A year of blog-lighting

It's the New Year and baby GG&G is one year old!

It began on something of a lark, during last year's holiday break.  Mainly I wanted to show my mother how easy it was.  My mother is an expert in early child development and eduction and has tremendous knowledge and enthusiasm about her subject.  She's also a great story teller.  And she's always claimed she wanted to write one day, so I suggested blogging would be a great way for her to get started.

So far my attempt at leading my mother by example hasn't worked, but I haven't given up.

Visits and page views here at GG&G are gradually increasing and typically range from 50-100 unique visits and 75-150 page views a day.  Sometimes, when Mark Thoma (who's probably responsible for 1/3-1/2 my visits) or some other higher-profile blogger links to GG&G, I can get 400 or more visits and over 600 page views.  (Thanks Mark!)  Besides Mark, I've been linked to by Grist, the Faceless Bureaucrat, Climate Feedback at nature.com (where I'm strangely blogrolled as "Other Voices - 'skeptics', industry, marginalized views"), Ezra Klein, the New York Times Room for Debate, Brad Delong, Andrew Leonard, Arnold Kling, and a few others.  I did a few posts for other blogs, including two at the NY Times and one for ePerspective at FoodTechnology.com.

All in all I'd say this has been less time consuming and way more fun than I expected it would be.  It's also a nice way to advertise some of my research.  But what I like most is that it forces me to keep track of at least some of my random thoughts--an intellectual diary of sorts.

Although, looking back, I'm also more than a little embarrassed by many of my posts.  I occasionally re-read some of them and see so many typos, missing words, bad phrasing, etc.   In many cases my thoughts are much less complete or as well-organized as I'd like them to be.  I don't try as hard as your average blogger or journalist to be catchy, clever, or especially concise. Nor am I a naturally talented writer.

I'd also like to see more comments. What can I do to inspire them?  Come on folks, take me to task on all my outrageous claims.  Or at least flog me for bad writing!

I know I could do better, but then that would take more time, and right now I have higher priorities. You know, that tenure thing is still hanging over my head and a few more journal pubs would help.  And, of course, teaching calls--WAY more time consuming that you think it will be.  Hopefully with practice and time I will improve on all fronts.

But I do think blogging is more than just a fad.  I'm late to the game but this is still a growing phenomenon.  And given the steady quality decline of traditional media, I believe academics and intellectuals will have an ever greater responsibility to communicate their ideas directly to the broader public.  I kinda wish every academic had a blog; maybe some day that will happen. Hey, it's all about sharing ideas and getting information out there, right?

Anyway, Happy New Year! 

On price-to-earnings and price-to-rent ratios

Standard metrics for assessing values of stocks and homes are the price-to-earnings ratio and price-to-rent ratio.  For stocks, sometimes a price-to-dividend ratio is used.  Also for stocks, since earnings and dividends can be highly volatile in the short-run, a longer-run average is used rather than current earnings or dividends.

Here's a recent chart from Calculated Risk showing the price-to-rent ratio for houses.

And here's a recent chart from Econbrowser showing the price-to-earnings ratio for stocks.

(Note that the first plot shows the index rescaled so that 1980 [1987] = 1.  If it were not rescaled this way, the units on the vertical axis would look pretty similar to those for stocks.)

These are nice metrics both conceptually and empirically.

Conceptually, they say something about the rate of investment return.  If the stock were infinitely lived and paid same earnings, then the net present value of the flow of earnings equals the price if future earnings are discounted at a rate equal to the inverse of the P/E ratio.  For example, a P/E ratio of 20 means the current price is equal to forever receiving current earnings discounted at a rate of 5% (1/20).  For houses it's much the same, since rent represents the earnings from a house.

Empirically, these ratios tend to revert to their means over the long run.  Thus, if the P/E ratio gets way above its historical mean it can indicate a bubble.  So when P/E ratio is above the historical mean, some say prices are too high and when the P/E ratio is below the historical mean some say it's a good buying opportunity.  Over the long run (10-20 years), returns are in fact much higher the lower the P/E ratio, a fact pointed out by Robert Shiller some 30 years ago that has withstood test of time.

Okay, that's the standard story.  The problem is that there are two other key factors to consider:

1) How much does one expect earnings to grow or decline in the future?

2) How do current interest rates compare to the historical average?

When examining the overall market, not an individual stock or individual house, I think (1) is a pretty small issue.  In aggregate, earnings or rents tend to be pretty steady or mean-reverting--there's typically no good reason to expect the future trend to be much different than the past.

