Robert H. Frank comes out strong for the carbon tax

While we're on the subject, check out this op-ed in the New York Times:

Mitt Romney, for his part, has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. “What I’m not willing to do,” he told an audience in New Hampshire last summer, “is spend trillions of dollars on something I don’t know the answer to.”

...  

The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. Early studies by the Intergovernmental Panel on Climate Change estimated that a carbon tax of up to $80 per metric ton of emissions — a tax that might raise gasoline prices by 70 cents a gallon — would eventually result in climate stability. But because recent estimates about global warming have become more pessimistic, stabilization may require a much higher tax. How hard would it be to live with a tax of, say, $300 a ton?

If such a tax were phased in, the prices of goods would rise gradually in proportion to the amount of carbon dioxide their production or use entailed. The price of gasoline, for example, would slowly rise by somewhat less than $3 a gallon. Motorists in many countries already pay that much more than Americans do, and they seem to have adapted by driving substantially more efficient vehicles.

A carbon tax would also serve two other goals. First, it would help balance future budgets. Tens of millions of Americans are set to retire in the next decades, and, as a result, many budget experts agree that federal budgets simply can’t be balanced with spending cuts alone. We’ll also need substantial additional revenue, most of which could be generated by a carbon tax.

If new taxes are unavoidable, why not adopt ones that not only help balance the budget but also help make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.

A second benefit would occur if a carbon tax were approved today but phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren’t investing it because their current capacity already lets them produce more than people want to buy. News that a carbon tax was coming would create a stampede to develop energy-saving technologies. Hundreds of billions of dollars of private investment might be unleashed without adding a cent to the budget deficit.

SOME people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It’s a fair point. But access to the American market is a potent bargaining chip. The United States could seek approval to tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.

As mentioned before, many of the steps we can take are cheap and/or already necessary to maintain a competitive economy. Some even pay for themselves without taking climate change into account:

The railroad has long been reluctant to accept government investment in its infrastructure out of fear of public meddling, such as being compelled to run money-losing passenger trains. But now, like most of the industry, it has changed its mind, and it happily accepted Virginia’s offer last year to fund a small portion—$40 million—of the investment needed to get more freight traffic off I-81 and onto the Crescent Corridor. The railroad estimates that with an additional $2 billion in infrastructure investment, it could divert a million trucks off the road, which is currently carrying just under five million. State officials are thinking even bigger: a study sponsored by the Virginia DOT finds that a cumulative investment over ten to twelve years of less than $8 billion would divert 30 percent of the growing truck traffic on I-81 to rail. That would be far more bang for the state’s buck than the $11 billion it would take to add more lanes to the highway, especially since it would bring many other public benefits, from reduced highway accidents and lower repair costs to enormous improvements in fuel efficiency and pollution reduction. Today, a single train can move as many containers as 280 trucks while using one-third as much energy—and that’s before any improvements to rail infrastructure.

When someone like Mitt Romney talks about spending trillions, the phrase is only meaningful if we're talking about a difference of trillions between two courses of action. In the case of rail upgrades, spending a trillion might well mean hundreds of millions in savings compared to achieving similar capacity through other means.

Megafires, incentives and the inactivity bias

One of the recurring themes of my conversations with Joseph is this country's growing disinterest, bordering on antipathy, in getting things done. (If you think I'm bad, you ought to get him started.) From building a badly needed piece of infrastructure to addressing global warming, we seem to focus most of our energy on finding reasons for inactivity.

NPR's excellent series on wildfires has a good example. If you weigh the costs and risks of prescribed burns against the costs and risks of letting current trends continue, the case for action is overwhelming, but we continued to let the situation get worse.

Add climate change to the mix (another situation we've shown lots of interest in discussing and little in solving), and we may have reached the point where there are no good solutions, only less terrible ones.

