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Thursday, January 25, 2007

More crazy talk from the Pigou Club

Mankiw boasts of more publicity for his pro gas-tax club. This publicity includes commentary by Economics correspondent Chris Farrell.

When asked by the interviewer:

"Now just saying the word "tax," if you're running for President or if you are President or I mean who's gonna buy this? "

Farrell responds"

"if you package a gas tax, not only as part of energy security but part of attacking global warming and leading toward a more sustainable environment, there are ways that you can manipulate this situation so that the word "tax" doesn't quite have the negative connotations which you have rightly raised. And it's more like environmentally-conscious, attacking global warming . . . "

Who really believes that? No matter how you package it as a sizeable environmentally beneficial thing (even if people think it really is which is questionable anyway), most people don't internalize envrionmental costs that much. Without the state of Washington, no one would care enough about the environment enough to pay more at the pump! Let's see one of you pigouers try and sell it based on the above quoted publicity - - -

'My fellow Americans, we are going to make you pay a dollar more in gas (albeit phased in) for every gallon of gas you buy. But don't worry, you're helping to save the environment. What's that? you don't care that much about the environment? What's that? If you cared all that much about the environment, you would have purchased less gas or drove less in the first place? Why is your face turning red? Are you chasing me!? What is that pie doing in your hand!!?'

Tuesday, January 23, 2007

Clive Crook's theft of reason

Clive Crook said: "On grounds of economic efficiency, the case for a bigger gas tax is unassailable."

BS - political rhetoric

I've seen pro gas taxers (yes, I still refuse to improperly call you pigovians because I think Pigou, if he were still alive, would be against this gas tax idea too) make some reasoned arguments for a gas tax. But, there are equally (and in my opinion more persuasive) strong arguments against such a tax increase. So to say that "a schedule" of gas tax increases will DEFINATELY be efficient (or, rather, more efficient than other alternatives previously discussed)is ridiculous and shameful.

Many posters on Mankiw's blog have debated these issues and then try to back their ideas up with theory or empirical evidence. Clive Crook just says it; it must therefore be so?

And beyond that, as I mentioned in a recent post last week, it is a mistake that economists continue to make when they detach efficiency from equity. When economists and 'thinkers' push (ignore) the problem of equity onto other fields, it leads to these kinds of black-and-white, rhetoric-filled statements.

Sunday, January 21, 2007

Not quite.........

Mankiw has a post scolding college econ profs for not doing enough to persuade the average Joe that free trade is a good thing.

I really think Mankiw is not giving the average Joe (or average college goer at least) enough credit. I think most people recognize the gains from free trade that specalizations by different countries can provide. What they take issue with, I think, is that it always seems to be the same people/sectors that get the benefits of the bigger pie, while the same unskilled factory workers (which make up a big chunk of the population) and sectors like farming, etc. continue to get the shaft.

People will always be against free trade until policy is such that these "losers" in the free trade game are better compensated for their losses. Economists are very quick to ignore this problem and are fast to say, "let's talk about efficiency, not equity." The problem is that the two are inseparable in reality....

Thursday, January 18, 2007

Laundry as Job location incentive....

This is a priceless (and local Indianapolis!) piece about how some companies are coming up with innovative ideas to keep (or attract) young workers to their corporation(s). How about at-work laundry? Sign me up baby!

IQ and Education

As discussed on Mankiw's latest post, I'm having some serious problems with Charles Murray's articles (2) (3). I understand the idea that IQ could create an upperbound as to how far education can take a person. My problem is he seemingly pulls these IQ constraints from a top hat. He writes:
"There is no magic point at which a genuine college-level education becomes an option, but anything below an IQ of 110 is problematic. If you want to do well, you should have an IQ of 115 or higher. Put another way, it makes sense for only about 15% of the population, 25% if one stretches it, to get a college education."

Where do these numbers come from? I didn't see a cite. Am I just not seeing it? This just smacks of elitism to me. ...Or maybe I just don't have the IQ to grasp it. Couldn't it just as well be that a typical 4 year college is worthwhile and useful to everyone with an IQ of at least 100, or maybe 90? Who's to say where that bound is?

