Gas booms and carbon leakage

Following what I hope is my last written exam ever earlier this month, I must apologise for the sporadic posting of late. You see, I've also made my way home for a surprise visit to see the family and life is very much in the slow lane at the moment. (This is what we are dealing with, folks.)

Nonetheless, I did manage to write up something for the Recon Hub last week.Contrary to some negative Nigels, I argue that the availability of cheap American gas will not result in U.S. coal flooding the export market (and thereby undermining climate efforts on a global scale). The reason for this is that Europe has a cap-and-trade system in place and that means imported U.S. coal might displace coal from other regions, but not in a way that leads to materially higher emissions.

Gas Booms and Carbon leakage

... It seems to me that most commentators are missing something quite fundamental.  Namely, that Europe has an emissions trading scheme in the form of the EU ETS. This arrangement naturally places a cap on the total level of emissions, so that the influx of cheap American coal should matter little from a climate perspective. After all, the beauty of a cap-and-trade system is that it guarantees environmental effectiveness in a way that is indifferent of how you might achieve it. As long as the cap remains in place, the market can be allowed to figure out the most efficient way of reaching it. (The climate doesn’t care if CO2 emissions come from burning American or Polish coal, so why should we?)

The current situation also points towards an interesting strategic development. Thus far, Europe has effectively acted alone in establishing a multi-national carbon market with binding emissions targets. A chief criticism of this unilateral approach is that it could ultimately just encourage carbon leakage, as polluting firms and fuel sources move to regions without binding targets. However, I have just described a scenario that largely precludes such an outcome. The proliferation of domestic gas resources may be forcing U.S. coal producers to look elsewhere, but the EU ETS places concrete limits how much of an effect this can have on global emissions.

...

The limits of reductio ad absurdum

Unlearning Econ has a new post up on Milton Friedman in which he, among other things, criticises Friedman's use of reductio ad absurdum arguments to win debates. I have a number of reservations about the use of reductio ad absurdum in the social sciences myself, and this seems as good a time as any to write them up. (I'll refrain here from commenting on UE's direct criticisms of Friedman.)

Reductio ad absurdum (RAA) is a reasoning technique where a set of hypotheses are shown to result in absurd or untenable situations if taken to their full logical conclusion(s). An invaluable tool in much of mathematics and pure logic -- where it is really a form of proof by contradiction -- I'm less convinced of RAA's usefulness in human affairs.

Interestingly, RAA appears particularly popular with groups on the extreme ends of the ideological spectrum. To the best of my knowledge, for instance, anarcho-capitalists base much of their belief system on some form of RAA reasoning or another (abetted perhaps with an appeal to natural rights -- a rather dubious concept to my mind). However, absolutist or deontological reasoning can take you to some pretty uncomfortable places very quickly. Even perfectly sound concepts are not immune to being overwhelmed by RAA-type arguments.

Consider that fundamental pillar of any market-based economy: property rights. It's hard to imagine that any prosperous and vibrant society could be sustained for long in the absence of property rights. However, a property rights regime doesn't fare particularly well under the scrutiny of RAA reasoning. For one thing, it implies that we should hold the wishes of the property owner as sacrosanct. I can then easily hypothesize a situation where the productive activities of the world are dramatically constrained by a small group of individuals who refuse to compromise on any violations of their own property. For example, here's an older post that considers the case of climate change and a group of radical environmentalists whose love for nature is not for sale. I think that my conclusion remains valid: "Libertarians that slavishly hold personal property rights above all else would inadvertently open the way for eco-fundamentalists to enjoin virtually all industrial activity. In doing so, they would threaten to form an unholy coalition that makes it impossible for society to react to an immensely complex problem [i.e. climate change] in any sensible way. They would, in effect, become Baptists and Bootleggers for the 21st century."

Another example of dubious RAA reasoning that I encountered recently was on the subject of gay marriage. One of the conservative discussants in our group cautioned that if men (or women) were allowed to marry other men (women), then what grounds did we have to stop someone from marrying a tree or their dog? Leaving aside the problems of mutual consent -- how does Fido feel about this? -- the problem here is that this remorseless logic applies equally to marriage between a man and woman! If John and Judy are allowed tie the knot, then why can't Ken take his vows with that splendid bougainvillea over there? The point here is that sometimes you can't salvage an argument by logical reasoning alone, especially where social institutions and ethics are concerned. The boundaries that we place on things may be arbitrary in the scheme of things, but that doesn't make them senseless. I am also comforted by the fact that social norms evolve over time, even if the pace on certain subjects like gay marriage is unacceptably slow.

THOUGHT FOR THE DAY: Be cautious of arguments that are "won" by reductio ad absurdum. Very few things in our social and moral landscape are black and white, so that even the soundest concepts may not survive the absurdity of being taken to their full conclusions.

Are there limits to (electricity) market liberalization?

Well, I don't want to give the game away, but my sources tell me that there might be...

Coffee drinkers and energy subsidies

Busy times over here with term papers due, TA work and finishing up some revisions for my current working paper. (Referee comments were pretty favourable, so I'm quietly confident.) Still, here's something that I wrote for the Recon Hub blog earlier today: Of caffeine and energy subsidies.

As the title suggests, I draw an ingenious[*] parallel between coffee drinkers and energy producers of the world. Or, at least, I try to ask the question of whether per-energy-unit subsidies are more important than the absolute level of subsidies? This is an important issue that often gets brought up the renewables vs fossil fuels debate... Get the answers here!
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[*] Open to interpretation.

Debt and utility come alive!

As promised, here is an interactive Excel spreadsheet showing how utility changes in a debt-financing scenario versus the laissez faire case. Read my previous post to get a sense of the motivation.

The spreadsheet is based on Bob Murphy's initial table, albeit with some slight changes. Perhaps most importantly, I assume that old people may now earn less than young people (where the Old:Young income ratio is determined by the parameter "a"). And we can obviously vary all other parameters as desired.

As we can see, it is ultimately the combination of variables and parameters -- say nothing of the assumptions used within this simple model -- that determine whether people are better off as a result of deficit financing and transfers. E.g. All else equal, a lower "a" will mean that government is able to transfer more from Old Al to Young Bob in the first period (i.e. higher "t"), whilst not lowering the utilities of future generations. Indeed, "t" is the most interesting parameter from my perspective since this is the one that Government must decide on when all the others are given exogenously.

For a more specific example, plug in the following values: r = 100%, g = 500%, a = 0.5 and t = 3. Clearly these large growth rates are absurd, but they serve to illustrate how subsequent generations can actually suffer a relative loss in utility if GDP growth ("g") is significantly higher than the interest rate ("r"). As I explained in my previous post, this is because I am assuming a diminishing marginal utility (DMU) function. However, you can offset things by now plugging in a = 0.2. This gives you an idea of how important the interplay between our parameters is.

I'd obviously encourage you to play around with things and see how your results change. As an added bonus, I've included a formula (in the light blue cell) that works out the maximum transfer for maintaining a neutral effect on utility, when we assume that utility is logarithmic.[*]



Please feel free to share and adapt as you wish. Of course, a pointer towards the original source would not go amiss.

