Fracking and water pollution

My new article for The Energy Collective is up: Hydraulic Fracking and Water Pollution.

There's much debate about whether shale gas "fracking" (i.e. hydraulic fracturing) poses a risk to our freshwater resources. However, alongside the fact that the water demands of fracking are relatively small compared to other uses, the available scientific evidence actually paints a fairly optimistic view of the situation. Thus far, no causal link between drilling activity and water pollution has been found -- despite researchers scrutinizing some pretty extensive data.

That said, water is so fundamental to our lives that it's entirely reasonable for residents to demand insurance against possible contamination. I give a brief overview of how property rights plays a key role in all of this, and my preferred regulatory framework for making sure that people are protected in the event of a dangerous leak.

Here's my conclusion:

It would be strangely naive to suggest that there are no potential risks to our water resources due to fracking activity. Like all energy sources, there are trade-offs to securing the benefits of shale gas and the possibility of water contamination is one of those. However, anti-fracking advocacy groups do their credibility few favours through the selective interpretation of – or pure disregard for – the existing scientific evidence, and what this actually says about the extent of these risks. Several comprehensive studies have thus far failed to establish any systematic relationship between drilling activity and water pollution. Important research is ongoing, but we clearly have reason to be optimistic at this stage. Regardless of the final outcome, I believe that such matters should be handled according to a clear regulatory framework that incorporates full liability and assures other stakeholders of the requisite contingency plans should an accident occur. After all, effective risk management is an entirely different animal to prior restraint.

Click through to read the full article.

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...

Why do we pay tax on plastic bags?

Because here's why:



Forget the environment. This flagrant disregard for personal space must end!

Irony

From the Wikipedia page on Agricultural Policy:

Some argue that nations have an interest in assuring there is sufficient domestic production capability to meet domestic needs in the event of a global supply disruption. Significant dependence on foreign food producers makes a country strategically vulnerable in the event of war, blockade or embargo. Maintaining adequate domestic capability allows for food self-sufficiency that lessens the risk of supply shocks due to geopolitical events. Agricultural policies[...] may be an ongoing subsidy designed to allow a product to compete with or undercut foreign competition.

Could this possibly backfire? Hmmm, let me think... This week in Scandinavia:

Danish dairies say no to Norway

Dairy producers in Denmark have said they won’t export butter to neighbouring Norway, despite moves by Oslo to cut tariffs as the country battles to get the product back on supermarket shelves.

Norway, like Sweden and Finland, has been hit by a major butter shortage in recent months. The Nordic trio have seen less raw milk available annually amid soaring demand for high-fat dairy products such as creams, butters and milk. 

[snip] 

But while the Danes are happy to help out the Swedes and the Finns, Norwegian shoppers look set to be left in the lurch with Christmas looming. 

Oslo has slashed import tariffs on butter for the month of December in an attempt to attract foreign producers, but leading Danish dairies remain unimpressed. 

“We’ve been bashing our head against an excise wall in Norway for more than ten years, so we don’t have enough faith in a little hole in the wall to start sending butter via that route,” said Mogens Poulsen from dairy Thise Andelsmejeri to news website foodculture.dk. 

Danish news reports said the country’s other main dairy producers were similarly disinclined to make a beeline for the Norwegian market. 

“We can’t start building something up only to dismantle it again three weeks from now,” said Arla spokesperson Theis Brøgger to foodculture.dk.

It may only be butter, but still a telling example. On a general level, I don't know which I find more impressive: The fact that so many people are in agreement about the need to drastically scale down agricultural subsidies... Or that these subsidies somehow remain as entrenched throughout the world as they do.

UPDATES: (1) Norway is a great place to live in many ways, but their protectionist trade policies suck. Most of the Norwegians that I speak to are pretty happy to echo these sentiments, although that might not be a representative sample. (2) Damn. Butter futures would have been a good investment. Black market bids currently going around $500 per half kilo!

Rhino horn! Homeopathy! Psychics!

A few weeks ago, the South African government announced that it was appointing a team to reconsider the ban on the trade in rhino horn. In short, the idea is that SA could kill two birds with one stone by capitalising on what is effectively an extremely lucrative market. Since a single rhino horn is estimated to fetch $500,000 on the Asian black market, government stock piles of the stuff (from culling and thwarted poaching operations) could actually bring in substantial revenue towards conservation efforts.

Take things a bit further and you could easily argue that the ability to legally farm and "harvest" these animals generally would bring the same positive effects that hunting does for wildlife conservation. That is, it establishes a profit motive that incentivises the preservation of valuable animal species.

Save a horny friend?

The libertarian journalist, Ivo Vegter, penned a provocative column shortly thereafter in support of the government announcement. Unsurprisingly, the essay captures some of the essence of free-market environmentalist thinking. Contrasting the fortunes of sheep with dwindling rhino numbers, he writes that the ban on rhino horn has undermined market incentives for managing these animals:

If they want rhino horn, let's sell them some 

Sheep aren't endangered, because farmers farm them. They have a vested interest in making sure that they breed and stay healthy. The profit motive ensures that sheep are either kept alive (in the case of the woolly kind) or get killed less frequently than they get born (in the case of the eating kind).