Beyond that, I do believe 'g' exists. What I DON'T buy into at all is the idea that once you reach a given education level, all formal education after that is pointless or (personally) inefficient due to your IQ. People always have room to improve - they always have room for intellectual growth, no matter what their IQ.

One problem with IQ as a measure is that it is a very narrow definition of innate intelligence. There are lots of different kinds of intelligence. Luckily our colleges understand this which is why, more and more, fields and disciplines are creatively expanded to work different peoples' brains. Besides, people also need to have the 'free will' to dream.

The Rudy's of the world need to try, and if they fail, they may just be more the wiser for it.

Wednesday, January 17, 2007

CAFE change vs. Tax hike for gas: ongoing debate

There is an ongoing discussion regarding the merits of reformed CAFE (as previously posted) vs. a gas tax hike.

For those interested in the CAFE reform, and the analyses behind it, I have linked some papers regarding it (see the right side of my blog under the heading "CAFE reform."

A response to Prof. Mankiw regarding the Pigou Club: Once more unto the breach...

In Mankiw's latest post which indoctrinates Dr. Robert Samuelson in Mankiw's gas tax cult, he exaults:

"In his latest column, Robert Samuelson says we should "enact an energy tax equivalent to $2 a gallon on gasoline -- introduced over six years, or about 33 cents annually," making him the latest member of the Pigou Club. I have proposed a more modest $1 increase, in part based on the research of Parry and Small, but of course there is a degree of uncertainty about how high the optimal tax is." [bold mine]

It is refreshing to see that Mankiw has finally acknowledged one of the many complaints regarding a gas tax increase proposal (for a slightly larger list, see my previous post titled: "Cafe or gas tax hike" or any of my posts on Mankiw's blog). Though the use of language "degree of uncertaintly" is laughable and a gross understatment.

Parry and Small use model calibration / simulation technique - which basically draws upon a whole host of varying assumptions to provide the answer that they want to get - namely that a $1 gas tax increase is "optimal."

The biggest assumption of the model is the elasticity of gasoline demand. PandS assume an average price elasticity (in absolute value) to be .55 with .30 being a LOWER bound (which is astronomical - see a previous post where I show research that puts the value close to .04. This obvious inflation biases their result upwards. But of course, being a calibration model, pretty much everything else is based on assumption as well (often using just one article from which to base the assumption on).

All of the following is assumed by Parry and Small: fuel efficiency, pollution damage, congestion cost, accident cost, labor supply elasticity, government spending, PPI of gas, initial tax on gas... the list goes on.

Can "congestion cost" really be quantified so easily? I'm highly skeptical. Also, PandS say:
"the congestion externality is the largest component of the optimal fuel tax. " But congestion reduction does not directly follow from a gas tax hike. In fact, their assumption of such large congestion reduction I think is too high given that most of the effect would be to substitute to a more fuel efficient vehicle as opposed to driving less. Also, the congestion effect is variable depending on where you live. Where I live, in Indianapolis, there would be likely little effect on congestion since there are few transportation alternatives.

Perhaps the biggest problem with this is that some papers I have read say $4 is needed, some say less than $1. Further, researches tend to ignore any of the directly negative consequences of large gas tax hikes (regressivity, gorge the beast...). The point is it is all dependent on your assumptions.

For my opinion on calibration technique, see this excellent paper on the subject entitled "Calibrating the World and the World of Calibration" by Mattias Polborn.

This strongly relates to my recent post regarding post-autistic economics and the strange need for Economists to find "optimal" answers using mathematics based purely on assumption.

Tuesday, January 16, 2007

Mike Moffatt has posted a very intersting snippet about the current state of economics. He talks about the Post Autistic Economics (PAE) movement that began whole-heartedly a few years back (I'm hesitent to call it a movement since it hasn't really caught on). While, like Mike, I take some issue with their un-PC choice of the word "autistic" to describe their feeling that Economics has become closed-mined and unrealistic - I do generally agree with their principles (as the title of my blog might suggest).

