Environmental Economics

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Apologies to those of you who have missed me the last few weeks (hi mom!) as I have recovered from taking care of some lingering neck issues from my years of head banging to 80's hair bands.  I'm back on my feet (computer) and ready to go (from the confines of my family room).

Anyway, I know John posted about our article that (finally) came out in the Review of Environmental Economics and Policy, describing the set of issues upon which a sample of AERE members appear to have consensus, and those for which they don't.  Here are a few highlights from the survey in light of President Trump's budget, keeping in mind that the survey was conducted before the thought of a Trump presidency was even a twinkle in the eye, and some of my thoughts on the results.

• 96% of respondents feel that unregulated markets do not provide public goods in optimal quantities.

Thought: I contend that many people who advocate for free markets fail to recognize the important distinction between 'free' markets and 'unregulated' markets.  From most economists' perspectives, a truly 'free' market is a market in which all of the costs and benefits associated with production and consumption (current and expected future) are fully encumbered by actors in that market today.

Too technical?  

Ok, try this:

'Free' markets have no unintended consequences.  

Still too technical?  

OK, how about one more:

'Free' markets have no spillovers.

I could go one, but hopefully you get the point.  If there are benefits or costs that come from making or consuming something, and those benefits or costs can't or aren't captured in the market from which they originate, the market is failing to do it's job.  That's why we call it a market failure.

An externality occurs when a cost or benefit from making or consuming something ends up costing or benefiting someone else, and that someone else has no choice in the matter.  For example, the health effects of air pollution from coal-fired electricity production in Ohio on the good people of Boston (I assume there are at least some good people in Boston), or the effects of second-hand smoke on those stuck in an airplane with a smoker, or the spill-overs from improved workforce productivity and social benefits of decreased crime from increased education.  

Each of these is an example of a cost or benefit that is generated by activity in a market, but spills over to people outside the market.  The result is that, in these cases, unregulated markets tend to underproduce good things and overproduce bad things (too much pollution, too much second-hand smoke, too little education).  

Why then don't the people in the markets, through generosity, just do the right thing?  

Unfortunately market forces are powerful.  If a good-hearted electricity producer in Ohio decided to voluntarily absorb the costs of pollution, the Ohio electricity-producer's costs of production will go up.  The producer then has the choice of trying to charge higher prices to those buying electricity, or settle for lower profits.  If they choose to raise prices, they are now at a competitive disadvantage to the less-good-hearted producers. Most consumers don't really know (or care?) where they get their electricity, so they are going to choose to buy from the cheapest seller, which now causes a big dilemma for the good-hearted producer: raising prices is off the table, so I either settle for lower profits or I abandon my morals and pollute.

Stakeholders are going to be less than pleased with lower profits, to the point that voluntarily lowering profits is not a long-term sustainable business strategy.  So ruling that out, the good-hearted producer has to either pollute or shut down.

Sorry, that was a long way to go to make the point that this is NOT a 'free' market.  It is an 'unregulated market.' And in the case of an externality, an unregulated market will overproduce bad things and underproduce good things (in the case of education, do you consider the positive benefits you provide to society when you decide how much education to get?  Or do you just consider your personal benefits?).

That is why, 96% of AERE members who responded to our survey think that unregulated markets fail to provide optimal quantities of public goods (an extreme form of externalities).  And it is also why:

Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy

Environmental economists are not market-killers.  In fact, most are advocates for truly free markets: markets that fully capture all benefits and cost of production and consumption through market-based regulations.  Afterall,

Eighty-six percent of respondents agree that emissions taxes or marketable emissions permits are a more economically efficient approach to pollution control than emissions standards.

Sensible market-based regulations make sense.  

 

My advice to the EPA Administrator? Use science.

I am an appointed member of the EPA Science Advisory Board Environmental Economics Advisory Committee. As a committee, our charge is to provide "independent advice to the EPA Administrator, through the chartered SAB, regarding the science and research to assess public benefits and costs of EPA’s environmental programs."

