Sunday, August 31, 2008

Random fact for the day

Although information on the internet about her current whereabouts is ambiguous, Stalin's only daughter is apparently still alive and living somewhere in the United States or Britain.

Saturday, August 30, 2008

Why I disagree with Jim Manzi

This month the excellent Cato Unbound has a discussion about global warming, with Jim Manzi, Joseph Romm, Indur Goklany, and Michael Shellenberger and Ted Nordhaus. As we should expect from the publication, this issue is both informative and entertaining, but unfortunately it is deficient in one key respect: a lack of high-level economic discussion. Jim Manzi is the only panelist interested in a genuine economic analysis of global warming, and many of his points are left unrebutted.

I feel compelled, then, to offer a list of reasons why I think his analysis is gravely incomplete. It is by no means comprehensive, or fully reasoned; the exact extent to which the points below change the outcome of a cost-benefit analysis is unclear, and should be investigated further. Still, I am convinced that they point to conclusions radically different from those offered by Manzi.

1. Extreme uncertainty about the extent of climate change and feedback mechanisms

This is the argument championed by Harvard economist Martin Weitzman in a recent paper. Using a clever mathematical derivation, Weitzman shows that under reasonable assumptions, the expected cost (a term economists use for the probability-weighted average of costs in different scenarios) of a disaster may be infinite. This is because "fat-tail uncertainty" overwhelms the calculation: the likelihood of far-off disasters does not fall as rapidly as their damages increase.

Does this mean that the expected costs of global warming are actually "infinite"? Of course not. After all, with a planetary issue like climate change, there is a certain upper bound on the amount of damage that can occur -- perhaps the existence of human civilization, as we know it, on Earth. This bounds the calculation below infinity. Further, direct conclusions from Weitzman's "Dismal Theorem" are unwarranted, because in theory it can apply to any type of disaster, not only global warming. Needless to say, we cannot run around and declare all risks to be infinite. In his criticism of Weitzman's work, Manzi refers to it as a "Generalized Precautionary Principle," whose almost unlimited implications cannot be consistently applied.

In reality, Weitzman's mathematical argument is best viewed as a theoretically compelling illustration of the need to analyze the full range of climate change scenarios, especially those that appear most unlikely and speculative. The moral of the Dismal Theorem is that under extreme uncertainty, seemingly marginal possibilities may be dominant. We cannot pursue a narrow, superficially precise analysis and wave off the exclusion of low-likelihood disaster scenarios as the inevitable cost of rigor. Instead, an insistence on precision is likely to make our analysis completely wrong, by excluding the possibilities that make climate change grave in the first place.

And indeed, although they are difficult to quantify with only today's research, the risks of feedback-induced disaster scenarios appear to be quite serious. Recent exploration has found evidence of astonishing changes in planetary and regional tempatures in the past, including the discovery that during a sudden event called the Palaeocene-Eocene thermal maximum 55 million years ago, the North Pole was subtropical. How did this happen? Our best guess is that some climactic change (perhaps a jump in solar radiative forcing) triggered a runaway cycle where CO2 and other greenhouse gases were released in enormous quantities into the atmosphere. Since our sudden and unprecedentedly rapid emission of carbon represents a similar disturbance to Earth's thermal equilibrium, the possibility that history may repeat itself should loom heavy in our minds.

Using estimates of the geophysical feedback factor from a paper by geologists Margaret Torn and John Harte, and aggregating 22 probability distributions of climate change published in reputable scientific journals and cited by the IPCC, Weitzman arrives at a crude probability distribution, which gives a 5% probability of a more than 11.5 C increase in global mean temperature and a 1% probability of an overwhelming 22.6 C jump. Such estimates, far above those provided by the IPCC (which does not consider geophysical feedback), raise the possibility of almost unthinkable climactic devastation.

Manzi responds:
"You really don’t need all of the complicated mathematical formalism that follows in Weitzman’s paper if you accept his distribution of possible climate sensitivities. At a practical level, he’s saying that there is a reliably-quantified 1% chance that the average year-round temperature on Earth will be about 100 degrees Fahrenheit within the foreseeable future. This is about the average summer temperature in Death Valley, California. I think that any rational person who accepted this premise would support pretty aggressive measures to reduce carbon emissions without needing a lot of further analysis...

