Paul Ryan's Opinions on Poverty are Irrelevant

From Wikipedia:

At an Atlas Society meeting celebrating Ayn Rand's life in 2005, Ryan said that "The reason I got involved in public service, by and large, if I had to credit one thinker, one person, it would be Ayn Rand", and "I grew up reading Ayn Rand and it taught me quite a bit about who I am and what my value systems are, and what my beliefs are. It’s inspired me so much that it’s required reading in my office for all my interns and my staff."

Taxing consumption is still wrong

Ugh.

Very stupid column courtesy of John Tamny at Forbes a few weeks ago lauding Eduardo Saverin (of Facebook fame) for renouncing his US citizenship so he won't have to pay capital gains taxes, or "feed the beast" according to this prick author.

Tamny says Saverin is an American hero.  He thinks US spending is wasteful, and that it would be so much better if Savern could just keep all his money and invest it in a bigger job-creation machine. This is the same libertarian, "free market" nonsense that's failed time and time again. Maybe the abolition of capital gains taxes would increase entrepreneurial investment, but it wouldn't be invested in sectors that are necessary to social welfare, e.g. education, healthcare, and defense.  Instead, we'd perfect the iPod and have holographic TVs, maybe even develop some new medical equipment (most investment has been in the technology sector lately), but everyone would be too poor to use it except the investors.

Then he says we should switch to a consumption tax.

Well, I've talked about this before. Here's the graph I made:

Consumption taxes aren't fair. They don't even make economic sense. Get it? 

Austerity Foolishness

There's an important point that Paul Krugman's been making lately, that a lot of people don't seem to get.

If everyone slashes spending at the same time, it's a problem.  Similarly, if the private sector implements its own "austerity" measures because it feels like it's racked up too much debt, and the government concomitantly does the same thing, there's going to be a surplus of available human capital (too many workers who can't find jobs) and a lot of money that's invested sub-optimally.  What that means is that a big spender (i.e. the government) needs to give the economy the push it needs. That's the only way markets are going to be able to recover.

Having a car to get from place A to place B may be necessary, but it's obviously not sufficient.  You also have to have gas, you need a driver, and you need someone willing to turn the key. Same logic.

Of course, there's an important relationship between economic downturns and the environment (there's an excellent paper by Stern and Bowen on this). Basically, environmental initiatives need a big player (again, the government) to get them rolling, and since economic depressions demand government spending, there's a huge opportunity during a depression (cough *now* cough) to make some substantial green investments.

Also, if anyone says Solandrya to me, I'll slap a...

A Few Thoughts on the Impulse to Cheat

Cheating is a serious offense in any walk of life, but nowhere is it more disgusting than in Academia.

Surely, there are two competing emotions that a cheater's decision must entail, one that necessitates it and one that allows it.  The first, and most obvious, is a rightful sense of inferiority, especially compared with his peers. I use the word "necessitates" because, if the cheater really feels like he's less intellectually able than his classmates or his colleagues, then nothing he can do on the same playing field would be good enough to surpass them.  So he decides to play on a different field to gain an unfair advantage.

Paradoxically, the second is a false sense of superiority.  The cheater feels entitled to special conditions, especially relative to his peers, who may have come from more affluent, supportive families or who may have gone to better high schools and colleges.  The cheater feels as though he's had to overcome some obstacle that his colleagues didn't have to face, and thus deserves the advantage he has unfairly bestowed upon himself.  This feeling of entitlement is what allows cheating to happen because it gives the cheater the perverse justification he needs to feel less guilty, if he feels guilty at all.

Both of these are dangerous, but the second has much more disconcerting implications for society.  The cheater will likely move up social and academic ladders, unobstructed, unless he is caught (or reported, of course). If he's cheated his way to the top, he will have lost any pride in his work.  An academic, for example, might be willing to sell his name - his "scientific results" - to the highest bidder.  A policymaker who is comfortable with cheating will be a weapon of lobbyists, most likely against his constituents.