Most economists would fully appreciate the logic of utilizing these types of incentives and market signals. I readily agree with the notion that ending the ban on rhino horn could be a boon for the rhino population. However, I do have problems with a subsequent paragraph:

Many environmentalists and armchair liberals are of the view that “we” merely need to educate the backward Orientals about the lack of medicinal qualities of rhino horn. This is rich coming from a group that routinely advocates the use of unproven herbal remedies. It is also supremely condescending. Imagine the Chinese coming to Africa and telling us to stop using muti, or better yet, instructing wealthy elites about the superstition that homeopathy works. We'd tell them to mind their own business and sod off back to China, and rightly so. Even if the Vietnamese and Chinese are wrong about rhino horn, re-educating half a billion people is as tyrannical as it sounds. And even the communists failed at that.

Apart from being wonderfully ironic in highlighting his own condescension -- something, it must be said, that Ivo does not lack for when discussing "greens" or "liberals" -- this paragraph merely serves to sidestep some very important ethical issues. The morality of selling unproven (say nothing of cruelly obtained) substances for human well-being cannot be simply disentangled from its economic outcomes. Indeed, a commentator draws attention to the matter by asking: "How can it be it ethically conscionable to sell, at huge profit, a remedy that has been proven to have absolutely no efficacy? SA should peddle rhino horn to cancer patients . . . shall we also farm and sell African potatoes to people who believe they will cure AIDS? How about exporting a few of our local evangelists to exploit the gullible in exchange for miracle cures while we are about it?" (posted on Wed, 5 Oct 2011 at 12:12)

Ivo responds, but I rather think he draws a line on the wrong side of this issue. To quote the truism: Two wrongs don't make a right... And just because some new-age salesmen are able to peddle their snakeoil wares to Western consumers -- under false pretences and without accurate labeling -- does not provide satisfactory justification for encouraging (or even allowing) others to do the same. Moreover, suggesting that it does, is simply to argue your case by association.

In another sense though, Ivo is quite right because inconsistency can be a maddening thing. The difference between us, is that I would like to see consistency achieved via some form of standard regulation -- at the very least in terms of evaluating product claims and policing false advertising -- rather than a free-for-all. Given the vast asymmetries of information involved, these are the type of situations where Government (and, yes, civil society at large) can play a crucial role in improving market outcomes; by providing accurate information on product effectiveness and regulating products that might otherwise thrive on fraudulent claims. More to the point, this why precisely we expect our doctors and drugs to be licensed in modern democracies, and why we have empowered state authorities to do so on our behalf.

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I was reminded of all this today when I saw this morning's xkcd strip, which might accurately be described as what happens when homeopathy gets into the book publishing business:

Sad, but true.

Also worth reading is the "tooltip text" that you can see if you hover over the image on the actual xkcd site. It explains the inspiration for this particular strip thusly: "I just noticed that CVS has started stocking homeopathic pills on the same shelves with -- and labelled similarly to -- their actual medicine. Telling someone who trusts you that you are giving them medicine, when you know you're not, because you want their money, isn't just lying -- it's like an example that you'd make up if you had to illustrate for a child why lying is wrong". [UPDATE: See this post.]

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Let me leave you with one more story that has been making the rounds in the run-up to Halloween, which highlights that fine line between deception and self-delusion. A group of skeptics (not the climate change kind!) has been offering a million dollar prize to anyone that can prove, under scientifically acceptable standards, that they posses paranormal abilities. Not content to see their money go unspent, the skeptics have publicly courted a number of high-profile TV psychics (e.g. Britain's Sally Morgan) and invited them to take up the challenge.

And, would you believe it, none of these self-proclaimed psychics have responded to this wonderful opportunity to earn international fame and scientific respect... say nothing of the cool seven-figure cheque. I know, I know... Unbelievable. The brilliant Derren Brown sums up the situation thusly:

You’d think psychics would be very eager to prove they can really do it. There’s a million dollar prize fund to be won by any psychic who can show under reasonable and controlled conditions (which they can decide upon in conjunction with the scientists) that what they do is real. This is money that could be kept or given to charity of course, not to mention the likelihood of also receiving a Nobel prize and the ability to give the world vital new knowledge that would change us forever. Imagine that! If I woke up to find that I could really do it, I’d be a selfish and odd creature to offer it only to TV viewers and theatre audiences. I’d be out there, doing every test I could until the scientific establishment sat up and listened. You’d be forgiven for doubting my sincerity if I said I had better things to do. 

"I  see  hear dead people. LOL!"

As far as "forcing" he likes of Sally Morgan to take the test, this seems to be most unsatisfactory solution and one that would impinge on any number of individual rights. However, there is the lingering sense that it is simply very wrong to charge grieving people for a service that amounts to little more than selling them outright lies at particularly vulnerable times in their lives. (Although, perhaps comfort is more important than truth in some circumstances?) In that sense, I'm glad she's being called out... Though I don't hold any hopes of either side being convinced.