THOUGHT FOR THE DAY: Relative to the non-intervention case, government deficits may or may not have negative consequences for the utilities of future generations... Like everything else in life, it depends on our starting assumptions. I sense that this might not be the definitive answer that some of you were hoping for, but so be it. That said, I'd suggest that plausible values for our parameters would be r = g = 3% and a = 0.75. In this case, one notes that government in our simple model could actually improve utilities quite easily by using deficit finance. (In the logarithmic utility case, they can transfer anything up to 25 units and still yield an improvement in the utility levels of future generations.)

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[*] The formula is based on equating the laissez faire and deficit utilities:

ln(X) + ln(aX) = ln(X - t) + ln[(1 + g)aX + (1 + r)]

Taking exponents and a bit of algebra allows us to solve for t:

t = [1/(1 +r)] * X [(1 +r) - a(1 + g)]

The plot thickens in the debt debate

Since joining this debate, I have consistently argued that deficit financing is no less sustainable than taxation if economic growth is at least equal to the interest rate (i.e. g >= r). The models that I have discussed so far always seemed to assume that the reverse was true, so it was completely unsurprising that future generations ran into trouble in these scenarios at some point. It was an inevitable outcome of the design.

As a corollary of this, I also assumed that individual's utility would not be adversely affected if g >= r. To be sure, some important qualifications need to be made here. Most notably, in economics we typically assume that people have diminishing marginal utility (DMU) with respect to consumption. This effectively means that they value losses higher than equivalent gains at any given income level. (If I have 100 apples, then I would lose more utility from having three apples taken away from me, than I would gain in utility if someone gave me three apples.) Of course, this is why we generally think it is better to tax rich people and give that money to poor people, rather than the other way around. 

In this case, deficit financing would improve individual utilities if it meant transferring money (or apples) from a young generation that was wealthier than the old generation.[*] The relatively poor old generation would value the gain in apples more than the rich younger generation would value their loss. And, of course, it certainly seems reasonable to assume that old people will be earning less direct income than young people at any moment in time (due to retirement, etc). This is at least a standard assumption in the OLG literature to the best of my knowledge. I tried to make these points more explicitly in this comment to Nick Rowe... 

However, I had something of an epiphany walking home from the pub last night. (Two epiphanies if you include the realisation that I really should have brought an umbrella with me.):

What if high GDP growth is actually bad for individual utility when a government is using deficit financing? More specifically, what if g > r is the very thing that causes the utilities of future generations (at some point) to fall relative to what they would have been under the laissez faire scenario? This may seem pretty counter-intuitive -- at least it was to me until last night -- but the reasoning is actually pretty simple. Again, it comes back to our old friend: diminishing marginal utility (DMU).

If g exceeds r then at some point a "poor" old generation will be relatively more well off next to their "rich" young selves. Economic growth will outstrip the relative increase in bond repayments. In this case, DMU kicks in such that the transfer from young to old becomes a net "loss"... at least relative to non-intervention scenario. 

I'm not sure whether this is an easy point for people to digest in written form. I sense that it would be much easier to show this in mathematical terms than the long verbal description that I have given above. Nonetheless, I've actually made an Excel spreadsheet that shows that the intuition is correct. As soon as someone is able to tell me how I can upload an active Excel sheet to a blog, I'll do so. [UPDATE: Here it is.]

Make no mistake, g =? r is not the only thing that matters here. Another key issue, for example, is the ratio of old people's incomes relative to the incomes of young people. That's why I want to upload an interactive version of the spreadsheet, so that people can play with different parameter values to see how relative utilities are affected.

I don't know what this means in the context of original blogosphere debt blowout. Frankly, I'm not even particularly interested in who said what at this point. The assumptions that we've been working with are pretty far removed from many of the real-life reasons for taking on debt in any case (e.g. Debt could spur innovation or actually boost economic growth relative to the counterfactual). However, it was an interesting "theoretical" result for me. Nick Rowe may have been making a more profound point than even he realised.

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[*] Strictly speaking, what matters in this case is that any young individual (or cohort) is relatively wealthy relative to their older selves. I have more disposable income available when I am working than when I am retired.

Even more debt and inheritance (and sales)

Bob Murphy and another commentator have left some interesting observations underneath my last post. They basically want to distinguish between straight-up bequests versus the sale of bonds to the next generation. I was going to leave a response there, but figured that this may be long enough to warrant it's own post.

Bob writes:

You're right, if people in the future are literally bequeathed the bonds from the previous generation, then they are OK (holding all other bequests constant). But what if the previous generation *sells* the bonds to them? Then they're screwed.

My immediate response is to say: "Okay, but what if these young people buy bonds only to resell them to the next generation in the following period?" That seems perfectly consistent with the other assumptions of this model. Taking it for granted that this option is available to every subsequent generation, we would be in exactly the same position as we started with. i.e. This is ultimately a problem of GDP growth being lower than the interest rate... Something which everyone seems to agree upon.

As a thought experiment, however, let's consider the alternative: What if the younger generation refuse to buy the bonds off the old generation? These old timers are now stuck with bonds that they can't sell and, assuming that they decide not to leave any bequests out of spite, what happens next? Well, surely both the bonds and corresponding government debt are extinguished at the start of the next period. In this case, government no longer has a need to finance any outstanding debt burden. We are back to the laissez faire outcome for all future generations.

To be sure, in this scenario one particular generation -- (e.g.) Frank -- will be made worse off, at the same time as everyone else is fine. However, having said that, government could step in at period 6 to maintain Frank's lifetime utility. It does this by taxing Young George an eye-watering 96 apples and transferring them to Old Frank. Of course, now the government is finally at an impasse in period 7. It physically cannot tax Young Hank enough to offset (Old) George's initial losses, since 96*2 > 100 annual production. However, that is an artefact of the model set-up, where any form of debt financing is de facto unsustainable given that we have imposed a positive interest rate and zero economic growth!

The way I see it, this keeps returning to one unavoidable conclusion: The "bad" outcomes of Bob's model can all be traced back to the fact that the interest rate exceeds GDP growth. Everything else is paper fodder.

Debt and inheritance

UPDATE: Spotted an important typo in the text that I've now corrected for. I've also added a sentence or two to the paragraph before the Baker quote to hopefully make things clearer.

Believe it or, but there are people out there who haven't been following this whole government debt debate from the very beginning. (That is, whether locally financed debt can ever really be a burden to future generations since we effectively owe it to ourselves. ) After a recent link from Daniel Kuehn, I finally decided to bite the bullet and have a quick look over some posts. I may be covering very stale ground here, but please bear with me while I wade in at this very late stage.

Right, so following from Daniel's links, I've clicked through to Bob Murphy's blog. Bob is shameless about his addiction to this debt issue and apparently has infinity + 1 posts on it. I've read these two. (And didn't even make it to the comments!) 

Bob neatly summarizes his (and Nick Rowe's) position via this nifty table, which shows an OLG endowment economy with 100 apples produced in each period and a 100 percent interest rate:

Using the above, Bob claims victory over people like Dean Baker and Paul Krugman, who have ostensibly been arguing that public debt cannot make an economy poorer if it is owed to its citizens. (We can see that all the people in red colouring from period 6 onwards are worse off.)

Nonetheless, I immediately have several questions upon seeing this table, including the obvious comment that you will always run into long-run problems if the interest rate exceeds GDP growth. Nonetheless, I'll stick to my most structural observation:

All the action effectively happens in period 6 when the government switches financing schemes. (In addition to young people financing old people, those same old people are now also being used to "pay back" their younger selves.)