My independent advice to the EPA Administrator?

Use science.

That's all.

 

Benefits and costs of free trade (off-topic)

We might be going off-topic a heck of a lot during the next four years:

While the costs of free trade tend to be concentrated, benefits like lower prices for imported goods are spread very broadly, making them less obvious. In an interview on Fox News on Sunday, Newt Gingrich, former speaker of the House and a Republican Trump ally, questioned whether that trade-off made sense.

In some cases, he said, Americans should be “prepared to pay a little bit more for imported products” to keep jobs at home.

If trade advocates can’t make a better case, or at least come up with better ways to help the inevitable economic losers of globalization cope, then free trade itself may be imperiled, whatever the overall benefits.

via www.nytimes.com

Using the very simplest (a static demand and supply model), and most compelling, economic analysis of international trade shows that the economic costs of tariffs (lost consumer surplus due to higher prices and lower consumption) exceed the benefits (producer surplus gains which are positively correlated with jobs).

In case you happen to be in Morogoro, Tanzania next week...

IAGRI Workshop Announcement

Introduction to Valuation Methods and Willingness to Pay

Dates: October 12-13, 2016

Location: iAGRI building, Sokoine University of Agriculture campus

Presenter: Dr. Tim Haab, Professor and Chair, Department of Agricultural, Environmental and Development Economics, Ohio State University, Columbus, Ohio USA

Abstract: Understanding of the values that people place on goods and services is critical to making sound economic decisions.  In many cases, markets provide an easy way for people to reveal value through their decisions to buy and sell goods and services.  But in other cases, markets fail to accurately reflect values.   Whether it’s because the good or service being valued does not have a market, or existing markets fail to reflect the full value of the good or service, non-market valuation methods are needed to fully measure the costs and benefits of goods and services.

This workshop serves as an introduction to non-market valuation methods and the economic concepts of willingness to pay and willingness to accept in the context of developing countries.  Through the use of current and classic examples, we will provide an introduction to the economics of valuation, the economic theory of measuring values and the practical tools economists have developed for measuring non-market values.  At the end of this introductory workshop, the attendee will have the knowledge and tools necessary to delve into the rapidly growing field of valuation as applied in developing countries.

Presenter: Professor Tim Haab is an internationally recognized expert on methods for measuring the value of goods and services not adequately represented by market prices.  He is the author of over 50 academic journal articles and 4 books on valuation methods, including the now standard book for valuation methods in environmental and resource economics: Valuing Environmental and Natural Resources: The Econometrics of Non-Market Valuation.  He has worked on projects applying valuation methods in such diverse settings as payments for environmental services to the rural poor in developing countries, the value of improved drinking water access and quality in developing countries,   the economic damages from oil spills, the environmental, health and resource effects of bio-based fuels, incorporating ecosystem service valuation into marine planning, the economic value of marine recreational fishing, the economic impacts of climate change, the economic costs of invasive species, the value of agricultural extension programs, and the impact of agricultural pollution on hypoxic zones of oceans.  As Chair of the Department of Agricultural, Environmental, and Development Economics at The Ohio State University, Professor Haab oversees a faculty of 21 world-class applied economists.

Quote of the Year: No need to fact check this Trump campaign quote--it's accurate

From Tom Barrack, one of Donald Trump's 'economics advisers':

"One thing we know about economists is that they never get it right"

Tacos for Everyone! (or, we're not the only snarky blog out there)

Philip Bump of The Fix at the Washington Post addresses "The national economic implications of a taco truck on every corner":

A supporter of Donald Trump appeared on MSNBC's "All In" on Thursday night to offer a vision of a bleak, delicious future.

"My culture is a very dominant culture, and it's imposing — and it's causing problems," Marco Gutierrez of Latinos for Trump told Joy Ann Reid. "If you don't do something about it, you're going to have taco trucks on every corner."

