Just got back from CTREE – many thanks to everyone who helped make it such a success! I had some great conversations, heard some super-interesting papers, and generally got re-invigorated, not just about teaching but about economics. Some random thoughts, just to get them out of my brain:
In the Thursday plenary, Thomas Nechyba talked about re-organizing the curriculum to make it easier to encourage and support undergraduate research. While I thought it must be great to be in the department at Duke, I also thought, “I can’t imagine my department ever buying that.” Maybe someday I’ll be department chair and find out…
Actually, this isn't so hard at places other than Duke. We offer three sections (10-20 students in each) of our capstone senior seminar course. Each student writes their own research paper and presents it to their peers. Many of the papers are quite good and would be publishable with the appropriate econometric model (beyond OLS).
Now, if our major was more popular we'd have more trouble pulling this off.
We (economics instructors) told you so. Jeffrey Sparshott
What was the American response to cheap gasoline? Buy more gasoline.
That’s at least part of a fairly nuanced picture the J.P. Morgan Institute found after analyzing (anonymized) transaction records from 1 million of the bank’s credit and debit cards.
When crude oil prices plunged in 2014, many economists and analysts expected households would splurge, offering a boost to consumer spending numbers and helping support the economy. Instead, the results were mixed and evidence of a cheap-oil dividend often elusive.
Federal Reserve Chairwoman Janet Yellen last month estimated the sharp fall in gasoline prices worked out to an average $780 in savings per household last year and another $420 through May of this year.
J.P. Morgan’s think tank found more modest, but still significant savings among its cardholders in 2015.
“Households had the potential to save $630 at the pump, of which they spent the majority—58%. This spending provided more than a $200 boost to spending on non-gas goods and services, primarily restaurants and retailers. The lower gas prices also caused significant changes in household transportation choices, leading people to spend $150 more at gas stations and spend less on transit.”
The article goes on to say that the macroeconomy didn't get a big injection from lower gas prices since gas is a small fraction of consumer spending. Flip that around and you might argue that a higher gas tax won't be a "job killer."
International development aid is based on the Robin Hood principle: take from the rich and give to the poor. National development agencies, multilateral organizations, and NGOs currently transfer more than $135 billion a year from rich countries to poor countries with this idea in mind.
A more formal term for the Robin Hood principle is “cosmopolitan prioritarianism,” an ethical rule that says we should think of everyone in the world in the same way, no matter where they live, and then focus help where it helps the most. Those who have less have priority over those who have more. This philosophy implicitly or explicitly guides the aid for economic development, aid for health, and aid for humanitarian emergencies.
On its face, cosmopolitan prioritarianism makes sense. People in poor countries have needs that are more pressing, and price levels are much lower in poor countries, so that a dollar or euro goes twice or three times further than it does at home. Spending at home is not only more expensive, but it also goes to those who are already well off (at least relatively, judged by global standards), and so does less good.
I have thought about and tried to measure global poverty for many years, and this guide has always seemed broadly right. But I currently find myself feeling increasingly unsure about it. Both facts and ethics pose problems.
Huge strides have undoubtedly been made in reducing global poverty, more through growth and globalization than through aid from abroad. The number of poor people has fallen in the past 40 years from more than two billion to just under one billion – a remarkable feat, given the increase in world population and the long-term slowing of global economic growth, especially since 2008.
While impressive and wholly welcome, poverty reduction has not come without a cost. The globalization that has rescued so many in poor countries has harmed some people in rich countries, as factories and jobs migrated to where labor is cheaper. This seemed to be an ethically acceptable price to pay, because those who were losing were already so much wealthier (and healthier) than those who were gaining.
A long-standing cause of discomfort is that those of us who make these judgments are not exactly well placed to assess the costs. Like many in academia and in the development industry, I am among globalization’s greatest beneficiaries – those who are able to sell our services in markets that are larger and richer than our parents could have dreamed of.
Globalization is less splendid for those who not only don’t reap its benefits, but suffer from its impact. We have long known that less-educated and lower-income Americans, for example, have seen little economic gain for four decades, and that the bottom end of the US labor market can be a brutal environment. But just how badly are these Americans suffering from globalization? Are they much better off than the Asians now working in the factories that used to be in their hometowns?
Most undoubtedly are. But several million Americans – black, white, and Hispanic – now live in households with per capita income of less than $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India or Africa.
Beyond that, America’s much-vaunted equality of opportunity is under threat. Towns and cities that have lost their factories to globalization have also lost their tax base and find it hard to maintain quality schools – the escape route for the next generation. Elite schools recruit the wealthy to pay their bills, and court minorities to redress centuries of discrimination; but this no doubt fosters resentment among the white working class, whose kids find no place in this brave new world.