Weitzman characterizes his analysis of the PDF of climate sensitivity using the following terms: “back-of-envelope” (page 2), an “extraordinarily crude approximation” (page 2), “ballpark” (page 2), “extremely crude ballpark numerical estimates” (page 5), “simplistic” (page 5), “naively assume” (page 6), “simplistically aggregated” (page 6), “very approximately” (page 7), “some VERY rough idea” (page 7), “without further ado I am just going to assume for the purposes of this simplistic exercise” (page 8), “wildly-uncertain unbelievably crude ballpark estimates” ( page 8), “crude ballpark numbers” (page 9), and “overly simplistic story” (page 9). Weitzman is a well-known economist, so I assume he could pass peer review with a paper titled “My Shopping List”, but at a certain point you just have to ask whether one should be able to publish an estimate in an academic paper with these kinds of qualifications around it."
Anticipating this criticism, Weitzman writes:
"These small probabilities of what amounts to huge climate impacts occurring at some indefinite time in the remote future are wildly-uncertain unbelievably-crude ballpark estimates -- most definitely not based on hard science. But the subject matter of this paper concerns just such kind of situations and my overly simplistic example here does not depend at all on precise numbers or specifications. To the contrary, the major point of this paper is that such numbers and specifications must be imprecise and that this is a significant part of the climate-change economic-analysis problem, whose strong implications have thus far been ignored."
Do we need more thorough research along the same lines? Of course. But I still believe that Weitzman's crude, back-of-the-envelope calculation is superior to the estimates of other climate models, because it stresses the importance of the unlikely but cataclysmic possibilities that almost certainly dominate the risk profile of global warming. Given this, it is difficult to view William Nordhaus's estimates of the cost of climate change, which provide the starting point for Manzi's argument, as anything but an extreme lower bound for the true expected cost.

2. Questionably high discount rates

Nordhaus's analysis, along with many other analyses of climate change, uses a high "discount rate." Discount rates are a mainstay of economic analysis; if I am trying to tabulate costs over time, a rate of 5% means that I should literally discount a cost next year by 5%, a cost fifty years from now by 92.3%, and a cost one hundred years from now by 99.4%. It is easy to see why the choice of discount rate may have a big impact on the calculated costs from climate change! In fact, the Stern Review's unusual choice of discount rate was almost singlehandedly responsible for its urgent conclusions.

A famous equation in economics, the Ramsey equation, gives us a formula to calculate the "correct" discount rate. It is r = delta + eta*g.

The 'g' is the rate of per-capita economic growth, and the 'eta' is a mathematical parameter called the coefficient of relative risk aversion. In plain English, 'eta' represents how we compare different changes in income. If eta=1, we treat all percentage changes the same: a move from an income of $1000 to $1500 gives the same additional "utility" as a move from $100,000 to $150,000, even though the latter change is much larger in absolute terms. If eta is higher than 1, we are even more interested in increasing income when we are at lower levels: in this case, a change from $1000 to $1500 is better than a change from $100,000 to $150,000. Alternatively, if eta is lower than 1, we place less weight on income increases from low baselines, and if eta is 0, we only care about the absolute totals of wealth -- $5000 is just as useful to a person with $1,000,000 as it is to someone with $1000. (If you think this sounds ridiculous, you're right -- no one uses eta=0, or even close to it.)

Observing the revealed preferences of market participants, almost all economists think that a reasonable value for eta is at least 1, and many think that it is 2 or even a little higher. Why does this matter, and what does it have to do with economic growth? The idea is that as the economic output per person grows, we become richer, and a real loss of $X become less important to us. Using some math, we find that this is best incorporated into the discount rate by multiplying the growth rate, g, times eta.

What's the other term -- the delta? This is fuzzier, and somewhat more controversial. Delta is our "pure rate of time preference," the amount by which we judge our well-being today to be more important than our well-being in the future, solely because of the time difference. If you're thinking "why should we preference one period of time over the other at all?," you are mirroring a long line of critiques of the entire concept of pure time preference.