But (2) can be hugely important.  After all, if you're not putting your money in stocks or a homes, where are you going to put it?  If interest rates are very high, you need a higher return (lower P/E ratio) to make investing in a home or stocks worthwhile.  If interest rates are low, a higher P/E ratio may still be a good investment opportunity.

The problem is that (2) gets unduly ignored.  This matters right now because if you do not account for (2), home and stock prices still look a little high--the P/E ratios, while well off their peak bubble highs, are still a bit above historical averages.  But if you account for the fact that interest rates are at historical lows, the P/E ratios look very attractive.  One place this is captured is by the housing affordability index--it's about as high as it's ever been.

In my view the right way to gain a quick assessment of whether current prices make sense is to instead look at an index of the P/E ratio divided by the inverse of the 10-year T-bill rate (after all, stocks and houses should be long-run investments).  I suspect that index would show today's index value to be quite low by historical standards, and thus a good time to buy.

If I find the time I'll try to put that index together on another day.

Update:   Here is Calculated Risk making the argument that houses are NOT cheap.  I disagree.  In the case where interest rates do rise to 7% in a few years (not something the market expects at all), home prices fall, and the owner wants to move, s/he can always rent the house out for well above the mortgage payment are receive a decent income from the difference (assuming s/he's takes out 30-year fixed mortgage at today's low interest rates) while continuing to steadily pay down the principal.  If interest rates rise to 7%, rents will rise too, and at today's price-to-rent ratio, rent is already close to the mortgage payment on the first day of the mortgage.

Maybe some homeowners wouldn't be willing or able to do this.  But to those willing and able, buying a house at today's prices and interest rates represents a fantastic long-run investment opportunity.  WAY better than cash, buying bonds (especially in you think interest rates will rise), and probably even better than buying stocks.

The only good reason not to buy right now is because you think prices will fall further.  While that's a real possibility, it's also the same kind of thinking that led to the bubble in the first place.

Might Krugman's polemic prediction about Enron vs. 9-11 ever come true?

I look at our financial and economic system in dumbfounded awe as to how it all works.  We shovel trillions of dollars into banks, stocks and mutual funds, rarely knowing the first thing about how well the underlying companies are managed or how profitable they are or what they are truly doing with our money.  While I think I'm more informed than the average investor, I couldn't tell you which 10 CEOs are most responsible for my investments.  I couldn't even tell you the top 10 companies!

I think most investors are like me.  So this begs the obvious question: what keeps those CEOs from running off with all our money?!

The fact that I do invest shows I have remarkable confidence in our financial system.  That confidence is based on history, the fact that firms and CEOs have been honest and transparent enough in their accounting and that, over the long run, the stock market has performed extremely well.  The long sweep of history says I'm crazy not to invest.

But then I look at recent history and I wonder how the long history came to be.  Honest and transparent are not adjectives that come easily to mind when looking at our modern financial system and events over the last decade.

This issue is in fact the lynch pin to modern capitalism.  At a fundamental level what makes it all work is to having institutions that deal effectively with asymmetric information (the econ jargon).  If one cannot see exactly what they are buying with their investment money, little investment will take place, and economies don't grow.  So modern capitalism requires rock solid institutions that reduce information asymmetries and allow dollars to flow toward investments with the greatest potential returns.

This is why, back in 2002, Paul Krugman made what I think was his most polemic prediction ever:

I predict that in the years ahead Enron, not Sept. 11, will come to be seen as the greater turning point in U.S. society.

Many, including me, thought this was a bit much, even if Krugman made some good points in that old column.

His column today, a tribute the naughties, echos similarly to his 2002 prediction.  He quotes Larry Summers from over a decade ago:

If you ask why the American financial system succeeds... at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.

So, in 2002 Krugman was worried about the collapse of our financial institutions and saw Enron as an omen.  He must have figured if our finanical institutions were to collapse, that would be more ominous that the 3-4000 killed on 9-11.  And if our finanical institutions didn't collapse, they would somehow have to be reinvented and made more sturdy, which would be a major turning point itself.

And here we are.  Things didn't collapsed completely but it wasn't pretty.  While we've begun to recover (barely) many problems still need fixing, particularly re-regulation of financial markets.

I still think Krugman overstepped when he made that prediction in 2002, not just because the Enron fallout blew over relatively quickly, but because the sweeping fallout of 9/11 has been so great. But today I do think there is a chance--a greater chance than I believed back in 2002--that Krugman's prediction might eventually turn out to be right after all.

