An Economist's Lament

I hope my thoughts on economic issues will resonate with those of you who are either economists or people not turned off by the dismal science. I am not going to rant, I am not going to throw mud at any particular schools of thought. President Truman had an interesting point of view about economists: he said, “Please find me a one-armed economist. I’m sick of hearing from my staff ‘On the one hand this, on the other hand that.’”

We economists all have a list of pet peeves and we hope to write a journal article or a book about these issues, but we tend to leave the work for later. For economist PALS, later might become rather a short period. The great Doctor Samuel Johnson famously said nothing concentrates the mind more than the prospect of hanging in the morning. ALS has concentrated my mind and galvanized me into focusing on at least a few of my pet peeves:

Cost-benefit analysis
Regulation theory and policy
The fiscal policy shell game (i.e “deficits don’t matter”)
Hedge fund managers who avoid taxes
Tax cuts for the rich
Economics of ethanol
Relentless rampant privatization of government functions
The fox in the chicken coop (EPA, OMB JUSTICE INTERIOR) and many others
Supply side economics
Self-regulation
Voluntary emissions reduction
Tax cuts for the rich
Folks who advocate defunding of most federal social programs
The Wall street casino and the risk management oxymoron
The glorification of quantification

One important public debate that draws on many of these peeves of mine is the food fight over global warming. The overwhelming majority of technical people accept the science, which says we humans are messing with the atmosphere. We have a serious problem b/c the level of greenhouse gases is starting to inflict real damage. We cannot reduce the amount of CO2 that’s up there already. It lasts for hundreds of years. Therefore all we can realistically expect to accomplish is the slowdown the rate of accumulation of additional greenhouse gases. Even the somewhat draconian Kyoto plan will be a drop in the bucket. The failure of China and India to sign on to Kyoto dooms any prospect of seriously capping greenhouse gas production. The gas that China and India are putting into the air in increasing quantities will eventually spread around the globe, so they and the US really need to join the effort. India and China say that we are denying them the right to have their own industrial revolution.

Before we think about means to reduce production of greenhouse gases, we need to know a lot more about the present and future costs of the phenomena that we are observing: dying polar bears, wild weather, shifting temperature zones, melting icebergs and glaciers, etc. We also need to have a better idea of the present and future costs of doing anything to remediate the effects from warming. Until we can do an honest cost-benefit analysis (CBA) of any remediation project, we need to answer those questions.

Unfortunately it is very easy to make a CBA come out the way we want it to by leaving out important elements or incorrectly estimating costs and benefits. Sometimes it only takes a small change in an assumption to change the direction of the conclusion. On a large project such as a dam or river-diverting exercise, the people who want the project to go through may overestimate the benefits and underestimate the costs.

Environmentalists opposing the project may do the opposite. And whenever it gets to the point of getting an honest CBA about global warming, we will not be able to go from a simple decision tree analysis to determine what we need to do and when and how to do it. We also have to think about the inter-generational aspects of our policies. If we do nothing today we may be handing future generations a terrible legacy. On the other hand, if we invest billions today for the future scenario that is not as devastating as some expect we have wasted today’s resources.and increased the debt burden on our children.

To start the decision tree we have to decide whether or not we accept the science . There are still a few flat-earth types in high places who aren’t on board. I think we can safely start on a journey without them. The next step, assuming we have come up with an honest CBA of a project to deal with warming, is to.run it through a series of expertly designed scenarios.

To be continued