I remark just how lush his forest is, how the Ponderosa pines almost reach out and touch one another. He doesn't take it as a compliment. "They're a plague," he says. "On this forest, it's averaging about 900 trees per acre. Historically it was probably about 40. Here in the national forest, what we're facing is a tree epidemic."
Armstrong has rubbed some people the wrong way with talk like that. But he says forest this dense is dangerous. "We're standing here on the edge of what is known as the Santa Fe Municipal Watershed," he explains. "Imagine a huge bathtub" — a natural bathtub sitting in the mountains around Santa Fe. When it rains, the water flows down into reservoirs. That's where the state capital gets most of its water.

Trees help slow down the flow, but big wildfires take out the trees. They even burn the soils. "They convert from something that's like a sponge to Saran Wrap," Armstrong says. "In the aftermath of a wildfire within this watershed, that would flood like the Rio Grande, for heaven's sakes; that would come down a wall of water, and debris and ash and tree trunks, and create devastation in downtown Santa Fe. Suddenly, they find that the entire mountain is in their backyard."

Armstrong supports trimming smaller trees with machines and chain saws. But that costs hundreds of dollars per acre. The service now lets some natural fires — ones started by lightning, for example — burn within prescribed limits. Or they start "prescribed" burns when conditions are safe. These clear out smaller trees and undergrowth to keep them from fueling megafires. Armstrong has done that here.

But people didn't like the smoke, and when an intentional fire gets out of control, people sue. And there's been widespread drought in recent years. These are some of the reasons the Forest Service has reduced the use of prescribed fires.

Let's say there's no global warming...

Here's a short list of a few of the things, some big, some small, that we could look to to address climate change:

Smart Grid/Smart Meters

Rail Choke Points

Reflectivity

Public transportation

Power plant upgrade

Increased gas tax

Plug-in hybrids and electrics

Ground source heat pumps

weatherizing

This isn't a complete list by any means. I could have put nuclear, wind, centralized solar, passive solar, biofuel (with some strong caveats) and any number of other technologies. I picked these because they were well established and easy to argue from a cost-benefit standpoint (and because, frankly, I didn't have time to read up on the cutting edge stuff).

There's nothing speculative here and, with the possible exception of the tax (which is just too freaking obvious to leave out), there's nothing controversial either. These are proven approaches with well understood behavior, the kind of approaches that lend themselves to quick, back-of-the-envelope cost-benefit analyses.

Let's say for sake of argument that there's no global warming and, while we're at it, no acidification of the oceans. Even if we take all the controversial stuff off the table and just look at things like balance of trade, protecting the economy from supply shocks, improving quality of life (and therefore property values), reducing recognized, non-climate related health threats, (in the case of choke points) improving highway safety and just saving money, most if not all of these proposals have benefits that outweigh their costs.

Setting a smart grid and upgrading our rail system would be the most expensive but given the pay-offs and the fact that it's almost impossible to be modern industrial power with outdated and unreliable energy and transportation infrastructure make it hard to argue against these improvements, particularly if we limited ourselves to high priority rail projects like choke points.

For the rest of the list, the cost is lower and the payoffs, though smaller, are more immediate. Ground source heat pumps are arguably at the break even point even ignoring externalities and might be held back more by a lack of public awareness than anything else. Still, a few moderate steps (tax breaks, targeted government backed loans, building codes, retrofitting public buildings) can go a long way to reducing our national heating and cooling bill. On top of that, ground source based cooling cuts back on energy consumption at the very time that the system tends to be be overloaded, thus having an added infrastructure benefit.

Even reflectivity and shade initiatives can be justified in a non-warming globe. The economic benefits to Phoenix of absorbing less heat still apply regardless of the temperature of the rest of the planet.

I won't list the benefits of the rest (you probably know them better than I do). Each is sensible and based on proven technology and associated with substantial positive externalities that probably outweigh the cost of implementation even when you leave out climate and oceans completely out of the analysis.

