the system he studied. Understanding civilization, and social phenomena more generally, is intrinsically very difficult, as human experience is not static but dynamic: it is a continuum:

"A continuum is a heterogeneous unity each point of which differs from all the surrounding points but differs from them by such subtle gradations in any one respect that no boundaries exist in the unity itself, and it can be divided into parts only by imaginary and arbitrary boundaries."
We are left to cope with the past the same way we deal with the colors of the rainbow, drawing arbitrary lines between red, orange, and yellow. These artificial categories or labels are necessary for discussion, but we must realize they are arbitrary.

Quigley asks students to be ‘executives’ of history, rather than simply its clerks. The distinction is that the clerk concerns himself with knowing the details of history, while the executive is interested in understanding history. The executive’s understanding is only as good as his analysis, and to this end he uses deliberate techniques to provide a systematic understanding of historical development.

These techniques will not be perfect – a fact Karl Popper and Nassim Taleb would insist upon more forcefully than Quigley – but only through the deliberate choice of one technique or another will the student be aware of the potential blind spots of his understanding. That is to say, every understanding of historical development depends on assumptions, whether the student deliberately makes them or remains blissfully unaware.

It is a tremendous err, however, to not deliberately pick a set of assumptions from which to interpret. By unknowingly operating off whatever assumptions make sense at the time, the student ends up with a contradictory and inconsistent assumptions (and interpretation of history). What's more, he never even understands the assumptions implicit in his own garbled understanding.

Quigley also takes issue with the how historical phenomena are compartmentalized into incomprehensible units, such as “nations” or “the middle class.” For the purpose of studying historical development, it is necessary to study distinct groups; a nation-state may have more than one distinct group, or may contain part of a distinct group that exists in another nation-state as well. Defining distinct groups is not easy, but it necessary for rational study.

Quigley also objects to the language of history. Historical terms should be selected to correspond to the process being studied and the technique being employed. Instead, historical development is explained in a language devoid of consistency or meaning, e.g., periods classified as “medieval” and “classical.” At best, terms are descriptive, at worst they are highly misleading. The exact lines drawn to classify different periods or peoples will always be somewhat arbitrary, but that doesn’t excuse sloppiness.

For another example, the time period between 400 and 1400 AD is referred to as the middle ages, medieval period, and the dark ages (for the beginning). The first term provides the student with the knowledge that this period is in the middle of two other periods. Medieval describes the period as “outdated,” which provides the student with the knowledge that this period is less up-to-date than more recent periods. The dark ages provides the student with a similar perception.

None of these terms convey how the events within this period figure in the process of historical development. If anything, they suggest that historical development stopped for 1,000 years. Quigley breaks down the same time period into four parts – mixture, gestation, expansion, and conflict. Quigley deliberately chooses a set of consistent and relevant labels for historical phases that correspond with the process of historical development and the on-the-ground reality; therefore, his technique is better able to explain supposed exceptions to the dark ages or medieval period, such as the Carolingian Renaissance. This periodization is more than a small nuisance: it has led to a high degree of specialization limited within these arbitrary designations. Now the most fruitful studies are likely to come from those who study the gaps and borders of these false categories.

In sum, Quigley joins Arnold Toynbee in arguing for the importance of analytical technique in historical and social analysis. A systematic technique not only provides a more coherent historical narrative, but also provides the self-awareness needed to understand one’s own potential blind spots. Toynbee properly identified these problems in his studies, but failed to provide proper definitions for his own terms and indeed fell prey to the same sloppiness he condemned.

It would be silly to argue that Quigley’s technique of understanding the rise and fall of civilizations is perfect, but with the ubiquitous disclaimer to handle all post-hoc narratives with care, he offers a superior history, an insightful critique of popular history, and a sound reminder for students of history to carefully choose a technique - even if it's not Quigley's.
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Monday, November 10, 2008

useful narrative for civilization development

Carroll Quigley provides probably the best narrative of the rise and decline of civilizations I've come across (better than Toynbee, Durant, Braudel) in his book, Evolution of Civilizations (download a PDF version here). I recently came across a document where I summed up a large portion of his insights and thought I would share it. I also have some notes on his critique of the study of history as a whole, which I'll share shortly.

To begin, Quigley defines civilization as a producing society (as compared to parasitic society) which grows thanks to an “instrument of expansion.” This instrument depends on invention and investment for the purpose of surplus creation. Instruments of expansion appear to be big picture developments, from feudalism to industrial capitalism – means of organizing inputs.

Quigley breaks down the civilization's life cycle into stages: mixture, gestation, expansion, and conflict, with universal empire, decay and invasion follow if the civilization fails to find a new instrument of expansion.

Mixture: A new society needs multiple cultures mixing; while there are millions of cases of cultural mixture, only rarely does it create a new society; usually this occurs on frontiers, where cultures mix to find “alternative ways of satisfying human needs,” e.g., a new instrument of expansion.

Gestation: Period before expansion begins, where few changes are apparent; status is still stabile, but investment and invention are taking place under the radar.

Expansion: Four kinds: a) increased production of goods, eventually leads to rising standards of living, b) increase in population of society as death rate declines, c) increase in geographic extent because of exploration and colonization, d) increase in knowledge; all are interrelated. Period typified by democracy, scientic advance, and revolutionary political change, while in the latter half of expansion, the instrument of expansion becomes institutionalized, “increasingly static and legalistic.” In time, all will see “investment begin to decrease, and the rate of expansion (although not expansion itself) begins to decline.”

Conflict: Period of declining rate of expansion and increasing class conflicts, due to a conflict of interests between the vested minority and frustrated majority, with neither side having clear idea of real issues or workable solution to crisis. The programs the majority want - sharing the surplus of the few with the many - are not germane, since expansion can be resumed only with concentrated surplus; such revolutionary programs will actually make the crisis worse by lowering the accumulation of surplus. The period is also marked by increasingly frequent and violent imperialist wars, along with growing irrationality, pessimism, superstition, and other-wordliness.

Universal Empire: This period is often considered to be the golden age by historians, as there is relative peace and prosperity as there are no competing political units and no struggle with outside societies. There may develop a common set of weights, coinage measures, and extensive government spending. This is all misleading, as there is no real economic expansion, as the previously-productive instrument of expansion has stagnated. Inventions are rare, and real economic investment is lacking. Society is now a monument to the vested interest. Masses live off waste of non-productive expenditures. “Golden age is really the glow of overripeness” - a prelude to decay.