THOUGHT FOR THE DAY: You often hear it said that economics is not a morality play. Perhaps there's some cold comfort in learning that, apparently, neither is the psychic business.
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[*] I do wonder about the practicals implications of actually farming these animals, and whether doing so would actually lead to a collapse in poaching. After all, poachers would still be able to capture substantial "rents" through their illegal actions, so long as breeding and raising a fully grown rhino remains an expensive exercise. That, however, is a subject for another day.

A very interesting paper...

From the latest American Economic Review:

Environmental Accounting for Pollution in the United States Economy

By Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus

ABSTRACT

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

Unless you're on a university server, you'll probably find that the article is gated. [Update - The working paper version is accessible here.] Fortunately, there are a number of good summaries available on the net. Bottom line: We severely underpay for the goods and services provided by major industries, given the measurable effect that air pollution from these industries has on human health and productivity.

Crucially, the environmental damages that drive these results have nothing to do with any kind of long-term climate change effects. They are simply the local damages that result from compromised air quality and are happening right now.

Lest it be unclear, this most certainly isn't about turning our back on coal (or even agriculture, another industry with a surprisingly high un-costed air pollution damages figure). Or markets in general. It is simply about trying to account for full costs and thinking about the best ways in which we can do that. That's all that good economics is about.

Links - Market Design edition

Regular readers[*] will know that a favourite theme of this blog is thinking about how -- and where -- markets function "optimally", versus cases where some form of intervention/regulation might be preferable. In that tinkering spirit...

1) The Boston Globe has a profile on Harvard's Alvin Roth, who specialises in optimising market design in a variety of sectors. Apart from his dedication to solving real-life problems, about the most interesting aspect of Roth's work is that he focuses on recreating market processes in precisely the industries where markets seem out of place, or even "repugnant" (e.g. organ donors). Much of this involves dealing with goods that are intrinsically hard to evaluate in monetary terms. [HT: Michael Giberson. I'd recommend a visit to Roth's Market Design blog as well.]

Reading the article, I was immediately reminded of the literature on "intrinsic motivation" and "moral crowding out", which highlight the pitfalls of trying to replace moral contracts with monetary incentives. The most famous example of this is probably the study of late parent arrivals at day-care centres in Haifa, which went up after monetary fines were introduced. In other words, the introduction of fines had the exact opposite effect of what was intended. Parents no longer felt bad about making a teacher stay late looking after their kids, since they were incurring a fine in return... A "fair" trade in their eyes.

2) Rob Stavins on the design options for cap-and-trade versus the alternatives. This is an older post, but one that is well worth revisiting for anyone interested in the options regarding climate policy and, as per usual, Stavins gives a really good breakdown of the key issues. To be honest, I've been meaning to write a brief summary on the differences between cap-and-trade and carbon taxes for a while (pros, cons, etc)... But this post (and others by Stavins) are a great place to start if you want to understand the basic arguments for and against the different climate policy instruments.

3) Daniel Kuehn is frustrated by the asymmetries in the public choice discourse. In particular, he takes issue with the assumption that being interested in market failure somehow makes you oblivious to government failure. I've trod a similar line here before and strongly agree that this is a false dichotomy.[**] However, and while I believe that Daniel is referring more to the armchair proponents of the public choice school than anything else, I would still note that the leading public choice figures themselves generally offer a far more nuanced and considered view of the market-vs-government debate. (E.g. See the paper by James Buchanan that I mention towards the bottom of this post. Some more thoughts on the matter here.)

Daniel quotes a segment from George Akerlof's seminal paper on information asymmetry, A Market For Lemons, which points to a careful arbitration between government intervention and private solutions:

It should be perceived that in these markets social and private returns differ, and therefore, in some cases, government intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increase in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power - with ill consequence of their own - can develop.

I replied in kind in the comments section by quoting the closing paragraph of Ronald Coase's 1960 essay, The Problem of Social Cost, in which he established the underpinnings for his eponymous theory on bargaining rights and (environmental) externalities:

It would clearly be desirable if the only actions performed were those in which what was gained was worth more than what was lost. But in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others. Furthermore we have to take into account the costs involved in operating the various social arrangements (whether it be the working of a market or of a government department), as well as the costs involved in moving to a new system. In devising and choosing between social arrangements we should have regard for the total effect. This, above all, is the change in approach which I, am advocating.

So, ya... Call me crazy, but that's two Nobel Prize laureates -- whose respective theories can and have been twisted by completely opposing factions -- essentially coming down on the same side of the issue.

[*] Both of us... Hi Mom. Other readers might be interested in the "regulation" or "externalities" taglines.
[**] I imagine that some might think me slightly schizophrenic to strongly criticize overbearing government in some posts on this blog and then complain about a lack of decent regulatory frameworks in others. However, I'm very much a horses-for-courses man. My basic premise is that markets work fantastically well by themselves most of the time... But it's the exceptions that make life interesting. 