But here's an important consideration for those who are tempted to cheat:  if you do, those who have maintained their integrity will feel slighted - dare I say cheated? - and will indubitably bear a grudge against you, especially in tight professional circles or narrow academic fields.

I think far too highly of myself to cheat, and while this may sometimes make me look like a prick (only to those who don't know me, I hope), it keeps me in line because I am proud of my work.  When I get a bad grade, I know I deserve it, but more importantly, when I get a good grade, I am able to feel genuinely happy. I'm sure it was someone very inspirational who said that integrity is what you do when no one's watching.  I would just add that it's also what you do when people are staring straight at you.

Good luck on exams!

HM Green Investment Bank?

Watching the Queen's Speech this morning on the news was uneventful. It's written by "her government" (i.e. the conservative coalition), and she's not allowed to say anything that they don't approve beforehand.

HM Queen Elizabeth II of the Very Serious People (source)

The beginning of the speech was annoyingly predictable.  She affirmed that her government is committed to austerity-driven deficit reduction, which has worked swimmingly already. One member of the House of Commons who refused to go to the speech rightly pointed out that the UK has just entered into a double dip recession.

But I'll leave that discussion to the blogosphere's dark wizards macroeconomists. What really piqued my interest was the Queen's announcement that her government will be forming a Green Investment Bank.

It's likely that an emissions trading scheme, maybe even an international market, would be at the core of a Green Investment Bank (I'll refer to this as GIB for the rest of this post). An ETS would generate capital gains that, in an ideal world, the GIB would funnel toward "low-carbon growth" in developing countries, which might include infrastructure modernization and R&D spending. An explanation of how this might work is presented here. I've sort of been expecting this. A few economists have been going on about it for a while, and Nicholas Stern mentioned in last semester in one (or more) of his speeches at LSE.

In theory, I guess, that's all well and good, but it's important to take a step back and ask ourselves if we really want to put an investment bank in charge of something as important as greenhouse gas (GHG) emissions reductions. Investment banks are pros at figuring out how to bend the rules, or when it's more profitable to break the rules and pay a fine. In a well-established market (blah blah with some other assumptions blah blah), that would be fine. The penalty imposed on a polluter who doesn't sufficiently abate will offset the social costs of the pollution. BAM. Everyone's happy (and no worse off than they were before). Efficiency achieved!

According to Bloomberg, polar bear futures are at an all time low.
(picture cred)

But, carbon markets are a lot trickier than most markets; a classic and appropriate discussion of this is Hardin's "Tragedy of the Commons," although if you read it, you should only pay attention to parts of it as he's kind of wacky about population control and stuff.

The underlying premise of carbon markets, and the rationale for a GIB, is that climate change will be real, real bad if we don't do something about it soon, and fast. Indeed, that's one of the main points of the Stern Review (written by Prof. Lord Stern, who I suspect will lead this bank, but maybe that's a premature assumption). However, it's generally accepted that market based instruments (which, intuitively, would form the bulk of a GIB's operations) are more suited to meet economic efficiency criteria, and not necessarily any environmental standards. If there is some emissions threshold that society can't afford to cross, a top-down (alternatively, a command-and-control) approach is superior to market based instruments. Think about a carbon tax. If, somehow, you have all the necessary information and set a tax to achieve a socially optimal level of abatement, then the abatement target will be achieved at least cost, but only in a perfectly functioning market.  Even minor distortions like other taxes or subsidies (which are exacerbated by institutional problems like corruption and monitoring and compliance issues) can make it cheaper for polluters to pay a tax than abate. Efficiency achieved?