However, it seems to me that Bob's model is missing the fundamental part of Baker et al.'s argument. Clearly, "old" Frank is not being compensated for the money that he is being taxed to pay back to his "younger self". In other words, it is the switching of financing schemes that matters. As I understand the Baker et al. argument, Frank should have 86 apples' worth of bonds in period 6 that must be left to someone when he dies. No-one inherits "Old" Franks' bonds and, consequently, they can never be redeemed.

Here is Baker making this exact point:

As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children.

I think that a faithful representation of the Baker and Krugman argument would include the inheritance of bonds. In this case, from Old Frank to (say) Young Hank and so on. Of course, doing so here would mean that you run into a big problem because debt now exceeds total repayment ability. (i.e. 86 rolled over to period 7 at 100% interest is 174, which is obviously more than the 100 income available in any one period.) However, this is an entirely separate  issue and again stems from the fact that this particular model assumes an interest rate of 100%, while GDP growth is zero.

As it stands, and with apologies Inigo Montoya, I'm not sure that this table means what people think it means.

Climate, economy and ladies

As a postscript to the previous entry, here's a quick story about a newspaper interview that I had last week. It was with one of the major broadsheets of the region and related to the launch of our new website.

The interview itself went pretty well, I thought. The journalist was mostly interested in discussing our aims, as well as how we perceive the public's general understanding of environmental issues from an economic perspective.

At one point, he asked the inevitable question of how I ended up in Scandinavia all the way from Cape Town. I told him that it was mostly down to my interests in these very issues. You'd be hard pressed to find a country that has a better track record of managing its natural resources than Norway. It didn't hurt that I was also lucky enough to receive some generous funding offers.[*]

However, I went on to tell him a joke that I had heard from another Southern Hemisphere expat upon arrival, which is that people like us usually find ourselves in Norway for one of two reasons: Oil or women. It was a throwaway line of course (and quite obviously a jape), and I didn't think much more of it...

I suppose it reflects my media naivete then that I was surprised[**] by the headline that ran above my interview the next day: "Climate, economy and ladies".
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[*] E.g. For those of you thinking about doing a PhD -- but can't bear the thought of scraping by on a measly tuition stipend for four/five years -- consider this: Doing a PhD in Norway is treated as a job and you are paid accordingly. That is, your salary has to be somewhat comparable with what a Master's graduate could typically earn outside of academia. Accepted PhD candidates are thus awarded a "research scholarship" which currently amounts to around US$71,000 per annum...
[**] Mind you, probably not as surprised as my (non-Norwegian) girlfriend.

Review: Surviving Progress

Apologies for the lack of posting recently. Aside from research stuff, most of my "internet" time has been spent working on the RECONOMICS HUB.[*] We have now officially gone live and will hopefully see a consistent level of posting from the various contributors in the weeks and months to come. Please free to stop by and let us know what you think... or follow us on Twitter!

My latest contribution to the blog is a review of the film Surviving Progress (produced by Martin Scorsese). To summarize, the film is long on intent and activism, but often fails to make a convincing argument. A snippet:

In another segment, the film jumps from Ronald Wright’s idea of a “progress trap” — something which certainly has merit in of itself — to claim that modern technology is at complete odds with our primitive physiology. (Wright: “We are running 21st century software, our knowledge, on hardware that hasn't been upgraded for 50,000 years.”) The language is undeniably provocative but is it necessarily meaningful? After all, our knowledge and innovations didn't occur in a vacuum. It is certainly hard to believe that any technological development can persist without bringing at least some form of benefit to its progenitors. The very strong conclusions that the film draws don’t necessarily follow from the premises that it provides.

Surviving Progress relies on a number of interviews and some of these work better than others. I was particularly unimpressed by a clip involving "geneticist/activist" David Suzuki, who is unilaterally scathing about the economics profession. (He calls conventional economics "a form of brain damage").

So, according to Suzuki, “externalities” is a collective term that economists use to explain away pesky things like the ozone layer, topsoil and biodiversity. Hmmm… 

There’s no other way to put this, so I’ll simply come out and say that Suzuki has completely mangled the concept of economic externalities. I cannot think of a single economist who subscribes to anything approaching the definition that he gives. (I’d even be surprised if anyone that has followed an ECO101 class would define an externality in this way.) Suzuki could open any introductory economics textbook and discover that an “externality” is simply some spillover cost or benefit incurred by a third party, which is not accounted for in the market price.

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[*] Resources. Energy. Climate. Economics

Google this

2 sqrt(-abs(abs(x)-1)*abs(3-abs(x))/((abs(x)-1)*(3-abs(x))))(1+abs(abs(x)-3)/(abs(x)-3))sqrt(1-(x/7)^2)+(5+0.97(abs(x-.5)+abs(x+.5))-3(abs(x-.75)+abs(x+.75)))(1+abs(1-abs(x))/(1-abs(x))),-3sqrt(1-(x/7)^2)sqrt(abs(abs(x)-4)/(abs(x)-4)),abs(x/2)-0.0913722(x^2)-3+sqrt(1-(abs(abs(x)-2)-1)^2),(2.71052+(1.5-.5abs(x))-1.35526sqrt(4-(abs(x)-1)^2))sqrt(abs(abs(x)-1)/(abs(x)-1))+0.9

 And that's how you map complex functions my friends!

Sam Harris on "Life Without Free Will"

He is on top form in this one.

Here is a passage that resonates particularly strongly with my own meta-views of morality:

If we cannot assign blame to the workings of the universe, how can evil people be held responsible for their actions? In the deepest sense, it seems, they can’t be. But in a practical sense, they must be. I see no contradiction in this. In fact, I think that keeping the deep causes of human behavior in view would only improve our practical response to evil. The feeling that people are deeply responsible for who they are does nothing but produce moral illusions and psychological suffering.

Indeed. For more on these ideas ideas, see this old post which quotes liberally from an outstanding article by Frans De Waal.

Back to Harris, there's some dark humour mixed in with the profundity:

[M]y wife and I recently took our three-year-old daughter on an airplane for the first time. She loves to fly! As it happens, her joy was made possible in part because we neglected to tell her that airplanes occasionally malfunction and fall out of the sky, killing everyone on board.

Are charts of oil priced in gold really that impressive?

Okay, one more gold-related post before I go home...

Following on from my last post, I've just clicked through to Chris's website and seen a post titled, Petrol Price in Gold Terms, in which he argues that the recent rise in South African petrol prices are "not owed to higher petrol prices, but a much weaker Rand, caused by the Reserve Bank". [I assume by petrol prices he obviously means oil prices.] He continues, "In hard currency terms, the price of petrol is unchanged since 2002."

Chris isn't alone in making this argument, which is a favourite among gold fans. That said, I've never found it as persuasive or profound as others seem to do. If you read my previous post then you may already have guessed why, but here is the key passage:

Looking at [gold] prices first, we can see that these have been undeniably impacted by the rising costs of producing an ounce of gold. This can be put down to a number of things, but chief on that list would be rising energy costs (since mines are incredibly energy consumptive)...