We are often told that it would be nice to do something about global warming but the cost is just too great. Someone explain this to me. We have to fix our energy and transportation infrastructure anyway. It's cheap to paint roofs and hang awnings. Ground source heat pumps actually pay for themselves. Where exactly is the threat to the republic?

I can imagine various objections, starting with the inevitable "it doesn't solve the whole problem" (otherwise known as Zeno's paradox of public policy), but these steps would go a long way to solving our part of the problem and, more importantly, this is nowhere near a complete list.

Just so we're clear, this is a largely unresearched blog post written by someone who knows nothing about the subject so weight this accordingly, but if the climate models turn out to be true, events like we've seen recently are going to become more common. Add up all of the primary and secondary costs of just this summer's weather (wildfires, crops devastated, ranchers forced to sell off breeding stock, cities dealing with record-breaking heat) and you find yourself talking in terms of some stunningly large numbers.

Loads of caveats here (and if there's an expert in the house, please join in), but to the untrained eye, if you assign a better than even chance that the scientists who studied this sare right (and that's generally a pretty good bet), the cost of inaction looks far greater than the costs of doing something.

Particularly when it's something we should be doing anyway.

Megafires

A truly scary story from All Things Considered. This is what happens when bad management meets climate change.

The perils of 401(k) accounts: a continuing series

Megan McArdle is back with this observation:

The 401(k) I started in the late 1990s, before I went to business school, is worth less than the money I put into it. And even when I look at the last decade, I don’t see 8 percent growth; after inflation, it’s more like 2 to 3 percent. Most of the money in my retirement accounts is the money I put in. Nor am I alone.
 

Potentially snarky comments about investment strategies aside, this is a lot like what I have been seeing lately as well.  Yield is extremely low these days.  While it is always possible it will spike up again, the wave of retirements suggests that there will continue to be some exit from the market (as retired adults dip into saving to finance their retirement) which should put some downward pressure on prices. 

Private market retirement is a tricky beast indeed. 

Government Health Care

Aaron Caroll:

There are plenty of things that government does poorly. Or, at least you can make that argument, and find some support for it out there. For instance, many people believe that government does a terrible job at sparking innovation. I could imagine a debate there. Some think that government does a bad job at providing choice. That’s entirely defensible. Government run systems also allow less room for profit, which can drive out entrepreneurs. Also arguable.

But what government systems do well is hold down costs. They use central planning. They use their large market power to negotiate for reduced reimbursement (see Part 2). They buy drugs cheaper. They eliminate profit and overhead.
 

 In a lot of ways this still understates the role of government in health care.  The regulatory rules about health care are aslo responsible for increasing prices as well and have some definite effects on innovation.  Now I happen to think that some of the rules are good (e.g. the FDA) and some of these rules are bonkers (e.g. limits on number of new physicians via residency slots).  But there is a point where you have to decide how you want a market to be run.  Designing it so that it regulates things that help interest groups (i.e. keeping physician numbers down) but not other things (i.e. reducing costs by using market power) is very much the definition of regulatory capture.

I am quite willing to have a discussion about free market health care.  The first barrier to a real free market system is how we deal with public health.  After all, it took government intervention to get sewers and outhouses to come into common use in Europe.  Just look at the complexity of the modern sanitation system in France.  There is a conflict between the freedom to dump waste on the streets and the need to protect the public from fecal borne disease.  Similar arguments can be made with the need to try and keep antibiotics effective. 

A system that keeps all of the regulatory barriers to entry but shifts costs to the consumer is a very partial form of opening an industry to the free market. 

Hearst and Hitler

In one of those synchronicity moments, shortly after writing this post about how the movie Citizen Kane plays with the persona of William Randolph Hearst, an unrelated news story got me to thinking about editors and publishers give platforms to people whom they would normally refuse to associate with. That got me thinking about how Hearst caught hell for some of those associations (and why this shot had such added significance for audiences back in 1941).