My own work with Anne Case reveals more signs of distress. We have documented a rising tide of “deaths of despair” among white non-Hispanics – from suicide, alcohol abuse, and accidental overdoses of prescription and illegal drugs. Overall death rates in the US were higher in 2015 than 2014, and life expectancy has fallen.
We can argue about the measurement of material living standards, whether inflation is overstated and the rise in living standards understated, or whether schools are really that bad everywhere. But deaths are hard to explain away. Perhaps it is not so clear that the greatest needs are on the other side of the world.
Citizenship comes with a set of rights and responsibilities that we do not share with those in other countries. Yet the “cosmopolitan” part of the ethical guideline ignores any special obligations we have toward our fellow citizens.
We can think about these rights and obligations as a kind of mutual insurance contract: We refuse to tolerate certain kinds of inequality for our fellow citizens, and each of us has a responsibility to help – and a right to expect help – in the face of collective threats. These responsibilities do not invalidate or override our responsibilities to those who are suffering elsewhere in the world, but they do mean that if we judge only by material need, we risk leaving out important considerations.
When citizens believe that the elite care more about those across the ocean than those across the train tracks, insurance has broken down, we divide into factions, and those who are left behind become angry and disillusioned with a politics that no longer serves them. We may not agree with the remedies that they seek, but we ignore their real grievances at their peril and ours.
As you may be aware, this year at the AERE Summer Conference in Breckenridge, we hosted a "Special Session" on research associated with valuing the economic losses from the 2010 Gulf of Mexico Spill. The 4 hour-long session was split into a recreation value section organized by Roger von Haefen from NSCU and a total valuation section organized by Norman Meade from NOAA (cc'd). The presenters have graciously made the slides from both sections available to the general public (including links to data sources and associated technical memos), and we thought that readers of your blog who weren't able to make it to Breck may find them useful. They can be found at the conference website here: https://sites.google.com/site/aeresummerconference/special-session. If you'd be willing to post a link to the website/slides on your cromulent blog, we'd be very appreciative!
This preference for using prescriptive policies –rather than market mechanisms- to coordinate abatement helps explain why carbon prices are so low. Some simple graphs summarize the basics behind this cause and effect.
In the cartoon graph below, each colored block represents a different abatement activity (e.g. coal-to-gas fuel switching, renewable energy investments, energy efficiency improvements, etc.). Think Sesame Street meets the McKinsey curve. The width of the block measures achievable emissions reductions. The height of the blocks measures the cost per ton of emissions reduced.
In this cartoon cap-and-trade story, suppose baseline emissions are 200 and policy makers are seeking a 25% reduction. If we rely entirely on a permit market to get us there, we’d allocate 150 permits and let the market figure out where the 50 units of abatement will come from. An efficient market would drive investment in the lowest cost options: A + B + 1/2 C. The total abatement cost incurred to meet the target would be (20 x $10) + (20 x $20) + (10X$50) = $1100. The market clearing price (and the marginal abatement cost/ton) would be $50.
Now imagine that, in addition to the permit market, complimentary measures are introduced to mandate deployment of options D and E. These mandates take us 80% of the way towards meeting the emissions target. The role of the carbon market has been seriously diminished – we need only 10 more units of abatement to hit the target.
Under this scenario, the carbon market will incentivize investment in 10 units of A. The permit price drops to $10. The total cost of meeting the emissions target rises to 10 x $10 + 20 x $100 + 20 x $150 = $5100. And we wring our hands about low carbon prices and broken carbon markets.
Of course, this cartoon picture omits lots of real-world complexities (see this important EI paper for a more detailed analysis of California’s abatement supply and allowance demand). But it illustrates two real-world considerations. First, when complementary measures mandate relatively expensive abatement options, the carbon price we observe in the market will not reflect the marginal cost of reducing emissions. Second, a reliance on complementary measures to reduce emissions can significantly drive up the costs of hitting a given emissions target.
In California and in Europe, there is growing evidence that low allowance prices in the carbon market belie much higher abatement costs associated with complimentary policies. For example, this paper estimates that the California Solar Initiative delivered emissions reductions at a cost of $130 – $196 per metric ton of CO2. California’s LCFS credit price (which reflects the marginal incentive to reduce a ton of MCO2e) is currently averaging around $120 per metric ton CO2. In Europe, researchers estimate that the implicit costs of renewable energy targets per metric ton of CO2 are on the order of hundreds of euros for solar (and wind in some locations).
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