Energy is a fundamental input in mining activity. Gold mines, which are deeper and more complicated to run than virtually all other mining operations, are clearly no exception. In that light, why wouldn't we expect the price of gold to track what is happening in the oil market? It would be roughly analogous to me saying that cupcakes have stayed at a constant price... in terms of flour.

Now, if you're about to argue that what I've said would hold for coal but not oil... Fuggedaboutit. The movements of coal and oil movements track each other very closely. So much so that oil prices are widely used as a proxy for coal prices when forecasting and hedging in the electricity industry (since they are also more liquid). This is true even in countries where oil plays an insignificant role in power generation. And, of course, mining companies still consume vast quantities of oil during their day-to-day operations regardless of which energy source fuels their electricity needs.

Anyway, to illustrate here is the price of gold per per barrel of oil since 1971, followed by the same for several commodities. These series were picked more or less at random and are taken from the World Bank's Data Centre. (Click to enlarge.)

Not much to choose between them, if you ask me. The point here is that virtually all commodities exhibit some kind of long-term mean relationship with oil. Indeed the increasing linkage between energy and non-energy goods was a driving factor in the commodities boom of recent years. Now, of course, scale matters here and it might be misleading just to eyeball separate charts. As one last treat then, here is a single chart containing the above commodities plus a few extra, normalized in terms of their respective units. (I pick 2002 = 1 for no better reason than this is the year that Chris used in his initial post.) Again, I think the message is pretty clear.

THOUGHT FOR THE DAY: All this talk about gold, but when are we going to have a serious discussion about the Fertilizer Standard, or the Soy Bean Standard?

Gold: Demand, supply and price

My old school friend and unashamed proponent of all things gold, Chris Becks, has left a few comments underneath this post in which I criticized misleading statements on the relationship between money supply and gold prices. After a bit of back and forth, I hope that we can at least all agree on the fact that it is simply wrong to claim "there is a 93 percent correlation between M2 and gold". However, Chris does raise a valid point about looking at both supply and demand factors. So I'm going to take the chance to do that and hopefully clarify my views on gold in the process.

First things first, here is a graph of the overall demand and production of gold from 2001 to 2011, which coincides with the gold bull run of the last decade. I've taken this data from the World Gold Council and have also included the gold price on the right-hand axis.

A few things immediately stand out. Demand and production are remarkably constant over the period despite the sustained price increase. Both  grow at an average rate of less than one percent per year over the full period. Demand exhibits a modest cyclical pattern, while production is almost flat. In fact, production even decreases slightly for a time -- even though, again, prices are rising![*] During these periods, additional demand must be met by recycled or "scrap" gold that is traded in second-hand markets. Of course, what we see here are simultaneous price-quantity combinations that clear the market, so we should avoid making direct comparisons with the classic demand and supply curves that one finds in text books. That said, it is undeniably striking that quantity is virtually unchanged over the same 10-year period where prices increase by over 450%. In technical jargon, this points to some extremely inelastic preferences.

Let's disaggregate things a bit to get see if we can get a better handle on what's really happening. The second graph that I'm going to show is gold demand broken up by major category: technology, investment and jewellery. I'll keep the gold price on the right-hand axis and will also include a line that captures the cost of mining gold.[**]

Things are starting to become much clearer. Looking at prices first, we can see that these have been undeniably impacted by the rising costs of producing an ounce of gold. This can be put down to a number of things, but chief on that list would be rising energy costs (since mines are incredibly energy consumptive) and the increased exploration and drilling costs that come with diminished supplies. Rising wage costs and depreciation costs are also factors.

We also see distinct trends emerging on the demand side. Gold use in the technological sector is extremely flat. The real change has occurred in the jewellery demand that has been displaced by investment demand. This is much more in line with what economic theory would predict; the demand for gold jewellery is (generally) decreasing in price. Economic theory would obviously also support the notion that demand for an investment good should increase as its value (i.e. price) increases. There is a complication, however, exactly because investment is fast becoming the primary force in maintaining overall demand for gold at record prices. Here are two ways of looking at it:

1. People are buying gold because other people are buying gold. This is classic bubble behaviour.
2. People are shifting towards gold because they believe that it has taken on a new level of intrinsic value. They regard it as providing a hedge against (tail) risk such as government insolvency or hyperinflation. They may even believe that it will gain increasing prominence in the international monetary system. 

Of course, the two cases above are not mutually exclusive. Different people have been purchasing gold for different reasons. However, it is important to understand what you are betting on when you buy gold. For example, do you really still believe that we are at risk of hyperinflation after our experiences of the last four years? (I say this even as there is growing consensus that we should encourage higher inflation to bolster the economy.) Alternatively, your position may simply be that central banks will accumulate more gold reserves and thus put upward pressure on the price. The latter notion strikes me as infinitely more reasonable than the idea that we are going to return to some kind of gold standard. (I don't just mean the likelihood that it will happen, but also the idea that it will somehow solve our problems and not create a host of new ones.)

In sum, I don't deride gold, but neither do I think it has any mythical qualities. This includes the ability to properly regulate the present-day international monetary system. I advised those close to me to invest in the stuff immediately after the crisis and this has obviously turned out to be a profitable decision. I also believe that current economic conditions will support a relatively buoyant gold price for some time to come. However, I recognise that gold is subject to market vagaries and uncertainties that no-one can properly claim knowledge of. That is why I regard gold as an important component of any investor's current portfolio, but would never recommend increasing your overall exposure above, say, five percent (and perhaps even half that). Moreover, what worries me is that the people who are really bullish on gold are staking their claims on events that my economic logic can only regard as pretty remote probabilities. I may be wrong, but I'm very nervous to load up on any asset whose value appears to be increasingly driven by long-shot bets.

NOTE: Comments disabled because of the inordinate amount of spam getting through. Spambots appear to love gold even more than libertarians.
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[*] I have discussed the negative short-run supply elasticity for gold in more depth previously. Scroll down to the bottom of this post if you are interested in that phenomenon.
[**] This is based on the authoritative "all-in" cost metric produced by precious metals advisory GMFS, which incorporates things like deprecation in addition to normal cash costs (per ounce). Unfortunately, I don't have information over the full period and had to piece together the figures from different sources. Still, I hope the general message is unaffected.

Starting a new blog...

A group of us at my university have decided to start a blog dedicated to tackling environmental issues from an economic perspective. Things are still very much in the development phase, but we've managed to get the basic structure up and have also decided on a cunning name: The REConomics Hub... as in Resource Energy Climate Economics. (Take that Freakonomics!)

The ultimate goal is to showcase the research that we are doing, as well as fill the gap in providing dedicated economic-based commentary on issues like climate change, energy use, resource depletion, etc, etc. I hope that some of the things I've written about here at Stickman's Corral will give you a flavour of things to come, though this will obviously be improved by the additional coverage and the possibility for divergent opinions.

Now, the site isn't "live" yet because we've still got a lot of things to sort out. However, we have written one or two test posts to give an idea of the format, etc... And I link to them here as a special treat to you with love from the Corral! Here is one written by my friend Patrick the compares solar PV to other energy sources. And here is one by yours truly[*] that looks at whether the concept of self-reporting in environmental economics has any relevance for drug cheats in sports. A snippet:

There are many parallels between the world of sport and environmental economics. In this case, you are dealing with “bad” behaviour that some regulatory authority is trying to eradicate (or at least discourage) through punishment. Compare the doping agency with, say, a fisheries ministry that wants to ensure that each boat sticks to its “quota”… You are effectively faced with the same problems of imperfect information and limited enforcement abilities. You don’t have the resources to check all the boats (or athletes) and, even if you did, there’s a chance that you wouldn’t find the illegal catch (or substances). 