We can look at this from a different angle.  The commoditization of nature is shameful, but when it comes to analyzing the costs and benefits of carbon markets or emissions standards or whatever, that commoditization extends to humans.  A friend of mine suggested a headline we might see in the FT in a few years:

Goldman Sachs posts record profits as Bangladesh sinks into the ocean

Obviously, that's a stretch (I hope), but it's a useful hyperbole for the way banks work. Since they operate in monetary units, they have to "think" in monetary units.  People become dots on a graph, aggregated into a gross (in both senses of that word) VSL term in some wonky cost-benefit equation. You can't blame a bank, though, for doing its job, so if people expect a specific environmental outcome, as opposed to a financial one, it's probably best not to rely on a gaggle of money-hungry financiers, even if some of the people working there are "nice".

To summarize, it's unwise to rely on financial institutions to achieve environmental goals, and since the rationale for swift action within international markets rests on the assumption of impending catastrophic climate change, it seems a bit hypocritical, especially for so many esteemed economists, to ignore the inefficiencies and other weaknesses of carbon markets, despite their theoretical simplicity. And if that's not reason enough to be skeptical of a GIB, the recent (and ongoing) financial crisis should have made us exceedingly wary of the role of investment banks in society, especially when we're trying to make it better.

Our President Is So Cool

(source)

Busy Busy

I've been busy with school (exams and dissertation) lately, hence the lack of blogging.  I'm too busy to breathe until late August, but rest assured, if i make it through math camp at Yale once I make it through math camp at Yale, I'll start blogging like a fiend.  I'll be a doing a PhD in environmental economics there, so I should have plenty of stuff to gripe about.

Expect some random blog posts over the summer.  I'll post links to them on Facebook; if we're not friends, either add me or subscribe to my blog updates.

Until then, smile.

(via)

Guns and Double Standards

America's gun laws have become a pretty hot topic in the UK recently.  And rightly so.

After Trayvon Martin, who was unarmed except for a bag of Skittles and an iced tea, was murdered by George Zimmerman, a racist vigilante neighborhood watchdog, activists staged a protest outside the US Embassy in London.  Then there's the case of two British tourists who were shot dead last year in Florida after getting lost in the wrong neighborhood.  It's tragic and embarrassing that even today, in the self-proclaimed greatest country on earth, people still have to be afraid of gun violence in every city and town in the United States.

Do you want to know why I've never felt unsafe walking alone at night through the streets of London or Shanghai?  Because no one around me has a gun.  Maybe a knife, but my chances of beating someone with a knife are a lot higher than trying to punch someone who's aiming a pistol at me.  Let's think about how these stories would play out in different contexts. 

Imagine Trayvon Martin not as a young man walking back to his dad's fiancée's home in suburban Florida, but instead as a young man walking back to his hotel room in a Tunisian resort.  If a local resident had followed him around the neighborhood in a big SUV, pulled over, aggressively asked what he was doing there, then shot him, we'd be outraged.  We'd call them uncivilized.  We'd call them anti-American and racist.  We'd call them lawless and irresponsible.  We'd berate their government for not protecting Americans, and presumably its own citizens, from every crackpot on the street with access to a gun.  Why aren't we asking the same questions now? Why aren't we raising the same issues in America?

Now let's imagine that the two British tourists were not in the US, but in Italy when they were shot.  In Florida, their deaths were linked to a gang initiation.  In Italy, maybe it would have been a mafia shooting.  We'd be outraged that such senseless violence was still possible in the developed world.  Why do these mobsters have access to guns in the first place?  Why has the Italian government not cracked down on this sort of thing? 

It's time for people in the US to look at the Second Amendment objectively and to get our priorities straight.  A society that values one citizen's "right to bear arms" over another citizen's right to life is backwards and dangerous.  It's 2012.  We don't need private militias to keep the government in check.  We aren't threatened by a British invasion - or any invasion, for that matter - that the US armed forces can't easily handle. Why on earth does anyone need a handgun if not to shoot another person?

I'd never be comfortable raising kids in a country where they can be shot dead on the street, Skittles in hand.  And I'm not sure I'm even comfortable living in that kind of country, especially after experiencing the alternative.

