Environmental Economics

Milestones

I just finished:

• 25 years in the UNC system 
• 10 years at Appalachian State University (12 at ECU, 3 at UNCW)
• 5 years as department chair

Er, congratulations to me?

Least shocking result of the day

John may be the only one who finds this funny, but a friend sent me a link to one of these stupid Facebook 'Which Star Wars Character Are You?' quizzes.  Being an idiot (and a Star Wars dork) of course I took the quiz. 

Guess who I am? 

The answer is below the jump so as to not ruin the suspense...

My dialect map

This is very accurate. My parent's families are from 30 minutes north of Winston-Salem and an hour south of Richmond. Here is the link.  

"The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future" is a good bet

I know you have all missed me for the last week, but I'm glad John was able to maintain the professional standards we have set for Env-Econ in my absence.  As for me, I was able to spend five days of observational field research on coastal erosion in eastern Mexico.  A few things I learned:

1. My three years of high school spanish surprisingly made for servicable conversation (Cerveza? Bano? Como se dice "Could you please repeat that in English"?)
2. It was really hard to watch what could possibly have been the greatest day of College Football ever, when the locals kept trying to turn the channel to some other game they called football. 
3. The closest major U.S. city to Cancun is Miami, Fl.  Who knew?
4. Cancun caters to U.S. tourists.  Who knew?  OK, I knew that one going in.
5. When I have a full day to sit and read, I can read a whole book.  Which is what I did with "The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future."  So here's my highly objective (i.e. biased) review.

The Bet is Yale University historian Paul Sabin's (no relation to Nick) telling of the story and political culture surrounding Paul Ehrlich and Julian Simon's 1980-1990 $1,000 bet over the Hotelling rule.  OK, it wasn't really over the Hotelling rule, but it was about Hotelling-like predictions of changes in depletable resource prices.  In particular, the bet focused on the change in prices of five metals (Copper, tin, chromium, nickel and tungsten--I think they made that last one up) over a 10 year period.  Whack-job dooms-day ecologist Paul Ehrlich--OK, that's unfair to Ehrlich, he is a butterfly biologist, not an ecologist (is that biased?)--famously predicted throughout the late 1960's and 1970's the coming cataclysmic collapse of the Earth's environmental/ecological systems due to natural limits and exponential population growth.

In short, Ehrlich believed that humans are but one part of the broad ecosystem, and subject to all of the natural laws and limits that come with being part of that system--including species collapse due to exceeding the system's natural carrying capacity.  Ehrlich was the loudest voice of the early zero-economic growth movement (and a contemporary of the Club of Rome and Limits to Growth).  One observable indicator of Ehrlich's and his colleagues' dire predictions would be the Hotelling-like rise in depletable resource prices over time.  As resources become more scarce (reach their natural limits), prices would have to rise.  This is a somewhat ironic prediction from Ehrlich given the lack of price rationing in the Limits to Growth-type models of world collapse, but I digress.

Julian Simon, a mild-manned Chicago-trained University of Illinois professor of marketing (who eventually ended up in the University of Maryland School of Business), disagreed with Ehrlich's basic premise that population growth necessarily strained the natural limits of the ecosystem and instead argued that scarcity creates increasing opportunity costs and opportunities for investment, exploration, discovery, innovation and development of subsitute forms of capital.  In short, Simon the economist argued that the simple form of Hotelling (prices rise in response to increasing scarcity) was correct, but the extension needs to be accounted for--increasing prices create incentives for the generation/investment/invention of alternative resources.  Simon believes that increased in population actually increased general well being, increased the stock of human capital and would ultimately result in the creation of substitute pools of resources (whether natural or man-made).  Simon believed that man-made capital would remain substitutable for depleted natural capital and resource prices would fall.