That's a serious charge, worthy of being considered seriously. Although easy access to inexpensive Mexican food would be a boon for hungry Americans, what would the inevitable presence of those trucks do to the American economy? How could our country accommodate an explosion of trucks at that scale?

The upshot:

And it would mean that, per Gutierrez's vision of the future, we'd suddenly see 3.2 million conveniently located taco trucks. How ubiquitous is that? Well, it's one on every corner. But we can also compare it to Starbucks, which seems pretty ubiquitous in a lot of places. In 2012, there were about 11,000 Starbucks locations in the United States.

...

But it's where we're headed, apparently, if Trump loses. That's good news for the economy in one way. If you assume that three people work in each truck, that's 9.6 million new jobs created. The labor force in August was 159.4 million, with 144.6 million employed. Adding 9.6 million taco truck workers would help America reach nearly full employment — and that's just the staffing in the trucks. Think about all of the ancillary job creation: mechanics, gas station workers, Mexican food truck management executives. We'd likely need to increase immigration levels just to meet the demand.

Of course, there would be other repercussions. Many of the taco trucks would struggle to find business, like those posted at remote crossroads in Kansas. Other restaurants would likely suffer as a glut of other options and price wars undercut their offerings. There would be plenty of jobs for those fired from higher-end restaurants, but the resulting drop in wages would be staggering.

Happy Labor Day.

"Considering John Krutilla and the Environmental Turn in Natural Resource Economics"

Spencer Banzhaf:

John Krutilla, a pioneer in environmental economics, helped to shape the field as an expert at Resources for the Future (RFF) in the mid-twentieth century. Perhaps his greatest legacy is shifting the discussion from one of economics versus the environment to consider a new economics of the environment. In a new RFF discussion paper, I tell the story of these intellectual moves. Here’s that story in brief: 

From the nineteenth century, environmentalism in the United States historically has been divided into its "conservationist" and "preservationist" impulses. The conservation camp, represented by its champion Gifford Pinchot (1865–1946), advocated conservation of natural resources to be used for human purposes, using a progressive model of rational government planning. Extending Jeremy Bentham's utilitarian maxim, it would conserve resources to deliver "the greatest good to the greatest number for the longest time." The preservation camp, represented by John Muir (1838–1914), advocated protecting wilderness from humans, rooted in a spiritual love of “Nature” for its own sake. Eschewing rational planning, it would undergird such preservation through grassroots organizations such as Muir's Sierra Club.

In the first half of the twentieth century, natural resource economics was firmly on Pinchot’s side of that schism. Thus, an interdisciplinary scientist like Aldo Leopold, with economic training and a position in a university agricultural economics department, could view the growing environmental ethic in terms of a tension between economics and the environment. Economics appeared to be about material use of resources, whereas a new environmental ethic required a love of the environment for itself. Thus, on this reading, any defense of the environment on economic grounds appeared to be too narrow.

That position began to change as the postwar environmental movement gained momentum. More than anyone, John Krutilla pushed economics to the point where it could embrace Muir’s vision as well as Pinchot’s. 

In "Conservation Reconsidered" (1967), published 50 years ago next year, Krutilla argued that if humans preferred a preserved state to a developed one, then such preferences were legitimate and belonged in the economic calculus. The traditional focus on conserving resources for material production needed to be reconsidered, he said, in light of the growing scarcity of preserved natural landscapes.

Krutilla's move coincided with a growing environmental movement on one hand and, on the other, an evolution in economists' understanding of their own discipline. Environmentalism increasingly was defined around aesthetic consumerism rather than materialistic conservationism. Economics, too, previously defined as the study of material welfare, was being redefined as the study of opportunity costs.