Tort law is no panacea for the environment

Looking over the comments section of an old post, I realised that I had yet to make good on a promise to "flesh out my scepticism regarding the ability of tort law to meaningfully contribute to climate change action" (or, alternatively, expose it as a sham). Essentially, a friend of mine with strong anarcho-capitalist leanings had suggested that the climate impasse could - and should - be resolved through the private courts rather than any type of government regulation that seeks to create, for example, a carbon price via cap-and-trade or carbon taxes. I have just left my response underneath his comment as to why I regard this stance to be wholly unworkable in practice. I invite you to look over my points and see whether you agree or not. (The summary version: Non-representation of future claimants, and the complete impracticability of claimants to adequately and fairly engage separate carbon producers from all over the world; and vice versa).

Anyway, moving beyond the specific case of climate change, this is leads me to the consideration of tort law as a means of addressing environmental ills, generally. Indeed, I would say it is very much related to something that's central to my specialisation: The role of markets (underpinned by legal institutions like tort law) versus the role of governmental regulation in dealing with environmental problems. Before continuing, let me first say that my usual position on economic matters is fairly uncontroversial in that I regard markets as vastly superior to any supervening government force. Freedom to choose, responsibility for our own actions, etc, etc...

However, as an environmental and resource economist, I am constantly brought up against cases where markets don't work particularly well, or, alternatively, no market exists to deal with the provision of certain goods. That is the nature of our specialisation; we have to consider externalities, fuzzy property rights, environmental public goods, and other market "failures". Even with these imperfections, I am inclined to heed the words of one of my university professors who said something to the effect of: "Always consider other options before getting involved in environmental policy, because outside actions have the potential to stuff things up proper make matters even worse".

Having said that, there are still undoubtedly many cases where government intervention and regulation has led to improvements in environmental outcomes and natural resource management. Further, it's no coincidence that such instances often invoke market mechanisms, thereby simulating artificial scarcity and conferring property rights. This ultimately creates the right set of incentives for people to act in a profitable way to address environmental issues.[*] I can name many, many examples... From the rejuvenation of previously endangered fisheries, to the reduction of acid rain.

Even if we ignore such successes, I find it curious that certain libertarians continue to hold an unshakeable belief in the efficiency of tort law to resolve all environmental ills in an otherwise unregulated market. Regulation, on the other hand, is seen as nothing more than unworkable nonsense cobbled up by a lumbering coalition of bureaucratic imbeciles and self-serving politicians. This position seems to not only understate the transaction costs and asymmetries of information and financial power in a real-world market system, but also thoroughly oversells the efficiency of our legal systems. So, in addition to the points that I tried to highlight specifically with regards to climate change, here are some additional factors that I believe limit the effectiveness of tort law when it comes to addressing environmental problems on a more general scale:

First and foremost, litigation takes a very long time and can be hideously expensive... especially when there is money and power involved. It's easy to cite a number of high-profile environmental and health incidents that illustrate this. Exxon took 20 years to pay out after the Valdez oil spill off Prince William Sound. Officials from Union Carbide were still embroiled in criminal proceedings upon the 25th anniversary of the Bhopal Gas Disaster in India (although the company had made an out-of court settlement in 1989). More recently, Chevron has vowed to overturn a landmark $8.6bn fine imposed by a court in Ecuador in a case that has already been running for 18 years. Because of these factors, there is an inherent bias towards groups with money and legal clout. Legal disputes are hardly ever a fair fight between equals; it's about who brings the best lawyers to the party and who can confidently front the costs for the entire (possible) duration of a trial.

These are pretty fair indications of how inefficient legal systems can be, with endless recourse to stalling and appeals. Indeed, (good) regulation is often aimed at circumventing inefficient and protracted tort processes such as the ones that I have highlighted. In other words, it helps to reduce transaction costs to a minimum.[**]

To be sure, unchecked government meddling in production and industrial processes can have - and has had - very damaging consequences to both human beings and our environment. For instance, the Indian Government had a heavy hand in the Bhopal Plant and may be as liable as anybody for the tragedy that ensued. However, I don't see that as particularly relevant to the sheer length of the subsequent court case. Moreover, if regulation is dangerous because it affords power to supposedly disinterested third parties, would judges and juries not be susceptible to this influence too? Or, more simply, could they not also be subject to making the same bad decisions that stand to affect both current and future outcomes through the rule of legal precedent?

This leads me to another weakness underpinning our legal system: It lacks the very mechanism that makes markets work so efficiently. That is, there is no comparable profit-loss mechanism that leads self-interested parties to drive a continual improvement of the system. This idea was succinctly captured in a recent paper by Nobel Laureate James Buchanan: The Limits of Market Efficiency. As a pioneering figure in public choice theory, Buchanan did as much as anyone to highlight the fallibility of government authorities in being effective regulators. In this paper, however, he sets to balance the scales by showing that a) markets "work" only under certain legislative frameworks, and b) these frameworks are themselves devoid of forces that would make them inherently optimal. Here's a snippet:

Consider[...] the differences between the spontaneous emergence of a body of law, a set of rules, and the allocation of valued resources in the market process. In the latter, [...]opportunities for securing differential private rents and avoiding differential negative rents are open and available to prospective entrepreneurs-arbitrageurs, whose behavior, in itself, becomes part of the correction that efficiency conditions require. Contrast this process with application to law. Suppose that a law, rule, or convention emerges and exists, one that is recognized, even if by all participants, to be less enhancing to their well-being than a readily imagined alternative. The opportunity cannot, however, be exploited by single entrepreneurs-artibrageurs because of the nonpartitionability of law, as such. There is nothing comparable to the profit-loss dynamic of the market that will insure any continuing thrust toward more desirable outcomes. 

