23 Mar 2016

Two Incidental Observations on Krugman’s 1990s Trade Essays

Krugman 9 Comments

I am going to have a bunch of trade stuff coming out shortly, but here on the personal blog let me note two things from my recent (re?)-reading of some of Krugman’s 1990s stuff.

(1) In this essay on trade negotiations I’m pretty sure in these throw-away remarks he’s talking about the tax interaction effect, which I have virtually singlehandedly been trying to bring up in the carbon tax debates:

The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees – designed to correct one distortion of incentives – with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.

It’s amazing. Krugman knows all about the tax interaction effect and yet I don’t recall him mentioning it in the last 10 years when talking about carbon taxes… Odd…

(2) The other thing I want to note is just how smart Krugman is. The following (from his famous “Ricardo’s Difficult Idea”) shows his familiarity with classical mechanics (and this funny article showed he knows relativity):

In sum, while the concept of comparative advantage may seem utterly simple to economists, in order to achieve that simplicity one must invoke a number of principles and useful simplifying assumptions that seem natural and reasonable only to someone familiar with economic analysis in general. (“What do you mean, objects fall at the same rate regardless of how heavy they are — if I drop a cannonball and a feather … you’re assuming away air resistance? Why would you do that?”) Those principles and simplifying assumptions are indeed reasonable, but they are not obvious.

If you know both economics and physics, the above analogy is simply awesome. He is exactly right: If a physicist told someone that gravity accelerates heavy and light objects the same, and the person brought up obvious counterexamples, and then the physicist said, “Well that’s because of air friction, which I’m assuming away to isolate the real way gravity works, suppose we were on the moon and dropped your feather and cannonball…” then the critic would think he was a charlatan. But of course, that is *exactly* how you proceed, in order to teach Newtonian physics. If you started out worrying about air friction, you’d get all screwed up.

And by the same token, when it comes to understanding the logic of international trade, it makes perfect sense to make unrealistic assumptions to generate simple thought experiments, to isolate particular forces. For example, to really “see” comparative advantage, you use simple examples of either two people or two countries, producing two different goods. And yet, in the real world, “there are more than two goods you charlatan!!”

23 Mar 2016

Richard Tol Trolls Sir Nicholas Stern

Climate Change, Shameless Self-Promotion No Comments

The author of the controversial and famous “Stern Review” on climate change (in 2006) has recently come out with a piece in Nature arguing that economists need to change their models of climate change because “the consequences being assessed should include the damages to human well-being and loss of life beyond simply reduced economic output.” (This isn’t the only thing Stern says, but it’s one of his complaints.)

At IER I explain how Richard Tol, creator of the FUND model and one of the leading contributors to this literature, went ballistic on social media about this. It’s funny (“funny” for economists) and you should check it out. But here’s an excerpt from my quoting of Tol’s own model, so you can see just how much stuff is in these things:

The FUND model has been used for many purposes, but its main strength has always been the impacts of climate change. Earlier versions had 9 regions, and later versions 16. In this paper, we discard most of the model, and only retain the impact module. This part, however, is reparameterized for 207 countries…We now present the national impacts module of FUND 2.8…

The climate change induced impact on cardiovascular mortality is based on Martens (1998)…Heat- and cold-related cases are modeled separately, as are effects on people below and above 65 years of age. Heat-related cardiovascular disorders are assumed to be an urban phenomenon only. Respiratory mortality is treated in the same way as heat-related cardiovascular disorders, but is not limited to urban areas.

Schistosomiasis, dengue fever and malaria are assumed to be linearly related to warming. The vulnerability is based on the 1995 data in WHO (1995)…

Diarrhea mortality is more than linear in warming with a power of 1.14, while vulnerability falls with an income elasticity of 1.58…

Species loss varies quadratically with the rate of warming. The value of species loss is logistic in the rate of warming. The maximum amount that people are willing to pay to prevent climate change-induced species loss is set to be $50 per person per year for people with the average income in the OECD in 1990…

The impacts of sea level rise are derived from Hoozemans et al. (1993) and Bijlsma et al. (1996). There are no more recent global impact studies; see Nicholls and Tol (2006) for a current review. Without coastal protection, wetland and dry land losses are assumed to be linearly related to sea level rise. The global mean sea level is determined by a geometric series depending on temperature that is calibrated based on the IS92a scenario in Kattenberg et al. (1996). Dry land losses decline linearly with protection, but wetland losses increase linearly with protection…

The impacts of climate change on agriculture are based on the rate and level of climate change and on effects from CO2 fertilization. All are functions of temperature and are calibrated to Darwin et al. (1995), Fischer et al. (1996), Kane et al. (1992), and Tsigas et al. (1996). [P. Michael Link and Richard Tol 2011, pp. 4-6]

23 Mar 2016

Sumner vs. Murphy, Round XIV

Scott Sumner 13 Comments

BTW Scott and I fight on the internet in the same way that young lion cubs spar. Anyway, in this post Scott pushes back, and I clarify in the comments. Note that I am standing up for a hypothetical Krugman, which my standard critics would be incapable of explaining. None of you understands my heart.

Regarding Scott’s claims that every person on planet Earth hates Donald Trump (except for the ones who have already voted for him, of course), check out this report: “Nearly half of the supporters of Ohio Gov. John Kasich would vote for Donald Trump, not Ted Cruz, as their second choice, according to the results of a Quinnipiac University national poll released Wednesday. And more than half of Cruz’s backers suggested they would do the same with their man out of the race.”

One more anecdote: I was talking to this somewhat unorthodox mother at a playground the other day, and she mentioned that she currently supports Trump. It turned out that in the last election she had voted for Nader. Part of what drives her current support is that she thinks the media is out to vilify Trump in a way she doesn’t perceive with the other candidates.

Do with that what you will. I think a lot of the popular explanations of Trump’s support do not actually match up with people who support him.

STANDARD DISCLAIMER: I don’t like bullies, therefore I don’t like Trump. He is a jerk and doesn’t even know basic economics, or at least, doesn’t give evidence that he knows it.

23 Mar 2016

Ludwig von Mises’ Contributions to Economic Science

Economics, Shameless Self-Promotion 2 Comments

A talk I gave at the International Students for Liberty Conference in DC a couple of months ago.

22 Mar 2016

Intellectual Vertigo

Humor 37 Comments

If you like rollercoasters:

(A) Read this, then skim this.

(B) After that warmup, read this, then skim this.

Be civil in the comments, kids. Maybe we can win them back.

21 Mar 2016

Lara-Murphy Show Episode 7: The Nuttiness of Negative Interest Rates

Lara-Murphy Show 2 Comments

Get it here.

19 Mar 2016

Contra Krugman Ep. 27 — Tom and I Talk Jobs & Trade

Contra Krugman, Economics, Shameless Self-Promotion 5 Comments

This one teaches some economics, just a heads up.

19 Mar 2016

Tatiana and Bob Talk Economics

Economics 3 Comments