Krutilla pointed out that developing a landscape came at the opportunity cost of preserving it; reciprocally, preserving a landscape came at the opportunity cost of developing it. Thus, the choice to develop was inherently an economic one. In this way, Krutilla helped reorganize earlier debates that put economics and the environment at odds to frame the discussion in terms of a new economics of the environment. Taking this theory to the real world, Krutilla testified to this effect during a controversy over developing Hells Canyon on the Snake River in Oregon—thus showing that economics could be on the side of preservation. Moreover, Krutilla argued that preserved landscapes could always be developed later, whereas development was irreversible. This consideration shifted the economic decision in favor of preservation, other things equal. 

via www.rff.org

As I've said before, Krutiall (1967) was the paper that inspired me to try a dissertation using the contingent valuation method.

"How Much Will the Paris Climate Deal Cost the U.S.?"

Real Time Economics (i.e., WSJ):

Now that officials from the U.S. and nearly 200 other countries have reached a deal in Paris meant to keep global warming at bay, many citizens back home want to know—how much will it cost us?

No one knows for sure, but one estimate from an environmental think tank in Washington pegs the cost as a $170 billion hit to U.S. gross domestic product in 2030, or about 0.7% of the total economic output that year. ...

The idea behind the Paris talks is that all countries have to participate in a United Nations-organized effort to curb emissions of greenhouse gases linked to global warming. To get everyone on board, each country was allowed to develop its own plan, and countries aren’t compelled to meet their targets, which cover the period after 2020.

Few political leaders are interested in ordering up deep, painful cuts to emissions in ways that could unleash high electricity prices, stunt industrial growth or prevent impoverished citizens from clawing their way into the middle class.

So most countries, under pressure from peers as well as domestic critics, settled on cuts likely to cause small to moderate economic pain in the medium term, with the potential for big benefits in the longer term if all the major economies comply and humankind keeps the effects of climate change at bay.

The U.S. pledge is built around President Barack Obama’s “clean power plan,” which focuses on steep reductions in carbon dioxide emissions from the electricity sector—mainly coal. The U.S. government estimates the impact of the power rule—issued by the Environmental Protection Agency—at between $28 billion and $39 billion in 2030, or 0.1% to 0.2% of projected GDP.

If the power-plant rule survives court challenges, it could weigh on coal-related jobs, but the U.S. Energy Information Administration’s economic model finds no appreciable effect on overall employment.

Besides the power-plant rules, the U.S. pledge in the Paris accord relies on regulations mandating more-efficient automobiles and trucks, plus other efforts to stem greenhouse-gas emissions.

In May, the World Resources Institute constructed an economic model that shows the effect of the overall target that the U.S. submitted in Paris, although without the final details of how it’s achieved.

That projection resulted in the $170 billion hit to GDP in 2030, not considering the potential gains from better public health or an improved climate. ...

via blogs.wsj.com

I haven't been able to find a cost estimate from a non-environmental think thank.

On Income Inequality: Ill-formed thoughts from me

For some reason I have been thinking about income inequality lately.  I guess it could have something to do with unavoidable coverage of asinine opinions by politicians trying to get people to elect them by saying whatever they think will get them votes.  Rather than criticize the asinine opinions of others, I thought I would offer my own asinine opinion for your criticism.  So here is my asinine opinion as an economist*: Inequality is an individual problem, poverty is a social problem.

Some may be tempted to argue that the difference between inequality and poverty is semantic: when politicians and policy makers talk of inequality, they are really only concerned about those in poverty, right?  Well, no.  Because if real poverty were the concern, and inequality alleviation were really an altruistic endeavor, then politicians would be much less concerned with alleviating inequality in the U.S. and much more concerned about alleviating poverty globally. 

Let's take a quick example:  Consider a single U.S. citizen who falls precisely at the current U.S. guideline for poverty: $11,770 per year (according to the Department of Health and Human Services).  I think most of us can agree that that is a pretty low income.  And I think most of us would find it tough to 'survive' on $11,770 per year. But let's look at that number from a global perspective.  According to the Global Rich List**, an income of $11,770 would place that person in the 85th percentile (top 15% of incomes) of the global income distribution.  Just to be clear, that means 85% of the global population falls below the U.S. poverty line, while only 21.9% of U.S. income earners fall below the poverty line (at least according to this calculator at Political Calculations).   Twenty-two percent is a big number and cause for concern, by why are U.S. politicians only concerned with 22 percent of the U.S. population, when 85% of the world population is just as poor (or poorer).