But I've still got my money in stocks.  Why?  Because if things fall apart completely it won't matter where my money is sitting.

Obama isn't elusive

I'm disinclined to blog much about politics.  But this column by the former blogger turned conservative NY Times columnist Ross Douthat kind of struck a chord in me.

Every presidency is the subject of competing caricatures. But almost a year into his first term, there’s something particularly elusive about Barack Obama’s political identity. He’s a bipartisan bridge-builder — unless he’s a polarizing ideologue. He’s a crypto-Marxist radical — except when he’s a pawn of corporate interests. He’s a post-American utopian — or else he’s a willing tool of the national security state...

If one were to read traditional media and never listen to what Barack Obama has actually said or written, then Barack Obama would seem elusive.  But if one actually listened to what he has said--and by any standard President Obama is particularly articulate are particularly non-evasive--then there is absolutely nothing at all elusive about him.  He has done pretty much exactly what he said he would do.  Douthat continues:

...In hindsight, the most prescient sentence penned during the presidential campaign belongs to Ryan Lizza of The New Yorker. “Perhaps the greatest misconception about Barack Obama,” he wrote in July 2008, “is that he is some sort of anti-establishment revolutionary. Rather, every stage of his political career has been marked by an eagerness to accommodate himself to existing institutions rather than tear them down or replace them.”

Okay.  But I don't think Lizza's prescient moment required deep analytical or perceptive insight.  All of this has always been as plain as day from day one, if one were to listen to the man himself or any of his closest advisors.  The only way not to see what Obama is--a  smart, pragmatic, and charismatic individual with an open mind and unusually varied background that allows him to see many sides--is to ignore the causes, ideology and political constraints of those drawing the caricatures.

To serve his cause--which I think is centered, broadly speaking, on a hope of a better human condition--Obama is willing to set ego aside and compromise to any extent necessary.  I, for one, was always inspired by Obama, not by his oratorical eloquence or race (okay, maybe a little), but by the fact that he eschews ideology.  He recognizes the world is complex and that special interests have many powers.  He will stand up to those powers to the extent that he is able.  But he's no fool.  Given the significant political constraints it seems to me he trys as best as he can to further general well-being.

As an economist who views policy from a technocratic perspective, it seems to me Obama is the best we can ask for in a leader.  The skills he combines with his noble objectives, intelligence and wise strategy of implementation, simply adds powerful ammunition to his worthwhile cause.

The painted facade of Obama's elusiveness comes from the ideologues who bristle that this egregious moderate might actually get something done, and in doing so shatter their fragile worldview.  Or otherwise diminish the cause of their particular special interest.

That Obama is truly elusive to anyone is a testament only to the poor and declining quality of our media (we can't really blame journalists for this, but that's another story...).  Don't buy sweeping generalized attacks of Obama or his presidency or silly conspiracy theories.  The only way to judge this man's presidency is by the specific policies he proposes and signs into law, and then only in comparison to what other policies you think might be politically feasible.

Yeah, it's a pain in the a#$$ to follow all the details, but that's real life.  Ignore everything else, no matter how salaciously interesting it may seem.  And it's especially important to ignore polls about whether people approve or disapprove of proposed policies when it's clear they don't understand the policy being proposed.

Update: Maybe I'm being too vague here.  The point is that Obama has bent over backwards to be the post-partisan centrist he claimed he would be.   But it just doesn't get reported that way.  Here's a clearer take with regard to health care.

First Agricultural Economics Workshop at NBER

Jeffrey Perloff has done a fantastic job organizing the first ever NBER workshop on agricultural economics.  Here's the program.  I just booked my ticket and am really looking forward to it.

This was a difficult thing to do and many kudos to Jeff for all his efforts.  Polite folks don't say it out loud, but the truth is that many econ folks see ag. econ. as the ugly stepchild of economics, and so it's quite a feat to have an ag. econ. grace the halls of the relatively exclusive NBER.  I hope this helps to whittle down silly intellectual barriers.

Rob Stavins is the best source for substantive review of all things related to climate policy

Here's his review of the Copenhagen summit.

Cochrane's tips for empirical work

A little while ago I stumbled upon this post by Greg Mankiw that provides great list of resources with advice for graduate students. I highly recommend all grad students read all of these, especially the first two by Don Davis and John Cochrane.