To help overcome these issues, one concept that has become popular in the field of environmental regulation is self-reporting. To continue with our fisheries example, boats would have the option of reporting a catch in excess of their quota — provided they are subjected to a reduced fine as a reward for their honesty. The main idea here is that self-reporting allows the regulator to focus its scarce resources on agents (i.e. boats) that don’t self-report and thereby increase overall compliance rates within the industry…. And, indeed, this is what the literature suggests will actually happen.

If you have any comments or suggestions, please let me know.

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[*] At this stage, I'm inclined to think that my identity is a very poorly guarded secret anyway. As such, you can follow me here on Twitter if you are so inclined...

Quote of the day - Occam's Razor

Finally, in some areas at least, Nature seems to show an inexplicable simplicity. This is a brute fact, more or less of a bonus, which if it had not existed could not have been expected. As a result, the working scientist learns as a matter of routine experience that he should have faith that the more beautiful and more simple of two equally (inaccurate) theories will end up being a more accurate describer of wider experience. 

This bit of luck vouchsafed the theorist should not be pushed too far, for the gods punish the greedy.

- Paul Samuelson (Theory and Realism: A Reply)

The problem with economic school-ism

Economists are a tribal bunch. The endless list of denominations, schools and sub-schools would be enough to make a Christian theologian blush.

Unfortunately, and while certain irreconcilable differences cannot be denied, there are far too many manufactured controversies that serve only to perpetuate a false sense of "exceptionalism" among various schools of thought. I've written about this kind of thing before, but yesterday a number of blog posts brought the issue to the fore. For instance, here is the indispensable David Glasner arguing persuasively that -- contrary to some dissenting opinions -- Hayek was first and foremost an economist in the neoclassical tradition.

I'd like to briefly focus on a different post written by John Aziz, however, which has also received a fair bit of attention for critiquing the methodology of Ludwig von Mises and Murray Rothbard. I largely agree with what he writes, but was struck by the following introduction:

I am to some extent an Austrian, on three counts. 

First, I subscribe to the notion that value is subjective; that goods’ and services’ values differ according to different individuals because they serve various uses to various users, and that value is entirely in the eye of the beholder. 

Second, I subscribe to the notion that free markets succeed because of the sensitive price feedback mechanism that allocates resources according to the real underlying shape of supply and demand and conversely the successful long-term allocation of labour, capital and resources by a central planner is impossible (or extremely unlikely), because of the lack of a market feedback mechanism.

Third, I subscribe to the notion that human thought is neither linear nor rational, and the sphere of human behaviour is complicated and multi-dimensional, and that attempts to model it using linear, mechanistic methods will in the long run tend to fail.

This really puzzled me. I sincerely wonder how anyone could regard the first two points as uniquely -- or even especially -- Austrian.[*] Subjective valuation and role of the price mechanism are fundamental concepts to virtually every school of economic thought, and certainly those found within the mainstream corpus. It's true that matters are complicated by the consideration of (say) externalities, but if these qualities are characteristic of Austrians... well, then basically all of us would qualify.

In fact, subjective value didn't even originate as an "Austrian" concept. The idea can be formally traced back to Jules Dupuit at least, a French engineer from the early 19th century who also expressed a keen interest in economics. Ironically, he developed his ideas on subjective utility in response to Jean Baptiste Say -- an otherwise revered figure in Austrian circles -- who had described utility as the objective worth of a good. Similarly, the role of the price mechanism and the impossibility (quote unquote) of central planning was also not entirely original to Mises and Hayek, but a "reprise of earlier Pareto-Barone-Wieser-Taylor debates". Now of course if must be pointed out that, for example, Friedrich von Wieser was a founder of the eponymous Austrian school, but you could convincingly make the case that the key role of prices had been well established long before that...

At this point, I don't wish to be too unkind to John. I enjoyed his post and judging by his response to me in the comments section, he was mostly trying to strike a conciliatory tone before moving on to his criticisms. However, this sort of thing is far too prevalent in the economic debates that I find myself in, with heterodox schools being especially guilty... and I say that as someone with strong sympathies for a number of heterodox positions. Unfortunately, despite a number of valid criticisms against the mainstream, many supporters of heterodox economics continue to demonstrate a very poor understanding of the fact that many of “their” ideas are actively embraced and shared by the rest of the profession. (Nick Rowe is another person recently given to exasperation after dealing with one too many lazy jibes from armchair critics, although in this case I can think of at least one person who is holding firm.) 

THOUGHT FOR THE DAY: Denying the impact that your favourite thinkers have had on other economists is a strange way to honour their legacy.

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[*] I'd say there's a case to be made for the third point as well, but it is a more complex topic requiring nuanced discussion so we'll leave it aside for the moment.

Is gold highly correlated with money supply?

Amidst all this talk about US Republicans eyeing a return to the gold standard, something on my twitter feed earlier this week caught the eye: A link to an old Zero Hedge post together with a claim that "there is a 93% correlation between M2 [money supply] and gold". A similar post here is more specific in saying "[t]he correlation between the total U.S. M2 and gold has exceeded 0.90 since November 2004".

Now presumably, this tweet was aimed at countering the inconvenient fact that the correlation between price inflation (i.e. CPI) and gold is virtually zero. And, if predictions of imminent hyperinflation have yet to materialise, well then at least "hard money" types can point to way in which monetary inflation has manifesting itself in the surging gold price of the last decade. (There's a lesson to be learned here about the velocity of money, kids, but that will have to wait until another time...)

Anyway here's a graph of the gold price and U.S. M2 since 2004, taken from the FRED website. Both are shown in terms of moving monthly averages and, sure enough, the correlation looks very high indeed.



Unfortunately, there are two things wrong with this picture. The first is that the time-frame really does matter. The second has to do with the statistical properties of these series. Let's take these two issues in turn.

Consider what happens when we look at the period from 1981 (which is first date for which FRED has data on both series) until 2004.



Woah! That positive relationship isn't looking too good all of a sudden. Now, of course, I can already hear angry golden-tinged voices accusing me of dueling a strawman. The correlation coefficient was specifically cited for the 2004-post period, so who really cares about what happened 20 or 30 years ago? Okay, perhaps something special happened around the mid-2000s that explains why the two variables have since become so intertwined. Fine, but then don't try to tell me that it's anything specifically to do with money supply. The noticeable kink in the M2 series leading up to that moment occurs around 1995 (after a period of mild tapering), which is close on a decade before the supposed special relationship with gold prices begins.

The broader point here is that if you are going posit a structural theory for why two variables are related, then that relationship needs to have enduring qualities. If not, how can you be sure that gold and M2, rather than one causing the other, aren't both being driven by some other factor? (For one thing, the money supply is supposed to be endogenous to what is happening in the broader economy...) I'm inclined to argue that focusing on the period since 2004 is just a form of data-mining and, as we'll see next, not a particularly good example of that anyway.

