The Ambrosini Critique

(h/t volokh)

Sometime, long ago, I got the religion that free trade is good. It seems so obvious that freeing people to trade at will must make them better off. If it didn’t, they wouldn’t trade. Right?

I don’t know if I should be more bothered by the fact that I just *believe* this economic dogma without knowing precisely why its true or that some of the best economists can’t agree on why its true (or if its true at all).

It seems to me the argument is over how fast it takes economies to shift from one equilibrium to another*. Proponents of free trade are saying “in the long run and under ideal conditions, trade makes everyone better off” and opponents are saying “the day after trade is made free, some people are made worse off.” If this is a good characterization of the debate, then it seems the policy implication is pretty clear. Let’s make trade free, but figure out ways to ease the transition to the new, better world.

UPDATE: Tyler Cowen weighs in.

UPDATE 2: macroblog talks theory vs. reality.

*Saying factors are not mobile is equivalent to saying the transaction costs for moving factors are really high. A legal trade barrier doesn’t make it physically impossible to move factors, for example, it just means its really expensive to do so (because if you do so and are caught they call you a smuggler and you suffer punishment or, worse, opprobrium). Adjustment costs add interesting dynamics to models, but if they change the welfare implications of a model I don’t see why the policy isn’t to just remove the the adjustment costs. In other words, if Rodrik is right about Heckscher-Ohlin being a better model than Ricardo, why not remove the barriers that are making capital immobile (e.g. remove trade barriers, increase access to capital markets, etc)? If the observed dynamics can only be replicated by adding transaction costs to our models (e.g. immobile capital, CIA restrictions in money models, etc), shouldn’t the policy be to remove those frictions? Go ahead, start lecturing me about second best policies, but you have to explain why we’re in the second best world to begin with.

Researchers at MIT and UCSB (which by the way has a lovely campus) found small positive effects (an increase in profits of 4%) of global warming for U.S. agriculture.

First, they looked at historical trends in the relationship of temperature and precipitation on agriculture profits.

They then used a climate model to predict temperature and precipitation in the U.S. Plugging those weather predictions into their estimated profit equations gave the predicted increase in profits.

Their results couldn’t preclude the possibility that there will be no effect of global warming on agricultural profits. It seems the debate is between those that think there will be a positive impact and those that believe there will be no impact. There’s no reason to believe there might be a negative impact of global warming on American agriculture.

At the Ask Philosophers website, there’s this question:

Put simply: does demand justify supply? If I sell an item – for instance, a computer-games machine – for a price that is much higher than either the RRP or the shop advertised price, and am able to do so given the scarcity of the item and the large demand for it, can I justify this by simply claiming that the fact that a person is willing to buy for that price justifies my selling it to them? Can this question be resolved so simply?

and this answer:

You are right to worry that this question cannot be simply resolved. In the case of the computer gaming machine, it seems reasonable to let demand determine the price. Even though people may very much want these new technological toys, nothing bad will happen to them if they cannot get them. But suppose we are talking about a scarce drug that has the potential to cure a life-threatening illness, such as bird flu? Or what about the resources (space in a car, or gas, say) to flee a city about to be overrun by an invading army? Those who hold these scarce and potentially life-saving resources are in a position to exploit the vulnerability of those whose life depends on having access to them. Whether it is morally acceptable for demand to determine price depends on whether the thing is needed or merely wanted; and if it is needed, how acute that need is. This means that, as you suspected, there can be no simple answer to your question.

The implied policy here is that people that hold “scarce and potentially life-saving resources” shouldn’t be allowed to charge as much as the market would bare in times of crisis. Sometimes this is is called price gouging, like when people start selling gallons of water for outrageous prices after a hurricane.

This policy makes sense if you just evaluate the effects on incentives today. It is outrageous to charge thirsty, desperate people lots of money for necessities like water. But if you consider the incentives in the future you’ll get a different answer.

If ‘price gougers’ are allowed to charge a lot for necessities during a crisis, they’ll have incentive to stock pile those necessities. If the price is high enough to warrant it, the higher price will encourage competition between stock pilers and the price, in turn, will go down. The net effect is that more of the necessities will be available during a crisis.

Without price gougers, hurricane victims are at the mercy of the government or volunteers to provide them necessities. The ample evidence, at least for the former, of complete incompetence makes me want to throw my lot in with the price gougers…

The long run consequences of freeing a half million of the smartest Americans, to changing their activities from reducing tax burdens to doing something productive like providing goods and services is enormous.

— Alvin Rabushka

Don’t tell my dad the CPA.

Prof. Knittel talks about gas prices. Consumers aren’t responding to the increases in gas prices as much as they did in the 70’s.