Empty Ideas

Jim Hansen, a well-respected and obviously very intelligent NASA climatologist, has apparently called for a global carbon tax to cut CO2 emissions to acceptable levels. A few problems, though:

First, taxes have been a favorite topic among economists because of their theoretical efficiency.  If (and this is a very big if) regulators know both the marginal damages of a pollutant and the marginal costs of abating it, then they can set the tax at a level that will encourage polluters to reduce their emissions to the socially optimal level.  Taxes also raise revenue, which can be used to finance clean energy projects or offset the costs imposed on polluters.  Unfortunately, the theory of taxation also restrictively assumes perfect information and efficient markets, neither of which are attainable in real life.  If they were, we wouldn't have a problem in the first place.

Second, emissions taxes don't guarantee the success of abatement goals.  One possible outcome is that polluters will just pay the tax and shift part or all of the burden onto the consumers without reducing their emissions, which would have distributional implications that I won't go into right now.  Cap-and-trade - which puts a socially optimal "cap" on emissions, distributes emission permits and allows polluters to figure out the cheapest way to abate and trade permits among themselves - has been more effective in practice, and economists like Nathaniel Keohane have argued in favor of cap-and-trade over taxes from both theoretical and empirical perspectives.

Third and finally, Hansen calls for a global tax, but he dismisses the idea of a government being effective enough to implement it: "We can't simply say that there's a climate problem, and leave it to the politicians. They're so clearly under the influence of the fossil fuel industry that they're coming up with cockamamie solutions which aren't solutions. That is the bottom line."

Well, maybe that's true.  But who, exactly, is supposed to administer the tax if governments are ineffective, incompetent, or both?  Even if we ignore the theoretical challenges of taxes, it's irresponsible to ignore the political infeasibility of its implementation.  This is the most significant roadblock to a global carbon tax.

Yes, politicians are coming up with plenty of "cockamamie solutions", but we should expect more from our top scientists.

---

Side note: Climate change is not on the same level as slavery at all.  What a silly comparison.

Economics vs. What We're Doing Today

They're not the same thing.

In class today, we explored advances in negotiation theory, focusing in particular on environmental negotiations.  A foundation of this theory is Nash's 1950 paper that developed a model where two players bargain over the allocation of a "pie".  The solution to his paper is well-known for its elegance and simplicity:  Players will come to a decision that maximises their utility or well-being, taking into account what happens if no agreement is made.


John Nash

We compared Nash's results with Rubenstein's, whose solution, while also pretty straightforward, is much more abstract.  In his game, the optimal allocation depends on the players' relative levels of patience, i.e. their discount factor (which is analagous to their inverse discount rate).  That's where things start to get tricky.

The difference between what Nash created and what Rubenstein derived is that Nash proposed something simple but realistic, in which caveats could be revealed and explicated.  Sure, Rubenstein generalized Nash's results to something more "realistic", but for practical purposes, the solution to his problem depends entirely on something that can't be measured.

Anyway, just a comment.  Tricky formulas and fancy models are nice to look at, and they help make sense of a complicated world when words get jumbled, but it's important to recognize their practical limits.  Economics is useful because it explains what drives human interactions.  That's not an explicit goal of mathematics.

Peak Oil Denial

Well, it looks like Arizona Tea Party Congressional candidate Jesse Kelly thinks oil is a renewable resource.

SMDH.

It's a .gif if you click on it.

Aside from the fact that this clown is trying to replace the irreplaceable Gabby Giffords, and regardless of whether or not he was joking (he's a joke either way), this new focus on the availability of oil represents a disconcerting shift in Republican/Tea Party anti-environment strategy.  They've spent the last few years dismissing the overwhelming evidence for climate change as junk science, and now they're trying to confuse people even more.

If you're not familiar with the scientific and economic definitions of peak oil, it's easy to get confused.  Formally, it's the maximum, or peak, of the extraction rate path, i.e. when the first derivative of the extraction rate with respect to time is equal to zero.  In layman's terms, once we've discovered and developed the economically viable extraction technologies, and once we've tapped most of our known oil reserves, the price of extraction will go up, demand will go down, and the extraction rate will necessarily begin to fall.