Okay. So, ignore the fact that the (weak) longer-term correlation between M2 and gold prices matters. Surely, eight years of data showing a 90%+ correlation can't be denied? Surely, we can say with extreme confidence that recent gold prices have been greatly influenced by money supply? Right?

RIGHT??

Sadly, no. Whenever someone points excitedly to very high correlations between trending time-series, your spidey-sense should be going off like Peter Parker on methylamphetamine. The reason lies with one of the fundamental concepts in time-series econometrics: Nonstationarity.

Wait a minute. Are those series... nonstationary?

Without getting too bogged down by statistical concepts, nonstationary series are characterized by a mean and variance that are changing over time. It's not that they can't be growing or declining over time, but rather that they should consistently return to some kind of mean trend. The most important thing from our perspective is failing to account for this issue will generally lead to spurious (i.e. "nonsense") regression results; an idea that goes all the way back to a classic paper by Yule  in 1926.

Aaaaaaaand.... as you might have guessed by now, the above series are nonstationary. In technical parlance, they are referred to as random walks with drift. Now, there is a famous exception to this rule that occurs when two series are said to be "cointegrated". Again, I'd rather avoid delving too deeply into the murky waters of statistics in a blog post, but suffice to say that that cointegration does not hold here.

To avoid the problems of bullshit spurious regressions, we must therefore adopt a tried and tested approach: Take the first differences of the series and only then test for correlation. Doing so produces a correlation coefficient of exactly <drum roll>... 0.32. Moreover, if we actually regress gold on M2 we get a pretty unimpressive R-squared statistic of 0.1. In other words, only ten percent of the gold's movements are explained by what is happening to money supply.  [UPDATE: Based on the comments, let me again emphasise that these numbers are specifically for the "highly" correlated post-2004 period.]

THOUGHT FOR THE DAY: Simply regressing gold prices on any nonstationary series -- whether that be iPhone sales or the number of Crocs™ wearers in Bangladesh -- would likely produce equally impressive, but obviously bogus, results. Now gold fans might be inclined to protest loudly at this point: "Duh", but there's no theoretical basis for linking those goods to gold. We have a theory that predicts the price of gold will rise with (monetary) inflation!" Except that we've just tested that theory and found it, if not entirely wanting, then at least highly oversold. Perhaps a bit like gold then... [See comments.]

PS - For anyone interested in checking all of this for themselves, here is some Stata code that I used to test the series. The code will always call the most recently available FRED data, so the exact figures you get may differ from those presented here depending on when you run it.

NOTE: In writing this post, I see that others have effectively made the same point before.

Hibernation

You may have noticed that blogging activity around these parts has taken a marked turn for the worse lately. My life has turned into one soul-sapping assignment after another, with additional research commitments and course work... And I really need to start prepping for exams too.

I feel a bit like this to be honest:

"Head for the sides, damn you stupid slinky!"

In all likelihood then, I won't be posting any new material on the site until finals are done. My only hope is that the big Lebowksi kills me before the Germans can cut my dick off.

Hopefully, I'll emerge relatively unscathed and also be able to tell you more about some fairly cool developments happening this side.

Until then, adios and stay classy.

Murphy vs Nordhaus vs Me summarized

It might be difficult to keep track of things in my previous post, because the lengthy discussion involves numerous claims and counterclaims. With the aim in simplifying things, here is a comment that I left on Daniel Kuehn's blog. I think that it provides a decent summary of my views:

Regarding "dancing around the issues"... Bob, my point here is that by choosing to interpret the WSJ skeptics (and Nordhaus' response) the way you do, you are either: a) Ignoring the obvious implications that they intended for their readers, or b) Rendering their specific claims as trivialities.

E.g. If you seriously believe that the skeptic claim about temperatures this decade -- i.e. "they have been flat" -- was not meant to convey any deeper message about future climate trends, do you then think that this observation is of any real use in of itself? Of course, if you think that it does say something important about long-term climate trends, which is the only thing that really matters in this debate, then you are back to the Nordhaus' response.

The Tol article is separate to the above and I do think that you highlight an important point regarding the net benefits associated with modest warming. Not many people understand this and you claim that Nordhaus badly misleads his readers by saying "Richard Tol finds a wide range of damages, particularly if warming is greater than 2 degrees"... despite the fact that Tol's own graph clearly shows net benefits up until that point. [See here - Ed.]

My response is that Tol specifically deals with this issue in his paper. He points out that these are "sunk" benefits, which we stand to accrue regardless of our policy choices today. The inertia in our climatic and economic systems will already ensure that we reach the edge of these positive gains from warming (due to increased agricultural yields, etc). Any action that we take against CO2 emissions today are solely aimed at tackling temperatures above two degrees, i.e. where things start heading into serious negative territory.

Bob, may I ask you whether you think your IER article helped readers understand this crucial point?

Nope, Nordhaus is still (mostly) right

[NB: See the UPDATE at the bottom of this post.]

Following our previous tête-à-tête on the Heartland Affair, here's a response to Bob Murphy's latest post on climate change.

In the interests of keeping this as a brief as possible, let me just say that my post follows a back-and-forth involving different groups of people. My aim here isn't to give an overview to the entire discussion, but rather to reply directly to Bob's key points. However, the four act summary is as follows...

• ACT 1: A group of 16 self-proclaimed climate skeptics write an op-ed in the Wall Street Journal, "No need to panic about global warming". 
• ACT 2: William Nordhaus, professor at Yale University and one of the founding fathers of climate change economics, pens a widely cited essay in response, “Why the Global Warming Skeptics Are Wrong.” Among other things, Nordhaus takes umbrage with the fact that these skeptics have bungled his own research in trying to argue that climate change is not cause for concern. 
• ACT 3: Enter Bob Murphy, who comes to defend the honour of the original skeptics in his article, "What Nordhaus Gets Wrong".
• FINAL ACT: Stickman Grant McDermott sweeps in from the shadows to set right the wrongs of the blogging world. Order is restored, women swoon and the sound of childrens' laughter fills the air. Murphy curses and retreats to his secret lair, vowing revenge.

Now that you've seen the plot spoiler, let's go through some details:

1) Global Temperatures Have Been Flat for a Decade

Bob claims that Nordhaus is using a rhetorical slight of hand in addressing the skeptic claim that global temperatures have not increased in 10 years. Nordhaus does this by referring to the instrumental temperature record, which dates back to the 19th century and shows a clear warming trend. Bob claims that this isn't fair, since "no warming in the last decade" and "no warming since 1880" are different statements.

To be frank, this is simply dancing around the issue. If the original claim was meant to serve no purpose beyond itself, then perhaps that would be okay. (Vacuous, but okay.) However, the implication and inference of the skeptics' original statement was abundantly clear: Global warming has stopped, so all this talk about dangerous increases in future temperatures is probably bunk.[*] Nordhaus rightly points out that this is a meaningless observation and that only long-term trends can provide proper context. However, Bob tries to head off this approach too, by providing a long-term graph with rescaled Y-axis; ostensibly to show that temperatures have hardly changed in absolute terms over the last 150 years.