In the end, Simon won the bet and Ehrlich paid off without much fanfare.  But in Sabin's view, the bet highlighted a growing set of divides: The academic divide between ecoologists and economists on matters of the environment, the philosophical divide between growthers and zero-growthers, and the political divide between the left and the right over matters of economic management.  Sabin does an intriguing job of couching the bet within the heated political environment of the 1970's and 80's tracing the environmental movement through the national political scene from the environmental conservatism of Nixon, to the limited growth/strict conservation advocacy of Carter (not much mention of Ford), to the deregulated free-marketism of Reagan.  In the end Sabin draws lessons from both Ehrlich and Simon to make a strong and lucid case for a middle ground between the coercive population reduction arguments of Ehrlich and the free-market environmentalism of Simon. 

On a personal note, I found the book particularly useful at providing a different perspective on my own training in environmental economics.  Beginning my graduate training in 1991, the year after the bet ended, the foundations of market-based environmental interventions had already been accepted by most economists  and much of the mainstream public (to varying degrees of course).  "The Bet" provides an interesting, easy-to-read introduction to the muddy politics and social setting that served as a backdrop for the development and relevance of the field of environmental economics.  The political and public context provided by "The Bet" has helped to provide me with a much better understanding of how I ended up thinking like I do about environmental issues. 

But that's just me.

 

Just for Tim

And anyone else from Balmer:

Maryland native Scott Van Pelt has a schtick every time he invites ESPN baseball analyst (and fellow Terrapin) Tim Kurkjian onto his radio show: he closes by saying something in Ballimerese and making Kurkjian burst out into furious, high-pitched laughter.

We've compiled these moments into one supercut, which you can play above. We encourage you to go here, where ESPN has made each moment individually available, for more context. SVP's show is already one of the WWL's best products, & that they're willing to have fun with this stuff is worth everyone's appreciation.

via deadspin.com

Off-topic post: How dare you call us profitable!

First a little background for those who don't follow Major League Baseball (why don't you?): The Houston Astros are bad...really bad.  The team is in the supposed process of rebuilding after moving to the American League from the National League this year.  They are currently 31.5 games out of first place. That means they would have to win 31.5 more games than the first place team in order to catch them--and they would have to pass the other 3 teams in front of them.  With only 32 games left in their season, that seems, shall I say, unlikely.  How have they accomplished the feat of incomeptence.  Easy, they cut costs.  Running a baseball team as a cost-minimizer will lead to bad baseball.  But, on the bright side, Forbes is claiming that the Astros are on pace to have one of the most profitable seasons in baseball history.

Before we delve into how things have been absolutely awful, let's concentrate on the peculiar manner in which the Astros have been extremely successful. According to Dan Alexander of Forbes, the franchise is the most profitable in MLB history.

We probably should have made sure you were sitting before that last sentence:

The Astros are on pace to rake in an estimated $99 million in operating income this season. That is nearly as much as the estimated operating income of the previous six World Series championship teams — combined.

The reason is quite simple: Owner Jim Crane has reduced cost dramatically as the club tries to rebuild and move forward in the American League.

via bleacherreport.com

But the Astros are taking exception:

We are very disappointed that, earlier today, Forbes released an article that includes significant inaccuracies relating to the Astros' finances. The Astros do not disclose financial information. However, as MLB will confirm, the information reported in the Forbes article relating to the Astros' revenues, the Astros media rights fee from CSN Houston, and CSN Houston's per subscriber rate are all significantly inaccurate. As a result, the conclusion about the Astros operational profit is significantly inaccurate.

How dare you call us profitable! 

Apparently it's better to suck on and off the field.

"Tiny Centre College in Kentucky lands $250M donation"

News about my alma mater:

A tiny liberal arts school in rural Kentucky that hosted vice presidential debates in 2000 and 2012 announced a $250 million donation Tuesday, one of the largest single gifts in higher education history.

The all-stock donation to Centre College from the A. Eugene Brockman Charitable Trust ranks among the 20 biggest gifts ever to a U.S. college or university, according to a list maintained by the Chronicle of Higher Education. ...