To conclude, I think that scepticism of government is absolutely justified in many cases, as I have tried to indicate at the beginning of this post and in a number of my previous posts. If there are market imperfections, it doesn't necessarily follow that government involvement will adequately address them. Indeed, it could exacerbate the situation and, frankly, it’s ridiculous to pretend otherwise. Where possible, I absolutely support community/individual management of resources above that of the State, just I support individual responsibility in many economic aspects. I also think that tort law can play an important role in controlling for localised environmental externalities. However, as per my reasons above, I disagree that regulations are inherently inefficient in comparison to a purely market-based system underpinned by tort law. Again, the danger is in applying blanket rules to complex situations that require evaluation on an individual basis.

THOUGHT FOR THE DAY: There is no silver bullet solution to solving our many, and often complex, environmental problems. Those that see tort law as some kind of panacea overlook the very real inefficiencies present in such a system. Consequently, torts remain very useful tools alongside regulatory measures for addressing environmental issues, but I don't believe that they can succeed by, or in of, themselves.

UPDATE: I completely forgot to talk about something that I'd originally meant to include in this discussion; the role that risk plays in limiting the effectiveness of pure market transactions. In particular, how different risk premiums are exacerbated by asymmetries of information, and how this can make it preferable to have some unilateral rule in place that guarantees us a minimum standard of protection from risk, which we cannot otherwise control for. This is very important in the context of justice administered ex post versus ex ante. As I wrote here:

[...] I much prefer driving in a country where standardised driver licenses and road-worthiness tests for vehicles offers me some insurance against risk-prone drivers. There's no way I control for who shares a highway with me, but at least I am reassured that their cars (say nothing of the drivers themselves) are expected to meet certain minimum standards. 

And, of course, I would suggest that "justice" administered ex post is, in many cases, a straggling third best; especially when it comes to more dramatic outcomes like severe injury and death. Don't get me wrong; there's plenty bad regulation out there... But I'd prefer (regulatory?) prevention than (courtroom?) "cure" when the latter involves putting a monetary value on matters that are inherently beyond valuation.

UPDATE 2: In an older blog post, Tyler Cowen points to an AER paper by Susan Rose-Ackerman, Regulation and the Law of Torts, which strongly supports the basic arguments I have made above. Speaking of Marginal Revolution bloggers, Alex Tabarrok co-authored this book a few years ago on the inefficiencies prevalent in the US tort system.

UPDATE 3: A follow-up, of sorts, here.
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[*] Daniel Kuehn has a really good series of posts in this regard, under the collective heading of calculation verses incentive problems.
[**] Two points additional bear mentioning. First, in all of the above cases claimants were afforded a fraction of the recompense that they were initially promised due, in large part, to the principles of corporate limited liability. In this matter, I am in essentially in agreement with the proponents of tort law that a system of limited liability encourages unduly risky behaviour. To get an idea of my views on limited versus strict liability, please see here. Second, I have seen tort proponents argue that transaction costs are subsidised by government in the case of regulation and therefore of equal weight to transaction costs incurred when markets are left to their own devices. This is a non sequitur. To use a simple example, if government bans the use of lead in petrol unilaterally then transaction costs have essentially been reduced to a minimum. Alternatively, think about how impossible it would be to track down the former owner of each and every plastic bag that happens to blow into your property versus government simply adding a tax to each bag that makes people utilise them in a far more effective and environmentally friendly way.

Dumb regulation

As should be clear from some of my previous posts, I think that some areas of our economy are in need of regulation; others distinctly less so. Here is an article describing some cases that fall into the latter category: A License to Shampoo: Jobs Needing State Approval Rise. 

Apart from the more ridiculous stories of occupational licensing, perhaps the most interesting insight is that the call for more regulation is coming from the practitioners themselves. They argue that "regulation will boost the prestige of their professions, provide oversight and protect consumers from shoddy work." Of course, the cynical economist in me says it would be remiss of us not to highlight problems of rent-seeking. Still, this is an admirably balanced article and not simply an anti-Government rant. 

A quote I rather enjoyed:

Mr. Lykins says it's in the public's interest to insist manicurists are well-trained. "Have you ever had a nail fungus? It's terrible," he says. "That's why we're there."

[Snaps fingers, bobs head]

(HT: Adam Ozimek)

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I've also been meaning to describe a particularly daft case of regulation that I've come across here in Lisbon. Across the city there are many decrepit and abandoned buildings, literally right in between thriving office blocks. This was really puzzling to me at first as, Portugal's wider economic troubles notwithstanding, I couldn't understand how you could get such variation within the same neighbourhoods... even the richest parts of the city are afflicted. From asking my Portuguese friends there are various reasons for this problem, including a rush out to Lisbon's outer suburbs that left the central parts of city suddenly much emptier than they had ever been. However, here is aspect worth retelling as cautionary note for all would-be rent controllers: 

(The precise details may be a little off here, but not so much that it materially affects the story.)