This is simply disingenuous. Let's conduct a simple thought experiment to show why. Imagine that observed warming since the Industrial Revolution isn't caused by mankind, but rather some combination of natural factors. Let's posit that the observed long-term trend due to this natural forcing trend continues unabated, so that temperatures eventually exceed pre-industrial levels by more than 2°C. Will there be economic costs associated with this, relative to a world without warming? Well, according to virtually every single study on the matter, the answer is a clear "YES". If it wasn't, then we wouldn't even be having this discussion... Why do you think adaptation through economic growth is taken so seriously -- not least of all, by prominent contrarians? (Also, see #3 below.)

The take home message is this: Seemingly small changes on the global scale will have tremendous impacts on the climate and natural systems that we depend on. For instance, a 3°C rise in average global temps will correspond to a world that probably hasn't existed for millions of years, entailing massive unknowns and downside risks. Further, the changes in regional temperatures will actually be far more acute, even if these "balance out" to some extent at a global level. (This point is often sadly overlooked by the focus on global averages.)

2) Actual Global Warming Has Been Smaller Than What the Models Predicted

Bob largely bases his comments here on a Master Resource blog post, which in turn cites a paper by Santer et al. (2011). Now, the main purpose of this study is quite technical in that it aims to show how different timescales can affect the ability to distinguish between climate "noise" and "signal". (Ironically, their bottom line is that we gain no understanding of climate change drivers simply by looking at the temperature record from a single decade.) However, we don't really need to concern ourselves with that here. The relevant issue -- and the one that Bob limits his discussion to -- relates to the below graph. It shows temperature measurements of the lower troposphere (TLT), as "observed" by two satellites (RSS and UAH) and predicted by climate models. Without going into specific details, Bob uses this as evidence to suggest that climate models exaggerate the warming effect in comparison to what reality will turn up.

Allow me to make two comments in response. The first thing to note is that satellite temperature measurements appear to suffer from an unresolved cooling bias.[**] Santer et al. (ibid, p. 10) actually highlight this issue in their paper:

“Given the considerable technical challenges involved in adjusting satellite-based estimates of TLT changes for inhomogeneities [Mears et al., 2006, 2011b], a residual cool bias in the observations cannot be ruled out, and may also contribute to the offset between the model and observed average TLT trends.”

In other words, the observed temperatures in the above graph are probably lower than they "should" be. Santer et al. go on to list a bunch of other factors that could also explain the (slight) difference between these satellite measurements and the model predictions. I wish to emphasise that this difference is, indeed, "slight". More fundamentally, this relates to my second point: The models are still remarkably accurate. Again, let's turn to the actual paper (p.10):

“There is no timescale on which observed trends are statistically unusual (at the 5% level or better) relative to the multimodel sampling distribution of forced TLT trends. We conclude from this result that there is no inconsistency between observed near-global TLT trends[...] and model estimates of the response to anthropogenic forcing.”

Translation: The models have performed exactly within the bounds of what we would hope for. I find it... interesting that Chip Knappenberger (author of the MR post) chooses to ignore these caveats and findings, instead offering his readership an alternative conclusion that the models are on the "verge of failing". But then what do Santer & co. know? I mean, they just authored the study.

As for the assertion that Nordhaus is arguing against a strawman by focusing on the role that human activity has played in driving climate change, versus the alternative (weaker?) claim that the models have simply overestimated warming full stop... Let's consider the original WSJ op-ed again: "The lack of warming for more than a decade[...] suggests that computer models have greatly exaggerated how much warming additional CO2 can cause." (Emphasis added.) You could perhaps argue that the statement is ambiguous, but I certainly don't think that Nordhaus is unjustified in highlighting the fact that, only by including CO2 alongside natural forcings, can we square model predictions with observed warming.

For more on the track record of computer models in predicting actual climate outcomes (including reconstructions of the past), see here.

3) CO2 Is Not a Pollutant / CO2 Poses No Harm to Humans

Now we get down to actual economics. Bob declares his unwillingness to wade into a semantic battle of how we define a pollutant... A smart move on his part, since defending the banal assertion that "CO2 can't be harmful because we, like, exhale it and stuff" -- a point that the WSJ skeptics effectively make -- could only lead to much wailing and gnashing of teeth. Instead, he thinks that he's caught Nordhaus at his own game by taking a deeper look at a study that he (i.e. Nordhaus) references in support of his arguments. The paper in question is a literature survey by Richard Tol (2009) entitled "The Economic Effect of Climate". The key figure is below, which Bob uses to claim that CO2 rise will bring net benefits; at least up until two degrees warming. [UPDATE: Bob Ward points out several typos in Tol's paper, which would bring the onset of (expected) negative effects forward. See here for an updated version of the below figure on the And Then There's Physics blog.]

Now, Bob is qualitatively correct here; several studies indicate that there are net gains to be had from some moderate level of warming. (Incidentally, this is not something that Nordhaus would appear to dispute.) There are several reasons for such benefits, including increased agricultural production in certain parts of the world. However, some crucial points must be emphasised:

• Look at the graph and tell me where your "ideal" temperature increase lies. The answer should be obvious: Around 1°C, since this is where we maximise welfare. Anything beyond that and you are doing worse than you would at the 1°C optimum. 
• The build-up of CO2 is characterised by tremendous inertia. Similarly, it takes thousands of years for CO2 released into the atmosphere to return to natural sinks. Of course, you would also need to consider the structural barriers and delays involved in reorganising your economy away from fossil fuels...
• Simply put, you almost certainly need to establish a carbon price long before you reach the 1°C turning point... let alone the sharp negative effects that we expect beyond 2°C. Tol actually highlights this in his paper (p. 34): "Policy steps to reduce emissions of greenhouse gases in the near future would begin to have a noticeable affect on climate sometime around mid-century — which is to say, at just about the time that any medium-run economic benefits of climate change begin to decline." To his credit, Bob acknowledges these issues... albeit in a footnote. To my mind, this is such a fundamental matter that I can't help but think that it deserves more than footnote status. (I'd also like to know how he squares these issues with his conclusion that immediate mitigation efforts -- presumably the beginning of some carbon price -- should be cast in "serious doubt".)

Another reason to be very cautious about the benefits of unimpeded CO2 emissions include disproportionately large downside risks (i.e. "fat tails") and, indeed, even regular loss aversion. If someone offers you the chance to flip a coin so that you either win $10,000 with 50% probability, or lose $9,500 with 50% probability, would you take it? I suspect that a clear majority of people would decline to take part in such a game of chance, even though the expected value is positive (i.e. $250). The idea that people value losses more than gains is very well established in the theoretical and empirical literature. Lastly, we would also need to consider the regional disparities in any presumed gains. Africa, for instance stands to be the big loser from climate change, while Eastern Europe wins due to increased agricultural output. Needless to say, this throws up some very thorny ethical issues around the potential benefits that some countries might enjoy at the expense of others.

4) Nordhaus’ Own Work Shows Harms of Government Intervention

Okay, Bob is quick to say that the WSJ skeptics "screwed up" here. Anyone that has read Nordhaus's work knows that he as long called for Governments to put a price on carbon. Still, Bob now offers up one of this own papers to show that... well, it would seem that changing various factors in a climate model can lead to substantially different results. To be honest, I'm not entirely sure what to do with this. Admittedly, I haven't read Bob's paper -- I'll hopefully do so when I get time -- but in his blog post at least he is making some pretty unremarkable points. For instance, Al Gore apparently has some very bad policy recommendations. Okay, but Nordhaus never mentions Gore in his essay and neither do the 16 WSJ skeptics. (Personally, I'm not particularly interested in what AG has to say about the economics of climate change and I certainly can't think of any major nation pushing for 90 percent emission reductions by 2050.) As for the fact that Nordhaus "assumes" that his calibrated carbon tax will be perfectly implemented over time... Um, yes, that's how benchmarks work. We describe the first-best scenario and then look at how deviations from that optimum will impact results.