I'd like to emphasize Cochrane's tips for empirical work:

These tips verge on “how to do empirical work” rather than just “how to write empirical work,” but in the larger picture “doing” and “writing” are not that different.

What are the three most important things for empirical work? Identification, Identification, Identification. Describe your identification strategy clearly. (Understand what it is, first!) Much empirical work boils down to a claim that “A causes B,” usually documented by some sort of regression. Explain how the causal effect you think you see in the data is identified.

1. Describe what economic mechanism caused the dispersion in your right hand variables. No, God does not hand us true natural experiments very often.

2. Describe what economic mechanism constitutes the error term. What things other than your right hand variable cause variation in the left hand variable?

3. Hence, explain why you think the error term is uncorrelated with the right hand variables in economic terms. There is no way to talk about this crucial assumption unless you have done items 1 and 2!

4. Explain the economics of why your instruments are correlated with the right hand variable and not with the error term.

5. Do you understand the difference between an instrument and a control? In regressing y on x, when should z be used as an additional variable on the right hand side and when should it be an instrument for x?

6. Describe the source of variation in the data that drives your estimates, for every single number you present. For example, the underlying facts will be quite different as you add fixed effects. With firm fixed effects, the regression coefficient is driven by how the variation over time within each firm. Without firm fixed effects, the coefficient is (mostly) driven by variation across firms at a moment in time. 

7. Are you sure you’re looking at a demand curve, not a supply curve? As one way to clarify this question, ask “whose behavior are you modeling?”
Example: Suppose you are interested in how interest rates affect housing demand, so you run the number of new loans on interest rates. But maybe when housing demand is large for other reasons, demand for mortgages (and other borrowing demand correlated with demand for mortgages) drives interest rates up. You implicitly assumed stable demand, so that an increase in price would lower quantity. But maybe the data are generated by a stable supply, so that increased demand raises the price, or some of both. Are you modeling the behavior of house purchasers or the behavior of savers (how savings responds to interest rates)?

8. Are you sure causality doesn’t run from y to x, or from z to y and x simultaneously? Think of the obvious reverse-causality stories.  Example: You can also think about the last example as causality: Do interest rates cause changes in housing demand or vice versa (or does the overall state of the economy cause both to change)? 

9. Consider carefully what controls should and should not be in the regression. Most papers have far too many right hand variables. You do not want to include all the “determinants” of y on the right hand side.

(a) High R2 is usually bad — it means you ran left shoes = α + β right shoes +γprice + error. Right shoes should not be a control!

(b) Don’t run a regression like wage = a + b education + c industry + error. Of course, adding industry helps raise the R2, and industry is an important other determinant of wage (it was in the error term if you did #2). But the whole point of getting an education is to help people move to better industries, not to move from assistant burger-flipper to chief burger-flipper.

Give the stylized facts in the data that drive your result, not just estimates and p values. For a good example, look at Fama and French’s 1996 “Multifactor explanations.” In the old style we would need one number: the GRS test. Fama and French show us the expected returns of each portfolio, they show us the beta of each portfolio, and they convince us that the pattern of expected returns matches the pattern of betas. This is the most successful factor model of the last 15 years ...even though the GRS test is a disaster! They were successful because they showed us the stylized facts in the data.

Explain the economic significance of your results. Explain the economic magnitude of the central numbers, not just their statistical significance. Especially in large panel data sets even the tiniest of effects is “statistically significant.” (And when people show up with the usual 2.10 t statistic in large panel data sets, the effect is truly tiny!)

Of course, every important number should include a standard error.

This kind of empirical logic was standard-fare training at Berkeley many years ago.  But it is still rare among environmental economists and almost nonexistent among agricultural economists.  Many of the standard fare "classics" in ag. econ have undefined errors in their models, obviously endogenous right-hands-side variables, and lack any discussion of the essential comparisons underlying the identification strategy.  I won't even get started on instrumental variables....  The prevailing style seems to be one in which assumptions are typically stated but rarely defended rhetorically.  Test statistics are often given but the weight of the evidence is rarely shown.

A common misnomer is that to worry about these issues somehow pits reduced-form or quasi-experimental empiricists against structural modelers.  This is obviously false given Cochrane--a pretty structural guy--is the one making these points.

These are just basic tenets of good empirical work with observational data.  As a new Associate Editor of AJAE (one of 20 or more), I plan to do my own tiny part in trying to enforce these tenets.

Late Update: The link on Mankiw's site is old.  Here's (PDF) a link to all of Cochrane's writing tips.