I've always had a fascination with the interplay of psychology and economics and behavioral econ in general. I do many 'experiments' in my intro macro class every semester - some of which backup mainstream econ, and some of which may not (though economists can usually rationalize any seemingly irrational action as being rational - ironic I think).

Sunday, January 14, 2007

The "Bush" (or I mean AEI) plan

Here is what President Bush said on 60 Mintues tonight in trying to sell his too -little-too-late plan to the American people tonight:

"I began to think, well, if failure is not an option and we've got to succeed, how best to do so? And that's how I came up with the plan I did...."

No, Mr. President, you "came up with", and REALLY needed all that extra time to 'decide' to use the plan that the American Enterprise Institute (AEI) came up with a week or two earlier, (2) and that had been in the works for quite some time.

But thanks for at least pretending to listen. ... Makes me wonder if you had to push the announcement to 2007 'cause you needed to wait for AEI's approval. Way to lead!

I know I'm not the only one to point this out. Heck, I recall hearing this on NPR in December that Bush was likely just going to use the AEI study (or 95% of it) and ignore all else - that's not bias - that's just what his administration does and has done in the past.

How does this relate to economics? Well, rational minds can have differing opinions, but putting ourselves deeper into a war where we are damned if we do and damned if we don't has huge macroeconomic implication in terms of our foreign policy/trade relations, our status amongst our allies, our federal budget, our consumer confidence, etc....

Tuesday, January 9, 2007

Language of the Ivory Tower

I love the Becker-Posner blog because it has two great economic minds debating or agreeing with each other on various topics, which makes for fascinating reading. Part of Posner's latest post regarding AIDS in Africa, however, made me chuckle (and wince) a bit.

He writes:
"The causes [of the AIDS epidemic in Africa] include profound ignorance about the disease (due in part to superstition and in any event an aspect of much broader deficiencies in education and literacy), miserable living conditions and short life expectancy which reduce aversion to risky behavior, migrant male labor that increases the demand for paid sex, cultural traditions of male promiscuity, female circumcision (a risk factor for HIV), and the extremely low status of women that drives many of them into prostitution and reduces their ability to bargain effectively with men over safe sex, to which men are more averse than women. Underlying all these things is the extreme poverty of most sub-Saharan countries..."

Only an economist, or judge with strong Chicago-school knowledge of econ, would refer to the male over-riding the female on the decision to use condoms etc as a lack of "effective bargaining."

Just what would effective bargaining for condoms etc entail?:

guy: oh that's so hot, keep doing it
girl: you like it?
guy: wait what are you doing, I don't wanna use that
girl: I just wanna be safe sweety
guy: but it feels weird
girl: I'll rub your feet later?
guy: Hmm, that's a decent proposition, but I'm not completely sold
girl: I could also go to that football game like you've been asking me to
guy: What about the foot rub, the game, and maybe we get to have sex later this afternoon
girl: I'm afraid the costs of all that exceed the benefit of using a condom - my utility preferences at this point is to not have intercourse with you at all
guy: That seems sub-optimal. Alright, you don't have to go to the game or give me a foot rub -
just some marginal sex this afternoon
girl: I dunno babe, we've been bargaining so long now that it's already dinner time.

How's that for the Ivory Tower ?

Monday, January 8, 2007

You've heard of Irrational Exuberance...

...Now how about "Irrational Patriotism."

I particular like the following quote from the article mentioned from the above link:

"Auto industry analysts say many people have the perception that cars made overseas are built better than American cars. But the performance of American-made cars is now actually very close to those made in Japan and higher than many cars made in Europe, they said. Foreign cars do have an advantage in resale value, however."

...Makes one wonder what these analysts think the major determinents of resale value might include.

Foreign cars pretty much across the board hold their value better than American cars. The main reason is obviously because foreign cars are more reliable, dependable, and parts are more accessible and easy to install, etc. ...In other words, they are "built better."

Friday, January 5, 2007

Fiscal Neutrality

Today Pelosi and the Democrats newly minted in congress agreed to ressurect the idea of Budget neutrality. The idea is simply that for any mandatory spending increase (Medicare...) or tax cut, either would be offset by spending cuts or tax hikes to maintain budget neutrality.