From a Newshour interview with Hearst biographer David Nasaw:

TERENCE SMITH: He had an odd relationship and view of both Adolf Hitler and Mussolini. Tell us about that.  

DAVID NASAW: Well, he had at one point working for him... because he had 20 million readers, he had a large number of politicians in the United States and world statesmen who wanted to write for him, who wanted to reach his audience. At one point or another in the 20s and the 30s, Winston Churchill, David Lloyd George, Benito Mussolini and Adolf Hitler all wrote for him. Hitler wrote for him from the time that his Nazi Party became the second-largest party in Germany until Hitler became the leader of the German state, at which point he demanded of Hearst that he be paid as much as Mussolini because he, too, was now a chief of state. Hearst denied him that request. Hearst said to the editor who was corresponding with Hitler, "Hitler doesn't write well enough, he doesn't meet his deadlines, he promises us exclusives he doesn't give us-- we don't need him." And they instead used Goering.

Levitt and publishing bias in medical journals

Via Andrew Gelman here is a quote from Steven Levitt

When I told my father that I was sending my work saying car seats are not that effective to medical journals, he laughed and said they would never publish it because of the result, no matter how well done the analysis was. (As is so often the case, he was right, and I eventually published it in an economics journal.)

Now compare his article to this one (published a year later):

OBJECTIVE: The objective of this study was to provide an updated estimate of the effectiveness of belt-positioning booster (BPB) seats compared with seat belts alone in reducing the risk for injury for children aged 4 to 8 years. METHODS: Data were collected from a longitudinal study of children who were involved in crashes in 16 states and the District of Columbia from December 1, 1998, to November 30, 2007, with data collected via insurance claims records and a validated telephone survey. The study sample included children who were aged 4 to 8 years, seated in the rear rows of the vehicle, and restrained by either a seat belt or a BPB seat. Multivariable logistic regression was used to determine the odds of injury for those in BPB seats versus those in seat belts. Effects of crash direction and booster seat type were also explored. RESULTS: Complete interview data were obtained on 7151 children in 6591 crashes representing an estimated 120646 children in 116503 crashes in the study population. The adjusted relative risk for injury to children in BPB seats compared with those in seat belts was 0.55. CONCLUSIONS: This study reconfirms previous reports that BPB seats reduce the risk for injury in children aged 4 through 8 years. On the basis of these analyses, parents, pediatricians, and health educators should continue to recommend as best practice the use of BPB seats once a child outgrows a harness-based child restraint until he or she is at least 8 years of age.

 So what is different?  Well, the complete interview data is a hint as to what could be happening differently.  It is very hard to publish a paper in medical journal using weaker data than that present elsewhere.  Even more interestingly, papers before this one found protective associations (this was 2006) which should also be concerning. 

Then we notice that the Doyle and Levitt has Elliott et al. as a reference, but still claim that they are the first to consider this issue:

This study provides the first analysis of the relative effectiveness of seat belts and child safety seats in preventing injury based on representative samples of police-reported crash data.

So now let us consider reasons that a medical journal may have had issues with this paper.  First, it does not seem to deal with the previous literature well.  Second, it doesn't explain why crash testing results do not seem to translate into actual reduction in events.  It might be due to misuse of the equipment, but it is not clear to me what the conclusion should be then. 

But it seems that jumping to the conclusion that the paper would not be published because of the conclusion seems to assume facts not in evidence.  It is common for people to jump fields and apply the tools that they have learned in their discipline (economics) and not necessarily think about the issues that obsess people in the field (public health).  Some times this can be a good thing and a new perspective can be a breath of fresh air.  But in a mature field it can also be the case that there is a good reason that the current researchers focus on the points that they do.

This reminds me of Emily Oster, another economist who wandered into public health and seemed surprised at the resistance than she encountered.