Of course, there are some theoretical reasons for a positive delta: Stern's report justified a rate of 0.1% using the possibility that humanity will go extinct for some reason other than global warming, and a more generic uncertainty about the future may warrant some time preference as well. But it is difficult to see how rates like 1%, which is used in Nordhaus's calculations, can be derived from a priori ethical considerations.

Instead, pure rates of time preference are justified by observing the market. Depending on the time frame we select for our statistics, the average return on equity in the United States is somewhere between 6 to 7 percent. Such a high return is extremely difficult to justify without some level of pure time preference.

But here we run headlong into the great conundrum of financial econometrics: the equity premium puzzle. The average real rate of return on a simple riskfree asset, the short-term treasury bond, is closer to 1%. To some extent, the gap between the return on equities and the return on risk-free bonds can be explained by compensation for risk, but most attempts at modeling this risk fail to show why we should have such a large premium for equity. A wild, confused set of economic conclusions thus arises. You can use the high return on equity, along with other market experiments, to conclude that there is indeed some implicit pure time preference in the market, and leave the low rate on riskfree assets as either a lingering curiosity or a deviation to be explained using another model. Alternatively, you can insist that riskfree assets provide a better approximation of the true discount rate, and that some hidden source of risk or uncertainty causes the market to demand such a high return on equities.

I think the second approach is more reasonable. If you're looking to use market evidence to determine the rate of pure time preference, interest rates on riskfree assets are the obvious place to start. It is inconsistent to claim a high-minded desire for an empirically derived discount rate, and then turn around and ignore the natural implication of the gap between equity and riskfree returns, which is that the true return on equity isn't 6 or 7 percent, and the market is pricing in catastrophic risk that financial economists have difficulty including in their models.

It is also worth stressing just how absurd the implications of pure time preference are. One classic objection to pure time discounting asks how a person today would feel to know that upon turning 21, he will die of cancer, because Cleopatra made a welfare-optimizing decision to have an extra helping of dessert. Yet if anything, the actual results of pure time discounting are even more dramatic. Nordhaus's 1% rate means that society 6000 years ago would be valued 154,000,000,000,000,000,000,000,000 times more than society today. Under this cost-benefit analysis, if a caveman in 4000 BC choose between scratching a fly off his back and saving the planet from destruction six millenia hence, the best decision for social welfare would be clear: get rid of the fly!

But this kind of analysis is critical to Nordhaus's -- and, by extension, Manzi's -- conclusions. After one century, 1% pure time discounting causes an 2.7-fold drop in the estimated present value of costs. (In other words, kids born in 2100 are already three times less important than kids born in 2000.) After two centuries, the costs of global warming are deflated by a factor of 7.5. Putting aside all the other problems with Nordhaus's work, simply axing the pure time preference in his model would transform it into a much stronger tract demanding action against CO2 emissions.

3. Uneven impact of climate change across nations

Like most economic modelers of climate change, Nordhaus and Manzi use aggregate world production as the only input in their welfare function. On its face, this appears a little absurd -- do they really think that the worldwide sum of material wealth is all that matters? Yet cost-benefit analysis over many centuries is a complicated endeavor, and to get tangible results we'll inevitably need to make some strong simplifications. The key is to pick simplifications that are least likely to skew the analysis in a particular direction.

Needless to say, this particular assumption is not so neutral, as a simple example demonstrates. Consider a hypothetical world where half the inhabitants make $40,000 and half the inhabitants make $1000. Now say that global warming causes an equally distributed 10% drop in income worldwide. With a risk aversion coefficient of 1.85, used by Nordhaus in his other calculations, it turns out that the magnitude of the utility drop hinges crucially on whether we aggregate wealth worldwide or consider different individuals separately. I won't bore you with the calculations, but the damage is almost 7 times higher when we cast off the "aggregate wealth" simplification.

Admittedly, the world income distribution isn't quite as unequal as the one in my example, which inflates the "7" figure. But the "proportional damage" part of my example is also a simplification, and it works in the other direction. Most evidence indicates that the damage from climate change will not be evenly distributed among the economies of the globe, but will instead fall disproportionately upon poor regions like Africa and the Indian subcontinent. Although these issues are too complicated for me to pinpoint the exact level of downward bias caused by the practice of using aggregate world GDP, I hope it is clear that the effects may be quite large.