Googling "Inflation targeting" and "fiscal stimulus"

I'm encouraged by a recent uptick in discussion about inflation targeting among some influential economists.

Brad Delong asks whether it's "time for some hand-forcing at the Fed." This in response to a very nice post by David Beckworth, which was partly in response to Bernanke's  unconvincing answer to Brad Delong's question to Bernanke about why the Fed isn't targeting a 3% inflation rate.

Paul Krugman then compares Ben Bernanke to Montague Norman.

Mark Thoma still thinks the focus should be on fiscal stimulus rather than inflation targeting or quantitative easing (there are subtle differences betweeen IT and QE--see Krugman).

I can understand why economists (a characteristically conservative bunch) would be worried about announcing a new inflation target and vigorously enforcing it with bond purchases.  Unhinging inflation expectations from a very stable 2.5 percent could have unanticipated consequences. 

But aside from knee-jerk conservativism, I see no reason (ie., no compelling model) in which a modest increase in the inflation target could be bad thing.  So I wonder, what is Ben Bernanke's loss function?  What is the scenario in which changing the inflation target would be a bad thing?  How bad would it be?  And what odds does he place on inflation targeting being a bad thing as opposed to it being a good thing, as most models indicate it would be? 

Bernanke may be the best person for the job as Chairman of the Federal Reserve.  But with unemployment at 10 percent and likely to stay that high for a long time, Ben Bernanke owes us clear answers to these questions.

Anyway.  I like the invigorated discussion of inflation targeting and quantitative easing vs. fiscal stimulus.  Still, it is disappointing this discussion has come so late and remains so subdued. 

How subdued? Well, today I took the pulse of "fiscal stimulus" and "inflation targeting" on Google News.  "Fiscal stimulus," with quotes, gets 1,712 hits, 10,538 hits without.  "Inflation targeting" gets 113 hits with quotes, 332 without . 

These results are not surprising.  But they do show a sad disconnect between modern macroeconomic thinking and what the public gets told through traditional media.  That might change if Krugman were to start writing more about inflation targeting in his headline column rather than just his blog.  With the economy likely to remain sluggish for awhile I expect this will happen eventually.

Paul Samuelson

Paul Samuelson was among the most influential economists in modern history.

After Keynes and Friedman, at the moment I can't think of any economist with more sweeping and enduring influence.  In some ways his contributions were deeper than Keynes and Friedman. He developed the modern structure of economics--not just how we think the economy works, but how think about how the economy works, particularly the way economists use mathematics.

He will be sorely missed.

Update:  Krugman's tribute 

Another update: Krugman summarizes some of Samuelson's biggest contributions.  I did not know Samuelson was the source of some of these.  Amazing...

I have not seen a single cogent explanation for why uncertainty about climate change implies inaction is the optimal policy

Via Brad Delong, Mark Kleiman tells us that "If anyone tries to tell you that uncertainty about climate change is a reason for inaction, he’s either a fool or a scoundrel. Probably a bit of both."

That may be a little strong.  But if there is a cogent explanation for why uncertainty means we should do nothing, I have no idea what it may be.

Brad Delong is a more precise.  He writes:

There is one set of circumstances in which uncertainty is a reason for inaction: (a) the measures you would take would be expensive, (b) the measures you would take will be irreversible, and (c) you will get a lot of new information soon to help you judge the situation better.

That set of circumstances does not apply here.

I agree.  Because the one uncertainty-related rationale for doing nothing is an option value--the value of waiting to learn more about the best course of action.  Option values are generally very small.  They are especially small right now because (a) the amount of new information we're likely to obtain will be minimal and take a long time to obtain; (b) that new information is unlikely to change the optimal course of action by very much; and (c) any reasonable course of action is easily reversible or changeable.  Any one of these puts the option value at approximately zero.

In all other ways, uncertainty increases the rationale for action, mainly because the downside is far worse if we do nothing than if we do something reasonably aggressive.

Update:  I should note that there may be non-negligible option values but these go the other way: they provide a reason for action rather than inaction.  This is because inaction is a decision to keep putting the same amount of CO2 in the atmosphere, and this decision has very uncertain costs and benefits and is largely irreversible.  That means there is some value to *not* emitting CO2 until we learn more about the costs and benefits.  While these option values are almost surely larger than the option values associated with inaction, they are still very small given we are unlikely to resolve remaining uncertainties for a very long time.

Econ 101 Analysis of Cap & Trade

(To read small text, click for larger slide)

  

Where are the incentives on the demand side of Waxman-Markey?

