Friday, June 16, 2017

Jobs are No Reason to Quit the Paris Climate Agreement

Donald Trump cited “jobs” no fewer than eighteen times in announcing his plans to withdraw from the Paris climate agreement. Nonsense. Jobs are not a good reason—in fact, they are no reason at all—for that decision.

Let’s start with the fact that the US economy doesn’t really need more jobs. We are already awash in jobs. At the macro level, there is no sign that the Paris accord, in place for over a year now, has hurt the steady growth of employment. Neither has it slowed the decline of unemployment, which reached a 16-year low in May. Take a look at the charts. Do you see a sharp break over the last year, since the agreement was signed? I don’t.

To be sure, the Paris agreement is not yet fully in effect, but markets are forward looking. If employers expected the agreement to put the brakes on growth, they would have been holding off on hiring already. What would be the use of taking on workers you are just going to have to lay off as soon as those onerous regulations come into play? If the charts tell us anything about Paris and the job market, it is not how great the employers expect the effects to be, but how small.

But that’s just the macroeconomic perspective. What about low rates of labor force participation and declining labor mobility? Those are real problems, but they have been around, and growing more serious, since long before the Paris agreement was even in the planning stages. Getting out of Paris will not fix them.

Wednesday, May 31, 2017

Would Hayek Have Supported a Carbon Tax? A Rejoinder to Robert Murphy

 On April 12, I posted "Hayek on Carbon Taxes: Prices Without Markets or Markets Without Prices?" both on this site and that of the Niskanen Center. On May 30, Robert P. Murphy posted a response on the Institute for Energy Research. I submitted a rejoinder as a comment, but some readers of the IER site have not been able to view it, so here is my rejoinder in full.

(1) With regard to “hijacking the legacies of deceased libertarians”: I would have thought that it would be obvious to any reader that to say, “Hayek would have supported a carbon tax,” is simply a rhetorical device that means “Hayek’s works contain arguments that bear directly on this issue.” I said that explicitly in the first sentence of my post. There is no hijacking going on here.

To be sure, beyond the substantive issues, there is the parlor game of finding quotes in the master’s text to illustrate one’s own views. I am happy to engage in that parlor game, as long as we both recognize that is all it is. So, in the spirit of the game, here is a quote I did not use in my original post, but which seems relevant to the discussion, and somewhat at odds with the one you cite:

“Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. . . In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created, does not prove that we should suppress competition where it can be made to function.” (Road to Serfdom, p. 40)

Here Hayek goes even further than I would. I have not suggested resorting to “direct regulation,” as Hayek does, but rather, to the somewhat less intrusive administrative action of imposing a price that, although it does not directly arise from competition, still serves the purpose of notifying market participants that the resource in question (the waste-disposal capacity of the atmosphere) has non-zero value.

IMO, Hayek puts the burden on you to explain how “competition can be made to function” in the absence of prices, or how carbon prices can be made to emerge spontaneously (even better).
(2) I don’t recall mentioning the social cost of carbon in my post, so I don’t see why I should be asked to “admit” anything one way or another about the Obama administration’s SCC estimates. 

However, let’s stipulate, arguendo, that they were ideologically biased. Without going back to check the documents in question, it was my impression, the last time I read them, that the high end of the range of SCC estimates was biased mostly by the assumptions made regarding the discount rate rather than those regarding the ECS. More generally, I have found that the discount rate issue dominates the ECS issue in all discussions of the SCC, not just those of the Obama administration. This seems like a side issue, though.

(3) You write, “So it’s true, Hayek was not in principle opposed to a tax on negative externalities, but as a pragmatic matter he warned that limitations on knowledge should make us very wary of rushing in to “fix” the market outcome when we are operating in a sea of ignorance. This is the exact opposite of Dolan’s conclusions from Hayek’s writings on knowledge.”

Actually, what you write is completely consistent with my views. Yes, let’s be wary of “fixing” every alleged market failure. Amen. However, sometimes we have to face the reality that we are operating in a “sea of ignorance,” as you put it, or, to use the standard language of business and economics, that we are engaging in decision-making under uncertainty. Yes, we do not know the optimal carbon price. Given our uncertainty, we must decide whether to act as if the optimal price is zero (that is, to do nothing) or to set it at some positive value, which we cautiously set at a level near the lower end of the range of plausible values. That is the way that real economic decisionmakers in business or finance go about things when they have to set the price on a new product or submit a bid for an asset the true value of which is “hidden in a sea of ignorance.” 