Decay: This period is unsurprisingly marked by “acute economic depression, decline in standards of living, civil wars between the various vested interests, and growing illiteracy.” There is often vain legislation to stop the waste. Religious, intellectual, social, and political levels of society lose the allegiance of masses. Religious movements then sweep society, along with a growing reluctance to fight for the society or pay taxes. This period can last a long time, until it can’t defend itself again the barbarians at the gate.

Invasion: The invaders attack the civilization until it can no longer stand, destroying the civilization, and creating a new period of mixture, providing the possibility for a new gestation period. For instance, the Greek invasion of the Minoans was Classical gestation, the Germanic invasion ended Rome, but birthed Western Civilization. This is not a given though, simply a possibility.

While Quigley’s model is based on the civilization experience, it applies to groups of all sorts all the way down to organisms. Political parties find instruments to expand their influence and popularity. These instruments become institutions protected by individuals who derive disproportionate benefit from their continuance. Over time, this institution sees a declining rate of utility to the party, and many in the party will think it best to reform or circumvent this institution and invest in a new instrument of expansion. If they fail to reform, their party’s position will decay further until they are replaced.

Mancur Olson has a related argument in “The Rise and Decline of Nations,” which argues that small, distributional coalitions form to protect their interests, and as the state endure, it accumulates more and more of these drags on expansion, causing increasing decline.

Quigley essentially takes natural selection theory and incorporates the uniquely human ability to choose. Animals change their instrument of expansion through thousands of years of selective survival and breeding. Humans, and any social groups they might comprise, can change their instrument of expansion simply through a will to change.

At earlier stages in civilization, it was the battle to see who had the strongest few, who would strengthen themselves through plunder abroad and appropriation at home. The chief instruments were indeed war and plunder. However, this initial plunder created a surplus which allowed for inventions that created new economic instruments that created surplus without conflict, and indeed, depended on cooperation and expansion to mature.

This created a lobby for peace and commerce, which butted heads with the entrenched war institution. This economic instrument was also institutionalized to secure its ability to flourish by land barons and guilds. This institution expanded for some time (at less-than-optimal rates) because of expanding items of commerce and expanding markets to sell, before finally commercial capitalism challenged the institution of feudalism. Commercial capitalism became the instrument of expansion until it was displaced by industrial capitalism, which in turn was institutionalized into monopoly capitalism.

Each evolution has depended on surplus-holders with weaker ties to the current instrument of expansion than the draw of potential gains in the untapped instrument. This group will only come into being if the vested interests’ instrument incidentally creates a surplus for another group. The pivotal moment in a society occurs when the vested interests trade a share of surplus to a distinct group for a service they could not provide themselves; if so inclined, the secondary group will continue to accumulate influence through its more efficient instrument before either co-opting the vested interests or stripping the vested institution of its privilege.

It seems like the US is in the Conflict stage, where Quigley offers some sage advice on the popular proscriptions. In this period of growing tension of evolution and increasing class conflicts between the vested minority and frustrated majority, neither side has a clear idea of real issues or workable solution to crisis; agendas to appropriate the surplus of the few by the many are worse than useless, since expansion can be resumed only with concentrated surplus to fund new or reformed instrument of expansion. Revolutionary programs responding to failure of investment will make the crisis worse by lowering accumulation of surplus; both the masses and the few are blind to what’s needed, a new instrument of expansion, which usually appears by accident or circumvention rather than through reform.

Every instrument of expansion sees diminishing returns, and the rate of expansion can only be maintained or increased through reform or circumvention (working around entrenched interests) to ensure surplus is invested in the best available instrument.

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Sunday, November 2, 2008

Fun with polls

I designed a quick and easy game for the election that focuses on the battleground states. I don't particularly follow the polls, but since I have to participate in my own game, I wanted a quick and easy method for making predictions I can at least pretend are more than WAG (wild ass guesses).

Battleground states (5): Virginia, Colorado, Ohio, Florida, Pennsylvania
Close states (5): North Carolina, Missouri, Indiana, Montana, Nevada
Popular Vote (1)

For each state, you must pick the winner and the margin of victory. I decided to simply rely on the average polling data, with one minor adjustment. Thanks to RealClearPolitics, I was able to quickly grab the last polling data from 2004 for each state as well as the eventual results. I then compared the polling forecast with the results, and looked to see if the polling data erred for/against Bush/Kerry.

The polling data for Colorado, Ohio, and Montana was virtually the same as the eventual voting outcomes. So I let Obama (CO, OH) and McCain (MT) keep their forecasted victories.

The 2004 Pennsylvania and Nevada forecasts, meanwhile, underestimated Kerry's eventual wins, so that secured Obama's W's in those states.

Bush outperformed his forecasted margins of victory in North Carolina, Missouri, Indiana, Virginia, and Florida. This solidified NC, MO, and IN as McCain victories in my book. In VA, Obama is +3.8, and Bush only outperformed his expected margin by +2, so I'm calling it for the gentleman from Illinois.

The toughest nut to crack is Florida. Obama is up big (+4.2), but Bush was only up +0.6 and ended up +5. It's a tossup according to my unscientific method, but I am going to go Obama with a slim margin.

For the popular vote, Bush outperformed his forecasted margin by a bit, so I am just taking a bit of shine off Obama (currently, +6.3) and leaving him +5.5

According to these predictions, Obama will bring home the victory with 338 votes: 311 if he comes up short in Florida.

VA: Obama +2
CO: Obama +6
OH: Obama +4
FL: Obama +0.5
PA: Obama +7
NC: McCain +2
MO: McCain +2
IN: McCain +3
MT: McCain +3
NV: Obama +6
Popular: Obama +5.5

After the election, I'll recap how everyone did in the prediction game. If you haven't entered yet, Click Here to take survey.
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Tuesday, October 21, 2008

incomplete guide to free market regulation

I’ve spent the past week or so struggling with how best to write a post on the proper role of regulation in market design. This a difficult topic to synthesize, since each market poses a different set of challenges for regulators; and I do not intend to catalog every regulation that exists and explain why I believe it to be useful or destructive.

That said, the current financial crisis has incited a chorus of criticism of the deregulation movement of the past thirty years. This deregulation has transformed numerous industries: air, bus, shipping, telecommunications, and, yes, finance. Now that there's been a financial meltdown, in the mind's of many, deregulation has been completely invalidated (of course, most of these folks felt this way five years ago).

I'm less than impressed by this mode of argument, as I believe that deregulation is necessary in many instances to reduce distortions in the market. But unlike some caricatures of the free-market position, I don't advocate deregulation to the point of anarchy. I'd like to remove many regulations, keep many others, and selectively add a few as well.

