February 13, 2007

That Unpossible!

Readers may recall the recent flap over the minimum wage, in which I argued that raising the minimum wage had costs and proponents of the wage argued that it didn't[correction: argued that its benefits outweighed its costs]. The plural of anecdote is not, of course, data, but the recent report in the Arizona Republic seems to at least provide some interesting countercommentary to claims the minimum wage has no effect on unemployment.

The article claims that teenage workers are being laid off in significant numbers due to Arizona recently increasing the minimum wage. This comes as no particular surprise to those of us who argued against the minimum wage: the costs of employment rise, so businesses make changes in order to compensate for those costs. And getting rid of some of your work force is an obvious method for adapting to higher costs for labor. Since the remaining workers are now being paid more, the employer has every right to demand that they work harder, which they will have to do in the absence of other workers.

Interestingly, the article points out that teenagers are being laid off in part because the companies understand the intent of the minimum wage is to help the working poor, and they are assuming that most teenagers do not need a job to the same degree the working poor do. If that's the case, then those supporting the minimum wage may still be able to claim a degree of victory in that those workers who are left are making more money and are skewed more to the working poor now. That's unlikely to be much comfort to the teenagers who have been laid off.

Posted at 09:40 AM · Economics · Comments (1) · TrackBack (0)

February 02, 2007

Unintended Consequences

And speaking of global warming, one of our nominal solutions appears to be causing its fair share of problems. If the U.S. is doing anything to prevent global warming, it is pushing for the use of non-fossil fuels, and the king among these is ethanol. I'm no scientist, so I won't pretend to claim that I know if ethanol is a real solution to the use of gasoline or not. Suffice it to say there's some question as to how much energy we're really saving by using ethanol.

But there's one effect we know is caused by the various ethanol subsidies: rising corn prices. By subsidizing the production of ethanol, corn farmers get more money selling their product to ethanol manufacturers than to food producers. Which means that people who want to buy corn to make, for example, tortillas, have to pay more for their raw materials and therefore have to raise their prices. Which, as we see in our neighbor to the south, has caused some problems.

I'm not much for blaming America first, but I think that in this case, we don't have any way to avoid it. We are pushing ethanol hard in this country, partly because people want to see thye U.S. become energy independent (a tempting but chimerical goal), partly because people see ethanol as a means to reduce global warming, and largely because Iowa holds the first Presidential caucus in the nation and is packed to the gills with corn farmers who want more money for their product. And they're getting it, but as in all such cases, that money has to come from somewhere, in this case, from people who like to eat corn and corn-based products, many of whom are quite poor.

Granting that I don't agree with the global warming set on many issues regarding what we can and should do about the problem, I think there are some areas where we can agree. First among these should be that the actions we take to mitigate global warming don't exacerbate other problems unless there is compelling evidence that the benefits will outweigh the costs. Let me be clear in saying that I'm not arguing that we shouldn't do anything unless we're 100% certain that it will work. But for a situation like ethanol, where the gains are questionable and the costs are clear, it seems clear to me that we should eliminate the ethanol subsidies in favor of policies that, even if they're no more certain to help, at least won't have such negative impacts on the people least well-equipped to deal with it.

This is why government is so ill-equipped to deal with problems like global warming (while, conversely, also being possibly the only entity capable of doing so). Republican (small-r) government responds to its constituents, and it responds better to constituents who have the ability to effect their current or future job prospects. Because Iowa is seen as a necessary gate to the Presidency, any American politician who is thinking about a run for President is reluctant (at best) to take on the ethanol subsidy (or other farm subsidies) for fear of torpedoing any chance they have at higher office. Add to that companies like the infamous Archer Daniels Midland that stand to make a great deal of money from subsidies and it is hardly surprising that ineffective remedies are often the result of government reaction to problems. Add to that the unfortunate tendency of republican government to never eliminate old programs and the problem becomes clearer. Global warming is an extremely complex phenomenon. Changes made to try and mitigate will doubtless follow multiple paths: some will succeed, some will fail, and some will make things worse. So we're going to need metrics that allow us to determine which programs work and which do not, so we don't waste time and money on blind alleys (or worse, on making the problem worse). But government doesn't do a good job measuring its own results.

