15 Aug 2009

Why Discounting Matters in the Climate Change Policy Debate

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Someone who is working on these matters emailed me in regard to this article. Here is a self-explanatory portion of my response. I’m trying to show the problems of “treating our grandchildren as just as entitled to happiness as we are.” In other words, I’m trying to show why you need to use market interest rates when comparing present costs of emission cutbacks, with future benefits of averted climate damage. (You might want to do a rights-based approach, not a cost/benefit. That’s fine, but if you are going to do a cost/benefit, then you need to use a discount rate, arguably the market’s.)

OK so let’s say that we have decided we’re going to limit GHG
emissions today and this will cause our (conventional) GDP to drop by
$1 billion. Someone says, “Wow, that’s a lot of money. Is the program
worth the high cost?”

The proponent says, “Yeah, it sure is! Our scientists tell us that our
policy will spare our grandchildren climate change, and our economists
tell us that the damage we are thereby averting would be priced at $3
billion at the time it occurs. So we’re spending $1 billion today to
spare our kids $3 billion in damages, as they would have appraised

Then the critic says, “Are you nuts? Instead of cutting back our
output, let’s go ahead and produce that $1 billion in extra GDP, but
then we’ll put $200 million of it into a safe investment earning 3
percent (after inflation) per year. One hundred years from now, that
will be worth $3.7 billion, which we’ll bequeath to our grandkids. So
everyone is better off! We only lose $200 million this year, instead
of the $1 billion you suggested. And our grandkids are happier too.
Sure, they’ve got $3 billion in climate damages to deal with, but
they’ve got an extra $3.7 billion in wealth to deal with it.”

15 Aug 2009

Three Strikes Against "Three Strikes"

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As Oprah-esque as it sounds to say this, I think there were really just a handful of teachers who really influenced the way I now view the world. And one of them was Gary Wolfram, in his Public Choice class at Hillsdale College.

I am still amazed at Wolfram’s abilities. If my memory serves, he had to give an opening lecture in the big auditorium to the incoming freshmen class. And not only was he hilarious, but he was hilarious in the midst of giving a lecture on political economy. In particular, he pointed out the crazy, unintended consequences of government measures.

For example, seatbelt laws can actually do little to reduce traffic injuries, while they definitely put bicyclists and pedestrians in more danger. (I leave the proof as an exercise to the reader.)

But my favorite example of the night, was his discussion of “three strikes and you’re out,” some feel-bad (get it?) law-and-order gimmick that had recently been put into effect. This was a while ago, but I think I have the details right: Under this new rule, a federal judge had to automatically give life in prison to anyone convicted of his third felony. At first that sounds OK, but then somebody informs you that a high school senior was charged with a felony for bringing a smokebomb to school. I found that story after 45 seconds of googling.

Do you really think it’s right to take away all discretion from judges during sentencing, if someone has committed the equivalent of three smokebomb pranks? Is it really just that that person gets life in prison? Because that’s what will happen, if “three strikes” is in place. You can’t hope that “oh they’d override the rule” to prevent that outcome. That’s the whole point; you’re taking away the judges’ ability to use commonsense, to realize that the statutes as written were not intended to yield this massive punishment on this particular defendant, and so the judge will ignore the sentencing guidelines. “Three strikes” takes away this power, so as to keep those effete liberal justices from legislating from the bench. “Three strikes” removes yet another buffer between the people and the raw, arbitrary actions of the federal government. I feel much better knowing that the mandates coming from the 535 members of Congress first get refracted through the prism of scores of “activist” judges who don’t do as they’re told. Yes, in a free judicial market, where judges competed for clients who wanted to have cases heard in a reputable court, the judges would likely be extremely fastidious and could back up every decision with precedent. Their reputations–and hence livelihood–would depend on it. But when the federal government has a monopoly on the entire judicial system in the country, I’m not sure that you want the people applying the rules to do what their told.

But I digress. Wolfram’s main argument against “three strikes” was that it gives the guy with two felony convictions an incentive to kill all the witnesses if he decides to hold up a liquor store. That person knows that if he gets arrested again, he’s spending life in prison. So he’s going to make darn sure he does what he can to prevent that. The marginal cost, if you will, of killing an additional person is zero, at least in a state with no death penalty.