Regulation is tricky business, and I am interested in arriving at a principled differentiation between regulation as appropriate market design versus regulation as nefarious market meddling. I’ve emailed a few highly-regarded bloggers, but in lieu of an appropriate response by these bloggers, I thought I would take a shot.

It’s appropriate to begin with a discussion of what I mean by market design versus market meddling. Market design is the set of formal and informal rules that shape and limit participation in the market: market design rules separate a market from anarchy. Market productivity is indeed enhanced by rules to govern market behavior. Thefts indeed reduce market exchange. Beyond security, consumer confidence is essential: forgeries will quickly empty a market place. The purpose of market design is to maximize voluntary exchange between willing parties.

Here's my (incomplete) theoretical check list for a free market:

* No single buyer/seller should exert significant influence over prices or output (e.g., monopoly, collusion, unions)
* No asymmetric/incomplete information: participants must be straightforward in what they are buying/selling (e.g., used car market)
* No unpriced externalities (e.g., cost of toxic chemicals released into local lake)
* No threats to property (e.g., theft)
* No restrictions on who can buy/sell goods (e.g., licensing)
* No restrictions on prices at which goods can be bought/sold (e.g., minimum wage)
* No restrictions on the quality of the goods exchange (e.g., FDA approval)

Many will point out that by this check list, no market is completely free. This is truism akin to the observable fact that no human being is truly free. Still, just as I'd prefer to be "more free" even if I'm not completely free, I'd prefer to participate in markets that are "more free."

Indeed many of these concerns will be mitigated by the market participants themselves. Two-faced scumbags will be left without a trading partner, while fair-dealing will be rewarded with more business. You probably don't inspect the newspaper you buy in the morning before you hand over your money. But there is no law against selling newspapers with pages missing.

Still, few markets of import are self-regulating in all aspects. Formal legal laws and informal rules are necessary to advance the free-market agenda listed above. This post has served to reestablish the principles of the free market, which has been perverted by critics of the deregulation movement in their zeal to win the political blame game currently taking place.

The next post will be a bit more practical in looking at the issues of regulation, including regulatory arbitrage and capture, specifically in the context of our faltering financial system. It's easy to say we need the "right" regulation (which obviously was lacking). It's even relatively easy to state the principles by which this regulation should abide. It's much harder to explain which, if any, rule-making institution (e.g, Congress?) is likely to produce regulation that improves the sustainability and productivity of the market.

But let's try.
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Thursday, October 9, 2008

skills to pay the bills - the college years

We've covered the importance of education, and the problems with our current public school education policy. Next up is the university level.

To begin, our universities truly are the envy of the world. That said, we aren't perfect. There are a few low-cost options: community colleges, online degree programs, and technical schools. But these alternatives are generally considered to be "second class" education with a very firm ceiling that rules out many well-paying careers.

In response, progressives have fixated on making it possible for every high school graduate to go full-time to a four-year college.

On one level this makes sense, even marginal college students can expect at least a 7% wage premium per year of college. This is because the bachelor's degree has achieved a majestical stature for students and for employers, signaling (at the least) a basic capacity to be trained (and eventually perform) in a high-value, well-paying profession.

There is nothing inherently wrong with a degree acting as a signaling device; we depend on just such signals for societal trust and exchange.

The problem is that the bachelor's degree is a very expensive signal, and there is reason to believe a very wasteful signal. And while it's not a societal problem if rich people want to spend their money on extravagant signalling, it is a societal problem when our anti-poverty program depends on subsidizing the poor's purchasing of this overpriced signal.

(This is what $60,000 apparently buys you! Apparently, they didn't budget for a decent sense of humor.)

In theory, this problem should resolve itself as firms exploit this opportunity by hiring and training smart high school graduates themselves for less than they would pay the college grads. That is indeed what has happened in India: at least one software company is thriving by hiring young professionals whom others disregard. They don’t look at colleges, degrees or grades, because not everyone in India is able to go to a top-ranked engineering school, but many are smart. The firm goes to poor high schools, and hires kids who are bright but are not going to college due to pressure to start making money right away. They train them, and in nine months, they produce at the level of college grads.

This is not occuring in the US, primarily because of a coordination problem.

Good future workers know they need to go to college to signal their ability to firms and firms know that they have a much higher chance of finding good future workers in the college group. Furthermore, employers are much less likely to have their competence called into question if a hire with a degree doesn’t work out than if they hire a worker without a degree (because of the correct perception of the low likelihood of that hire being a wise choise).

The question is how to credibly signal to good future workers that a four-year college degree isn’t necessary to be considered as a candidate and to convince firms that there are enough good future workers without a four-year college degree to make it a wise investment to include them in their employee search.

The challenge is to develop viable alternatives to the bachelor's degree that don't confer a 'second-class' status. I'd like to see the proliferation of shorter, no-frills academic programs that focus on teaching professional skills and testing relevant capacity (take a lesson from master's programs). In addition, I do believe that CPA-like exams for different professions (or areas of competency) will allow for a more fair and open competition.

There can be great value-added by a four-year liberal arts program, just as there can be value-added by a PHD or masters program; the problem is that the bachelors degree hasn't become an option for those so inclined, but a requirement for a well-paying job - and an expensive requirement at that.

It would be wonderful if we could afford to send every child to a four-year sleepaway camp, where they could sleepwalk through four years of classes (if they so chose) and receive a magic ticket to a well-paying job -- but that isn't the case.

There is a lot of fat to be cut and changes in educational philosophy to be made. Perhaps rethinking the well-manicured campuses and live lectures, for instance. The academic lecture, by the way, has its roots in the medieval training of theologians in a time when one-book-a-course for four years of schooling would cost about $1.6M in book outlays. Back then, it made economic sense to have a lecturer (from latin lector - reader) read from a single book aloud to a hall filled with students. Yet despite the fact that nowadays students could read the contents of a lecture in an instant at virtually no marginal cost, or even watch a video of the lecture -- the lecture remains at the foundation of university teaching.

Everyone in every occupation starts as an apprentice. This is as true of history professors and business executives as of chefs and welders.

The challenge is to make both our advanced schooling and our advanced signaling more efficient and thereby, more accessible. A proper long-term strategy is not to subsidize students' purchasing a $160,000 education, but to support the establishment of alternative means, be it CPA testing or shorter, low-cost advanced degree programs for students to prove their merit to potential employers.

