Environmental Economics

On non-use values, second best, job creation and other oddly related things

To save the imperiled spotted owl, the Obama administration is moving forward with a controversial plan to shoot barred owls, a rival bird that has shoved its smaller cousin aside.

The plan is the latest federal attempt to protect the northern spotted owl, the passive, one-pound bird that sparked an epic battle over logging in the Pacific Northwest two decades ago.

The government set aside millions of acres of forest to protect the owl, but the bird’s population continues to decline — a 40 percent slide in 25 years.

Bastardized version of the Theory of Second Best: In the presence of an uncorrectable (non) market failure, it is sometimes better to create a secondary market failure.

A plan announced Tuesday would designate habitat considered critical for the bird’s survival, while allowing logging to reduce the risk of catastrophic wildfire and to create jobs. Habitat loss and competition from barred owls are the biggest threats to the spotted owl.

I like the slipping in of jobs...but remember as John so often points out: JOBS ARE COSTS.

Interior Secretary Ken Salazar called the draft plan “a science-based approach to forestry that restores the health of our lands and wildlife and supports jobs and revenue for local communities.”

And we know how well science and policy get along.

By removing selected barred owls and better managing forests, officials can give communities, foresters and land managers in three states important tools to promote healthier and more productive forests, Salazar said.

But what if I value the barred owl more than the spotted owl?

The new plan, which replaces a 2008 Bush administration plan that was tossed out in federal court, affects millions of acres of national, state and private forest land in Washington, Oregon and Northern California.

The plan to kill barred owls would not be the first time the federal government has authorized killing of one species to help another. California sea lions that feast on threatened salmon in the Columbia River have been killed in recent years after efforts to chase them away or scare them failed.

The U.S. Agriculture Department kills thousands of wild animals each year — mostly predators such as coyotes — to protect livestock. Other animals, including bears, wolves and raccoons also are killed through the program.

This is interesting. In other cases, the culling of species is to prevent market losses (salmon have market value, livestock have market value...).  In this case, the administration is promoting culling to prevent further non-market (existence) losses.  If the spotted owl goes extinct, no markets would collapse.

The latest plan for spotted owls was accompanied by a presidential memorandum directing Interior to take a number of steps before the plan is finalized, including providing clear direction for how logging can be conducted within areas designated as critical habitat and conducting an economic analysis at the same time critical habitat areas are proposed.

More economics analysis is always better (for me and John at least).

Officials acknowledge that the plan to kill barred owls creates an ethical dilemma, but say an experiment on private land in northern California has shown promising results. Spotted owls have returned to historic territories after barred owls were removed.

Tradeoffs.

Salazar and other officials stressed the new plan’s job-creation component, noting that for the first time logging would be allowed in areas designated as critical habitat for the owl. Previous plans had prohibited logging in areas designated as critical habitat.

Jobs are costs.

“Appropriate timber harvests consistent with ecological forestry principles (should) be encouraged,” the Interior Department said in a statement.

The American Forest Resource Council, a timber industry group, was skeptical that so-called ecological logging would produce a significant amount of timber or jobs. At the same time, the plan has the potential to double the amount of acres designated as critical habitat, said Tom Partin, the group’s president.

Count me among the skeptics.  That's not to say I'm opposed.  Just skeptical of any jobs claims.

via www.washingtonpost.com

Me and my big mouth

I rather enjoy those trivial, noncontroversial posts. They are easier to write and subsequently defend, since there are no objections.

In response to this post, James Manley points out this paper:

How High Gas Prices Triggered the Housing Crisis: Theory and Empirical Evidence, by Steve Sexton, Junjie Wu and David Zilberman

Abstract: The U.S. housing collapse in 2007 is widely blamed for inducing a financial crisis that spread to the real economy and caused a severe and prolonged downturn. This paper investigates the role of rising gas prices and a dramatic gas price shock in triggering the housing market collapse. Specifically, we employ a parsimonious model of housing demand that integrates the Alonso-Muth model of urban form and the Poterba model of housing investment in order to demonstrate that unanticipated increases in gas prices increased the cost of work commutes, lowering the value of homes away from the city center and increasing foreclosure rates as homeowners either could not afford mortgage payments amid elevated gas expenditures or sought to abandon underwater homes. This theory predicts that gas price shocks disproportionately affect suburban homes that face greater exposure due to longer commutes and greater vulnerability due to lower incomes. Empirical evidence from the 2007-08 housing collapse is presented to support this theory.