When considering the implications of the three concerns I have raised, one question is particularly important to keep in mind. What happens if the concerns are simultaneously valid -- if the Nordhaus/Manzi damage estimates are biased down by more than one of the weaknesses I mention? To a first approximation, they multiply. This means that if the failure to analyze extreme uncertainty, the high discount rates, and the crude worldwide aggregation of damages present in Nordhaus's model each lower the optimum carbon tax by a factor of two, a better estimate would have a starting carbon tax approximately eight times as high. Since Nordhaus's "optimal policy ramp" starts with a tax of $7.40 per ton of carbon dioxide, such a recalculation would bring us to almost $60 per ton, which is close to what many carbon tax advocates suggest. More interestingly, if each of the above failures causes a miscalculation by a factor of three, the total estimate may be off by twenty-seven. This brings us to a very high carbon tax of $200.

Granted, the situation is not quite so simple, and crude multiplication does not account for the complicated ways in which changes in all parts of the model may interact with each other. But it does provide a good mental estimate, and most of all it illustrates how reasonable modifications to the Nordhaus/Manzi analytical regime drastically change the urgency of its recommendations.

Friday, August 29, 2008

Pricing life

Helen Rittelmeyer of the excellent Cigarette Smoking Blog is upset with my last post:
I have developed a lengthy repertoire of thought experiments over the years (ask me the one about hiring a private eye to spy on your girlfriend*), and I am sad to see two of my favorites violated in one day.

First, Matt Rognlie:

"Say that an all-powerful being walks up and offers you a trade. You have two options: you can either (1) permanently satisfy the basic needs of everyone on the planet or (2) save one life. Which do you choose? Obviously (1)."

No, not (1), or at least not obviously. The whole point of Darkness at Noon, reviewed by Christopher this very day, is that "twice two are not four when the mathematical units are human beings."

He's right to say that, at some level, we have to put a price on human life, but he's picked the wrong thought experiment. The one you wanted, Matt, is the artificial heart that costs a hundred billion dollars to make. Comes in handy when talking about health care.
I don't think I understand the objection, especially in light of the artificial heart example. In both instances, we are trading off one life saved for a large amount of money. The sums are different, of course, but I don't think that's the cause of any fundamental disagreement. Both sums remain overwhelmingly large, and the tradeoff is exactly the same.

The only difference I can see is that in my example, we are being given money for refusing to save a life, while in Helen's example we decline to spend money we already have. But I don't think this is a significant difference at all; it is merely a question of how much money we start with, and is logically separable from the question of whether to make the trade. Consider the following example:
A disease afflicts all 6.6 billion people in the world with precisely the same frequency, and kills (on average) one person daily, with everyone having exactly the same chance of dying on any given day. Scientists discover a compound in the Earth's crust that if released into the atmosphere can stop the disease for a day, will cost $100 billion to extract for a day's use, and when applied is likely to save one life. At the same time, the world is magically granted an additional $100 billion in purchasing power. The world's governments must decide whether or not to implement the life-saving measure.
I made the example a little cleaner, by stressing the randomness of the life saved (to avoid complaints about the immorality of picking who not to save) and also switching to Helen's dollar figure. But in every other respect, this experiment is identical to the one I proposed in my earlier post. It is exactly as if a genie descended upon Earth and offered a choice between $100 billion and saving a life.

I think it's clearer here, however, that the superficial difference between my example and Helen's example -- the question of whether the money is given or spent -- is irrelevant to the moral question at hand, and is really just a matter of the initial level of wealth available. Yes, the declining marginal utility of wealth means that the initial level of wealth does matter in making spending decisions, but on a worldwide basis $100 billion is hardly enough to revolutionize the tradeoff between lives and cash. And frankly, I do think that it's "obvious" that we should take the cash instead of the extra life. For one, given our current mix of health policies, we could easily save many more lives with the extra purchasing power. I'm not a utilitarian caricature who believes that whenever X>Y, saving X lives is better than saving Y, no matter which lives are saved, but I do think that saving tens of thousands of lives is almost certainly better than saving one, especially when the "one" in question is random.