Equally important is understanding what peak oil is not.  It's not when we run out of oil, or even when we get close to running out of oil, for that matter.  Republicans are now trying to argue that we're not anywhere close to running out of hydrocarbons, and they're right.  We have hundreds, maybe thousands, of years of natural gas that we could suck up and burn.  That's a straw man, though, because no one ever suggested that we were about to run out of oil.  Republicans know it's a silly argument, but it gives them something to talk about other than the health and economic effects of local pollution and the devastating domestic and international effects of climate change, the evidence for which would completely discredit their drill-baby-drill position if it ever enters the mainstream American dialogue.

We should be offended that they think we're so stupid.

*****UPDATE*****

Someone asked me about the math behind the idea of peak oil.  It's pretty straightforward, and I've drawn a crude graph here:

From the point where time t equals zero, which we'll assume is the exact moment humans started extracting oil, oil was being extracted (I hope this is obvious).  Intuitively, since we were extracting something as time moved forward along the bottom axis, the rate of extraction is necessarily greater than zero.  It's impossible to know exactly (or even approximately) how much oil is underground, but we know for a fact that there is not an infinite supply.  That means eventually, as time continues moving forward, the extraction rate must move back toward zero.  Thus, there has to be a trend, and it has to have a turning point.

Now, obviously in real life, the extraction rate isn't smooth, which is why I've included the thin red line to simulate what an actual extraction path may look like after including new discoveries, new technologies, etc.

Anyway, just FYI.

Keystone and China, again

Matthew Kahn at UCLA discusses the debate among economists, environmentalists and businesspeople over Keystone XL:

If Canada doesn't sell us their fossil fuel, will it really sit in the ground and not be consumed?   Global GHG emissions would be lower if such natural resources weren't tapped.  This is really an issue of transportation costs and economic incidence.  If the pipeline had been built connecting Alberta, Canada to U.S consumer destinations, what would have been the gains to trade?  In the absence of this pipeline, will this natural resource now be shipped to Asia?  At what transportation cost and what are the gains to trade?  So, does not building the pipeline have a causal effect on the dirty resource staying in the ground?  China smells an arbitrage opportunity here and is stepping in.  Have well meaning greens defended their "line in the sand" or have they merely diverted oil that will be consumed anyway?  World trade poses a challenge to the boycotters.

I addressed this issue a few months ago, but it's important to point it out again, especially as the debate intensifies in light of Obama's Keystone XL hold-up.  China would love to get its hands on all that oil (although one commenter on Kahn's post rightly notes that British Columbia would put up a fight if TransCanada tried to bisect it with an oil pipeline).

I agree with Kahn that opponents of Keystone XL - and environmentalists in general - should focus more on ways to incentivize innovation in the clean technology sector.  Economic theory tells us that we will use a resource either until it runs out or until the marginal cost of that resource exceeds the marginal cost of some alternative.  Making clean energy more efficient and less costly is the only way to go, but until then, it's important to weigh the costs and benefits of letting other countries exploit Canada's oil sands.

Getting Lectured

One of my favorite things about LSE is the number of public events that are hosted each week.

On Tuesday, I went to a lecture called "Crises and Revolutions: The Reshaping of International Development" by Sri Mulyani Indrawati, a managing director of the World Bank.  She made some interesting points about the relationship between politics and economics and how the World Bank, despite being a "non political" organization, has to recognize that money drives a lot of what goes on within governments, and vice versa.

She also talked about the importance of civic participation in the development process, and she referenced the role that protesters played in the ongoing political turmoil throughout the Middle East.  She said that a lot of people mistakenly believe that "government vs. people" is a transitional phenomenon, but that in reality, it's something that can crop up any time there is social unrest.  People are looking for "a new social contract with the government", which has been highlighted by the financial crisis. That, coupled with the Arab Spring, makes 2011 a history marker, and she thinks from now on, we will change the way we view development, with countries like China and India taking a much more prominent role.