My reply to James:

On first glance I'm still having a hard time believing that the price increase was [all] _that_ unanticipated. According to my assumptions, around each of the past three Junes a household spent between $114 and $122 more monthly on gasoline relative to the 2004 baseline. In June 2008, this rose to $190 of which $75 could be considered unanticipated. With all of the poor decisions made by borrowers and lenders, and the housing market following a classic bubble pattern, blaming gas prices seems akin to blaming the 12th beer for next morning's hangover.

In addition, while I'm a big fan of theoretical models and simulations, I would also like to statistical evidence to be convinced that the impact of gas prices was a major factor in this context. In other words, and at the risk of angering the gods at Berkeley (and Corvallis), I would have titled the paper "How high gas prices might have contributed to triggered the financial crisis" (additions, subtractions).

All that said, I'll lighten up on Santorum, except to say that "triggered the housing crisis" is less fundamental than "caused the housing crisis." The bubble burst in housing because ... bubbles tend to burst.

Rhythm and melody

The Hill:

Rick Santorum on Monday blamed the housing crisis on high gas prices. 

During a campaign appearance in Michigan, Santorum said the housing bubble burst in 2008 because people could no longer afford to pay their mortgages because of high gas prices. 

"We went into a recession in 2008 because of gasoline prices," Santorum said in Michigan according to Buzzfeed. "The bubble burst in housing because people couldn’t pay their mortgages because of $4 a gallon gasoline."

This is worth a look since real gas prices peaked at over $4/gallon from May-July 2008 and remained close to $4 in August and September (gas prices from the EIA and the CPI from FRED):

Let's do some numbers, suppose the average U.S. household enjoys $2/gallon gasoline (average 2003 price = $2.02/gallon), drives 20,000 miles in a 20 MPG automobile. Annual household expenditure on gasoline is $2000, or about $167 per month. Since February 2004, monthly increases in gas expenditures, relative to the 2003 average, look like this:

The Santorum assertion would go like this, with an almost $150+ additional monthly expenditure on gasoline in the summer of 2008, households were unable to change their transportation habits, eat out less often and do other things so that they could pay their mortages. U.S. households stupidly refused to change their behavior and defaulted on their mortgages, triggering the housing crisis.

Further stupidity: I decided to estimate a regression of the percentage change of GDP (from FRED) on the percentage change in gas prices. The elasticity is 0.02, which means that a 100% increase in gas prices will lead to an increase in the GDP growth rate of 2% ... relatively healthy growth. Of course, this is stupid because GDP measures income, income is a factor of driving demand and my regression gets the causality totally wrong.

[clarifying edits triggered comments: additions, subtractions]

Oil price shocks can trigger recessions but that is not what happened in 2008 different than gas prices causing the housing market crisis. Continuing the Hill's story:

The official government take on the collapse, authored by the Financial Crisis Inquiry Commission, blamed Wall Street banks for taking on excessive risk via subprime mortgages, and government regulators for failing to sniff out the start of the crisis before it threatened the global financial system. 

Republican members of that panel dissented from the official report, blaming a global credit bubble and lax government housing policy. But they didn't put the blame on high gas prices, either.

Certainly, higher gas prices could have contributed to some defaults for those households who signed variable rate mortgages that they could not afford when the rates went up. But, to say it was the trigger is to mislead.

Trying to undo a bit of the stupidity, I regressed the monthly percentage change in miles driven (DOT), roughly measuring gasoline demand, against the percentage change in gas prices and income. The data are from February 1986 to December 2011 (n=311). This is the simplest demand model that can be estimated. I can imagine a better model would include lagged gas price changes (short run vs long run) and inclusion of other important variables (along with doing some time-series econometrics). Nevertheless, the model explained 19% of the variation in the percentage change in miles driven and produced a price elasticity of -0.003 (p value = 0.072) and income elasticity of 0.13 (p value = 0.00).

According to this model a 100% increase in gas prices (2003 to 2008) would lead to a reduction in miles driven of 0.3% (i.e., very small) and that each percentage change in GDP leads to a 0.13% change in miles driven. I'm not sure what this model tells us in terms of the housing crisis and "great recession," but that might be the point. Connecting $4/gallon gasoline to the broader economy is very difficult, more difficult than noticing that $4/gallon gasoline happened and then the housing crisis happened and asserting that one caused the other. 

Update: Make sure you read the follow-up post.

Crickets chirping

The sound I hear after sending this email in response to a showing of the Economics of Happiness on campus:

The film "economics of happiness" was the major topic of discussion in my senior seminar class yesterday. Several of my students thought that the panel could have used an environmental economist (to my knowledge, no one from the department was invited to participate). I agree, since the "... series focuses on environmental and economic issues ...". I'm sure that if invited to participate in the future we could make every effort to have a representative present the economics angle in a balanced way that would benefit the audience. ...