I'm torn about this idea. On the one hand, I admire it as a postive step to try to quench the sick idea that somehow we can have our cake and eat it too. In essence, it recognizes that starving the beast (see one of my previous posts - the idea that a tax cut that results in a current budget deficit will have the effect of reducing future spending thereby natuarlly bringing the deficit back to neutral) just doesn't work. In fact, it is a rule that will essentially pull the beast's feeding tube anytime congress wants to enact a tax cut (it will have to be offset by a reduction in future spending or tax increases elsewhere).

That said, I understand the Republicans' point that this will make using fiscal policy and enacting tax cuts more difficult. What I'm not so sure about is that that is such a bad thing in and of itself. Not all tax cuts are created equal.

No, the thing that is of interest to me the most about this is that this rule essentially renders fiscal policy (for the most part) moot. If a policymaker felt we were in a recession and he/she thought we could cut taxes to help spur the economy, that tax cut, according to the new rule(s), would have to be met quickly with a tax increase elsewhere or a spending cut. But, as we know, that would counteract much (depending on the relative effects on the economy of each) of the "kick" the original tax cut provided.

But is rendering fiscal policy moot a problem? To me, not really. Most economists today agree that monetary policy is a much more stable and independent way of having a soft-landing recession, or to cool off the economy in times of fast inflation. And one big benefit of this budget neutral proposal would be that it would force the congress to really prioritize and to recognize those spending programs / tax policies that aren't working, and compare them to those that are.

So in closing, I support the Democrat's plan - though perhaps it is not ideal, and perhaps it is biased against the tax side of the equation - but it is a great first start, and quite frankly is a refreshing change from the neo-Republicans' faulty laffer-based economics of cut taxes and spend out the rear.

Thursday, January 4, 2007

CAFE or tax hike on gas

I have been involved in an online struggle of epic proportions - mostly with economists that I respect and admire - who are quite adament that a gas tax increase is the way to: reduce our dependence on foreign oil, increase tax revenue, reduce congestion, reduce pollution etc.

I have been very adamently not in favor of said hikes. I've heard some economists, like Mankiw say an additional $1 tax is needed. I've heard others say as much as $3 or $4 US dollar increase. Most all of them use, in my view, out-of-date (and too large) elasticity figures (see paper on the right) for gasoline and simulation models based soundly on the assumptions that the modelers themselves think will produce their desired result.

I won't go into too much detail on my disagreement about a gas tax since I've discussed / commented on it ad naseum on Mankiw's blog, and and elsewhere. Suffice to say I have deep-seeded disagreements on the basic assumptions of said tax hike. Namely, I don't think it will reduce dependence on foreign oil (rather than simply making high-cost producers suffer - albeit slightly). I don't think congestion will be helped except in perhaps large cities with significant public transportation and/or high density. I don't think pollution (or congestion again) will be largely effected because I view the short-run and the long-run demand for gasoline to be very inelastic (the paper I have linked on the right says elasticity is about -.04 in short-run and also much lower than previously thought in long-run). This means that tax revenues can be expected to be large, but at the cost of primarily causing the poor consumers in the society to suffer the most. The assumption with this last point being that the EITC or some offsetting tax credit is not as easy or as accessible as it sounds to be (either politically or on a tax form).

Ok, so I guess I did go into a little more detail than expected ;).

But what about good ole' CAFE? Proponents of a gas tax increase a very quick to dissmiss CAFE. I worked on CAFE a little when I worked for the US DOT. I wonder how many people are aware that the DOT has been working on an incredibly complex model to try and rework CAFE to account for some of the known biases. I think a revised CAFE is a little less heavy handed than a tax increase in this case - and should not be thrown out without consideration.