So even from a purely pragmatic viewpoint, if the goal is to minimize “crime,” we have to realize that the deterrence effect may indeed reduce the commission of many types of felonies. But it will probably push up the number of homicides. It’s not clear, a priori, whether “three strikes” actually decreases crime. When you throw on all the injustices that it will occur in terms of harsh penalties, it seems an obviously bad policy.

And just to round out the title of this post, let’s not forget that if you lock someone up for life, then you have to siphon yet more money from the taxpayers, to keep the slave, er, prisoner, alive. The third and final strike against “three strikes.”

14 Aug 2009

Science or Not? CRU Admits It No Longer Has Original Temperature Records

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This is a great example of where suspicion of the other side’s motives can really juice up a conflict. The global warming debate is chock full of this tendency. Check out this story, which is based on true facts (as I understand them):

The world’s source for global temperature record admits it’s lost or destroyed all the original data that would allow a third party to construct a global temperature record. The destruction (or loss) of the data comes at a convenient time for the Climatic Research Unit (CRU) in East Anglia – permitting it to snub FoIA requests to see the data.

The CRU has refused to release the raw weather station data and its processing methods for inspection – except to hand-picked academics – for several years. Instead, it releases a processed version, in gridded form. NASA maintains its own (GISSTEMP), but the CRU Global Climate Dataset, is the most cited surface temperature record by the UN IPCC. So any errors in CRU cascade around the world, and become part of “the science”.

Professor Phil Jones, the activist-scientist who maintains the data set, has cited various reasons for refusing to release the raw data. Most famously, Jones told an Australian climate scientist in 2004:

Even if WMO agrees, I will still not pass on the data. We have 25 or so years invested in the work. Why should I make the data available to you, when your aim is to try and find something wrong with it.

In 2007, in response to Freedom of Information Act requests, CRU initially said it didn’t have to fulfil the requests because “Information accessible to applicant via other means Some information is publicly available on external websites”.

Now it’s citing confidentiality agreements with Denmark, Spain, Bahrain and our own Mystic Met Office. Others may exist, CRU says in a statement, but it might have lost them because it moved offices. Or they were made verbally, and nobody at CRU wrote them down.

Now don’t get me wrong, there are some kidney shots in the above–like calling Phil Jones an “activist-scientist.” But even so, you can get why the “global warming is a hoax” crowd would look at this and think their worst fears had been vindicated decisively. I mean, just think of it: The group that is the caretaker of one of the most venerable global temperature series, is basically just asking us to trust it!

That was actually Roger Pielke’s take on the whole sordid affair. And I have to confess, it did seem crazy to me that Jones gave his excuse with a straight face. But then Chip Knappenberger, a climate scientist who often blogs at MasterResource, posted a comment on Pielke’s blog that made me doubt my quick conclusion:

I have plenty (probably the vast majority) of papers which I couldn’t provide the raw data for if asked, much less many of my analysis routines. But, in my published papers, I include Data, Methods, and Results sections where I describe my work. And the fact that it is peer-reviewed means that someone, somewhere, with some qualifications in the field thought it was reasonable. So readers of my papers don’t simply have to “trust me” even if I can’t provide the data and/or the routines at some later date. If what I have done is wrong, it’ll be replaced by new and improved science, either by me or others—that is one of the primary ways that science moves forward—historically with our without the co-operation of all interested parties.

Perhaps my way of thinking about this is old-school and a new era is upon us (one which I have yet to fully embrace and not sure I ever will, especially the latter) in which everyone has to use the same data archiving techniques and the same analytical tools and reviewers will be required to precisely replicate the results before they are published—if not the reviewers themselves, perhaps a staff of analysts employed by the journals. But even if this will someday be the case, I don’t see how it should be retroactively applicable. Will all the journals be wiped clean of all past material, only to have it reinstated once each and every article has been replicated?