After the Carnation Revolution in 1974 overthrew the authoritarian Esta Nova regime created by Antonio Salazar, the left-leaning revolutionaries instilled a new law whereby property rent was fixed from the time that a person first moved in. Tenants may have celebrated this ruling at first, but of course this also meant that landlords had no incentive to invest in maintaining or renovating their buildings over the years that followed. I believe the law has since been amended to allow for rent increases in line with inflation, but long-established tenants (particularly in the south of the city) are still paying absurdly low rentals. This includes historic neighbourhoods like the otherwise beautiful Alfama... even buildings that would constitute prime real estate right in the financial district.

The same tenants that benefited from decades of low rentals now have to live in dangerously decrepit buildings. Worse, there is a very real social problem at stake, since the housing "shortage" has pushed up prices for residents in functioning buildings all over the city. As with abandoned neighbourhoods around the world, there is a lingering problem of crime in places where no-one is investing and actively living. 

[UPDATE: Here is an article discussing the same problems behind  the abandoned buildings of Lisbon. Here's another.]

THOUGHT FOR THE DAY: Dumb regulation will make everyone's lives worse off, no matter how good the underlying intentions.

Exploitation and Industrialisation

In the comments thread of the Meat and Veg(etarianism) post, I drew a parallel between the ethical treatment of animals and the banning of child labour. That is both involved society making a collective decision about the appropriate regulations rather than simply leaving it up to individuals to decide upon the standards themselves. The exact quote, if you're interested, was: "[L]ike many cases, I actually think that the decent treatment of living creatures is a social good deserving the requisite levels of public discourse and debate. Similarly, we have not outlawed child labour in modernised countries because it is unprofitable to firm owners, but because it is morally repugnant."

By coincidence then, here is something I happened to read last night in David Landes' masterful The Wealth and Poverty of Nations. Providing some afterthought on the industrialization of Japan and other countries (pp 381-383), Landes writes:

  The traditional account of Japan's successful and rapid industrialization rings with praise[...] It is a good, even edifying story. Yet one aspect of the Japanese achievement has not caught the attention of celebratory historians: the pain and labor that made it possible. The record of early industrialization is invariably one of hard work for low pay, to say nothing of exploitation. I use this last word, not in the Marxist sense of paying labor less than its product (how else would capital receive its reward?), but in the meaningful sense of compelling labor from people who cannot say no; so, from women and children, slaves and quasi-slaves (involuntary indentured labor). The literature of the British Industrial Revolution, for example, is full of tales of abuse[...]

  The most common ailment of these wretchedly unhappy children  [sent to work in the textile mills, coal mines and so on] was a nervous stomach. Small wonder that many fell victim to sexual predators and went on to prostitution. It seemed a promotion. 

  The high social costs of British industrialization reflect the shock of unpreparedness and the strange notion that wages and conditions of labor came from a voluntary agreement between free agents. Not until the British got over these illusions, in regard first to children, then to women, did they intervene in the work place and introduce protected labor legislation. [...]

  The European countries that followed England on the path of modern industry had their own labor problems and scandals, though less serious, largely because they had had warning and were able to introduce protections by anticipation.

Remember, this from arguably the foremost economic historian of recent times and in a book that was, among other things, praised for "unashamedly bang[ing] the drum for the liberal ideals of freedom, hard work and open markets" by the FT and a score of other reviewers. Your dyed-in-red, protectionist, trade-unionist Landes is not. (His snipe at the Marxist conception of "exploitation" direct evidence of this.) Yet his views on the dangers of unfettered industrialism (capitalism?) are laid out quite succinctly above. Like him, I believe that history clearly shows there to be asymmetries of power and information in economic relationships which warrant the protection of certain parts of our society.

"But the one on the left looks happy!"

As an afterthought on the paragraph highlighted above ("the strange notion that wages and the conditions of labor came from a voluntary agreement between free agents"), this is surely analogous to cases of domestic violence. We don't stand idly by while women (or men) suffer abuse at the hands of their partners on the flimsy defense that they are engaged in a relationship of their own accord. Instead, we actively support them through protective structures (legal and police enforcement) that are decided upon and borne by society as a whole because that is the only morally just course of action.

America is in good hands...

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Chair Apparent
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

[HT: Aguanomics and Env-Econ]

I'd like to to echo the sentiments expressed in the above blogs: Oh. My. God.

PS - Reminds me of a comment I left elsewhere: 

Yup, the Tobacco Institute-esque funding of Climate Change denial is a huge problem in trying to clear all the misinformation out there. (I almost feel sorry for sincere sceptics, because it's increasingly hard to separate the BS from legitimate concerns. Although, perhaps that says something in of itself...)

Still, with some people, 'evidence' will never be enough:

“Climate change is real, and man is causing it,” Mr. Hill said, echoing most climate scientists. “That is indisputable. And we have to do something about it.”

A rain of boos showered Mr. Hill, including a hearty growl from Norman Dennison, a 50-year-old electrician and founder of the Corydon Tea Party.