Nevertheless, let me try to reply in kind by saying that I, too, have nagging problems with Nordhaus' methodology. In particular, using observed market rates for making normative judgments and implicitly assuming perfect substitutability between man-made and natural goods. I have previously written about these issues here and here.

THOUGHT FOR THE DAY: The Wall Street Journal continues to push climate change opinion that is highly misleading and, at times, patently wrong. Bill Nordhaus did us all a service in picking apart some of the more egregious mistakes, as exemplified by this particular op-ed. Bob Murphy makes some interesting points in response, but I don't see that he offers any substantial rebuttals of the fundamental criticisms levied at the "WSJ 16". Nordhaus continues to have the right of this, as far as I am concerned. Obfuscation, begone!

UPDATE: Bob and I are have a little back and forth about this at his blog (also at Daniel's). However what I really wanted to show you is this comment by Richard Tol about his own paper:

It's easy to misinterpret Figure 1 from Tol (2009). 

Initial warming is indeed likely to be beneficial: CO2 fertilization of crops, reduced spending on heating homes, and fewer cold-related deaths are the main factors. 

However, totals do not matter. The incremental impact turns negative around 1.2K. If we were able to control climate, we would warm the planet by 1.2K and stop there. However, the momentum of the climate system and the energy system is such that, if you accept the mainstream view of the workings of the climate, we cannot avoid 1.2K warming, or 2.0K warming for that matter. 

The initial benefit is thus a sunk benefit: We will enjoy it regardless of what we do.

Indeed.
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[*] The original WSJ op-ed also makes use of the much misrepresented quote by Kevin Trenberth from the "Climategate" emails. That is: "The fact is that we can't account for the lack of warming at the moment and it is a travesty that we can't." For more on that issue, see here.
[**] Part of this probably has to do with the fact that they employ a convoluted modeling procedure to produce temperature readings. For starters, satellites do not measure temperature directly, but rather various signal wavelengths that must then be mathematically inverted to obtain indirect inferences of temperature. I should also say that the UAH temperature set referenced by the Santer et al. study, which is produced by John Christy and Roy Spencer, is particularly contentious. You can read more about these issues here and here.

If it worked for Casanova...

This might not hold much interest beyond some old school friends reading this blog, but flicking through channels this morning I stumbled on a CNN documentary about oyster-harvesting off the coast of Namibia... Featuring my old boarding house master (and quasi John Travolta lookalike), Jason Burgess.

Apart from a bit of nostalgia for me (Great House, Mason House!), this is a nice summary of the challenges and opportunities provided by mariculture and aquaculture. At a broader level, if offers some real-life insight into establishing a sustainable business venture in the more remote parts of the world.

The programme continues below the fold (although I must express my displeasure surprise that the oysters were consumed sans Tabasco):

Sunday night music - Eddie Vedder & The Heartbreakers

Eddie Vedder really does have the most awesome voice around, doesn't he? [Note: I will fight you if you disagree.]

Not that he does anything spectacular by his own standards here... But, still, it's just a sublime rendition of this Tom Petty favourite.


And with that, back to my DSGE models...

Quick links (05/05/2012)

I'm about to go into a pre-exam blogging hibernation, but here are some links to keep you interested:

1) Ed Dolan gives a nice overview of the economic issues surrounding fracking and the environment. Summary: "As an economist, I see something still different [to fracking critics or industry supporters]: a familiar pattern of negative externalities and missing market signals, to which the appropriate response is unlikely to be either prohibition or laissez-faire."

2) Economic blog comment of the week goes to this guy: "This was not Netanyahu at the UN."

3) Bryan Caplan draws inspiration from Game of Thrones in writing up The Bettor's Oath (a la the Brothers of the Night's Watch).

4) Turning to sport, I enjoyed this column by David Moseley on the farce that Super Rugby has become. More specifically, the laughable tournament format cooked up by the SANZAR brains trust (a concept that needs to be employed in the loosest possible sense).

5) Ever wondered where or how bands got their names? Here's a list that's worth going through. Lots of cultural homage and sexual innuendo, as you'd expect. Some of the more interesting/unexpected ones for me were Procol Harem, Pulp, Spandau Ballet, and The Replacements. Speaking of which...

And that, ladies and gents, is what we call a stone cold classic.

6) UPDATE: Forgot to mention that I've signed this petition on GMO research. You should too, and show your support for science against mind-numbing Luddite prejudices.

Slogans for Heartland

Given my previous discussion of the Heartland Institute and climate change, I feel to compelled to comment on this latest development. From The Guardian:

Heartland Institute compares belief in global warming to mass murder 

Billboards in Chicago paid for by The Heartland Institute along the inbound Eisenhower Expressway in Maywood, Illinois. Photograph: The Heartland Institute

It really is hard to know where to begin with this one. But let's start with: "What on earth were they thinking?" 

The Heartland Institute, a Chicago-based rightwing thinktank notorious for promoting climate scepticism, has launched quite possibly one of the most ill-judged poster campaigns in the history of ill-judged poster campaigns. 

I'll let its own press release for its upcoming conference explain, as there's simply no need to finesse it further:

Billboards in Chicago paid for by The Heartland Institute point out that some of the world's most notorious criminals say they "still believe in global warming" – and ask viewers if they do, too…The billboard series features Ted Kaczynski, the infamous Unabomber; Charles Manson, a mass murderer; and Fidel Castro, a tyrant. Other global warming alarmists who may appear on future billboards include Osama bin Laden and James J. Lee (who took hostages inside the headquarters of the Discovery Channel in 2010). 

[snip] 

The people who still believe in man-made global warming are mostly on the radical fringe of society. This is why the most prominent advocates of global warming aren't scientists. They are murderers, tyrants, and madmen. 

As argumentation via guilt by (extreme) association goes, I would place this in the "WTF" category. Still, if this is the way Heartland want to play the game, I have some suggestions for future campaigns:

- "CHARLES MANSON BELIEVED IN THIS SO-CALLED THEORY OF EVOLUTION. AND HE WAS A MURDUUUUUUURERRRR." [Note: This argument has already been made.]

- "POL POT ALSO LIKE THIS 'GRAVITY' IDEA. THINK TWICE BEFORE YOU USE THOSE FANCY NEWTONIAN MECHANICS."

- "KARL MARX THOUGHT THAT BABIES CAME FROM A MAN'S PEE-PEE. ARE YOU A FREEDOM-HATING COMMIE? (www.heartlandforstorks.org)"

- etc.

For the record, I've double checked that the campaign and associated evidence were sourced from Heartland's official website and Twitter feed. Barring some extraordinary hack, I think that we're on safe ground in saying that this is legit.

So, Bob (Murphy), if you happen to be reading this, I guess my question to you is: Does this "reveal that these people really have no idea how their opponents on the climate issue actually view the world?"