So if the CRU is guilty of requiring people to just “trust them” them, I would imagine that so too are 90% or more of all the authors ever published in the scientific literature.

I should stress that there are two distinct issues in the global warming (aka climate change) debate: First, what is our understanding of the impact of human activities on the environment? Second, what (if anything) should the government do, in light of this scientific understanding?

Libertarians shouldn’t be afraid to find out that the climate’s true sensitivity to greenhouse gas emissions is on the high end of the range of guesses. And they certainly shouldn’t rest their opposition to cap and trade legislation on the relatively fragile claim that “global warming is a hoax.” I consider it a much safer argument to observe, “Politicians have never solved a societal defect in the history of the world.”

14 Aug 2009

Pentagon Seeks Authority to Post 379,000 Troops in U.S.

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Reader cypress brings this alarming story to our attention. I am not familiar with the website so I can’t vouch for the claims, but here’s what it says:

The Pentagon has approached Congress to grant the Secretary of Defense the authority to post almost 400,000 military personnel throughout the United States in times of emergency or a major disaster.

This request has already occasioned a dispute with the nation’s governors. And it raises the prospect of U.S. military personnel patrolling the streets of the United States, in conflict with the Posse Comitatus Act of 1878.

In June, the U.S. Northern Command distributed a “Congressional Fact Sheet” entitled “Legislative Proposal for Activation of Federal Reserve Forces for Disasters.” That proposal would amend current law, thereby “authorizing the Secretary of Defense to order any unit or member of the Army Reserve, Air Force Reserve, Navy Reserve, and the Marine Corps Reserve, to active duty for a major disaster or emergency.”

Taken together, these reserve units would amount to “more than 379,000 military personnel in thousands of communities across the United States,” explained
Paul Stockton, Assistant Secretary of Defense for Homeland Defense and America’s Security Affairs, in a letter to the National Governors Association, dated July 20.

The governors were not happy about this proposal, since they want to maintain control of their own National Guard forces, as well as military personnel acting in a domestic capacity in their states.

“We are concerned that the legislative proposal you discuss in your letter would invite confusion on critical command and control issues,” Governor James H. Douglas of Vermont and Governor Joe Manchin III of West Virginia, the president and vice president of the governors’ association, wrote in a letter back to Stockton on August 7. The governors asserted that they “must have tactical control over all . . . active duty and reserve military forces engaged in domestic operations within the governor’s state or territory.”

According to Pentagon public affairs officer Lt. Col. Almarah K. Belk, Stockton has not responded formally to the governors but understands their concerns.

“There is a rub there,” she said. “If the Secretary calls up the reserve personnel to provide support in a state and retains command and control of those forces, the governors are concerned about if I have command and control of the Guard, how do we ensure unity of effort and everyone is communicating and not running over each other.”

Yeah, I’m sure that’s what the governors are worried about.

14 Aug 2009

On the Other Hand: A Sample of Brad DeLong

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Every once in a while it occurs to me that it’s possible my worldview has a serious flaw in it, and that the people who really drive me through the roof might actually be right. Fortunately, such moments soon pass and I can get back to blogging.

But just to make sure you guys realize that our opponents aren’t morons, let me quote from a recent Brad DeLong essay in which he discusses the thought of John Hicks. After explaining the conventional mechanism through which central bank operations can stimulate an economy, DeLong says:

A little thought, however, will lead us to the conclusion that such open-market operations may fail. In them, the Federal Reserve is buying bonds, shrinking the supply of bonds out there–and thus pushing up their price and pushing down interest rates. For each amount that the Federal Reserve expands the money stock, therefore, it puts downward pressure on interest rates and thus on monetary velocity. In the limit where interest rates are so low that people don’t really see a difference between cash and short-term government bonds like Treasury bills, open-market operations have no effect because they simply swap one zero-yielding government asset for another.

It is in this situation that a government deficit can be useful. A government deficit means that the government is printing and issuing a lot of bonds at exactly the same moment that private investors are looking for a safe asset to hold. As these bonds hit the market, people who otherwise would have socked their money away in cash–thus diminishing monetary velocity and slowing spending–buy the bonds instead. A large and timely government deficit thus short-circuits the adjustment mechanism, and avoids the collapse in monetary velocity that was the source of all the trouble.