Note that the setting of Darkness at Noon, Stalin's Russia, raises different issues. Stalin didn't merely decline to save his citizens' lives in exchange for some economic reward; he also actively killed them in his quixotic pursuit of stable governance and industrial growth. The implicit moral dilemma here points to other thought experiments, which in my view are actually more interesting and controversial than the one I provided. For instance:
Again, $100 billion is magically added to the Earth's purchasing power, and you are a powerful decision-maker with control over these resources. A genie demands that he allowed to kill one person (who he credibly assures you will be selected from Earth's population of 6.6 billion with a perfect random number generator), and declares that otherwise he will take the $100 billion away. He will kill this person so that the death appears to be a result of natural causes.
The tradeoff here is the same as in my example above: again, you are choosing between $100 billion and one life. The only difference here is that the decision is whether to kill rather than whether to save, and it's not clear that this is really a difference at all. After all, in highly stylized thought experiments, declining to save a life is effectively the same as allowing a random murder, particularly when the "murder" appears to be a natural death (and thus doesn't cause any of the heightened grief or social fear that accompanies a killing).

Indeed, if I were in this decision-making position, I would instruct the genie to go ahead with the murder. Does this mean that I think that killing civilians in the service of some social good is okay, and that Stalin's murderous campaign in Soviet Russia could be justified in theory (if not in its actual impact)? Not really. Stalin's Russia, and other authoritarian regimes that placed human life below the "collective good," demonstrate that no actual person or institution can be allowed to enforce such moral judgments, even if in principle the violent sacrifice of some people for the general benefit of others could be justified. Inevitably the power to use violence in the service of social good will be abused, leading to a totalitarian nightmare that leaves us unambiguously worse off.

To sum up: murder to increase the general wealth is wrong not because there is any compelling first-order moral principle against it, but because in the real world of institutional design, granting a person or group of people the right to use murder is inescapably a prescription for tyranny.

Monday, August 25, 2008

Everything has its price

We all know the old saw: you can't put a price on human life. Like so much conventional wisdom, it is nonsense.

Say that an all-powerful being walks up and offers you a trade. You have two options: you can either (1) permanently satisfy the basic needs of everyone on the planet or (2) save one life. Which do you choose? Obviously (1). Yet, contrary to the old adage, your decision effectively puts a price on life. It's an extraordinarily high price, involving wealth that may outstrip the current production of our planet, but it's a price nevertheless. Although I have no idea what the equivalent price in dollars would be (it depends on how you define "basic needs," for one), $1 quadrillion is probably a decent estimate.

Now the being offers you a different trade. You can either (1) pay one dollar or (2) save one life. Here the moral imperative is equally clear: you should save a life. One dollar can't even buy a 20-ounce bottle of Coke at the new vending machines near my room; certainly it's a bargain for saving anything as precious as a human life.

But note that these two opposing answers imply an inevitable conclusion. Somewhere between $1 and $1 quadrillion, you will no longer be willing to spend the money. This is the price you place on human life.

Admittedly, I'm a little ambiguous about what a "human life" is. There is a world of difference between saving a healthy 10 year-old child and extending the life of a comatose 120 year-old by a day or two. But even if you place different levels of importance on preserving different lives, this thought experiment is still valid for any individual life. For that 10 year-old child, you'll be willing to pay $1 but not $1 quadrillion; again, somewhere in between, your decision-making will implicitly set a price on life.

Just a theoretical curiosity? Not at all. By refusing to acknowledge that some price on life is inevitable, we use inconsistent values in policymaking and thus cause unnecessary deaths. If we neglect to pursue a $2 million per life venture while doggedly maintaining a program that costs $10 million per life, we are wasting money that could have been used to save more people. Professor John Graham -- now working with Bush's OMB -- refers to this practice as "statistical murder." While I do not agree with all Graham's work, I cannot imagine a more appropriate term.

Meanwhile, this lesson is only a reflection of a broader, critical principle: all tradeoffs are quantitative. If having better X makes Y worse, any rigorous analysis of the proper balance between X and Y must rest, at some level, on a numerical comparison. After all, if you can get a massive improvement in X for a slight decline in Y, you are likely to opt for X; if the situation is reversed, you'll choose Y. Again, somewhere in between, there is a balance at which you're indifferent between improving X and Y. To find this balance, you must combine your best estimate of the tradeoff between X and Y with your preferences about the relative merits of X and Y. This will involve a comparison between two magnitudes; the only question is whether it is fuzzy or explicit.