What’s different about the now versus the 70’s that consumers are so much less responsive to price changes? The obvious answer, at least to me, wasn’t mentioned in the article, but is discussed in the associated research paper:

Another hypothesis is that as incomes have grown, the budget share represented by gasoline consumption has decreased making consumers less sensitive to price increases. The price income interaction model presented here provides insight into this hypothesis. If increasing income results in a decrease in the consumer response to gasoline price changes, one would expect the coefficient on the interaction term of the model to have a positive sign. However, in both periods we find that the coefficient on the interaction term is negative suggesting that on average, gasoline consumption is more sensitive to price changes as income rises. This somewhat counterintuitive result is supported by the household gasoline demand analysis conducted by Kayser (2000) who also finds a negative coefficient on the price income interaction term. The hypothesis proposed by Kayser is that as incomes rise, a greater proportion of automobile trips are discretionary. Alternatively, at lower income levels, the amount of travel has already been reduced to the minimum leaving little room for adjustment to higher prices. Another possible explanation is that the number of vehicles per household increases with income. When the number of household vehicles exceeds the number of drivers, there is the possibility for drivers to shift to more fuel efficient vehicles within the household stock as gasoline prices rise. Whatever the explanation, the overall decrease in price elasticity despite growth in incomes suggests that these effects are relatively minor compared to other factors affecting gasoline demand.

These results are extremely important if one thinks its a good idea to raise gas taxes. If consumers don’t respond to the higher after tax price by buying less gas, then you’re getting all the bad stuff that comes with taxes (consumers are poorer with the tax so they buy less stuff) and your not getting any of the “good” change in behavior.

Let every American, every lover of liberty, every well-wisher to his posterity swear by the blood of the Revolution never to violate in the least particular the laws of the country and never tolerate their violation by others. As the patriots of ‘76 did to support the Declaration of Independence, so to the support of the Constitution and laws let every American pledge his life, his property and his sacred honor. Let every man remember that to violate the law is to trample on the blood of his father and to tear down the charter of his own and his children’s liberty. Let reverence for the law be breathed by every American mother to the lisping babe that prattles on her lap. Let it be taught in the schools and the seminaries and the colleges. Let it be written in the primers, spelling books and in the almanacs. Let it be preached from the pulpit, proclaimed in the legislative halls and enforced in the Courts of justice. And, in short, let it become the political religion of the nation. And let the old and the young, the rich and the poor, the grave and the gay of all sexes and tongues and colors and conditions sacrifice unceasingly upon its altars.

— Lincoln (Quoted in a great speech by Justice Thomas where he squares his “originalism” with the original constitution’s institution of slavery. “In Lincoln’s day, no less than in the Founding era, secession meant the establishment of a regime on this continent, devoted to the perpetuation of slavery, rather than merely one which suffered its existence.”)

I think Lincoln’s words are true, but I also think lawmakers should appreciate the burden this “religion” places on citizens before they pass even more laws.

(h/t volokh… which has been extremely excellent recently)

… stupid fast.

See here:
Facts:

1: Global mean temperatures have increased 0.5C-0.7C since 1900.
2: CO2 has increased from about 280ppm to 383ppm since pre-industrial times
3: Human CO2 emissions were about 24 billion metric tons in 2002
4: 24 billion tonnes would be about 0.8% of the 2.996×10^12 tonnes of CO2 in the atmosphere, or about a 383 ppm * 0.008 = 3ppm annual increase
5. The actual annual increase in atmospheric CO2 is about 2ppm, less than #4, so a “CO2 following temperature” can probably be ruled out for the current trend.
6: All other variables being fixed, every doubling of CO2 concentration would increase global temperatures by a fixed amount. (aka saturation of the infrared absorption of the CO2)
7. Because of #2 and #6, some part of the temperature increase in 1 should be caused by CO2 forcing.
8: Climate feedbacks can reduce or increase the affect of any given temperature forcing
9: According to Hansen et al in 2003 (missing my citation, sorry), the CO2*forcing is 3 degrees C per doubling of CO2 concentration
10: At the rate in #9 and a 3ppm rate of change (higher than current levels) in CO2 levels, in 2157 CO2 will be 832ppm and the temperature delta would be 4.7C.
11: The temperature delta in #10 would cause significant changes to ecosystems, food supplies, and economies.
12: Major changes are usually catastrophic, QED.

IMO, The so called “consensus” of climate scientists covers items #1-8 above. The part that starts to get really really iffy is item #9. Hansen himself revises his figure every few years, and has rather large error bars on it. Also, if Hansen’s numbers were correct for historical data, we would have seen a temperature delta of 1.35C, where we have only seen 0.5-0.7C—and that is ignoring that temperature does indeed correlate to solar forcing very well for about half of that temperature increase.

The only non-debatable issue is that there is some temperature increase due to human CO2 emission. The magnitude of CO2’s historical contribution to temperature is debatable, and the magnitude of future CO2 emissions is a step above guesswork (maybe two steps). Add to that the question of whether warming is bad in the first place (which is probably a function of how much warming we’re talking about, which is guesswork), and the question of what we can do about it anyway (not much without nuclear or draconian measures to change our energy consumption), and I think I can safely say that debate is still called for here. (emph. added)