So is the explanation Levitt's father gave possible?  Yes.  But far more likely was the difficulty of jumping into a field with a high counter-intuitive claim and hoping for an immediate high impact publication.  Medical journals are used to seeing experiments (randomized controlled drug trials, for example) overturn otherwise compelling observational data.  So it isn't a mystery why the paper had trouble with reviewers and it does not require any conspiracy theories about public health researchers not being open to new ideas or to data. 

Cost is tricky in health care

An interesting Yglesias post:

Instead the existing Medicare Advantage program tries to apply a risk-adjustment formula to the patients, and Ryan proposes doing the same in his greatly expanded version of Medicare contracting-out. But this doesn't change the fact that the real profit-making opportunity here is to try to identify and exploit inevitable flaws in the risk-adjustment process. The winning strategy is to craft products that are appealing to customers the formula is willing to overpay for and unappealing to customers the formula would underpay for. Now that could be a small problem or a it could be a giant problem, all depending on how good the government is at setting the rates. Which is to say that for bringing private bidders into the process to work well, you need really effective central planning. And to the extent that you have effective central planning, it seems to me that it makes sense to take advantage of the economies of scale that come from a single-payer system.

I think that this understates just how tremendously difficult epidemiological risk modeling really is.   But I do not think it undermines the central point -- once you put the work into risk adjusting the payouts to private companies you have all of the machinery for a single payer approach.  And it is dead obvious why a naive approach won't work.  But even the modern risk models aren't that great accoridng to Peter Orszag:

In 2006, Medicare Advantage plans were overpaid by more than $3,000 per beneficiary because they were able to select beneficiaries who cost less than their risk-adjusted payments. About $1,000 of that overpayment reflects what the plans were paid, rather than what they bid. So relative to their bids, the plans were overpaid by $2,000 per beneficiary -- or roughly 25 percent of the bid, on average.

That is a huge profit making potential (just think of the return on investment for that statistical model).  So you focus the incentives of the private sector on finding weak spots in the model (because that is incredibly profitable) and not on reducing health care costs (because that is hard and painful). 

I am somewhat sympathetic to the "put lot's of resources in medicine and technological improvements will follow" types of arguments.  But it seems to me that this approach is going to focus the innovation in precisely the wrong spot. 

Ground source heat pumps

Some background for an upcoming post.

From Wikipedia:

The US Environmental Protection Agency (EPA) has called ground source heat pumps the most energy-efficient, environmentally clean, and cost-effective space conditioning systems available. Heat pumps offer significant emission reductions potential, particularly where they are used for both heating and cooling and where the electricity is produced from renewable resources.
...
Ground source heat pumps are characterized by high capital costs and low operational costs compared to other HVAC systems. Their overall economic benefit depends primarily on the relative costs of electricity and fuels, which are highly variable over time and across the world. Based on recent prices, ground-source heat pumps currently have lower operational costs than any other conventional heating source almost everywhere in the world. Natural gas is the only fuel with competitive operational costs, and only in a handful of countries where it is exceptionally cheap, or where electricity is exceptionally expensive. In general, a homeowner may save anywhere from 20% to 60% annually on utilities by switching from an ordinary system to a ground-source system. However, many family size installations are reported to use much more electricity than their owners had expected from advertisements. This is often partly due to bad design or installation: Heat exchange capacity with groundwater is often too small, heating pipes in house floors are often too thin and too few, or heated floors are covered with wooden panels or carpets.
...
Capital costs may be offset by government subsidies, for example, Ontario offered $7000 for residential systems installed in the 2009 fiscal year. Some electric companies offer special rates to customers who install a ground-source heat pump for heating or cooling their building. Where electrical plants have larger loads during summer months and idle capacity in the winter, this increases electrical sales during the winter months. Heat pumps also lower the load peak during the summer due to the increased efficiency of heat pumps, thereby avoiding costly construction of new power plants. For the same reasons, other utility companies have started to pay for the installation of ground-source heat pumps at customer residences. They lease the systems to their customers for a monthly fee, at a net overall savings to the customer.