Consider this:
Reformed CAFE , (2),
"...Effective 2011, a reformed CAFE program has been adopted for light trucks. During a transition period 2008-2010, manufacturers have the choice of complying either with the unreformed CAFE standards shown in Table 1, or with the reformed CAFE rules.
Under reformed CAFE, each manufacturer’s required level of CAFE is based on target levels set according to vehicle size. The targets are assigned according to a vehicle’s “footprint”—the product of the average track width (the distance between the centerline of the tires) and wheelbase (the distance between the centers of the axles). Each vehicle footprint value is assigned a target specific to that footprint value. Compliance is determined by comparing a manufacturer’s fleet average fuel economy in a model year with a required fuel economy level calculated using the manufacturer’s actual production levels and the category targets.
The target values are determined from the following continuous mathematical equation, based on the vehicle footprint and four parameters (a ... d) which are adopted for each model year, Table 2.
T = [1/a + (1/b - 1/a) e(x-c)/d/(1 + e(x-c)/d)]-1
where:T - fuel economy target, mpga - maximum fuel economy target, mpgb - minimum fuel economy target, mpgc - footprint value at which the fuel economy target is midway between a and b, ft2d - parameter defining the rate at which the value of targets decline from the largest to smallest values, ft2e = 2.718x - footprint of the vehicle model, ft2

The resulting CAFE target curve is an elongated S-shape, with fuel economy targets decreasing as the footprint increases. An example target function is shown in Figure 1.

Figure 1. Example CAFE Light Truck Target Function
The reformed CAFE regulation also applies to medium duty passenger vehicles (MDPVs) of GVWR up to 10,000 lbs as part of the MY 2011 regulated light truck fleet. Thus, the regulation captures nearly all larger size pick-up trucks and SUVs which were excluded from the unreformed CAFE fleet. The DOT estimated that the average light truck target required of manufacturers under the reformed CAFE rule in MY 2011 will be 24.0 mpg.
CAFE Testing. CAFE fuel economy testing is done over the same laboratory test that is used to measure exhaust emissions (FTP-75). CAFE certification is typically done based on fuel economy data provided by the manufacturers. In some cases, the EPA performs the testing in its laboratory in Ann Arbor, MI.

The CAFE values—used to determine manufacturers’ compliance with the average fuel economy standards—are significantly higher than the EPA on-road values. The CAFE data reported by the DOT is not adjusted by the 15% factor used by the EPA. Furthermore, the following caveats apply to the CAFE values:

The unreformed CAFE standards (before MY 2011) did not apply to vehicles above 8,500 lbs GVWR. Many pickup trucks and some of the largest SUVs which belong to this category were excluded from CAFE data.

Credits are provided for alternative fuel vehicles. The CAFE fuel economy of an alternative fueled vehicle is calculated by dividing its real fuel economy by a factor of 0.15. For instance, a 15 mpg natural gas vehicle will be rated as a 100 mpg gasoline vehicle. For bi-fuel vehicles, this calculation is applied to the expected percentage of alternative fuel use.

Manufacturers who exceed the standards earn CAFE credits, which can be applied to any three consecutive model years immediately prior or subsequent to the model year in which the credit was earned. "

Optimal choices of Senator(s) in a primary election

I am reading a paper from 2004 called, "Spatial Model of US Senate elections" which I have posted on the right bar. It comes to some startling conclusions about the effects of our staggered primary process in terms of Senate electios.

Basically, the author finds that the equillibrium is such that:

"The stable long-run result of full divergence." In other words, for any given state, senator one will expect to have fully opposite views to senator two, in the long-run. I don't though - it seems that if anything, senators from a given state are holding more similar views than ever. But I could be wrong about that.

RE: Education and Mortality (health)

Having finished reading the paper, I have to say I was quite impressed by the care taken to cover all angles and 'plug all holes' as it were. Kudos to the author.

The study basically used two different datasets - one from various Census reports (1960-1980), and another from the National Health and Nutrition Examination Survey. The author conducted varying types of regression analysis and in each case and for both datasets came to the conclusion that education (as instrumented by variables representing compulsory attendence and other compulsory law changes that starting coming into effect after the 1910s) has a postive causal impact on health (as measured by mortality rates of hypothetical cohorts).