The easy answer is 'We live in the U.S. dammit, we can't expect to solve the world's problems.  USA! USA! USA!'  But I don't think that is the real issue.  I think the real issue lies in how we perceive poverty.  I fear that even if we were to find a way to raise all U.S. incomes above the poverty line, we would still be hearing about and talking about income inequality.  Why?  Because inequality relies on relative comparisons whereas poverty relies on absolutes.  We can measure absolutes, but relative comparisons require judgments.

Let me give an extreme example to hopefully illustrate my point.  I live in a bubble--that's what we call our bucolic suburb, 'The Bubble.' It is one of the wealthiest towns in the state (if not the country).  If I were to compare my income to those in the bubble, I would probably fall somewhere near the median.  Not poor by any means, but the distribution of income in the bubble puts me in the middle.  The fact that there is a distribution means that there will be inequality.  Of course, this level of inequality is small relative to comparisons at the state or national level, but that is exactly my point.  There are times when I get jealous because my income doesn't match up to those around me.  It somehow seems 'unfair.'  They have more than me.  But I fully recognize that my jealousy is my problem.  This is not the result of any market or government failure.  It is a consequence of my own human condition--I am a sinner and I am jealous.  There, I said it.  Whew.

But seriously, I don't know how to make comparisons between income distributions.  If you look at my income at the national level, I am suddenly no longer in the middle of the distribution and I am rapidly sliding into that class of people who are the target of attack in political discourse: The X% (GASP!). 

But why stop at the U.S. borders?  If we look globally, suddenly most of the U.S. population falls into someone elses X%.  The World Bank sets the level for extreme poverty at $1.90 per day AFTER adjusting for differences in purchasing power. 

Read that again. 

$1.90 per day. 

That's $693.50 per year.

(After adjusting for differences in prices!)

Do you know what percentage of the U.S. population falls below this extreme poverty line?

I'll give you a hint.  The answer starts with 'Z'.

So what is my point?  My point is simple.  Income inequality is relative.  In order to solve the income inequality problem we have to answer questions like:

"What is an equal distribution?"  "How much is too much?"  "Should we care about the starving in Africa when considering the income distribution in the U.S.?"

And I don't know how to answer those questions--my economics training has failed me.  But neither do you.  And neither does Donald Trump, or Marco Rubio, or Hillary Clinton, or Bernie Sanders.  No one can answer those questions because there is no single answer.  The answer as to which income distribution is the best distribution is an individual answer.  It depends.  It depends on who you are and who you are comparing yourself to and how jealous of a person you are.

Inequality is relative, but poverty is not.

Is it reasonable to say that Warren Buffett, or Bill Gates, or the Walton Family should have less simply because they have more than most?  It might not seem 'fair.' but the fact that they have more than me or I have more than someone else is not a social problem, it is an individual problem: 'I don't like them having more than me.  It's not fair.'  Doesn't it seem more reasonable (more objective?) to say, let's make sure everyone has at least enough to survive and damn the distribution of the rest.

Now that I've convinced you that I am right, how do we solve poverty?

Ensuring a minimum standard of living for everyone requires one of two things: 1) Either finding more money for those who are below the standard without decreasing the income of anyone above the standard, or 2) Redistributing some income from some of those above the standard to those below the standard.

The first case requires finding money laying on the ground.  In other words, there has to be a way to rearrange things so that nobody is made worse off.  Economists call this a Pareto-improvement.  But to get a Pareto improvement, there has to be an inefficiency somewhere in the economy (resources left unspent).  But market-based economies work in such a way as to minimize inefficiencies; so there aren't a whole lot of dollars laying on the ground.  This is both the beauty and the beast of market-based systems.  Market-based systems ensure that the economic pizza is as big as possible, but the market doesn't give two craps about who gets what sized slice of pizza--and unfortunately some get very small slices.