In short, the burden of proof is on opponents of carbon pricing to show that zero is the true optimal value. The awkward thing about that is that there are no purely economic arguments that arrive at that result. That is why the opponents of carbon taxes always fall back on arguing the science of climate change, not the economics of climate policy. They never dare to answer the central economic question, which is, “If it were the case that the social cost of carbon had a nonzero and positive value, then what would be the correct policy response?”

Monday, May 22, 2017

Economic vs. Personal Feedom in Singapore

Today’s New York Times carries an op-ed by Singaporean novelist Balli Kaur Jaswal on censorship in her home country. It begins by describing the deletion of scenes from American TV shows that feature taboo subjects like vibrators and nonbinary gender identification. It continues with a tongue-in-cheek account of her efforts, together with high-school friends, to figure out just what “sex” was by raiding their mothers’ stashes of contraband women’s magazines. But the real point of the op-ed is a serious one: In Singapore, freedom of information is spotty, at best.

The story sent me running to one of my favorite data troves: The rich collection of statistics on economic and personal freedom put out by the Cato Institute’s Freedom of the World project. Singapore is famous for its economic freedom. On the Cato economic freedom scale, it earns a score of 8.71 out of a possible 10, second only to Hong Kong’s 9.03. The high rating is helped along by sound money, free trade, and a small government, along with perfect 10s in areas like freedom to dismiss workers, freedom from minimum wage requirements, and freedom to practice your chosen profession without a license. These economic freedoms pay off in terms of prosperity. Singapore’s GDP per capita is third in the world, after Qatar and Luxembourg.

When it comes to personal freedom, though, it’s another story. On Cato’s personal freedom index, Singapore ranks seventy-seventh out of 159 countries, a little better than Cambodia or India, but not as free as Turkey or Papua New Guinea. What’s the problem?

Friday, April 21, 2017

How Big Government Affects Freedom and Prosperity

Economists, libertarian economists included, love to measure things. The Human Freedom Index (HFI) from the Cato Institute is a case in point. Its authors have assembled dozens of indicators of personal and economic freedom. They invite interested researchers to use them to explore “the complex ways in which freedom influences, and can be influenced by, political regimes, economic development, and the whole range of indicators of human well-being.”

I am happy to accept the invitation. This post, the first of a series, will take a first look at what we can learn from the data about the relationships among freedom, prosperity, and government. The relationships turn out to be not quite as simple as many libertarians might think. 

The Data

The Human Freedom Index consists of two parts. One is the Economic Freedom Index (EFI) from the Fraser Institute, which includes measures of the size of government, protection of property rights, sound money, freedom of international trade, and regulation. The other is Cato’s own Personal Freedom Index (PFI), which includes measures of rule of law, freedom of movement and assembly, personal safety and security, freedom of information, and freedom of personal relationships. The Cato and Fraser links provide detailed descriptions of the two indexes.

In order to explore the way freedom influences other aspects of human well-being, I will draw on a third data set, the Legatum Prosperity Index (LPI) from the Legatum Institute. The LPI includes data on nine “pillars” of prosperity, including the economy, business environment, governance, personal freedom, health, safety and security, education, social capital, and environmental quality.
The EFI and PFI cover 160 countries and the LPI 149 countries. In this post I will use the set of 143 countries for which data are available in all three indexes. The Cato, Fraser, and Legatum links above provide detailed methodological information.

Thursday, April 13, 2017

Hayek on Carbon Taxes: Markets without Prices or Prices without Markets?

As far as I know, Friedrich Hayek never wrote a word about climate change, but two of his most famous works contain arguments that bear directly on this key issue of environmental policy. Judging from what he wrote about the role of science in public policy and the use of knowledge in society, I think that if he had lived on into the twenty-first century, he might have supported a carbon tax.