This is not wholly inevitable. If enough people notice the problem, it can be mitigated. But that's going to require people willing to take a critical look at programs they've agitated for. I'm not hopeful that we'll see much of that.

Posted at 01:12 PM · Economics • · Global Warming • · Politics · Comments (0) · TrackBack (0)

January 29, 2007

Happy Milton Friedman Day

I'm no economist, but if you're a fan of free minds and free markets, it's hard not to be a fan of Friedman's work. And especially now that he's dead, it's good to see that people are keeping his message alive. Free to Choose Media is doing their part by declaring today Milton Friedman Day and sponsoring various debates and discussions of his work. Worth checking out, I think, even if you're interested only in trying to debunk Friedman's work, since understanding it is the first step down that road.

Posted at 10:20 AM · Economics · Comments (0) · TrackBack (0)

November 22, 2006

The Minimum Wage, Continued

When the minimum wage goes up, the cost of employees goes up for any business that employs people for the minimum wage, and for many other businesses as well due to union contracts that base wages on the minimum wage and due to wage compression. That money has to come from somewhere, a fact minimum wage advocates often appear to gloss over. If the cost of each worker is now higher, the business has only so many ways it can cover that cost. It could let people go, so that there are fewer workers at higher pay rates. It could raise prices to cover the higher cost of labor. It could go out of business. It can reduce its profit margins to absorb the higher cost of labor. Or it can get more productivity out of its now higher-priced workforce so that the money it is paying out is covered by the productivity of the labor force.

It is becoming an article of faith among minimum wage advocates that a higher minimum wage doesn't cost any jobs. This flies in the face of basic supply and demand, but it's true that studies have had a difficult time showing any significant drops in employment in areas where the minimum wage. I suspect that one factor here is that most businesses paying the minimum wage have very high turnover to begin with (one of the things minimum wage advocates don't like to discuss is that not many people work at minimum wage for long; like the issue of helping people in the bottom 10%, they ignore the fact that in a dynamic economy these aren't the same people from year to year), so the higher cost of labor may not be enough to convince them to start firing people when they already have trouble locating decent help. Some people may also have a reluctance to fire people just because the government raised their pay; firing people isn't a pleasant job, and if you're in a high-turnover industry to begin with, it can be easier to just wait for that person to quit. But, it is important to note that simply because we cannot find solid evidence of employment dropoffs in areas where the minimum wage is raised does not demonstrate that raising the minimum wage is cost free. If businesses aren't letting people go when the minimum wage goes up, they're doing something else to cover those costs.

Businesses may absorb the cost of minimum wage increases by increasing their prices. This is a traditional method for business to cover its costs, after all, particularly those imposed by government. (All those who think taxes on business aren't reflected in prices raise your hand.) This also helps to address one of the issues I raised in my last post, the inflation that a raise in minimum wages can cause. But wait, commenters complained, the total supply of money hasn't increased, so the price of goods shouldn't increase. While it's technically true that the total supply of money doesn't go up when the minimum wage is increased, the amount of money available for the kinds of goods purchased by people making minimum wage has increased, and when demand for a good goes up, prices rise with it. Some commenter with an amazing faith in the marketplace pointed out that if demand goes up, supply will rise as well. This is true in the long term, but it doesn't happen immediately and supply generally rises in response to demand because prices go up and it therefore becomes profitable for more people to generate the goods. This whole process is extremely complex, as it involves so many individual actors, and the end result will certainly not be that we are status quo at the end. People making the minimum wage will be able to afford more of some things, and less of others, so whether or not they'll be better off will depend highly on their individual circumstances.

Businesses can also ramp up the productivity of the jobs they have in order to get more worth from these now-higher prices workers. As Tyler Cowen notes, an employer can always make one's job worse. Whether by requiring higher quotas, reducing break time, eliminating amenities or something else, employers can find ways to get their money's worth out of their employees. Are these minimum wage employees now better off, or worse off? There's more to life than the size of one's paycheck; I know I've worked a job or two that, while it may have paid well, I didn't consider worth the money.