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Wednesday, October 8, 2008

no skills to pay the bills, pt. 1

I'm sure if you asked Barack Obama or John McCain directly about the importance of schools, they'd give you a rousing sermon (or at least a few firm talking points). Yet education reform has been notably absent from our political debate. The candidates love riling up voters' economic nationalism, whether it's talk of foreign oil, foreign cars, China (everyone's favorite boogeyman), outsourcing, globalization, immigrants, or any other buzzword that places blame for American worker woes far from the doorstep of the American government and people.

Yet it’s not globalization or immigration or computers that have widen inequality and slowed wage growth for many Americans. It’s the skills gap.

And while there are plenty of expensive plans to alleviate American poverty to varying degrees, tax-and-redistribution will never provide the economic opportunity and security that we wish for all Americans.

Education should be the primary program to cure our social ills as the key to sustainable high compensation. It is both the key to advancing the welfare of the American poor, and also the means of securing America's economic growth.

This post will focus on primary/secondary education, with a post to follow on college education. Some of the prettier lines from this post I've lifted either from my summaries (linked below) or the original articles (also linked below), but I've spent a bit more time for the sake of flow and coherency to reformulate these ideas.

First, let's recount why education is more important than ever.

The labor market has expanded dramatically in the past 50 years -- undoubtedly for the better of Americans and all mankind. That said, unskilled Americans have had a much, much, much smaller share of the bounty than their fellow citizens.

The problem is that employing unskilled American labor isn't much more profitable than buying a simple machine or employing unskilled labor in a third-world country, yet many unskilled Americans will only accept wages that are much higher than a third-world laborer will accept or a machine will cost.

The value of unskilled labor is low. This sounds like a truism, but it wasn't always the case. Before the machines took over the world and the cost of doing business far from market plummeted, an unskilled laborer simply giving you a few hours time could get a decent wage (of course, that is relative to his peers; relative to his 21st century counterpart his life would be shorter and more brutish). What's more, the American laborer with a high school education likely still had an advantage over his global competition - that advantage has since disappeared.

Meanwhile, unskilled laborers have watched the skyrocketing wages of skilled laborers,. This shift in labor value has been jarring for many Americans, who are ill-prepared to compete for wages based on value-added by their labor, rather than simply time spent at work. And let's be clear, the days of factories full of high-paying manufacturing jobs are gone forever.

Most means of fighting this growing inequality carry large costs that reduce the size of the economic pie (e.g., taxes on capital gains, rent control, large welfare programs). By contrast, investing in human capital encourages work and offers the potential for permanent increases in earnings.

It is no surprise we are seeing a divergence in income when the most valuable skills (soft) are only being attained by a minority of students who graduate college and high-school graduates lack both hard and soft skills.

The skill-wage hierarchy will always exist. Education -increasing skills- is the lone hope for the poor to actually improve their condition.

The wage premium for a high school degree has all but disappeared. There is little point in recounting the soul-crushing underperformance of American public schools, so let us instead look abroad to high-performing examples.

Two of the best primary/secondary schooling examples to learn from reside in Sweden and Finland. The Fins explain the key to their success is to develop excellent initial training for teachers (only ~10% of applicants are accepted for teacher training), start education late and gently (Fins start at 7), and don't waste resources on national testing. The Fins' biggest problem? Getting rid of bad teachers- even with alcohol problems.

While the Fins are more focused on testing achievement (...just not national testing), the Swedes are more interested in developing well-rounded thinkers, evidenced by their varieties of schools and competition, forcing schools to think more pointedly about quality as they risk losing 70k kronor if an unhappy student goes elsewhere.

Swedish reforms in 1994 allowed nearly anyone who satisfies basic standards to open a new school and take in children at the state's expense. Schools can't admit based on religion or entrance exams and nothing additional beyond the set payment by the state can be charged for - but making a profit is fine. Since the reforms, the share of Swedish children educated privately has risen significantly, leading to the proliferation of many "chain" schools.

In these chains, teachers update material on websites, utilize tutors, student-specific syllabi, and weekly student progress reports, and received performance monitoring and bonuses as personal tutors and subject teachers. There are no large school-owned facilities.

The schools are profitable despite only getting a fixed $8-12 thousand per student rate from the locality. The average returns on capital are 5-7% per year thanks to the adept, no-frills, IKEA-style management. I imagine its hard for Americans to imagine so little money can get you student-specific syllabi and tutors - but it can.

Back in the US, efforts to reform public education have centered completely on one thing: money. (One exception is the widely panned NCLB... Why is it panned? Big reason is lack of funding!)

Yet there is scant to any literature that shows increased spending leading to improved results, despite many court decisions mandating increased spending on the premise it is responsible for achievement gaps. That is not to say that less books are as good as more books, but it is to say that spending is not the binding constraint on academic achievement, and that dramatic increases in funding will not lead to the academic gains we'd like to see.

I believe that the public school organizational structure is incompatible with the flexibility and experimentation needed to attain the efficiency and productivity found in Sweden or Finland. Yet until recently, experimentation with other types of schooling has been verbotten. Thankfully, the crumbling public school empire couldn't hold off the barbarians at the gate forever.

Free-market types have managed to carve out a few nooks and crannies for educational experimentation in the US, and we are beginning to see the first efforts to sprout out of these charter-school reservations.

The nation's largest laboratory can be found in New Orleans, where 55% of public school students attend charter schools, by far the highest percentage of any city in the country. Dayton, Ohio and Washington, D.C. are second and third in charter-school market share.

It is still too early to draw firm conclusions on the New Orleans charter system, but there has been demonstrable achievement improvement in what was an entirely stagnant district. Classes are smaller, principals have been reshuffled or removed, school-hours remedial programs have been intensified, and after-school programs to help students increased. Much of the gains are attributed to the quality of instructors.

It would appear that government would be able to accomplish these aims, but it has not. New Orleans charter schools have capitalized on their flexibility to try different programs, allocate resources differently - to innovate. Surely, there will be success and failure in this process; the belief is that the successes will survive and reproduce, while the failures will whither away from disuse.

Top-down government management is ill-suited to support this process.

Meanwhile, in NY, charter schools are experimenting with increased principal autonomy, higher teacher salaries (with cutbacks elsewhere), and other education philosophies. In Washington D.C., there is a pilot program that will pay middle school students that meet academic and behavioral goals.

Are any of these ideas answer? Maybe, maybe not. But whether they work or not, the path to progress in education lies in entrepreneurial districts not national standards, empowered teachers not accredited teachers, and education markets not education mandates. Progressives are often quick to suggest we take notes from top performers around the world. I would love to see us take a page out of the Swedish playbook.

Next, we will look at what's holding back America's university system from reaching its potential.

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Sunday, October 5, 2008

Sunday, September 28, 2008

What to do about Climate Change...