Lately I have come to believe that the notorious “liquidity trap” is a legitimate phenomenon. The closer nominal interest rates approach zero, the more that government debt begins to resemble government fiat money. This surely can’t be a good thing.

Think of it: The central government and central bank conspire to take the distinct markets of debt and money, and merge them into a common reality. It’s like they divided by zero.

Naturally, I’m not endorsing the Keynesian policy prescriptions for “what to do when you’re in a liquidity trap.” But I’m saying that Keynesians have been saying for more than a year that something funky happens when central banks drive interest rates down to zero. And unfortunately, their Chicago School / monetarist critics have largely ignored their insights.

14 Aug 2009

Yet Another Reason They Will Legalize Marijuana, Soon

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Lately I have been giving economic arguments that suggest the government will soon have to legalize marijuana. I’ve come up with an independent argument.

The authorities over the next few years will need to legalize marijuana in order to clean out the prisons. They will need to make room for people like you.

14 Aug 2009

Picture Rod Serling Discussing Atlas Shrugged

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Walter Block sends along this amazing video. (If you aren’t into it by 2:00, then you should stop it. But many of you will be hooked by that point.) Does anyone recognize this guy? Is this clip part of a show?

14 Aug 2009

The "Efficient Markets Hypothesis" Is a Mental Crutch for Economists

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In a recent post, I discussed Robert Lucas’ defense of mainstream macroeconomics. Lucas made excuses for why economists couldn’t have predicted the housing crash, excuses that drove me to declare, “I’m starting to think the efficient markets hypothesis is a state of mind, a consciously chosen way of looking at the world. I’m not sure what it would mean to really falsify it.”

I’m going to take another swipe at this, since others are adopting Lucas’ line. For example, William Easterly recently wrote:

[E]conomists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.

Picture a man who had watched CNBC faithfully through 2004 and 2005, and who had borrowed against his pension in order to buy six condos in Las Vegas. Then, after everything blew up in his face–what he had previously been assured was a “six sigma” event–the man asked, “How did you economists fail to see this coming?!” Can you imagine what that guy would do, if William Easterly happened to be there to give him the above answer?

Easterly, Lucas, and other economists think they are oh so clever, yet they’re merely assuming their conclusion. They look out at the world, and see that it can be made consistent with the EMH if we assume certain other things about how the world works.

But by the same token, suppose that the critics of the economic forecasters are correct, and that groups of people–including economists and investors–are capable of making systematic errors for years at a time. Now if that alternate view of the world were correct–meaning the EMH had to be false–then what would the last five years have looked like? Well gee, they would have looked like what just happened. In other words, we can quite easily make the theory of “not-EMH” consistent with the observations.

For example, right now there are some people who are quite convinced that very large price inflation is imminent, while there are other people who are quite convinced that very large price deflation is imminent. The prices for gold, silver, and 30-year Treasurys are constantly shifting, but at any given time they do their part to balance the speculative powers in the camps of the dollar bulls vs. dollar bears. Especially in these unprecedented times, when people are unsure even what framework to use when anticipating the future, it is rather misleading to think in terms of an “equilibrium price” for a one-year put on oil futures. At any time, the put’s price should be interpreted as a ceasefire, not as a “best guess.”

Now let’s suppose that the people worried about collapsing credit lines (e.g. Mish) turn out to be right. The CPI falls by about 10% a year for the next four years. If that happens, I promise that I will say, “I was wrong and Mish was right.”

I’m not going to say, “I didn’t predict this coming, but then again no one did. If Mish thinks he predicted it, he’s sadly mistaken. His arguments and graphs were all taken up by the market, and yet gold remained above $900. Therefore Mish just got lucky; he really couldn’t have known for sure that this would happen.”

I am not being cute or making an analogy; I think the above paragraph is literally what Lucas and Easterly have done, albeit they could point to formal models with Greek letters to make their case less blatant. Even so, they are imposing the EMH on the world, and they don’t even realize it.