Environmental Economics

At What Cost? Legislators come up with solutions to Harmful Algal Blooms. Environmental Economists come up with cheaper solutions.

The Legislature of the State of Ohio is currently considering legislation to reduce Phosphorous loadings into Lake Erie by 40%.  This is a good thing, as reducing Phosphorous going into Lake Erie will reduce the incidence and impact of Harmful Algal Blooms in the Western Lake Erie Basin.  

The proposed legislation establishes a Clean Lake 2020 plan that includes:

A significant new Clean Lake Capital Fund that may appropriate up to $100 million per year for five years for both Lake Erie algae reduction, and agricultural best practices.  Funding may include establishing facilities to improve manure application processes, projects to reduce open lake disposal of dredged materials, funds to local governments for water quality-based green infrastructure, water management projects to help reduce nutrient and sediment runoff impacting the lake and other strategies.

A new Soil and Water Support Fund, with some of the funding provided directly to soil and water conservation districts to assist farmers in soil testing, nutrient management plans, installing edge of field drainage devices, encouraging inserting of nutrients (subsurface placement), and agreed to conservation methods that may include riparian buffers, filter strips and cover crops.

To the casual observer, this all looks good.  The proposed bill has widespread support among agricultural groups, and local and state authorities. As one of the bill's sponsors notes:

“These are not brand new ideas, just a greater sense of urgency to implement them,” Arndt said.  “There appears to be widespread agreement with state officials, environmental and agriculture groups, tourism advocates and business leaders that many of these strategies will make a big difference.”

And he is right, these strategies could make a big difference. 

But as economists we are trained to ask, 'At what cost?' 

December 2007: “There’s no recession coming. The pessimistas were wrong. It’s not going to happen. ...The Bush boom is alive and well. It’s finishing up its sixth consecutive year with more to come. Yes, it’s still the greatest story never told.

The WaPo:

President Trump's top economist blasted the Congressional Budget Office on Tuesday, dismissing the scorekeeper's recent projections that the Republican tax law would push the nation's annual deficit over $1 trillion.

“Never believe the CBO. Very important: Never believe them,” Larry Kudlow, director of Trump's National Economic Council, said during an interview on “Fox & Friends.” “They're always wrong, especially with regard to tax cuts, which they never score properly.”

Trump reportedly watches “Fox & Friends” regularly and often reacts to the programming either on Twitter or with proposals for action.

Kudlow's remarks reflect a widespread belief in the Republican Party that the CBO has failed to adequately account for higher economic growth when estimating the tax law's effect on the deficit. The CBO said the tax law will cut government revenue by $1.8 trillion over the next 10 years, or by $1.3 trillion when factoring in potentially higher growth spurred by the law.

Kudlow, a longtime television commentator who was tapped last month to lead the economic council, said CBO's estimates of growth under the law should be much higher. He argued that the tax law will create far greater economic growth than most nonpartisan forecasters estimate.

Dude, chill, it's an empirical question. The tax law has been passed, I don't notice anything in my paycheck and we can find out just how much bigger the deficit is going to be when the time comes. 

My guess is that Larry Kudlow's distrust of the CBO won't have much effect on the mid-term election anyways. But wait, isn't Kudlow the guy who always gets it wrong? (that's his quote in the title)

This article at Vox summarizes everything that I've been trying to say at this blog for the past 10 years (and have been too apoplectic to say during the past year)

David Roberts:

President Donald Trump’s administration has been on a deregulatory bender, particularly when it comes to environmental regulations. As of January, the New York Times counted 67 environmental rules on the chopping block under Trump.

This is not one of Trump’s idiosyncrasies, though. His administration is more ham-handed and flagrant about it, but the antipathy it expresses toward federal regulation falls firmly within the GOP mainstream. Republicans have been complaining about “burdensome” and “job-killing” regulations for so long that their opposition to any particular health, safety, or environmental regulation is now just taken for granted.

For instance, why would the Environmental Protection Agency close a program investigating the effects of toxins on children’s health? Is there some evidence that the money is wasted or poorly spent? Why would the EPA allow more unregulated disposal of toxic coal ash? Don’t people in coal regions deserve clean air and water? Is there any reason to think coal ash is currently well-regulated?

These questions barely come up anymore. Republicans oppose regulations because they are regulations; it’s become reflexive, both for the party and for the media the covers them.

As it happens, though, we know something about the costs and benefits of federal regulations. In fact, Trump’s own administration, specifically the (nonpartisan, at least for now) White House Office of Management and Budget (OMB), just released its annual report on that very subject. (Hat tip to E&E.)

The report was released late on a Friday, with Congress out of session and multiple Trump scandals dominating the headlines. A cynical observer might conclude that the administration wanted the report to go unnoticed.

Why might that be? Well, in a nutshell, it shows that the GOP is wrong about regulations as a general matter and wrong about Obama’s regulations specifically. Those regulations had benefits far in excess of their costs, and they had no discernible effect on jobs or economic growth. ...

Keep reading here: https://www.vox.com/energy-and-environment/2018/3/6/17077330/trump-regulatory-agenda-omb

Here is the link to OMB's report: https://www.eenews.net/assets/2018/02/26/document_pm_01.pdf

How not to do statistics lesson of the day (courtesy of @DonaldJTrumpJr)

Test question*: Consider a class of 10 people taking a statistics test.  The scores of those 10 people are:

50%, 52%, 55%, 55%, 60%, 65%, 75%, 75%, 95%, 100%

A) What is the average test score?