Update:  I really need to eat some crow here.  The demand side incentives are in place on Waxman-Markey, so long as utilities pass through the value of permits to consumers in "lump-sum" fashion as the bill prescribes (see Stavins, with hat tip to 'R' in the comments of this post).  Darn it all.  My apologies.  I now remember reading this post by Stavins.  I'm going prematurely senile...

The key idea underlying cap-and-trade is to create a market price for carbon emissions that wouldn't otherwise exist. While this provides a useful incentive to cut carbon emissions, it also means higher energy bills for the consumer.

But a clever idea in the Waxman-Markey bill limits the price effect for consumers.** It does this by issuing a share of the tradeable carbon permits to local utility distributors.  Local utility companies are regulated not-for-profit enterprises due to their status as a natural monopoly.  Thus they are not free to charge consumers any price they wish.  Instead they are required to charge prices than just cover their costs, which are reviewed by a local commission.  By giving these local distributors carbon permits (which they would presumably sell to coal-fired power plants), it gives them an additional revenue stream to offset presumably higher wholesale prices.  Thus, consumer prices may rise very little, if at all, even while wholesale price would rise under Waxman-Markey.

This is extremely clever from a political viewpoint.  It is also helpful if you prefer progressive taxation: if the less well-to-do pay a larger share of their income on energy, higher energy prices would translate into higher "tax" burden from cap-and-trade, making the "tax" regressive. Giving local utilities carbon-permits keeps the tax burden on relatively progressive Federal income taxes.  I don't have a real problem with these objectives.

But there is a downside to this.  This approach effectively eliminates all demand-side [price] incentives for energy conservation.  The beauty of cap-and-trade is that it puts a price on carbon no matter where it exists, which allows for all kinds of creative ways to avoid paying that price.  Maybe it is true that the real gains long term are to be had in the way energy is generated.  But right now the cheapest ways to reduce carbon emissions appear to be on the demand side of the market, in the form of greater energy conservation--better-insulated homes, more efficient appliances, smaller home, and so on...

While there are proposals for other kinds of tax-related incentives to insulate your home, replace windows, and so on, these stop-gap approaches don't have the beauty or robustness of price-based incentives.  It's a bit more like command and control.

Is there another way?  I think so.  I think W-M could enforce some kind of increasing marginal price rule for local utilities.  This is basically the opposite of what a monopoly would do.  The idea is to charge a low price for the first X megawatts of energy each household consumes and then gradually increase the price as household consumption rises.  This way household could pay the same average price as they normally would but potentially pay a very high marginal price, and thus have a stronger incentive to conserve.  I think some local utilities do this but I wouldn't complain if all were required to do it, at least to some degree, under Waxman Markey.  I think it would do a lot to lower the overall costs of reducing carbon emissions while keeping the effective tax burden reasonably progressive.

**Warning: I'm paraphrasing this from what I learned from talking with others who know more about this than I do.  I haven't, alas, actually read Waxman-Markey.  If you know something I don't please let me know in a comment.

Climate Change Really Shouldn't be a Big Deal

For all the media attention and research focus on climate change, and the potentially dramatic implications of warming currently predicted, it is kind of amazing how small a deal this really should be.

Why a small deal?  No, I'm not a denialist.   It's a small deal because the costs of curbing greenhouse gas emissions are probably very small if done in an intelligent way.  And Waxman-Markey, while probably far from ideal policy, does seem to get a lot of the basics right.  In fact, all anyone talks about these days are market-based approaches to solving the problem (carbon taxes or cap-and-trade), so I'm optimistic that if policy is implemented, it will at least get first-order efficiencies right.  That is a huge victory for economics.  But the longer we wait to do something the more expensive it gets.

Krugman, as usual, is able to clearly and concisely cover a lot of key issues.  I think he's right on almost all accounts here.  The science and the economics back up his assertions.

I trust the low-cost estimates because I know where they are coming from: MIT, Resources for the Future, and CBO.  These are not institutions known for cooking the books to serve environmental causes.  In contrast, the Heritage Foundation has a well-known (extreme?) agenda and always cooks the books to serve the interests that funds it.

Furthermore, as Krugman points out, model-based estimates almost always exaggerate costs rather than underestimate them.  Costs are always exaggerated because every innovation or adaptation that the researchers cannot anticipate lowers the cost relative to the estimate.