The use of the education instruments I find fascinating. Basically, the author was able to construct a quasi-natural experiment by comparing mortality rates of cohorts in states before and after compulsory education laws went into effect, and also note the effect such law changes that effect education (at the time the cohorts were children in the 1910s-30s) have on future (adult) mortality of synthetic cohorts. The Census data was used to track more aggregated data, while the NHNES could be analyzed at the individual level.

Some of the more valid criticisms to the author's findings are posted on Mankiw's Blog. I tend to agree with at least one commenter that said that using such compulsory law changes as instruments for education may be a bit muddied by the fact that such changes took effect in a period in America's history where the labor laws (and especially the child labor laws) were quite lax. As such, what the author thinks is instrumenting for "education," may in fact be instrumenting for "time away from hazardous job," or something of that nature. In other words, the marginal year of schooling required by the compulsory law changes may be one less year working in a coal mine.

However, to be fair, the author points out this very possibility on page 26 of the paper (see right side of my blog):

"The second issue is that the effect of education is quite large, and it is important to understand
why. I categorize the potential effects of education into two categories: direct and indirect effects. First note that if the effect of compulsory schooling was to remove kids from unhealthy jobs and bring them to the classroom, then the effect of education cannot be distinguished from the effect of not working."

She still concludes that, while that may be an issue, it doesn't seem to be able to account for the quite large and significant effect of compulory education changes as a child on adult mortality. And on this point i think she may be on to something:

"An additional year of education lowers the probability of dying in the next 10 years
by approximately ... 3.6%." That's pretty big.

Of course there are other issues mentioned by the author, such as the possibility that the effect of education on mortality (health) is mediated by income or occupational choice. But again, the author notes that the effect of education on health is so large, that income and occupation can't account for all of the relationship.

All in all, this was an interesting read. I definately learned quite a bit from it (specifically on exactly what is synthetic cohort analysis). And while I don't think I 100% am ready to say that "education" is a main driving causal force of future health, I definately think this provides evidence that demands a second look.

Wednesday, January 3, 2007

Education as direct and main cause of health?

Greg Mankiw has posted a link to an NYTimes article about a paper that claims that education is the single largest determinating factor in a person's health. I have linked to the original paper to which the article refers (see right). I haven't read much of it yet, but I hope to comment more later. At this point I'm wondering if the data this paper used (from the 1910s to the 1930s) is really robust at pinpointing a good causal relationship. .... I'll know more soon.

Starve the Beast a different phenomenon than Gorge the Beast?

In response to Mike Moffatt at's "Will Higher Taxes on Gasoline Lead to Higher Government Spending?"

One of the arguments in favor of a gas tax hike is that it will produce additional government revenues, and that there is little evidence that more taxation leads to more government spending. In other words, to proponents, a tax increase can essentially be deficit reducing.

Others argue that the "starve the beast" philosophy (popular under Reagan and to a lesser extent, Bush Jr.) means that lower taxes would cause lower government spending. The corrolary to that being that higher taxes cause higher government spending (gorge the beast). But do both concepts or none have to be true at the same time?

It seems to me, especially in today's climate that starving the beast (especially given evidence), does not hold for precisely the same reason that gorging the beast does. That is, in times of high 'demand' for government services (be they military or other discretionary spending), a reduction in taxes has no effect on government spending. Why? well it makes sense that if an event is ongoing that requires a substantial outlay (like, oh i dunno, a "war") any reduction in taxes is unlikely to stop the need for government spending.

However, this does not hold true (IMOP) in cases of a tax increase concurrent with high demand for government spending. Why? Well, under the assumption that more money is being demanded to be spent at time X than currently is politically available, at time Y after the tax increase, more money to feed that demand is now available than was at time X. It is also now more politically feasable to increase government spending since the increase in taxes can hold the debt neutral. In essence, the beast is hungry and the tax increase quenches more of that hunger.

So, if one notes a difference between starving the beast and gorging the beast, particularly attimes where large government spending (to pay for troop armor, to pay for increased security, national borders...) is in great 'demand', then it becomes easy to see how one could conclude that a gas tax really might just be the beast's icing on the cake.