The 'natural resources' tag encompasses everything from oil to water to the earth itself. This is a large area to canvas, and I'll focus specifically on international and national proposals to "green" our development. Once again I've taken much of the language in this digest from the sources linked to at the bottom of the piece, and while this post is quite long, I wanted a comprehensive take. I will note that I left out the many legitimate criticisms of environmental modeling and forecasting in the first place. There are many reasons to be suspicious of all of the forecasts that essentially "predict" the weather in a hundred years. This post will ignore these concerns, however, and concentrate on the data that is put forth by the UN and the UN's Intergovernmental Panel on Climate Change (IPCC).

High Cost

Three examples of these environmental proposals are the Kyoto Protocol, Al Gore's plan, and T. Boone Pickens' plan. All three are costly. Pickens plans to generate 20% of America's power through wind, and he estimates it would cost $1 trillion to build that capacity and another $200 billion to update our electrical grid. Gore wants the US to "produce every kilowatt of electricity through wind, sun, and other Earth-friendly energy sources within 10 years. This goal is achievable, affordable, and transformative."

Environmental economist William Nordhaus ran the numbers on Gore's idea to reduce carbon emissions by 90% by 2050. He found that such a plan would reduce the maximum increase in global temperatures to between 1.3 and 1.6 degrees Celsius, and it did so at very high cost of between $17 trillion and $22 trillion over the long term. Even at a very, very low estimate, Gore's plan would cost about $300 billion per year for the next ten years.

Meanwhile, the Kyoto Protocol is estimated to cost around $165 billion annually.

The costs of these plans are large (and I ask that you compare them to the costs of different types of interventions I will raise later), and I will contend they are not worth it, and that lower-cost R&D and "focused adaptation" plans would be far more sensible.

But how do the proponents of these plans justify these massive interventions?

Super Ultra Emergency?

Thomas Friedman justifies massive green spending by explaining that humans are an "endangered species" and none of us "are going to make it" as we experience disasters "of a biblical scale." Friedman trumps Gore five-fold, coming to claim that sea levels might rise a hundred feet, whereas the UN expects between six inches and two feet this century. Friedman says that in 22 years the evening news will feature 'weather, other news and sports' - in that time sea levels will have risen fewer than three inches.

If you buy in to the rhetoric of humans being "an endangered species" with disasters of "biblical scale," then we should start shutting down power plants and confiscating cars tomorrow. We have no good evidence that such a disaster scenario is imminent, but nobody can conceivably prove it to be impossible. Once you get past the table-pounding, any rationale for rapid emissions abatement is really a restatement of the precautionary principle: downside possibilities are so bad that we should pay almost any price to avoid almost any chance of their occurrence. Of course, this same principle would justify spending trillions on countless other "possibilities."

I disagree with those who view global warming as a super-ultra emergency, and agree with those view warming as a problem, one that must be managed via greenhouse-gas restrictions and a weaning away from fossil fuels.

Putting the Benefits of Mitigating Climate Change in Context

Most scientists warn that a temperature rise of 2 degrees Celsius (3.6 degrees Fahrenheit) could have serious consequences. How serious? Well, according to the UN IPCC a 4C increase – twice this amount – would reduce global economic output by 1% – 5%. That’s in the world of the 22nd century which is expected to have per capita consumption of something like $40,000 per year versus our current consumption of about $6,600 per year. So we are condemning future generations to be only 5.7 times richer than us.

But global warming isn't just about wealth reduction -- it's about the death and disease that would hit already at-risk populations. But even using the IPCC's warmest scenario - increased global temperature of 4°C between 1990-2085, climate change will contribute ~10% of the death toll from hunger, malaria — a surrogate for vector-borne diseases in general — and flooding. Thus, eliminating climate change completely would reduce annual mortality by 2 million to 6 million in 2085, depending on the IPCC scenario employed.

That's the potential upside of completely stopping climate change. Of course, the initiatives we are talking about don't even pretend to make such claims. The Kyoto Protocol would reduce climate change by less than 10% in 2085-2100, while costing $165 billion annually.

I mentioned initially the idea of "focused adaptation," which amounts to dealing with the symptoms of potential climate change, such as hunger, malaria, and coastal flooding. For instance, by 2015, malaria could be reduced by 75% for $3 billion per year, hunger by 50 percent for $12-15 billion per year. Please take a look above again to see how small these costs are in comparison to the efforts to mitigate climate change. Climate change will contribute ~10% of the death toll from these causes and look at the amount of spending it will take to even reduce 10% of climate change. Meanwhile, we can reduce 75% of Malaria for $3 billion per year.

My beef with the Environmental Movement

The environmental movement has welcomed a flurry of, at best, benign and wasteful, and, at worst, destructive movements and legislation - all in the name of "green." For instance, Al Gore, among others, pimped ethanol hard, and the government policies that followed made it harder for people to eat -- accounting for as much as 75% of the global increase in food prices since 2002.

These same folks want us to commit enormous amounts of resources to ideas like the Kyoto Protocol, Gore's Plan, and Pickens' plan, as they attempt to win support for these ideas with exaggerated doomsday scenarios and refusing to acknowledge the immense opportunity costs of their plans.

Environmentalists such as Friedman respond that we should still help the poor, for instance, but instead of giving them diesel, we should give them solar panels to power their lives.

That's a nice thought, but not relevant to the question of opportunity costs. If the investment cost for solar power is 14 times more expensive than diesel, the money spent on helping the poor will simply not go as far -- instead of 14 kids getting power you help just one. The large-scale emissions abatement central to Gore and Friedman's strategies would carry astronomical costs, and they would carry real tradeoffs that its proponents should acknowledge.

It's time to quit endorsing every lame-brained environmental strategy lobbyists dream up.

Ideas I'll get behind

Contrary to popular belief, many of us who are 'skeptics' of the environmental movement's claims don't believe in doing nothing at all. The harshest critics of Gore's plan still believe that global warming is real and poses a serious risk, and agree that an R&D program is a component of a solution. We also support adaptation to weather problems (disease, hunger, flooding mitigation), and believe ongoing efforts to analyze physical and economic trade-offs involved in various proposals through the IPCC and similar bodies are valuable and should be supported.

The government has no business picking winners in the alternative-energy competition (sorry, Illinois constituents and T. Boone Pickens), but augmenting basic research spending (as it is does in medicine) makes sense. And, again, taking steps to deal with hunger, disease, and flooding will do much more to help poor people, whether the climate change predictions come true or not.