So, like all policy issues, the question about climate change mitigation comes down to both costs and benefits.  The benefits, while highly uncertain, could be high if current climate forecasts are correct (not something I would stake my life on).  Furthermore, uncertainty is not our friend and a bad excuse for inaction.  Think of climate change mitigation as an insurance policy, one with a very low premium.

If climate change mitigation is so cheap, then why the conflict?  Ideology probably plays a role.  But I imagine the larger reason is that oil and coal would lose, big time.  In fact, the cheaper CO2 mitigation is, the more these interests lose.  Why is that?  Basic economics: If we can't cheaply reduce CO2-emissions, we'll have to do it by consuming less energy, which means much higher prices.   If prices go up a lot then Big Coal and Big Oil get very rich.  A cap-and-trade system would be almost like a government-enforced monopoly for BC and BO.

So, my hypothesis is that Big Oil and Big Coal (a.k.a, the climate skeptics, Pew, and Heritage) are fighting hard against climate change policy because they know or strongly suspect alternative energy sources are or will be cheap. And that will hurt their pocket books, because with a little time and innovation on the renewable energy front, all their oil and coal reserves will be worthless.  So they have good reason to fight hard and fight dirty against climate policy.  Not because it's bad policy.  But because it's good policy.

100 Best Blogs for Socially Minded MBAs

Here's a pretty cool link.  Greed, Green and Grains in number 20.

I don't know all of these blogs, but I like the mix and the way it is organized.

A nice summary of various climate issues

Brian Angliss over at Scholars and Rogues has written a very nice summary of climate modeling and geo-engineering issues.  Nominally it's about Levitt and Dubner's unfortunate combination of arrogance and ignorance.  But even if you could give a hoot about Superfreakonomics, there's a lot of meat here, and useful links too.

Nature Editors on the climate/email controversy

Here's the link

Nature 462, 545 (3 December 2009) | doi:10.1038/462545a; Published online 2 December 2009

Stolen e-mails have revealed no scientific conspiracy, but do highlight ways in which climate researchers could be better supported in the face of public scrutiny.

The e-mail archives stolen last month from the Climatic Research Unit at the University of East Anglia (UEA), UK, have been greeted by the climate-change-denialist fringe as a propaganda windfall (see page 551). To these denialists, the scientists' scathing remarks about certain controversial palaeoclimate reconstructions qualify as the proverbial 'smoking gun': proof that mainstream climate researchers have systematically conspired to suppress evidence contradicting their doctrine that humans are warming the globe.

This paranoid interpretation would be laughable were it not for the fact that obstructionist politicians in the US Senate will probably use it next year as an excuse to stiffen their opposition to the country's much needed climate bill. Nothing in the e-mails undermines the scientific case that global warming is real — or that human activities are almost certainly the cause. That case is supported by multiple, robust lines of evidence, including several that are completely independent of the climate reconstructions debated in the e-mails.

First, Earth's cryosphere is changing as one would expect in a warming climate. These changes include glacier retreat, thinning and areal reduction of Arctic sea ice, reductions in permafrost and accelerated loss of mass from the Greenland and Antarctic ice sheets. Second, the global sea level is rising. The rise is caused in part by water pouring in from melting glaciers and ice sheets, but also by thermal expansion as the oceans warm. Third, decades of biological data on blooming dates and the like suggest that spring is arriving earlier each year.

Denialists often maintain that these changes are just a symptom of natural climate variability. But when climate modellers test this assertion by running their simulations with greenhouse gases such as carbon dioxide held fixed, the results bear little resemblance to the observed warming. The strong implication is that increased greenhouse-gas emissions have played an important part in recent warming, meaning that curbing the world's voracious appetite for carbon is essential (see pages 568 and 570).

Mail trail

A fair reading of the e-mails reveals nothing to support the denialists' conspiracy theories. In one of the more controversial exchanges, UEA scientists sharply criticized the quality of two papers that question the uniqueness of recent global warming (S. McIntyre and R. McKitrick Energy Environ. 14, 751–771; 2003 and W. Soon and S. Baliunas Clim. Res. 23, 89–110; 2003) and vowed to keep at least the first paper out of the upcoming Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).

Whatever the e-mail authors may have said to one another in (supposed) privacy, however, what matters is how they acted. And the fact is that, in the end, neither they nor the IPCC suppressed anything: when the assessment report was published in 2007 it referenced and discussed both papers.