Here is more on the movie: http://www.theeconomicsofhappiness.org/.

I had hoped to attend the movie and panel discussion along with my students but I was chose my kids first U11 soccer practice instead. If I knew that the economics discipline would receive the one-sided treatment that caused my students concern, I would have found a substitute soccer chauffeur.

A brief moment of joy

The Onion (Cost of living ...):

A report released Monday by the Federal Consumer Quality-Of-Life Control Board indicates that the cost of living now outstrips life's benefits for many Americans.

"This is sobering news," said study director Jack Farness. "For the first time, we have statistical evidence of what we've suspected for the past 40 years: Life really isn't worth living."

To arrive at their conclusions, study directors first identified the average yearly costs and benefits of life. Tangible benefits such as median income ($43,000) were weighed against such tangible costs as home-ownership ($18,000). Next, scientists assigned a financial value to intangibles such as finding inner peace ($15,000), establishing emotional closeness with family members ($3,000), and brief moments of joy ($5 each). Taken together, the study results indicate that "it is unwise to go on living."

Hat tip: David Zetland

Daily demand and supply

The munchies just got more expensive:

Do you love the convenience of having your pepperoni pizza or egg foo young delivered right to your door?

If gas prices continue to rise in the next few months, it might cost you more for the privilege depending on where you order.

Triangle-area delivery restaurants worry about the impact higher gas prices could have on their businesses. It's a concern that is felt among these restaurants nationwide.

via www.newsobserver.com

Gas prices shift the marginal cost of delivery upwards, leading to a decrease in the supply. Prices rise and quantities fall.

Off-Topic Picture of the Day

Here's a picture of the set-up from the Official Second Oldest Daughter of Env-Econ's gymnastics meet* in Tampa, Florida this past weekend (That's Tropicana Field).  Just thought it was cool.

*Please excuse me for the following Proud Dad Moment: She finished 3rd out of 16 in her level/age group.

A cool reminder of budget constraints

Click here for a map of gas expenditures as a percent of income by U.S. state.

A major disappointment

I greedily opened up this article, thinking it would contain ample material. And all I got was this:

The president said that the United States is producing more oil now than at any time during the last eight years, with a record number of rigs pumping. The White House, he said, was prepared to open new areas in the Arctic Ocean and the Gulf of Mexico to exploration.

But Mr. Obama warned that no amount of domestic production could offset the broader forces driving up gas prices, chief among them Middle East instability and the ravenous energy appetite of China, which he said added 10 million cars in 2010.

Er, what he said?

Coase is smiling

Frances Homans:

Maybe this could go into your "teaching" category.  I have students keep a log of externalities, both positive and negative, that they both generate and experience.  Winston Oakley sent me this, which I thought was env-econ worthy.  He gave me permission to send it to you.

I wake up in the morning to my alarm. I start flipping on lights. I turn on the radio to listen to the news. I cook my breakfast on my electric stove. Everything uses electricity; electricity generated by a coal-burning power plant. That burnt coal sends tons of greenhouse gases into the atmosphere, degrading air quality and contributing to global warming. But those costs aren’t included in my electric bill. The first externality of the day is on me.

I get ready and head to the bus stop. I hop on the bus and ride to campus. It gets me there by burning diesel. Once again, I’m degrading air quality and contributing to global warming. These costs aren’t covered [in] the price of the bus fare. Another negative externality on my part.

After attending a class I head to the student lounge to study. I sit down and start looking over my class materials. My concentration is broken when two other students start up a boisterous conversation. They’re having a great time, but my ability to study suffers. Negative externality on them. A few minutes later, a friend of mine comes into the lounge and it’s our turn create an externality. Now our conversation interferes with their work. Payback sucks.

My classes get done and I wait at the bus stop to head home. Another student walks up and stands nearby, also waiting for the bus. He decides to take this opportunity to enjoy a cigarette. The smoke blows over to the air I’m breathing. He gets all the enjoyment from smoking, I get the second-hand externality.

I get back to my apartment building and walk inside. It’s dinner time and the smell of each resident’s cooking seeps out into the hallway. It smells awful. They can’t really be eating something that smells like that, can they? Maybe it tastes better than it smells. Either way, they get the benefit of eating it; I have to suffer through the smell. I get in my apartment and make my own dinner. I wonder if it smells that bad out in the hallway…

I strum the guitar for a while to unwind. I play hard and sing loud. The walls of my building aren’t that thick, so I know my neighbors can hear every note. They didn’t have to pay extra to live next to a talented musician. Nope, they get that all for free. At least I finish the day with a positive externality. If any of my neighbors say differently they’re just jealous.

Thanks Frances! Thanks Winston!