Thomas Friedman sums up the environmental position when he equates spending trillions of dollars on greening with "training for the Olympic triathlon. If you make the Olympics and you run the race and do the whole triathlon, you may win. But if you don’t, even if you come in second or third, you’ll still be so much fitter, so much stronger, so much healthier, so much more respected, so much more secure. Which part of this sentence don’t you understand? Why would we not want to run this race?"

To continue with his analogy, my response is that while in 100 years you are much more toned and fit, your wife has left you, and your kid dropped out of school to sell drugs. But hey! You are in TERRIFIC shape. No denying that. The point of the analogy is that our resources are not unlimited, and that you concentrate them on one area (climate change mitigation) to the detriment of other areas (UN's Millenium Development Goals).

Attempting to be an Olympic gold medal winner in "greening" isn't the smartest use of our limited resources. As I've argued above, we can do much more to help both ourselves and the poorest people in the world by using some of the resources (that would otherwise be sucked up by the cost of olympic training) on other things we care about.

We live in a world abundant with poverty, disease, dictatorships, terrorism, nuclear proliferation, lack of girls' education, and more than 1 billion people without cleaning drinking water or electricity.

These people would likely be better served if Daddy ditched the Olympic medal delusion, and started acting like a rational adult. That doesn't mean he shouldn't stay fit; but maybe instead of buying muscle milk he gives the kids some clean drinking water.

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Monday, September 22, 2008

digest: trade, the global growth engine

(Much language borrowed from the summaries and articles linked at the bottom of the post)

Free trade is blamed for a lot of things, often for exporting American jobs and forcing poor people to work in terrible circumstances. Of course, the poor locals are not enslaved, they are offered jobs, and while (sometimes) these work standards may not be up to 21st century American standards, they are still better than the poor people's other options.

With regards to American job losses, trade is often tarred with blame that would be better assigned to technological innovation. American industrial production has actually increased significantly over the years, the secret is that Americans have lost their job to machines. Like technological innovation, trade can lead to losses for particular groups of workers; however, if you oppose free trade on these grounds you should realize you are borrowing your argument from the Luddites and should call for horse-and-buggy subsidies as well (and of course, those workers' jobs wouldn't have existed in the first place were it not for trade).

More practically, if it was good for Vaclav in W. Czech to trade with Vlad in E. Czech in '88, why is it any less good for them to trade now that the country is split in two?

One of the better arguments against simply advancing free trade is that while the gains to winners from free trade are sufficiently large that a hypothetical redistribution of these gains from winners to losers could make everyone better off, economic analysis doesn’t say that these compensations actually take place.

This is true, but again, it's also true of all change, whether it's from trade, technological advances, or simply a change in people's tastes (Woe is the Pog maker! Where is his safety net?)

To oppose free trade on these grounds is again to take up arms with the Luddites. Would you have supported a "timeout" on technological innovation until we came up with a plan to help out the horse-and-buggy industry? Then why support a trade timeout??

Free trade gets a bad rap because of man's wonderful suspicion of foreigners and tendency to divide people into "in groups" and "out groups" and to elevate one and demonize the other. So free trade and immigration get tarred and feather as the enemies of America's workers, as opposed to the truly significant (entirely domestic) problems, e.g., health care, bad schools, and, in recent times, bad banking practices.

Overall, trade has yielded not only a bounty of material good, but also of intellectual and cultural capital, an understanding of our neighbours, and a desire to sell things to others rather than to annihilate them. Yet the astonishing increase in the sum of human happiness that has been wrought by lifting hundreds of millions of Asians from the misery of subsistence farming into comfortable prosperity is [often] conveniently forgotten.”

In the course of human existence, poverty has been the rule. The past few hundred years has seen an explosion of wealth previously unimaginable. Those that have been left behind are notably those excluded from the global exchange. Trade doesn't impoverish people; people are naturally impoverished, and in global exchange there lies the opportunity (not a guarantee) to attain wealth and security.

I'll quickly add that none of this it to argue against a societal safety net, which I believe can be justified (in some forms) as creating a more resilient workforce and therefore economy. It is to say that free trade should not be held up as we figure out what the safety net should look like (alas, it likely will.)

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Tuesday, September 16, 2008

American poor see major gains after '80

Of course, the day after I write up the post on 'American poor,' the WSJ features a piece that reexamines income growth for the poorest Americans. What follows are my takeaways from the piece, which can also be found at My one sentence conclusion is that the poor have shared in the gains of the past 25 years - especially historically oppressed groups (e.g., black females) - and that chronic American poverty is a much smaller problem demanding a more surgical solution.

When all sources of income are included and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005: the poor are not getting poorer. Looking at the last two business cycles, this low-income group experienced a 10% rise in their after-tax incomes from 1983 to 1992 and then another 11% rise from 1992 to 2002. Household income gains have been underestimated for a few reasons: number of people living in the households has been shrinking (44% real income gain per capita for low-income households from '83-'05), and EITC requirements have led to counting more poor families today than in the past. 66% of '87 most poor have attained a higher tax bracket. Top 1% in '98 saw a decline in their income of 52% over the next ten years. Only 3% of Americans are chronically poor (impoverished for three years or more). Since '80, white males have seen the smallest income gains (+9%), black females the largest (+79%). Read more!

Monday, September 15, 2008

publius' digest: american poor edition

This post will look at understanding the American poor, and critique some of the efforts to help them. This post will not cover education (my top priority for the American poor), health care, or trade, which I cover under those 'tags' specific to those categories.

I agree with the Dems that alleviating poverty is a moral call which also has positive externalities for all. I depart from the Democratic party line when they talk about relative poverty or inequality. I believe that relative poverty 'justice' is not rooted in an objective assessment of the negative consequences of income disparity (though I would love to see such a study of income disparity, not poverty, effects), but an emotional, superficial gut reaction to seeing the wealth of others when many are in need. I am concerned with advancing the condition of those in need, but I believe relative poverty taints the moral imperative of poverty alleviation with jealousy and envy -- relative status warfare.

While I am not very concerned with the cries of relative poverty, I am concerned with the decline of wage growth for many Americans. Growing income inequality is caused by the returns to highly-skilled labor outpacing the returns to low-skilled labor, of which there is an abundance outside of America with workers who have much worse options than the American poor. Americans whose labor does not add value over the global poor's labor are seeing their income and job security decrease. I explore this with the 'education' tag.

People like Barbara Ehreneich do a disservice to the debate on how best to help the American poor with their narrative of class warfare. She is wrong in saying that total compensation has stagnated since 1981, and (more importantly) wrong in linking compensation to class warfare, instead of productivity. She is wrong in implying that the presence of high CEO pay is what is holding back the American poor's compensation (instead of the value of their skills).

