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May 2019 posts

Nordhaus on Climate Change

By Jonathan B. Wight  

The latest AER has William Nordhaus’ Nobel Prize address from last fall, “Climate Change: The Ultimate Challenge for Economics.”  

Proponents of markets point out their power to solve problems, but negative externalities are a huge elephant mucking about in the house of economics. 

There are lots of ethical approaches, including non-consequentialist ones, that address negative externalities.  Duty and virtue ethics are strong voices for self-control, moderation, and justice with regard to carbon emissions that may cause harm to others and the planet.

The normative approach in economics, using the concept of efficiency, is clearly violated when there are spillovers, and, to bring Coase into the conversation, when it is difficult to ascribe property rights and/or it is expensive to get information and protect property rights.

Nordhaus starts his essay thus:

“The award this year …. involves the spillovers or externalities of economic growth, focusing on the economics of technological change and the modeling of climate-change economics. These topics might at first view seem to live in separate universes. The truth is that they are manifestations of the same fundamental phenomenon, which is a global externality or global public good. Both involve science and technology, and both involve the inability of private markets to provide an efficient allocation of resources. They also draw on the fields mentioned above as integral parts of the theoretical apparatus needed to integrate economics, risk, technology, and climate change.

“The two topics not only share a common intellectual heritage, but also are both of fundamental importance. Technological change raised humans out of Stone Age living standards. Climate change threatens, in the most extreme scenarios, to return us economically whence we came. Humans clearly have succeeded in harnessing new technologies. But humans are clearly failing, so far, to address climate change.”

It is strange to be living at a time in history when things appear to be going backwards. The advances made to human cooperation after World War II – which include the world trading system, GATT, the European Union for solidarity that prevents another war on the continent, and the elevation and respect for science, and the coalition to solve climate change—all these appear to be in jeopardy.

Of course, there are good things that come when old traditions are broken up, but chaos is not pretty, and usually results in making things worse, certainly in the short run.

Sicily’s Bridges

By Jonathan B. Wight

Everyone knows about China’s famous bridge building campaign, resulting is some of the world’s most amazing architectural feats.  These are exploits of pride, as well as engines of development, and in some cases, sources of political power and control.

But who has heard of Sicily’s new infrastructure?

Sicily, going back to the Greeks, has traditionally emphasized its ports. Inland travel has often been slow and difficult, making economic development—and commercial, political, and social integration—more difficult.  No surprise that the people from Palermo don’t see eye to eye with the people from Catania, and so on.  There may have been a Kingdom of Sicily, but each of the nine provinces has its own history and story. 

Enter the EU, and its subsidies for poorer regions like Sicily.  The island has been at the teat quite a bit, according to published reports. Our cab driver from Catania to Siracusa also observed that there was a giant tunnel on our route, paid for with EU funds, when there were no mountains or other obstacles to get around or under!  It was pure waste, enriching insiders with construction and architectural contracts.

Driving across the middle section of the country this week, we encountered a number of stunning bridges that must have cost a fortune (see photo).  These were soaring over valleys, seemingly hundreds of feet in the air. Bridge.

Without the bridges, cars would go the old-fashioned way, winding in switchbacks over hills, at much slower speeds.  Yet the destinations of these roads did not seem to warrant the extravagance.  The one pictured here was on a provincial road (SP138) to Petralia Sottana (pop. 2,766), Petralia Soprana (pop. 3,200), and other similar tiny places. 

The biggest boondoggle potential infrastructure project is the canceled Strait of Messina Bridge, that would have connected the island to the toe of the mainland’s boot.  At a projected cost of over 6 billion euros (there would surely be overruns), the structure would be the longest suspension bridge in the world, at about 2 miles.  

But critics point out that the supply chain advantages of the bridge are slight, particularly because infrastructure on either side of the proposed structure are also lacking!  This would be a bridge to nowhere.

Sicily’s development may benefit from well-planned infrastructure projects, but the potential for corruption and abuse seem pretty high: the wrong things, built in the wrong places, may be the result, leading to more cynicism and fatalism.


Viva! St. Lucia (Saint Lucy)

By Jonathan B. Wight

Legend has it that Saint Lucia (283-304 AD) of Siracusa (Syracuse, Sicily) was born into a wealthy family, and vowed to save her virginity for God.  However, after her father died, her mother betrothed her to the son of a pagan family.  Lucia opposed the marriage, and after the mother’s miraculous healing from a bleeding disorder, the mother agreed to Lucia’s plan to give away her dowry to the poor.

The angered suitor reported her to Roman authorities, who arrested her for being a Christian revolutionary.  Lucia, barely 20 years old, resisted being thrown into a brothel and was murdered with a dagger in her throat (see  photo).Santa lucia

So much for cheeky women!  Yesterday, St. Lucia was celebrated in Siracusa, Italy, but perhaps not for her generous spirit to the poor, or her defiance of male authority. 

People were seeking something to believe in, wanting there to be a blessed life, a miraculous cure for blindness, pain, and suffering. Children were raised up to touch the hem of her robe, as if it would impart an elixir of protection. The crowd shouted “Viva Santa Lucia!” as doves were released into the sky.

20190505_135918What would St. Lucia think of all this?  Perhaps she would wonder if her magnificent silver statue should be melted down and used to feed the homeless?

Sicily, which in olden times was a rich kingdom compared to the then-impoverished northern Italy, is today one of Italy’s poorest regions, with high employment and underemployment. Yet Jesus, when Mary anointed him with the ridiculously expensive perfume of pure nard—trekked in caravans from Nepal 3,700 miles away from Jerusalem, and costing a year’s wages!—admonished his followers that “You always have the poor with you, but you do not always have me” (John 12:1-11 NRSV).  It was okay to venerate and celebrate the divine.