“It’s a flat-out lie,” Mr. Dennison said in an interview after the debate, adding that he had based his view on the preaching of Rush Limbaugh and the teaching of Scripture. “I read my Bible,” Mr. Dennison said. “He made this earth for us to utilize.”

http://www.nytimes.com/2010/10/21/us/politics/21climate.html?_r=1

Take *that* science!

Experts, democracy and public opinion

Consider this a follow-up, of sorts, to my Facts vs Beliefs post...

Going over what I had written there and then partaking in the comments section, I was reminded of a review of Mark Levin's best-selling book, Liberty and Tyranny, by Jim Manzi[*]. It's a great piece of literary criticism in which Manzi - focusing specifically on the the issue of climate change - doesn't pull in punches about Levin's intellectual laziness. I really urge everyone to read the entire article, but here is a sample:

Liberty and Tyranny and Epistemic Closure 

[W]hen I waded into the first couple of chapters, I found that – while I had a lot of sympathy for many of its basic points – it seemed to all but ignore the most obvious counter-arguments that could be raised to any of its assertions. This sounds to me like a pretty good plain English meaning of epistemic closure. The problem with this, of course, is that unwillingness to confront the strongest evidence or arguments contrary to our own beliefs normally means we fail to learn quickly, and therefore persist in correctable error.  

I’m not expert on many topics the book addresses, so I flipped to its treatment of a subject that I’ve spent some time studying – global warming – in order to see how it treated a controversy for which I’m at least familiar with the various viewpoints and some of the technical detail. 

It was awful. It was so bad that it was like the proverbial clock that chimes 13 times – not only is it obviously wrong, but it is so wrong that it leads you to question every other piece of information it has ever provided. 

Levin argues that human-caused global warming is nothing to worry about, and merely an excuse for the Enviro-Statist (capitalization in the original) to seize more power. It reads like a bunch of pasted-together quotes and stories based on some quick Google searches by somebody who knows very little about the topic, and can’t be bothered to learn.

After mentioning the fact the Levin fails to mention a single one of the host of scientific organisations that have endorsed the notion of man-made global warming, Manzi goes on to list a good number of them. He then writes:

Of course, this roll call [of scientific bodies] could be arbitrarily long and illustrious, and that does not make them right. Groupthink or corruption is always possible, and maybe the entire global scientific establishment is wrong. Does he think that these various scientists are somehow unaware that Newsweek had an article on global cooling in the 1970s? Or are they aware of the evidence in his book, but are too trapped by their assumptions to be able to incorporate this data rationally? Or does he believe that the whole thing is a con in which thousands of scientists have colluded across decades and continents to fool such gullible naifs as the U.S. Congressional Budget Office, numerous White House science advisors, Margaret Thatcher and so on? Are the Queen of England and the Trilateral Commission in on it too?

But what evidence does Levin present for any of this amazing incompetence or conspiracy beyond that already cited? None. He simply moves on to criticisms of proposed solutions. This is wingnuttery.

===

By chance, I then scrolled through some of Manzi's more recent posts and came across one that is directly relevant to the topics that Becks, Mars and I have been discussing in the comments section of the Facts vs Beliefs post. Essentially, Manzi is grappling with the question of how we should proceed when public opinion conflicts with that of the relevant experts. He cites some interesting articles that offer food for thought on a number of opposing views. Again, I urge you to read the full article, but here is a snippet:

Our So-called Experts 

Ezra Klein[...] was admirably willing to call a spade a spade:

This isn’t a very popular statement, but there is a role for elites in public life. Just like I want knowledgeable CEOs running companies and knowledgeable doctors performing surgeries, I want knowledgeable legislators crafting public policy. That’s why we have a representative democracy, rather than some form of government-by-referendum. But of late, the elites in the Republican Party are abdicating their roles, preferring to pander to the desire for free tax cuts and the hostility to Al Gore than make tough and potentially unpopular decisions to safeguard our future.

[snip]

I think this raises the crucial question in this debate: What is the valid scope of expertise?

In the case of climate change, there is actual scientific knowledge about the properties of CO2, but advocates of emissions mitigation schemes constantly attempt to drape the mantle of science, or more broadly expert knowledge, around public policy positions that, as I have argued many times, do not follow even from the core technical reports produced by the asserted experts.

[snip]

The essential Progressive belief that Klein expresses in undiluted form is that crafting public policy through legislation is a topic for which, in simplified terms, the benefits of expertise outweigh the benefits of popular contention. Stated more cautiously, this would be the belief that the institutional rules of the game should be more heavily tilted toward expert opinion on many important topics than they are in the U.S. today.

This would be a lot more compelling if the elites didn’t have such a terrible track record of producing social interventions that work.

While social interventions certainly don't always work, this of course does not mean we should abdicate our responsibility in thinking seriously about how we might solve the problem at hand. Further, the crucial point with "relevant expertise" in the context of this discussion, is the juncture where we move from science to the spheres of policy and economics. As I've pointed out a number of times before on this blog, these need to be separated. I want scientists to tell what they expect the likely impacts of climate change to be, but they shouldn't be the ones to decide how (or if) we react. Speaking of which...