While wage growth has been leveling off, the past 15-20 years made it much cheaper to clothe and feed poor families due to the benefit of global trade (inflation on 'poor' goods is less than that of 'rich' goods); so income inequality statistics also undervalue the improved well-being of the American poor by ignoring how much further a dollar goes for a poor American in 2008 as compared to 1985.

As I near the end, I'll look at housing policy and the minimum wage as examples of policies I think are not helpful, and representative of many efforts from the left aimed at helping the American poor.

Housing policy had noble aims, securing the poor by making it easier for them to own homes, but the policies created a huge industry built on taxpayer guarantees of inherently risky lending -- a very bad idea. Better plan would be checks/vouchers for putting towards a down payment, if home ownership is really something we want to incentivize in the first place. Rent control is another well-intentioned bad idea; the real solution to low-income housing is making it easier and cheaper to build new housing. Increase the supply, you'll lower the cost of renting and buying.

Meanwhile, the minimum wage increases the cost of employing low-skilled workers. If a poor person's labor is worth less than $6.55 an hour, you don't help that person by making it illegal for anyone to profit from hiring them. Thankfully, the wage floors are low enough that they don't make a difference one way or another -- they are political distractions from real anti-poverty programs like the EITC.

In both cases, I think that assistance that takes the form cash transfers either through tax refunds or through vouchers are preferable. If we want to guarantee a 'living wage,' then let's use the tax system to subsidize their income, not create incentives to buy houses they can't afford or create a wage floor.

Overall, Americans making $2,000 a year are still in the top 18% in the world, and the great majority of the American poor are doing just fine by world standards. Immigration is by far the number one 'American poor' issue. I'll explore it later, but it trumps every other issue as both a moral imperative and in the interest of the American economy. More generally, global welfare rates higher as a moral cause worthy of investment than the American poor. That said, we should should spend more time thinking creatively about education, as well as slums, or poverty traps, (different than simply low-income areas), which cannot be corrected by providing more money, but still demand attention.
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Tuesday, September 9, 2008

overview of foreign policy

Our chief foreign threats do not rest in the developed world, but in failed states, which are present with great suffering and pregnant with the potential for great destruction to us. Both morality and self-interest dictate that we intervene if we can have a positive impact, and despite our past mistakes, I believe we can develop a strategy, which is economic, diplomatic, and militaristic, to "prepare our partners to defend and govern themselves." We need a 21st century coherent doctrine that includes both soft and hard power.

We have missed many opportunities to advance our interests in areas from Central Asia to Somalia, and there many more human rights atrocities taking place every year that could be resolved or prevented by a legitimate, credible commitment to peacekeeping and conflict prevention.

Clearly, we cannot count on China to sacrifice their immediate interests for these moral aims, and I would add that Europe's moral posturing is just that, and nothing more (by extension, I include the UN). While international support is desired, we should seek it as a political tool, not as moral approval. Likewise, state sovereignty is a very real political concern, but not a moral reason to avoid intervention.

Global stability is a public good that only we have the incentive to provide at any cost greater than lip service. In many instances, if we do nothing, no one will.

To this end, our military must continue to shift from its historical large-scale conventional warfare focus to a 'small-war' mentality. We should maintain an active, albeit selective, participation in aiding in governing failed states. Concretely, I think this will take the form of security guarantees and quick-response peacekeeping initiatives.

This is not an inclusive post, but I will summarize: we must learn from our recent mistakes, and engage much more thoughtfully; that said, we should not lose or nerve; we should not hand out moral compass to the UN, and we should not shy from engaging the world economically, diplomatically, or militarily. Isolationism, in any of these instances, is immoral and unwise.

Scroll over the link titles to read the summary.

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Sunday, September 7, 2008

overview of health care

It's been awhile, but I've been trying to figure out how to leverage the delicious tagged articles and reduce redundant writing (and reading). So below is a summary I've written up on the health care perspective I've amassed, along with supporting articles and their summaries below.

US health care is bad, but less so in providing access to expensive treatments (we do have the best cancer survival rates) than in paying for everything under the sun. Universal health care is not the primary health care issue facing the US; the primary problem is cost containment. If you want universal health care, you better first deal with that - Medicare spending is projected to some insane percentage of GDP (like 30-40%) of GDP, yes GDP, in not too long - as neither Medicare (nor private payers) have figured out how to deny coverage or payment to over-priced products or services. The reason Western Europe is more cost-effective than the US is that they DON'T COVER a lot of expensive drugs and therapies (explaining why our cancer survival rates are better). They let the government apply a cost-benefit analysis to every product/service -- if a private payer or Medicare does that, they end up in SiCKO.

We shouldn't try to emulate Western Europe, but take lessons from less-visible systems like Singapore. We need to separate redistribution for care for the sick from actual health insurance. We also need to change the way we think about care and coordination, which means changing Medicare's payment systems for physician services and health care products. The emphasis should not be on reducing profits, but ensuring payment is linked to value-added, not service provided.

Below the fold is more information.

Scroll over the link titles to read the summary.
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Tuesday, August 26, 2008

step back to step forward

I've enjoyed blogging on current events and policy issues as new happenings and writings trigger responses that end up being blog posts, but I've found it a bit frustrating. The idea of spinning my wheels, repeating myself on the same issues bores even me. I would like to make a point, record that point and the supporting evidence, and move on -- drawing on that point when useful in further discussions.

That's a bit problematic. The blog medium has become (needlessly) something of a disposable art. Written, sometimes read, and forgotten; it's no surprise that bloggers repeat their main points in slightly altered forms, like a late night TV host who provides the same slightly off-kilter angle on daily events.

I've neither the time nor the interest in disposable reporting. I would like to isolate some of the larger issues of the day and explore the validity of potential solutions. This means updating the blog with any new arguments or developments in the issue area, expressing my perspective, and isolating and exploring disagreement.

To this end, I've signed up for, a social bookmarking website that allows you to "tag" webpages with titles, descriptions, and labels (e.g., immigration). I am in the midst of converting my posts and the articles I've shared through Google Reader into labeled delicious entries. It's quite a process, but I think worth it. It will allow me to systematically accumulate knowledge and understanding of particular issues, and hopefully allow this site to serve as a medium for acknowledging the valid points on both sides of the argument, and debating the points of contention.

Furthermore, I hope some will find it useful for finding interesting points of view on the topics found on this blog -- from cognition to immigration to trade to health care.