The next lecture I attended was a Green Coffee Talk hosted by the LSE Environment Society and was, IMHO, the most interesting of the three (we limit attendance to around 15 people so we can have more of a discussion than a lecture, plus the subject matter is obviously very relevant).  Dr. Carmen Marchiori, one of my environmental economics lecturers and an expert on negotiation theory, talked about international environmental agreements, including predictions of what might happen in the future.  With environmental negotiations, countries have a strong incentive to free ride, and game theoretic models predict that only weak agreements can achieve broad consensus in an international arena.  Carmen's research explains why countries do end up agreeing to somewhat aggressive emissions abatement goals by looking at the complicated relationship between governments, lobbyists and civil society.

She has also done work on linkage strategies, i.e. attaching a stipulation for R&D funding to specific emission reduction targets.  Free-riding is always a problem, but when there is a credible and severe punishment attached to failure, countries are a lot more likely to respond (although it could have the perverse effect of turning countries away from the negotiations altogether).  

Her research predicts that, in the future, environmental negotiations will result in smaller coalitions with more aggressive abatement targets, and the focus will shift from mitigation to adaptation, which helps solve the non-excludabiliy problem that has encouraged actors to free-ride in the past.  Developing countries like China and India will be hit especially hard by climate change, and as quickly as they're emerging as major players on the international environmental scene, we can expect a lot of pressure from them to invest in adaptation projects. 

Finally, I went to a lecture called "OECD Labor Markets in the Great Recession" by Nobel Laureate (economic sciences) and LSE Professor Chris Pissarides.  I had heard he was boring, but his lecture was actually very interesting.  He specified a simple model of employment, then took the residuals from the model and explained why it was different for each country.  His conclusions were fascinating.  For example, he said that the US has really good employment laws (i.e. nonrestrictive) but that our lack of incentives to hire new people, coupled with an underfunded education that isn't preparing graduates (at either the high school or college level) for available jobs, has lead to a jobless recovery.  He also pointed to the change in labor mobility in the US, which he linked to home ownership (if people can't sell their homes, they can't afford to move and look for work), the extension of unemployment benefits with few stipulations attached, and a lack of training programs to help the unemployed find work as reasons for our jobless recovery.

This post is getting long, so I'll end it, abruptly, here.  You can dig through the LSE website to find podcasts of the two public lectures I mentioned above.  Unfortunately, the Green Coffee Talk wasn't recorded, but the interested reader can find some of Carmen's research here, although it's quite technical.

Fracking and Information Disclosure

There's a weak new rule floating around DC (in draft form) that would require oil and gas companies to disclose the chemicals they use in the hydraulic fracturing, or fracking, process - but only if they're fracking on federal land.

Of course, industry groups and some members of Congress argue that such disclosure requirements would reduce the competitiveness of firms by revealing trade secrets, but intuitively, that's not true.  There are only a few companies with the physical capital necessary to frack, and it's a safe bet that those companies already dominate the market.  It's like Wal-Mart being worried about competition from a mom-and-pop store because it had to disclose the contact information of its Chinese wholesalers.  Ridiculous.

I harp about externalities a lot, but that's because they're a main theme in environmental economics.  In case you've missed other blog posts where I define it, an externality exists when one actor's decisions impact another actor without taking those impacts into consideration.  A common example is second-hand smoke: if I'm smoking a cigar outside a bar, I've probably weighed the pros and cons for myself (e.g. lung cancer vs. looking "cool"), but it's unlikely that I considered the negative effects my cigar smoke has on all the people around me.  It's easy to extend that example to industrial pollution.

Two externalies that have been linked to fracking are ground water contamination and earthquakes.  Industry groups argue that the science is unclear, but that's the same story we've heard from the same groups concerning climate change science.  It's an old trick. 