Now, am I saying that there is a clear, mathematical way of resolving all policy disputes? Of course not. We will still place different values on different objectives. While I'd probably say that freedom and material prosperity are the most important policy goals, an Islamic fundamentalist might claim that widespread reverence of the Qur'an is vastly more important than anything else. Math cannot resolve our disagreement. It provides the best way to make decisions about policy after our objectives are set.

Sunday, August 24, 2008

Please, please stop listening to EPI

I've never thought of the Economy Policy Institute as a useful policy shop. If you read Paul Krugman's hilarious 90s-era books, especially Peddling Prosperity and Pop Internationalism, you'll see how the cast of characters that founded EPI -- Robert Kuttner, Robert Reich, Lester Thurow, Jeff Faux, and a few others -- has engaged in first-rate policy hackery for some time. But it's still hard to believe that EPI is putting out work this obnoxious: The China trade toll: widespread wage suppression, 2 million jobs lost in the US.

First of all, whenever anyone pretending to offer serious economic commentary presents numbers about how many jobs have been "created" or "lost" by trade, you should run away. The overall level of employment is set by large-scale macroeconomic forces, like the business cycle and the corresponding monetary policy, that are essentially unrelated to changes in trade barriers. Meanwhile, author Robert Scott's methodology is laughably crude:
The impact of changes in trade on employment is estimated here by calculating the labor content of changes in the trade balance—the difference between exports and imports. Each $1 billion in computer exports to China from the United States supports American jobs. However, each $1 billion in computer imports from China displaces the American workers who would have been employed making them in the United States. On balance, the net employment effect of trade flows depends on the growth in the trade deficit, not just exports.
Scott's work is glorified division: he takes US trade deficit with China and tallies the number of workers it supposedly displaces. Of course, translating the trade deficit into a "jobs lost" total makes two implicit assumptions, both ludicrous:
  1. The entire value of products currently imported from China would be made by American workers, if not for trade with China.
  2. The jobs resulting from this labor would not merely displace other jobs and restructure the economy, but actually add to aggregate employment.
He proceeds to claim a decline in wages, based on the same astonishingly shoddy methodology:
One of the most important findings in this study is that, for trade with China, average wages in exporting industries, at $839.32 per week, were lower than in import-competing industries, where they were $877.76 per week—a 4.4% premium.
Never mind that since trade is global, fixating on the bilateral flow with China is meaningless. Never mind that trade leads to efficiency gains, often manifesting themselves in lower consumer prices, that can swamp whatever reallocation away from wages that Scott claims is taking place. And never mind that it is unclear what constructive policy message Robert Scott wants to convey, other than "trade with China is bad."

(Does he advocate a shift to autarky in the US? A dramatic revaluation of the yuan? "Labor standards" for imported goods, whose "success" at reducing imports inevitably must come at the expense of the poorest Chinese workers, who are desperate to shift from dire poverty in subsistence agriculture to lighter poverty in labor-intensive manufacturing?)

If the New York Times publicized work this bad, Dean Baker would get an aneurysm. Luckily, this is from his very own EPI...

Saturday, August 23, 2008

Is GDP everything? Of course not.

In David Leonhardt's NYT piece on Obama's economic philosophy, Obama favorably cites Bobby Kennedy's famous speech criticizing GDP:
“Two things,” he said, as we were standing outside the first-class bathroom. “One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?”

I didn’t, I said.

“Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,” Obama said.

In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, “counts special locks for our doors and the jails for those who break them” but not “the health of our children, the quality of their education or the joy of their play.”
This line of attack has always annoyed me. It's not that I think that GDP actually is all-important -- of course it isn't. Rather, I'm upset that this is viewed as a legitimate criticism of mainstream economics, when in reality I can't think of any actual economists who view GDP as the sole indicator of national welfare. There is nothing in the theory of neoclassical economics that suggests that we should place any special emphasis on GDP maximization. We use economic output as a rough but functional measure of a nation's economic capacity -- nothing more, nothing less.