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Monday, August 18, 2008

'nudge' tops short action-verb econ books

I second-guessed my purchase of Richard Thaler and Cass Sunstein's Nudge: Improving Decisions About Health, Wealth, and Happiness, almost the minute I received my Amazon e-mail receipt -- I had already read Malcom Gladwell's Blink, and heard about the literary disaster that is Sway, and yet there I was, reading Nudge's introduction about the arrangement of cafeteria food.

I'm glad I did. While Thaler and Sunstein are happy to revel in the small ways that their insights into "choice architecture" can lead to better or worse choices, they also lay out their political principles and detail their impact on current policy debates (e.g., Social Security, Medicare Part D, Education.) To top it all off, they begin the book with a treatment of our cognitive failings, distinguishing between our automatic and reflective processing systems (what's not to love!), leading right into their arguments for how to help the automatic majority overcome their cognitive frailty without infringing the reflective minority's ability to choose.

So what is choice architecture? Well, are you choosing out of ten choices, or 100? Are you automatically enrolled in one choice or another if you don't make an active decision? How is that default set? How is information presented to you to about the available choices? All of these questions speak to choice architecture -- in other words, the arrangement and organization of choices -- which has a nasty habit of leading individuals to choices that they themselves would not find optimal (see don't be bob bias, the mind and morality).

Furthermore, "choice architecture, both good and bad, is pervasive and unavoidable." This point is essential to Thaler and Sunstein's argument if you are a libertarian. Ignoring choice architecture won't make it go away, it will only make it more likely that the choices favored by choice architecture are more likely to be poor. For instance, you can make the default option for new employees enrolled at 5% in a 401(k) with an option to opt-out, or you can make the default option to not be enrolled (as is often the case). If you stick with the current default, many who would otherwise enjoy being enrolled will not do so because of the choice architecture. Thaler and Sunstein recommend acknowledging the importance of choice architecture and deliberately deciding on its design.

Thaler and Sunstein aren't interested in helping individuals pick out their dry cleaners; as the authors note, if a dry cleaner performs poorly, it is fairly easy for individuals to make a better decision the next team.

Rather, "people are most likely to need nudges for decision that are difficult, complex, and infrequent, and when they have poor feedback and few opportunities for learning."

Individuals are primed to make poor choices for Medicare Part D, Mortgages, and retirement investments. Thaler and Sunstein don't advocate for eliminating choices because of these problems. On the contrary, their final chapter points to the infamous "third way" -- separate from both the command-and-control left and the single-minded 'choice' monkeys of the libertarian right.

There needn't be a war between 'no choice' and 'unlimited choice.' Thaler and Sunstein spend around 250 pages explaining that this is indeed a false choice. Like myself, they side with the libertarians when it comes to the importance of choice, and side with the left when it comes to the failure of 'choice' to solve all problems. Choice is important. Coercion isn't necessary. Focus on the choice architecture.

Oh, and I have to add. As someone who has long supported responding to the gay marriage debate by taking government out of the marriage business (perhaps keeping a civil union or partnership business) and leaving it to independent churches, I was very happy to see Thaler and Sunstein put forth such an argument in Nudge.

Whether you are on the left or right, worth a read!
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Saturday, August 16, 2008

priorities for helping humanity

Bjorn Lormborg isn't against reducing man's carbon footprint, but -- like me -- he just thinks that the proposals bandied about cost too much given other available choices for helping the world's worst off. The Copenhagen Consensus ranked a list of solutions to the world's problems based on their cost and estimated benefits. The Copenhagen Consensus was originally sponsored by the Danish government and The Economist to assess proposals to advance global welfare under the stewardship of Lormborg, a Danish economist. There have been two rounds of discussion by the group -- which invites the world's top economists to participate (five Nobel laureates this year) -- the most recent in the spring of 2008.

Lormborg recently penned an opinion piece for the WSJ answering the Copenhagen Consensus' question, "How to get the biggest bang for 10 billion bucks." You can also watch his past Ted talk below for an introduction to his work, and read more (link also appears below the video) for a few select factoids from his work. Lormborg is something of a controversial figure, because of his skepticism regarding the global warming movement, but if you watch the Ted talk and read what he has to say, I think you'll agree that he is very intelligent and very reasonable.

Of Lormborg's top five priorities to improve global welfare, three address malnutrition, one disease, and one trade. At the bottom of Lormborg's list (of 30 priorities), two fall under global warming, two under pollution, and one under disease.

What's number one?

"Providing micronutrients -- particularly vitamin A and zinc -- to 80% of the 140 million or so undernourished children in the world would require a commitment of just $60 million annually, a small fraction of the billions spent each year battling terrorism or combating climate change. The economic gains from improved productivity and a lower burden on the health system would eventually clear $1 billion a year. Every dollar spent, therefore, would generate economic benefits worth $17."

I'll leave you with Lormborg's take on the current environmental proposals, which I largely agree with:

"If mitigation -- economic measures like taxes or trading systems -- succeeded in capping industrialized emissions at 2010 levels, then the world would pump out 55 billion tons of carbon emissions in 2100, instead of 67 billion tons.

This is a difference of 18%; but the benefits would remain smaller than 0.5% of the world's GDP for more than 200 years. These benefits simply are not large enough to make the investment worthwhile.

Spending $800 billion (in total present-day terms) over 100 years solely on mitigating emissions would reduce temperature increases by just 0.4 degrees Fahrenheit by the end of this century.

When you add up the benefits of that spending -- from the slightly lower temperatures -- the returns are only $685 billion. For each extra dollar spent, we would get 90 cents of benefits -- and this is even when things like environmental damage are taken into account.

A continued narrow focus on mitigation alone will clearly not solve the climate problem. One problem right now: Although politicians base their decisions on the assumption that low-carbon energy technology is being rapidly developed, that is not the case. These technologies just do not exist. Wind and solar power are available -- at a high expense -- but suffer from intermittency. Researchers need to develop better ways to store electricity when those renewable sources are offline.

If we took that $800 billion and spent it on research and development into clean energy, the results would be remarkably better. In comparison with the 90-cent return from investing solely in mitigation, each dollar spent on research and development would generate $11 of benefits."

As Lormborg emphasizes in the Ted talk above, it's time to stop conflating goals and proposed solutions. You can believe that it's important to save the environment and still think the Kyoto Protocol is a waste of resources. Pumping funds into R&D will be a lot less visible and might give us a less fuzzy feeling than taking Hummers off the road, but that doesn't make it the wrong choice.

Returning to Lormborg's number one priority, if anyone has information on well-run programs to distribute micronutrients (e.g., vitamin A) I would love to check it out.
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