From an economic perspective, information asymmetries are a classic form of market distortion, which prevents an efficient and optimal allocation of resources from being achieved.  With that in mind, it is the government's responsibility to correct those asymmetries by requiring companies to reveal everything they do that could negatively affect society.  That gives consumers the information they need to make rational decisions.  If consumers then decide not to purchase natural gas that was extracted via fracking, then the externatlies imposed by oil companies are internalized, and efficiency can be (theoretically) achieved.

The point is, this law should be stronger and it should be enacted quickly.

Mankiw's Mistakes

Greg Mankiw wrote an interesting piece for the New York Times this weekend about tax reform.  For those of you who don't know, Mankiw is a professor at Harvard and the first economist to become a millionaire from textbook sales.

Oh, yeah, he's also the Romney campaign's economic policy adviser.

Mankiw squawks about "tax[ing] consumption rather than income" and simplifying the tax code.  Unfortunately, he completely ignores the distributional effects of consumption-based taxes, and he tries to slip one by us when he suggests that "our progressive income tax could further evolve toward a progressive consumption tax".  For that to be true, we have to pretend assume that 1) effective tax rates in the US are actually progressive and 2) rich people consume proportionally more than poor people.

In fact, just the opposite is true.  As Mitt Romney's newly released tax returns show, the US tax system is not progressive at all, but rather, it's somewhat regressive.  American Progress provides a fancy little graph that demonstrates this:

Well, there goes one argument.  And here goes the second one:  Crunching a bit of data from the BLS (pdf) reveals Mankiw's "progressive consumption" fallacy:

That's not a mistake.  The poorest 20% of Americans, whose before tax incomes (I used pre-tax instead of post-tax incomes since we're talking about shifting from income to consumption taxes, not that it makes much difference in the relative ratios) range from just over $10,000 to around $18,000 per year have to spend almost twice what they earn on necessities like food, electricity and healthcare.  Compare that with the necessary consumption of the richest 20%.  There's obviously a downward trend there, and I would bet money that if the data were extended to include micro-level data (i.e. per person), that trend would continue, eventually reaching near-zero for the top few earners (cough, cough, "earners").

So, a consumption tax would actually be far more regressive than the current rates people end up paying. That means if I'm really poor, I'd actually be taxed on 200% of my income, while rich people would be taxed on less than 50% of theirs.

The piece also addresses negative externalities, invoking the oft-cited example of anthropogenic (man-made) climate change.  That's funny, considering some of his boss's past comments, but we'll overlook that and focus instead on his "gasoline tax" idea.

Mankiw is absolutely right that a tax on gasoline would help reflect the true social cost of driving, just like taxing coal-burning power plants would help reflect the social cost of SO2 and arsenic pollution, but so would ending fossil fuel subsidies.  Of course, Mankiw knows that it's not politically feasible to implement a tax on something that people rely on, and if he were a responsible, non-partisan economist, he would suggest (or at least mention!) the role subsidies play in distorting the markets and further embedding externalities in our economic model. 

There are some other mistakes in the post, e.g. the idea that people who are taxed more will work less.  That's not really true at all, intuitively or theoretically. Consider a rational actor who is utility-maximizing.  If his utility is a function of his consumption, and if his consumption is a function of his post-tax income, and if his post-tax income is a function of wage rate multiplied by the number of hours he works, then maximizing his utility will necessarily require maximizing the number of hours he works, to some threshold, of course.  Remember, it's all about wealth/utility/profit.  Now, I don't necessarily agree with that idea, but it's the theory that Mankiw espouses, so why not use his own rationale to discredit his fundamentally silly argument(s).

That's all.  The point about subsidies reminded me of an article I read the other day, so I'll blog about it when I get a chance.

dU/d(time spent doing Hamiltonians) < 0

If we extract perfectly substituitable resources r = i,...,j at rate R, from given stock* S, we should follow extraction path ρ (that's a rho, you fool, not a p) from time t = 1,...,T (social planner picks T), then society will be sOoO happy.  Utils maximized!**

*which we don't know

**assuming things that aren't real.

Farming for Brains

I attended a fascinating lecture last night by Philip Coggan on his new book Paper Promises. He talked about the evolution of paper (and digitized) money, and how the entire system relies on faith in government institutions. For the first time in history, there is no 'anchor' on the creation of money, and he thinks by 2050 or so, the financial system in which we rely on huge accumulations of debt to function will have collapse, with China replacing the United States as the world's regulator.  This implies that capital will flow less freely from country to country, and national budgets (while probably not balanced) will maintain much lower debt/GDP ratios.