Centre will use the money to set up scholarships for students majoring in science, economics and computer science. ...

Starting in fall 2014, 40 new Brockman Scholarships will be funded each year for students majoring in the natural and computational sciences and economics, with a total of 160 students receiving the full-ride scholarships plus more benefits by 2017, the school said. The merit-based scholarships will cover tuition, room and board, and fees — which will cost $45,100 for the coming school year — as well as money to support study abroad, summer research and internships. ...

Brockman formed the charitable trust in 1981. His son, Robert T. “Bob” Brockman, is a Centre graduate and a former chairman of the school’s board of trustees. ...

The elder Brockman “saw firsthand the tremendous impact that Centre had on his son ... whose own drive and ambition were empowered by his experience as a Centre student,” said Evatt Tamine, trustee of the Brockman Trust.

The leafy campus in Danville, a picturesque central Kentucky town of about 16,000, has found itself on the nation’s political center stage twice, when it hosted vice presidential debates in 2000 pitting Dick Cheney and Joe Lieberman and again in 2012 when Joe Biden and Paul Ryan squared off.

Centre expects enrollment of about 1,370 students for the fall semester. The school ranked 52nd nationally among liberal arts colleges in last year’s ratings from U.S. News & World Report, but it ranked fifth in best undergraduate teaching and alumni giving.

via www.washingtonpost.com

Some comments:

1. I majored in economics at Centre College. I'm quite sure I would not have been a "Brockman Scholar." At the time, the economics major was one of the easiest with more of a political economy bent. Many of the knuckleheads majored in it. My first semester of graduate school was a shock. 
2. $250m is a lot of stock. Suppose it earns an average of 3.5% each year. That will generate $8.75m and support 160 students with almost $10k per student for study abroad and et cetera (if I was economics faculty I would definitely try do some faculty-student research that requires grant money for a survey :)
3. The elder Brockman also saw firsthand "... that preparation for leadership and service in a rapidly changing world best takes place with the firm intellectual, moral, and social grounding that young people receive especially well at Centre." I received some serious grounding in front of the student higher judiciary! Thanks Dean Mount!
4. Ranking 52nd nationally requires a "but" afterwards? As if 52nd is kinda sorry?

Pictures of the weekend: part 2 (scenic view)

On Saturday I volunteered at the Blood Sweat and Gears rest stop #1. It was at the Grandview Overlook (MP 285) on the Blue Ridge Parkway, 25 miles worth of the 100 mile ride. Later that day we went for a "grueling" 18 mile ride.

Photo credit: Boone Area Cyclists facebook page

I can't help it ... one political post*

I'm finding this poll aggregation stuff fascinating, aren't you (The Rise of the Poll Quants)?

So what exactly do these guys do? Basically, they take polls, aggregate the results, and make predictions. They each do it somewhat differently. Silver factors in state polls and national polls, along with other indicators, like monthly job numbers. Wang focuses on state polls exclusively. Linzer’s model looks at historical factors several months before the election but, as voting draws nearer, weights polls more heavily.

At the heart of all their models, though, are the state polls. That makes sense because, thanks to the Electoral College system, it’s the state outcomes that matter. It’s possible to win the national vote and still end up as the head of a cable-television channel rather than the leader of the free world. But also, as Wang explains, it’s easier for pollsters to find representative samples in a particular state. Figuring out which way Arizona or even Florida might go isn’t as tough as sizing up a country as big and diverse as the United States. ...

But the forecasters don’t just look at one state poll. While most news organizations trot out the latest, freshest poll and discuss it in isolation, these guys plug it into their models. One poll might be an outlier; a whole bunch of polls are likely to get closer to the truth. Or so the idea goes. Wang uses all the state polls, but gives more weight to those that survey likely voters, as opposed to those who are just registered to vote. Silver has his own special sauce that he doesn’t entirely divulge.