So to fix the problem we need to figure out a way to cut the slices more evenly.  The problem is, as soon as you start changing the sizes of the slices of pizza, the whole pizza shrinks.  This isn't an opinion, or an argument against redistribution, but rather an economic reality--unless there are inefficiencies in the allocation of resources, redistribution of income will shrink the size of the economic pie.  The question is then, how much smaller of a pie are we willing to tolerate in order to generate a more 'fair' distribution of the pie?

My answer has already been stated:  We need to be willing to tolerate enough redistribution to ensure we maintain a minimum standard of living for everyone.  Beyond that, we need to get out of the way and let the markets do their thing and create as large a pie as possible given the no poverty constraint. 

But won't that allow inequality to persist?

Yes.  But inequality is only bad in a relative sense and the degree to which inequality is bad depends on how much inequality your own jealousy allows you to tolerate. 

I'd rather focus on solving poverty and then making sure everyone has equal opportunity to play equally in the market sand box.  Our focus should be on ensuring the minimum social safety net possible (what should Social Security, Unemployment, SNAP, Medicare/Medicaid look like to ensure a minimum standard of living for all?), eliminating inefficiencies (correcting market failures), and eliminating barriers to opportunity (end discrimination in all forms so that everyone is playing by the same set of rules and has the same opportunities). 

Beyond that, if you don't like the distribution of income, that is your problem...not the government's.

My name is Tim and I am NOT running for President of the United States--although you can feel free to write my name in because it would be cool to get a few votes.

*I do not speak for all economists.  I am simply basing my opinion on my own training and thoughts from an economics perspective. 

**I'm not sure I believe the numbers that this calculator produces, I am just using it to illustrate a point.  The actual numbers might be different, but the point still holds.

Raise your hand if you want to work with me...

The Department of Agricultural, Environmental, and Development Economics (my department) in the College of Food, Agricultural and Environmental Sciences (my college) at The Ohio State University (my university) is hiring for four new faculty positions--and I am not ashamed of taking advantage of this blog to promote the positions.  If you have (or are close to earning) a PhD with interests in agricultural economics, environmental economics, regional economics, development economics or some combination of those fields along with other interests, then we can probably align your interests with one of our four positions. 

Come join me in a top rated department (according to the National Research Council at least) in a top 20 public university (according to US News at least) in the Best Opportunity City in the U.S. (according to Forbes at least).

Our open positions are:

• Assistant or Associate Professor in Global Economic Modeling: a tenure-track assistant/associate professor position in the area of global economic modeling and integrated assessment. Economic modeling approaches of particular interest include dynamic optimization and computable general equilibrium modeling, as well as familiarity with approaches for handling decision making under uncertainty. Individuals with experience integrating economic models with physical/biological models are encouraged to apply.
• Assistant or Associate Professor in Sustainable Food and Farm Policy:  tenure-track assistant/associate professor position to conduct innovative research on policies related to food, farming and sustainability and to provide intellectual leadership to the Department and to the University’s Discovery Theme Initiatives in the area of sustainable food and farm policy. 
• Assistant Professor in Agribusiness: a tenure-track assistant professor with teaching and research responsibilities in agribusiness.  Applicants with interests in agricultural markets and marketing, finance, supply and demand analysis, industrial organization, international trade or agricultural and food policy, that complement a primary interest in agribusiness are encouraged to apply.
• Assistant or Associate Professor in Sustainable Development and Economy: an assistant/associate professor, tenure-track position to develop an internationally recognized program of research and teaching focused on sustainable development and the trade-offs among economic development, social equity and environmental protection in international or regional contexts.  Areas of interest include, but are not limited to: economic growth; equity; resource use; technological change; socio-ecological systems; sustainable and resilient communities. 

Click on the links for full descriptions and application info.