Yet it is not clear to me how this veneration, joyous and moving as it was yesterday, fulfills the Second Commandment to “not make for yourself any idol, nor bow down to it or worship it.”  A graven image is “a carved idol or representation of a god used as an object of worship,” and clearly that is what Lucia’s statue is—and many others like in Christian shrines and churches. 

As much as we claim to be denizens of the 21st century, we long for the early human connection to the belief in potent magic. Perhaps that’s not a bad thing, given the documented power of placebos to cure a multitude of maladies, and the role of belief and faith generally in the successful conduct of human affairs.

In that spirit, Viva Santa. Lucia!

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[As an aside, the beautiful Italian song, “Santa Lucia,” has nothing to do with the saint, only with a so-named sailboat in the Naples harbor.]

Diverse Subjects for Sunday

By Jonathan B. Wight

Here are some interesting ethics and economics stories:

The Myth of Testosterone

Should a woman athlete’s normal production of testosterone be held against her?  Should she be forced to take unneeded (and potentially damaging) drugs in order to compete with other women with lower levels of testosterone? 

The Court of Arbitration for Sport ruled that Olympic champion runner Caster Semenya cannot compete because her natural level of testosterone is too high.  This is crazy.  Athletes are special for a host of reasons. Singling out Semenya’s natural baseline level of testosterone as a bar to competition is appalling.  It is akin to barring basketball players over 6’6” from competing because they’ve had too much growth hormone. 

The Raisin Situation

Collusion, price-setting, and market rigging, enforced by physical threats—it’s not your textbook free market example.  The raisin growers and processers in California are a tight knit cultural group, except when they’re at each other’s throats, as indicated in this story. The same could be said, I’m sure, about many fishing markets and other markets. 

It’s a shame economics students don’t learn from case studies like these what many markets are actually like.  My father-in-law, who worked for several big name international corporations, always made fun of the theoretical economic view of how markets work, compared with the bared-knuckle fighting and dirty tricks that were the norm of his world.

One reason economics teachers shy away from case studies is that it is harder to induce grand theories from the heterogeneous evidence.  Each case is unique, and knowing the history, culture, and individual idiosyncrasies is necessary to understanding the functioning of that market.

But shouldn’t students be aware that this is the case, rather than believing that every market works the same way, driven by MC=MR behavior, and without any additional knowledge or insider insights needed? 

How Trump Co-opts Leaders Like Bill Barr

How does an amoral leader co-opt and gain acceptance from moral followers around him or her?  This is a chilling piece by James Comey, suggesting the psychological and spiritual road to hell, which arises from silence in the midst of lies, lies, and lies.  It corrodes the will and the soul. History will not look kindly on those who maintain the silence. 

This story has legs beyond the narrow politics of the times.  How many corporate leaders likewise step over the ethical edge, leading collaborators along the same path?  According to Business Insider, twenty percent of CEO’s are psychopaths, as measured by inability to empathize with those they have hurt, insincerity, and superficiality. The fact that so many of these people are successful enough to reach the top means that they have collaborators who have kept silent for personal gain, or because, as Comey suggests, they are psychologically co-opted.

We Dodged Two Bullets

By Jonathan B. Wight

Thank goodness, Herman Cain and Stephen Moore have withdrawn their names from consideration for appointment to the Federal Reserve Board.  Neither appears to know a lick about monetary policy. 

Honest and smart people can learn fast, but neither of these two appears to be interested in learning anything that would go against pre-conceived beliefs.  In Moore’s case, he does not appear to have beliefs, and flip-flops his views wildly depending on who sits in the White House. 

  • Moore wanted to raise interest rates in 2009 when unemployment was 10 percent, and wants to lower them now that the economy is at or below full employment. That is goofy, and only makes sense if Moore is a political drudge, not a serious macroeconomist.

Moore’s claim that a monetary rule can work better than monetary discretion may have some intellectual standing, however, going back to the gold standard or Milton Friedman’s monetarism.  (I had an excellent monetarist teacher in college, Tom Havrilesky, who was a devoted fan in the mid-1970s during the heightened inflation era.)

Friedman’s claim, which he maintained until the early 1980s, is that money demand is a stable function of a small number of variables Capturethat can be predicted, and hence that the rate of spending of money (velocity) can also be relied on to grow at a fairly constant rate.  The chart here shows this reliable and steady growth in M1 velocity from 1960 through 1980.  Who could blame Friedman for thinking he’d found an elixir? 

All one needed to do, in this scenario, is increase the money supply by a constant rate that would account for the steady growth in velocity, the steady growth of real GDP, and the desired rate of inflation.  (See a numerical example at bottom.)

But what happened after that is legendary.  Suddenly in the early 1980s the economy tanked (when the Fed raised rates to fight inflation).  People began increasing their holdings of money for precautionary reasons.  The demand for money soared and velocity fell.  The following decades (see second chart) Capture2have made it clear that no one can predict in advance why or when people will hold money and when they will spend it.  Hence, no monetary rule works very well, and thus perhaps we do need real people to use their experience and their discretion to guide monetary policy.

Of course, the situation is far more complex than outlined above.  M1 is probably not the right money measure to use, and there are other potential rules not covered above.  But the general principle remains the same, that someone has to mind the store.  We don’t have self-driving cars (yet), nor do we (yet) have a self-driving monetary policy through gold or rules.

Does this mean that those guiding the Fed will make mistakes?  Of course.  Those mistakes have to be weighed and compared against the disasters that would likely occur with a rule. 

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The notion that Moore is off base is backed up by examining the letter signed by 100 economists in support of Moore.  Of the group, 24 are retired.  Of the remaining active economists, none are

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