The role of science in public policy

Hayek’s 1945 article, “The Use of Knowledge in Society,” draws a distinction between two kinds of knowledge. One is “knowledge of the particular circumstances of time and place,” that is, knowledge that is widely dispersed among individuals, each of whom sees only a small part of the whole picture. The other is scientific knowledge, which, he says, we can reasonably expect to find in the possession of a suitably chosen body of experts.

Most of the article focuses on how best to make use of dispersed knowledge. However, near the beginning, Hayek comments briefly on the role of scientific knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available— although this is of course merely shifting the difficulty to the problem of selecting the experts.

Hayek quickly moves on to his main subject, but he returns to the issue of scientific knowledge several years later.  In a 1960 essay, “Why I am Not a Conservative,” he explains the differences between the conservative worldview and that of “liberals,” a term Hayek uses in the European sense for what Americans would call classical liberals or libertarians. Liberals, he says, are prepared to come to terms with new scientific knowledge, whether they like its immediate effects or not. Conservatives, in contrast, are more wary of science:

Monday, April 10, 2017

High-Risk Pools Pose a Dilemma for Conservatives

High-risk pools have played a prominent role in the debate over U.S. health care policy, especially on the conservative side. In contrast to liberals, who lean toward a single-payer system or public option, conservatives would like to limit the government’s role to the very sick and the very poor. For the poor, they seem ready (grudgingly) to accepted Medicaid, or something like it, as long as coverage is limited to the “truly needy.” What to do about the very sick is a more complicated problem. High-risk pools, which both HHS Secretary Tom Price and House Speaker Paul Ryan have endorsed, offer a possible solution, but one that comes with issues of its own.

High-risk pools in theory

High-risk pools are a response to the inability of private companies to offer insurance at an affordable premium unless their pool of customers has enough healthy individuals to keep average  claims low. If too many sick people join the pool, claims and premiums, begin to rise. Rising premiums cause healthy people to drop out of the pool and take their chances on life without coverage. The dropouts push premiums higher still for those who remain in the pool until, eventually, no one can afford coverage. Economists call this phenomenon adverse selection. It is popularly known as a “death spiral.”

The traditional way of dealing with adverse selection was to practice medical underwriting, which means dividing the population into separate pools according to health status. If medical underwriting is permitted, insurers quote premiums that reflect the actuarial risk of each pool. They may refuse altogether to cover people with pre-existing conditions, cover them only at very high rates, or place caps on annual or lifetime benefits.

Although it keeps premiums affordable for the relatively healthy, medical underwriting inevitably means that some people cannot obtain coverage at an affordable premium, or have exhausted their coverage by reaching their spending caps. Before the Affordable Care Act (ACA or “Obamacare”) limited medical underwriting, many states created high-risk pools to meet their needs. Such pools were not intended to be profitable and were supported by government subsidies.
Described in this way, high-risk pools sound like a good compromise between the comprehensive government health care found in the rest of the developed world, and a purely market-based system that would make health care unaffordable for any but the healthy and the wealthy. What could go wrong? Several things, it turns out.

Saturday, April 1, 2017

Universal Healthare Access is Coming to the US. Stop Fighting It. Make it Work.

Many observers are describing the dramatic failure of the American Health Care Act (AHCA) as a debacle, but perhaps it will prove to be a step forward. As everyone knows by now, the United States is alone among advanced economies in not having universal access to health care, but it is already much closer to such a system than most people realize. The defeat of the ACHA may be a tipping point in which the forces trying to figure out how to make universal access health care work gain the upper hand over those that are fighting it.

The true scope of government in our healthcare system

The term “single payer” is often used to describe the healthcare systems of other high-income countries. Although that is a convenient term, it is not entirely accurate. As the following chart of healthcare spending in OECD countries shows, all countries use a mix of private and public payments. Furthermore, even in many countries where the government share of spending is high, the actual administration of payments is split among several funds, trusts, or regional agencies. There are no countries where all health-related services, including optical and dental services, drugs, and long-term care, are entirely free to patients without co-pays or deductibles.  Healthcare systems of OECD countries also differ widely in such aspects as whether facilities are publically or privately owned, whether doctors are public employees or independent practitioners, and whether private provision of healthcare, in competition with public services, is encouraged or discouraged.