Now, every minimum wage advocate's favorite: business can simply trim its profit margins to absorb the cost of labor. A lot of minimum wage fans hear profit and flinch like Nosferatu confronted with a cross: that's one of those things they'd like to see eliminated. Why should those nasty capitalists get profits from the sweat of their workers, after all? Advocates with a bit more solid grasp of capitalism understand that profits are what drive the economy, however. Going into business isn't easy. Business owners put a great deal of time and effort into their business. There are startup costs, the struggle to find the right workers, advertising, and more, all of which are what help to make most new businesses fail pretty quickly. Schumpeter's creative destruction is good for the economy as a whole, but it leaves a lot of disappointed entrepreneurs along the way. But if it wasn't for those people spending their time and money to create businesses, we wouldn't be creating those minimum wage jobs. And what causes people to go into business? Profit, or the potential for profit. Few people go into business on the assumption they'll lose money. Smart people take a look at the industry they're considering to determine whether or not they've got a reasonable shot at making money there before they actually go into business. And one of the ways they do that is to look at the profit margins of people who are already in business. If the local restaurant businesses are turning an average 10% profit, Joe Entrepreneur may consider that a pretty good bet, as his entry into the market will probably still allow him to take an 8% profit. But if businesses absorb minimum wage increases by trimming their profit margin to 6%, Joe may decide that there's no point in entering the market. Which means those jobs Joe might have created never come into existence. That's an economic impact we can't really quantify, because we never see the loss. But make no mistake, it is a loss, and it is therefore a cost of government interference in the economy.

Sometimes these costs are worthwhile, I should note. All actions we take offer a mix of costs and benefits. The tricky part of life is determining which are higher. But I get very little sense from minimum wage advocates that they even think there are costs to this policy, and that's an opinion I have a difficult time letting slide.

Posted at 06:54 AM · Economics · Comments (7) · TrackBack (0)

November 19, 2006

Costs

My onetime co-blogger hilzoy is pushing for a minimum wage increase to help the poor. To defend that, hilzoy notes a number of sad stories about poor people who live on the edge and who are extremely vulnerable to economic dislocation.

The beauty of anecdotes is they're almost impossible to fight. Who wants to stand up and be the guy who's in favor of people living without electricity, without heat, without food, and so on? And make no mistake, if you don't agree with a lot of leftists about their policies for helping the less fortunate, you actively want to see the poor suffer as far as the left is concerned. The argument quickly spins away from logic into emotion, which gives the left the advantage they're quite happy to press. Which of us, after all, really wants people to suffer? If we were handed a magic wand that could eliminate poverty, I suspect there are very few people who wouldn't use it. Unfortunately, too many people think that such magic wands exist, only they use names like the minimum wage to describe them.

Hilzoy's argument is that the benefits of a minimum wage outweigh the costs. My instinctive response to that is how nice it must be to be able to make those decisions for other people. I personally would have a hard time telling someone that they're better off being out of a job than having a job for less than minimum wage. And it's pretty obvious, given the influx of illegal immigrants into the country, that there are a lot of people who are more than willing to work for less than the minimum wage, so clearly they disagree with those who say that you shouldn't be allowed to work for a lower wage than that set by the government.

Which is really my number one objection to a minimum wage: what gives the government (and particularly the federal government) the power to interfere with freedom of contract? If I'm willing to work for $5 an hour, why should the government be allowed to step in and say 'No, you either work for $5.15 an hour or not at all'? Am I the only one who thinks that's a bit insane? You have someone willing to work and someone willing to pay, but we need a bureaucracy that can prevent that transaction from occurring?

This is why I tend to chuckle when people on the left say they're about personal freedom. They're really no different from those on the right: they're willing to support the freedoms they think we should have, but they're quite willing to suppress the freedoms they think are bad for us. Sure, the freedoms the left and right want to protect and suppress vary a bit, but in the end, we end up in the same place whichever of them is in charge: only as free as our overlords are willing to allow.

There is, of course, a counter to this. Businesses tend to have more power than individuals. If Wal-Mart is only willing to offer $2/hour, as an individual who needs $5/hour (all figures, I should note, are wholly fictional, so please don't waste time explaining that nobody can live on $5/hour) I have very little leverage to force them to pay me more. If unemployment is very low and there are lots of jobs out there, some upward pressure on wages will accrue, but I can't depend on that to get me the money I need. Businesses will, of course, always try to pay people the least amount possible, and because they deal with many people, it is relatively easy for businesses to determine the going rate and not overpay for labor. Individuals, conversely, are unlikely to deal with a great number of businesses, so it is more difficult for them to know if they're not getting as much money as the market will bear. They can, of course, demand raises until they don't get them any more, but that technique carries with it the risk of termination, something the poor really can't afford. Minimum wage is seen as a solution to this by setting a floor for wages.