Medical Costs

A very left wing blogger writes:

Saying that voucherizing Medicare merely wouldn’t “hold down costs” is far too charitable. In fact, the evidence is unambiguous that voucherizing Medicare would increase costs all things being equal, since private insurers are clearly less efficient than actually existing Medicare.

It is worth noting that countries with public medical systems seem to get similar health outcomes at much lower costs.  I am unclear why "privatizing" of medical care is limited to shifting the costs to patients instead of a single payer.  Why does it not tackle licensing issues that result in a medical doctor shortage (which raises wages and thus costs)?  Or open up prescribing powers to more providers (why can Pharmacists not prescribe?)?

It seems to be odd to focus on this one aspect of the health care segment of the economy and not even discuss the other regulatory issues involved.

Some thoughts on cinema overe at MippyvilleTV

Arrested (cinematic) Development

With friends like these.. Peter Bogdanovich and Citizen Kane

More Econ 101

Worth pondering

So, when somebody says that the government should buy paper from a private provider, hey, great. There are lots of buyers and sellers of paper. Go for it. If somebody wants to contract out janitorial work or food service, again, there are lots of buyers and sellers of those services. But I’ve never seen how contracting out more specifically governmental tasks really improves things. You go from having a monopoly provider, with all the disadvantages thereof, to a monopsony buyer, that still has to exert oversight (which is subject to all sorts of information problems and all sorts of good and bad incentives). And if there’s only one buyer, that buyer is, effectively, a monopoly provider for the public.

In all sorts of arenas, information is the real limiting factor.  I like to apply this to fields like health care.  There is no real open market in health care.  We have subsidized insurance or government provided insurance for the majority of customers.  The plans that exist often lock in networks that make it more challenging to comparison shop.  Most customers do not have the ability to shop around on price.  Treatments are legally protected from being sold on the open market (you can't self treat with a statin).  Medical doctors are a protected guild that has a limited number of residencies (and thus a cap on members) leading to increased costs due to shortages. 

None of this looks like a functional market with good information, equal quality goods, freedom of entry/exit, or substitution effects on treatment. 

Worth pondering. 

One hundred degrees by moonlight

When you add up all of the associated costs of global warming, I don't see how a good cost benefit analysis could possibly support doing nothing.

From All Things Considered:

Phoenix actually suffers from two heat problems. One is a product of growth. Desert nights don't cool down they way they used to, because energy from the sun is trapped in roads and buildings, a phenomenon researchers call the "urban heat island effect."

As Phoenix grows, so does the problem, says Nancy Selover, the state climatologist.

"We keep thinking we'll probably see a night when we only get down to 100 as a minimum temperature, which is kind of shocking," Selover says.

Stock Markets

Brad Delong

Historically, people who invest in indexed mutual funds like the Vanguard S&P make 5.5%/year above inflation (but, alas! only 1%/year since January 1, 2000); people who invest in actively-managed mutual funds like those run by Fidelity make 4.5%/year above inflation (but, alas! only 0%/year since January 1, 2000); people who actively trade individual stocks turning over their portfolio once year or so as it appears Paul Ryan does make 3.5%/year above inflation (but, alas! only -1%/year since January 1, 2000); and day-traders who trade every day lose 5%/year (and, alas! have lost 10%/year since January 1, 2000).

These differences in returns are a lot of the reason that I see it as critical to have a paternalist view on retirement savings.  The more involved the individual invester is, the worse that they seem to do in the brave new world of finance.  Passive investing, the best option listed, depends critically on individual stocks not going out of balance with the whole (ask any Canadian about Nortal and Canadian stock index funds).  But all of the other options are worse. 

If the more recent (since 2000) figures are the result of demographic factors and not as a result of "unique" or "unlikely" economic factors (due to the liquidity crisis or what not) then the future of stock market investment is bleak indeed.  At the very least, periods of slow growth like this are not good signs for the future.