B) What is the median test score?

C) How many people scored below the average?

D) How many people scored below the median?

Apparently, Donald Trump Jr.  would fail this test.

*Correct answers:

a) 68.2%

b) 60%<Median<65%

c) Six people are below average

d) 50% of the class is below the median (5 students).  That's the DEFINITION of a median.

That's how STATISTICS works.

 

If its what you say I love it especially later in the summer*

Yoram Bauman (via the Stand-up Economist email):

Just in time to help President Trump's advisors, I'm thrilled to report that the Cartoon Introduction to Economics is now available is Russian (ba-da-boom!) plus a dozen other languages. Cartoon Climate Change is becoming ever-more  important, and my co-author Grady Klein and I have finally finished a draft of Cartoon Calculus, so if you (or your students, etc.) want to provide feedback on the draft then email me and I'll send you more information (and maybe even a signed book when it's out next year :). Thank you!

*To quote one of President Trump's advisors.

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.  

 

Economists believe that the CBO makes credible forecasts

See for yourself: http://www.igmchicago.org/surveys/the-cbo. And here is the information on the survey and panel:

This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

And these economists understand the task. In contrast, politicians who don't understand the task put little credibility on CBO forecasts. I don't understand the dichotomy other than politicians are notoriously partisan and therefore prone to saying whatever and behaving however to accomplish their goals. 

Here is a screenshot:

"Trump administration tells EPA to cut climate page from website"

This has been a little unexpected:

U.S. President Donald Trump's administration has instructed the Environmental Protection Agency to remove the climate change page from its website, two agency employees told Reuters, the latest move by the newly minted leadership to erase ex-President Barack Obama's climate change initiatives.

The employees were notified by EPA officials on Tuesday that the administration had instructed EPA's communications team to remove the website's climate change page, which contains links to scientific global warming research, as well as detailed data on emissions. The page could go down as early as Wednesday, the sources said.

"If the website goes dark, years of work we have done on climate change will disappear," one of the EPA staffers told Reuters, who added some employees were scrambling to save some of the information housed on the website, or convince the Trump administration to preserve parts of it.

The sources asked not to be named because they were not authorized to speak to the media.

A Trump administration official did not immediately respond to a request for comment.

via mobile.reuters.com

I can understand a new administration choosing to change direction on environmental policy, but removing information and data seems to be bad government. I'm no expert on politics, but it is hard to imagine that choosing ignorance as official policy is in the long term interests of the Republican Party. 

The website is still available here: https://www.epa.gov/climatechange.

Economists [not] in the new administration

Justin Wolfers (Why most economists are so worried about Trump):

If the November election was intended as a rejection of elites, of expertise and of the sort of technocratic advice that economists often give, it’s a punch that has landed.

In somber analyses, huddled hallway conversations and pointed asides during endless panel sessions at the annual conference of economists last weekend in Chicago, the major theme was a sense of anxiety about the incoming Trump administration. This foreboding was evident in roughly equal measure among conservative and liberal economists. But it is in direct contrast with the feelings of small-business owners and Wall Street traders.

Most of my fellow economists remain convinced that university-trained economists can offer useful insight to the new administration. Few believe it will matter. The life force that animates the econ tribe — that what they’re doing matters — has been drained away.

Few see useful channels for influence. Partly this reflects President-elect Donald J. Trump’s legislative plans. On issues like restricting trade, directly intervening to assist specific industries or corporations, targeting tax cuts to the wealthy, his agenda stands as a rejection of the advice that mainstream economist have typically offered.

And partly this reflects Mr. Trump’s appointments. Few of his key economic advisers have any economics training, and the only official who identifies as an economist — Peter Navarro, who earned a Harvard Ph.D. in economics and will head up the newly formed National Trade Council — stands so far outside the mainstream that he endorses few of the key tenets of the profession.

Concern about the role of economic advice translated into concern about the economy. Over three days of intense discussions, I didn’t encounter a single economist who expressed optimism that Mr. Trump’s administration would be good for the economy. The optimists were those who thought Mr. Trump would not have the energy to actually implement his agenda; the pessimists’ thoughts veered toward disaster. ...

Count me among the pessimists and as one of those "economists [who] remain convinced that university-trained economists can offer useful insight to the new administration."

"VW agrees to $4.3B settlement in emissions scandal"

This is a lot of money:

Volkswagen has agreed to a $4.3 billion draft settlement to end a legal fight with federal regulators over its diesel emissions scandal. 

The company said it would pay the fine and also plead guilty to criminal misconduct as part of a criminal and civil settlement with regulators, Reuters reports. VW's board is meeting this week to approve the settlement deal.

According to the report, VW will now commit to spending more than the $19.2 billion it had previously earmarked to deal with legal issues arising from the scandal.

In 2015, federal officials revealed that Volkswagen was deliberately skirting emissions testing for some of its diesel vehicles. Regulators said VW had equipped up to 11 million vehicles with “defeat devices,” or software allowing the cars to emit more toxic chemicals than is allowed under federal law. 

The company has settled a handful of complaints against it related to the scandal, including a $14.7 billion deal covering owners of 2-liter diesel vehicles and environmental violations and a $1.2 billion deal with U.S. franchise dealers. The company is also planning to buy back 3-liter diesel vehicles that include the defeat device software. 

via thehill.com

Hopefully, this will increase the perceived probability of getting caught doing something illegal and reduce the criminal behavior. Of course, we can't hold everything else constant between then and now.