Both Wang and Linzer find it annoying that individual polls are hyped to make it seem as if the race is closer than it is, or to create the illusion that Romney and Obama are trading the lead from day to day. They’re not. According to the state polls, when taken together, the race has been fairly stable for weeks, and Obama has remained well ahead and, going into Election Day, is a strong favorite. ...

While it may not seem likely, poll aggregation is a threat to the supremacy of the punditocracy. In the past week, you could sense that some high-profile media types were being made slightly uncomfortable by the bespectacled quants, with their confusing mathematical models and zippy computer programs. The New York Times columnist David Brooks said pollsters who offered projections were citizens of “sillyland.”

Maybe, but the recent track record in sillyland is awfully solid. In the 2008 presidential election, Silver correctly predicted 49 of 50 states. Wang was off by only one electoral vote. Meanwhile, as Silver writes in his book, numerous pundits confidently predicted a John McCain victory based on little more than intestinal twinges.

Anything that makes David Brooks look silly and shuts up CNN, Fox and MSNBC is OK with me.

*And I didn't send it to my Facebook feed ... you're welcome!

What am I missing in the whole health care mandate debate?

I'm a simple man.  And by simple I mean I seek the simplest solution to complex problems.  At times that means I miss the nuance and detail that is really at the heart of many complex problems, but that doesn't stop me from offering simple analysis.

So here's my economist take on the national health insurance, health care mandate, Obamacare, socialism...whatever...debate....

It's all about the risk pooling. 

Insurance markets work when non-systemic risks are pooled across a population.  Let's use car insurance as an example.  For the most part, the probability of me getting in an accident is independent of the probability of you getting in an accident unless you happen to be driving next to me at 75 mph while I eat a Whopper with one hand and check my Facebook status with the other.  By pooling the independent risks, insurance companies can offer relatively low priced insurance against one or the other of us getting in an accident.  So states require (mandate) that in order to drive, you must have insurance, thereby reducing the external costs of my bad habits on you.  If you don't have insurance, you aren't supposed to drive and if you are caught driving without insurance you face stiff penalties.  The result: Users of the product that causes the risk (driving) have insurance--most of the time.  You can choose not to buy insurance and not drive.

So what about healthcare?  Shouldn't it work the same way?  In theory, yes.  Users of health care could be required to buy insurance against catastrophic outcomes.  By pooling the risks across large populations, the individual cost of health care will be lower than the expected cost to you if you bore the full risk of your own health.  Risk pooling reduces costs and protects againsts catastrophic outcomes.  And, just as with car insurance, if you choose not to buy health insurance, you lose the right to consume healthca...oh, wait. 

Human decency has to be factored in.

In the absence of health insurance, individuals can still not be denied health care (at least emergency care, which is expensive).  So what happens when an individual chooses to forego health insurance?  The cost of the uninsured care, guaranteed by human decency, gets rolled into the premium of those already insured.  In other words, health care costs rise.  Further, if individuals know that health care will be provided regardless of the willingness or ability to pay or willingness or ability to be insured, there is a perverse incentive to underconsume health insurance and further reduce the size of the risk pool in the insurance market (we call that moral hazard). 

So what are the possible solutions?

1. Rely on people to 'do the right thing.'  But each person's definition of right might be different.  While I think it is right to participate in the insurance market, others might think it is right to take advantage of the rules of the game. And as we know, economic incentives are powerful things.
2. Have the government act as the insurer of last resort.  This is the model we currently have.  The government offers subsidized insurance for those who are unable to afford health insurance (medicare/medicaid) and then acts as the insurer of last resort for the unisured.  The result: the cost of providing insurance to the uninsured and underinsured are passed on to the insured through higher taxes and higher insurance premia.
3. Mandate that everyone buy health insurance and play by the same rules, and penalize those who opt out.  The results 'should' be more efficiently priced insurance premia for those already insured, reduce costs of providing health care to those unable to afford insurance, and a less morally hazardous (I made that up) risk pool.

So what am I missing?

Let me have it.