If there are benefits to the e-mail theft, one is to highlight yet again the harassment that denialists inflict on some climate-change researchers, often in the form of endless, time-consuming demands for information under the US and UK Freedom of Information Acts. Governments and institutions need to provide tangible assistance for researchers facing such a burden.

The theft highlights the harassment that denialists inflict on some climate-change researchers.

The e-mail theft also highlights how difficult it can be for climate researchers to follow the canons of scientific openness, which require them to make public the data on which they base their conclusions. This is best done via open online archives, such as the ones maintained by the IPCC (http://www.ipcc-data.org) and the US National Climatic Data Center (http://www.ncdc.noaa.gov/oa/ncdc.html).

Tricky business

But for much crucial information the reality is very different. Researchers are barred from publicly releasing meteorological data from many countries owing to contractual restrictions. Moreover, in countries such as Germany, France and the United Kingdom, the national meteorological services will provide data sets only when researchers specifically request them, and only after a significant delay. The lack of standard formats can also make it hard to compare and integrate data from different sources. Every aspect of this situation needs to change: if the current episode does not spur meteorological services to improve researchers' ease of access, governments should force them to do so.

The stolen e-mails have prompted queries about whether Nature will investigate some of the researchers' own papers. One e-mail talked of displaying the data using a 'trick' — slang for a clever (and legitimate) technique, but a word that denialists have used to accuse the researchers of fabricating their results. It is Nature's policy to investigate such matters if there are substantive reasons for concern, but nothing we have seen so far in the e-mails qualifies.

The UEA responded too slowly to the eruption of coverage in the media, but deserves credit for now being publicly supportive of the integrity of its scientists while also holding an independent investigation of its researchers' compliance with Britain's freedom of information requirements (see http://go.nature.com/zRBXRP).

In the end, what the UEA e-mails really show is that scientists are human beings — and that unrelenting opposition to their work can goad them to the limits of tolerance, and tempt them to act in ways that undermine scientific values. Yet it is precisely in such circumstances that researchers should strive to act and communicate professionally, and make their data and methods available to others, lest they provide their worst critics with ammunition. After all, the pressures the UEA e-mailers experienced may be nothing compared with what will emerge as the United States debates a climate bill next year, and denialists use every means at their disposal to undermine trust in scientists and science.

Here's the thing: Scientists, while human, are lousy at politics and media management.  The denialist movement, in contrast, is very well funded by special interests and is extremely savvy at media relations.  They got their start on the editorial pages of the Wall Street Journal and have backing of big oil and big coal.  This is not a scientific debate; its a scientist vs. well-funded-media-hack debate (even though some of the hacks have worn scientist hats in the past).

Here's an interesting video by a history professor at UCSD that documents the history of the denialist movement. (Warning: It's long and somewhat academic).



Scientists may be tempted by the relentless goading of the denialists to get into to the media game but they really shouldn't.  The scientific community does not play this game well.  But the truth, whatever it is, gets out eventually.  It's important for scientists not to muck up that processes by stooping to denialist tactics.

Research calls...

My semester free from teaching is quickly coming to an end.

And I'm in a panic.

Because the stack of unfinished papers on my desk is not out the door. Yet.  So I'm scrambling to finish them before I have to teach again.

I'm putting the finishing touches on a really cool paper that measures the incidence and budgetary cost of moral hazard in the U.S. crop insurance program.  I'm also finishing up a consulting project surrounding an environmental impact statement for the Conservation Reserve Program.   And several other papers that need revision very soon.

Anyway.  That's my excuse for light posting these days...

China approves GMO corn and rice

Here's the story at Bloomberg.

Interesting stuff, but I suppose this was just a matter of time.  The same will happen in other developing countries, too, I suspect.  Especially if prices keep going up, I suspect resistance to GMOs will vanish.

But (there's always a but...) I won't believe the yield gains until I see them.  Why? China's yields have already grown more than anyone else's in the past 50 years.  (Hopefully I'll post a plot showing that one day when I have some time.)

The reason that matters is that GMOs haven't really boosted yields in places where yields are already high.  Mainly they just save labor and input costs, saving pesticide spraying and making herbicide spraying really easy. There have been some yield gains in the poorest developing countries and so there may be some gains in China.  But given how much things have already improved there, I'm skeptical.

And the comparison in the Bloomberg article to U.S. yields is kind of silly.  The reason our yields are way higher has at least as much to do with our soils, climate and irrigation systems as anything else.  While I'm far from the biggest expert in this area, I'm quite sure that GMOs will not, by themselves, come close to closing the yield gap between China and the U.S.