If anything, economists are less likely to fixate on GDP, and the abstract "economy" more broadly, than politicians are. Consider alternative energy. I agree with Barack Obama that the world needs to shift its energy mix away from carbon-intensive fossil fuels, but he takes the case a step further and makes claims about "green jobs" and general economic benefit. Using GDP as a metric, he may be right: although the issue is far from clear, the higher costs of alternative energy may induce workers to put in a little more labor to achieve the same effective purchasing power (this is known as an "income effect"), causing an overall increase in GDP. Similarly, if cruel dictator Matt Rognlie forces every resident of the United States to send him $100,000 to support his personal army, the economy of the US will also improve, because Americans will work harder to recover their previous lifestyles, while the army funded by confiscated income will add to aggregate GDP. Indeed, if the US government blows trillions of dollars on poorly justified Mideastern adventures, its poor judgment may still benefit the "economy," as measured by GDP. (Here things are a little more complicated, because the government uses income taxes to fund its operations, and taxing labor makes people less willing to work. We thus have an GDP-increasing "income effect" -- people are poorer when their money is spent on military conquest, and work harder to compensate -- competing with a GDP-decreasing "substitution effect," where erstwhile laborers substitute leisure for work when the returns to work go down.)

But, of course, GDP isn't really important; what matters is its utility to actual people. Cleaner energy is a good idea because the potential damages from climate change outweigh the benefits of cheap energy today -- end of story. Abstract debate about whether it helps or hurts "the economy" is meaningless. Yet vague ideas about the size of the economy, which intuitively rest on the idea of aggregate production or GDP, continue to dominate political decision-making. Economists, despite their reputation as dour adding machines, are actually far ahead of politicians in their understanding of what's important in economic policy.

Did that actually just happen?

I just received the big text message from Obama... at 3:30 in the morning. Apparently the campaign decided that with all major news organizations blaring the news about Biden, they needed to pull the trigger and preserve the "first to know" promise.

But... aren't most people asleep at 3:30 in the morning? Sure, I'm awake, but my understanding is that this is because I'm some kind of eccentric night-dweller. Waking up thousands of supporters with a bizarrely-timed announcement message (a consequence of the arguably inevitable failure to keep a lid on the secret) isn't an ideal way to begin the convention season.

(And yes, I have more substantive posts planned for the near future -- I promise!)

Friday, August 22, 2008

I lose

We haven't yet received the text message of doom, but it appears very likely that Biden will be Obama's VP pick. I don't have complete confidence in the online prediction markets -- they're so illiquid that I see arbitrage opportunities every time I log in -- but Biden at 80 is a strong sign, and Marc Ambinder's scoop about the charter from Chicago to New Castle certainly raises eyebrows.

Let's just say this: I'm not happy. Joe Biden is a dimwitted, bloviating hack, and a VP pick that pushes him into a position of greater political power and responsibility can only damage our government. I'm a little comforted by the fact that after an eight-year Obama presidency, Biden will be 74 at the start of the next term -- making it a little less likely that he'll be a contender -- but the notion that he's only a heartbeat away from the highest elected office in the land still grates.

The veepstakes

By all accounts, Obama's vice presidential choice is just an hour or two away. Like any good political junkie, I twitch and quiver at every text message I receive, ready to hear the news at any moment.

And as the anticipation builds, I'm becoming ever more disillusioned: does the Democratic Party really have so little talent? To me, the four most popular choices lie on a spectrum from mediocre to downright repulsive.

Bayh is an empty suit whose sole credential was a famous father. Sibelius, also a prominent beneficiary of political nepotism, bungled her moment on the national stage by delivering the worst State of the Union response I have ever seen. Biden is an aggressive but fundamentally vapid showman, prone to spouting idiocy in response to basic policy critiques. And Kaine... well, I don't have any deep resentment of Kaine, but that's probably because he's too new and unexciting to make me notice at all.

Believe it or not, I hope that Obama picks Clinton. Not because I'm fond of her, but rather because the past week of speculation has made me realize how deeply awful the other choices are.

(Jack Reed and Wesley Clark wouldn't be awful either... but for whatever reason, their names haven't received as much attention.)