Mr. Coggan also talked about the allure of working in the financial sector, which attracts the brightest minds in math, economics and even the natural sciences.  A friend of mine the other day was telling me about a recent Cambridge graduate who earned a PhD in biomedical engineering. She could have contributed tremendously to scientific fields like medicine and physiology, but instead, she went to work as an analyst for Goldman Sachs.  At LSE, I see equally brilliant people all the time who tell me, "Yeah, I'm really interested in poverty reduction in Africa, but I've only applied to Goldman Sachs and BCG."  It's a shame that such an unproductive sector, i.e. banking/finance, has such a monopoly on smart people.  Mr. Coggan is convinced that the gilding is about to wear off, though, and that all these would-be doctors and mathematicians and academics will be re-attracted to the pursuit of knowledge, rather than the creation of money.

Paul Krugman also brought up this issue of misappropriated human capital, citing a post by Greg Anrig (an excellent post, which I encourage you to read now) at the Century Foundation.  Really intelligent people are being forced to sit in front of a computer for their entire careers, helping rich people move their money around to find the lowest possible tax rate.  According to Krugman, the fact that the tax system is so complicated is "bad economics" because it diverts more human capital (i.e. smart people) into an industry (i.e. accounting/finance) than a less distorted market (i.e. with a simple tax code) would normally require.  Put simply, complicated tax codes mean really smart people have to be employed to figure it out, when they could (and, normatively, should) have have been employed elsewhere in more productive careers.  Anrig's fourth point sums this up nicely [italics added for emphasis]:

4. The tax-favored treatment of capital gains is a notorious source of complexity in the tax code, diverting the energies of highly paid accountants and lawyers into wasteful efforts to shelter the incomes of wealthy clients from taxes.  The elaborate tax forms known as Schedule D ("Capital Gains and Losses") and Form  8949 ("Sales and Other Dispositions of Capital Assets") provide a superficial glimpse at how the differential tax treatment of capital gains can suck up enormous quantities of time and money for the well-heeled and their tax pros. But much more costly and wasteful than the tedious forms are the strategic energies engaged in manipulating income flowing to the wealthy in ways that minimize tax liabilities....

[The shifting primary source of capital gains from stocks to "pass-through" entities] has required an enormous investment of brainpower, administrative work, and other energy that has profited individuals engaged in those activities without any discernable payoff to the rest of society. Little of that unproductive work would continue if capital gains were taxed at the same rates as earnings from work.

There's obviously a need for smart, well-trained financiers.  We need people to understand things like the derivatives class I sat in on this morning, which almost made me jump out of a window.  Finance is playing and will will continute to play a huge role in environmental and development initiatives (For a really excellent book on this, click here.), but we don't need millions of Excel experts whose job prospects rely on convoluted tax laws.  In a similar vein as Anrig's tenth point, society shouldn't glorify the financial analyst whose only job is to expand his client's wallet the global "capital pool".

I'm glad this debate has found its way into the mainstream.

London, Round 2

I arrived in London yesterday morning, and I'm excited to start the new term, especially since I only have class on Mondays and Tuesdays.

Some tasks for spring:

• Pick a dissertation topic
• Write that dissertation
• Find a job
• Get good grades
• Visit Istanbul
• Be a better blogger

I've haven't been great at keeping this blog (1) updated or (2) on track (i.e. environmental economics).  It's my blog, so I'm allowed to make fun of Republicans whenever I want to, but I'll start trying to focus more on the environmental side of money things.  Suggestions are always welcome, as are comments.