I deplore misinformation and alarmism on both sides of this argument. I can think of a number of people - Manzi among them - who believe that man-made global warming is occurring, but provide reasonable arguments as to why it makes more (economic) sense to focus on, say, adaptation rather than mitigation measures. For various reasons - uncertainty, the imperfect substitutability of of natural and man-made goods, etc - I respectively disagree with these assertions.

Nevertheless, whatever your stance, the fundamental problem remains that carbon does not carry a price to correct for the negative externality that it entails... People are simply not able to make an economic valuation of how best to respond to climate change if they are missing the cost component. There are many good reasons to oppose regulations and micromanagement of our lives by the state. However, I have yet to hear a single convincing argument of how society would resolve the climate issue without significant government intervention. That, unfortunately, is the very problem at the heart of public goods.

[*] For those of you that haven't heard of Manzi before, I don't think he would object to me summarising his political position as somewhere between a modern-day conservative and libertarian (though closer to the latter). He has provided reasoned criticisms of reactionary emissions-reductions policy while writing for the Cato Institute among others, yet remains strongly critical of those opposing the mainstream scientific view on (i.e. anthropogenic) climate change. He currently contributes regular opinion pieces for The American Scene.

Daylight savings, cigarette bans and the freedom to choose

Over on the aguanomics blog, David Zetland has a post arguing that the concept of Daylight Savings Time (DST) is "rubbish". He says that it does not contribute towards energy savings and simply inconveniences people.

I'm pretty sceptical of the 'benefits' of DST myself, but felt compelled to comment on his assertion that "it wold be better (more flexible) for businesses to adjust work hours, instead of facing a command and control 'fix'". In essence, my point is that individual businesses are unlikely to adjust their own work hours, or have much freedom (i.e. scope) to do so in reality. Firms need to operate during "conventional" office hours because this is when everyone else is doing business. It just isn't profitable to break rank when it comes to this kind of thing. Deciding to open shop an hour later would be counterproductive in terms of profitability and competitiveness; you've essentially cut yourself off from the bulk of the marketplace for that entire period.

In these situations - where we're faced with norms that have become institutionalised - it's very difficult to establish the level of coordination that makes it profitable for a firm to change its work hours without some intervening force guaranteeing that everyone does the same. Or, at least some critical mass of firms that corresponds to a tipping point. Thus, if daylight savings does confer benefits (again, I'm certainly not convinced), the institutional inertia associated with the established system makes the market inflexible to adapt. In short, my behaviour is too dependent on the behaviour of others and the norms in society. This is closely linked to what Thomas Schelling described in discussing the problems of "micromotives and macrobehaviour"...

To give some brief anecdotal evidence, I mentioned the fact that, having worked in countries without DST, I can't really recall any companies changing hours of their own volition. (Flexible work hours -- e.g. the option to arrive between 9am and 9:30am -- don't count because firms arrange for overlapping cover. Someone has to be at the office at 9am and again until 5pm.)

Anyway, this got me on to the issue of cigarette bans and smoking laws, which I do consider a legitimate problem. I've been chewing on this for a little, since I sympathise with free market arguments over the primacy of private property and market incentives to create "smoke-free" clubs and restaurants if there is a need. Further, if non-smokers freely choose to frequent such places, exactly what externality does Government correct when it passes smoking legislation? However, while there's a seductive logic to these sort of arguments, things just don't seem to work like this in reality... Again, I can draw on my personal experiences.

Having spent most of my childhood in South Africa, I remember restaurants installing separate smoking sections only once they had been required to do so by law. Despite this convention having been in place for over a decade now, bars and nightclubs -- which do not fall under the same law -- have yet to follow suit. So it's not like the market hasn't had time to react. In my home city of Cape Town (and the rest of the country for that matter), I really can't recall a single bar or nightclub that has established smoke-free zones of their own accord. I've asked several friends and family members just to be sure and they can't name any either. It's the same for other areas of the world that I've visited where no smoking bans exist.

Public health issues of cigarette smoke aside, I think that this again boils down a matter of institutional inertia and a coordination problem that is limited by competitive behaviour. Nightclubs and bars may want to switch over to smoke-free environments, but would be nervous to lose clientèle. Further, the problem with these places of social gathering is that they represent, in effect, areas that we like to enjoy in common. I don't wish to exclude my smoking friends from the places that I frequent, and vice versa. (I think that this issue of "commons" is another reason to be sceptical of the "freedom to choose" argument in this particular instance.) Unfortunately, since there are inevitably some people already smoking in the club, there's little point in "polite" -- for want of a better word -- smokers going outside for a drag. Lastly, I'd suggest that it's not a matter of smoking being "socially unacceptable", but rather that these institutions have become so entrenched that we can't assume businesses will change their own rules, at least not on any significant scale.

THOUGHT FOR THE DAY: We should always question whether Government interventions really make us better off as a society. The rule of thumb is that we want less micromanagement and more freedom to choose for ourselves. However, market outcomes don't always play out as well as we'd like to think they will. As always, the proof of the pudding is in the eating.

UPDATE: Karl Smith agrees.