Unfortunately, that floor is permeable. There are plenty of immigrants willing to work for less than minimum wage. This creates two problems: first, we have a surge of illegal immigrants flooding the country, providing chances for less desirable people to come across the border in their midst (I have no objection whatsoever to illegal immigrants, I should note; they come here to work, and I'm not going to condemn that). Second, these immigrants end up taking jobs from citizens, although I'm not sure how much of that is people not getting the jobs because the immigrants undercut their wages and how much of it is people who just don't want to work. In any case, we end up with a fair sum of people who aren't gathering any benefits from minimum wage increases, and we may be exacerbating our security problem into the bargain.

Minimum wage proponents also fail to address another key fact of economics: all economics is is a means of distributing resources. That's why the supply and demand curves work the way they do: if there is very little of a resource, it will sell for more money because only a few people can have it. If there's a lot of something, its price will fall because it's not hard to get. Money is nothing more than a means to an end: a way for people to exchange their labor and production for other people's labor and production. As such, the amount of money in a system will affect prices by causing prices to rise when more money is available. Yes, this is basic economics, but it's something that people who want to raise minimum wage don't seem to consider: if there are 1,000 people trying to get their hands on 500 items and you increase the amount of money people have, what will happen to the price of that item? Obviously it will go up. There are still the same number of people who want the item, and there are no more of that item available, so all you've done by increasing the amount of money people have is to raise the price of the item. It's difficult for me to see how this helps people.

Having said all that, the damage has already been done. We're not going to repeal the minimum wage, and even in relatively red states such as Colorado, people voted to increase the minimum wage and index it to inflation. Were I a betting man, I'd guess we're not really doing much to help people, but I suppose the minimum wage does at least allow people to feel better about themselves by arguing that they're 'doing something' about poverty. I'm not sure how to value good feelings, but I suppose they're worth something. Further, as I'm not really sure how to help solve some of the problems I mentioned above, I suppose I'm not likely to convince people not to raise the minimum wage without offering some alternative solution, particularly when whatever damage the law causes is likely to be invisible. After all, we have no way of knowing how fast the economy will grow, so if laws cause it to grow less rapidly than otherwise, there's no way to prove that, so nobody notices the damage.

This is a common problem in American politics. We realize there's a problem, but we fail to find solutions that will actually solve the problem. Instead we offer some solution that does little good, and often harms people, and pretend we've fixed the problem, or wonder why our solution hasn't fixed it. Will the minimum wage help some people? I think it certainly will. Will it help more people than it harms? That's a much more difficult question, but I think the answer is no. Ultimately, raising the minimum wage will do little more than price some labor out of the market and increase prices, meaning the poor will have more money but will really be no better off. I'm not certain what the solution to improving the lot of the poor is, but increasing the amount of money they have without improving their purchasing power doesn't strike me as particularly helpful.

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Posted at 10:20 AM · Economics • · Philosophy • · Politics · Comments (5) · TrackBack (0)

November 16, 2006

Milton Friedman, 1912-2006

Milton Friedman has died at the age of 94. Among those noting his passing and his accomplishments:

Radley Balko notes Friedman's efforts against America's futile drug war and bemoans the marked lack of Friedmans in the American government.

Jane Galt mourns a poorer world without Friedman.

Blake Hounshell and Ezra Klein note his passing, albeit not necessarily mourning the loss of his ideas.

The Corner links to an interview with Friedman from this summer.

Reason links to several interviews over the years.

The Economist notes his accomplishments and closes with one of Friedman's most important points: "The only way that has ever been discovered to have a lot of people cooperate together voluntarily is through the free market. And that's why it's so essential to preserving individual freedom."

Update: Jane Galt notes a classification error with Ezra Klein's comments.

Update: Rogier van Bakel hits the nail on the head regarding how important it is to note that Friedman's philosophy was far more consistent than generally accepted in its defense of personal freedom.

Posted at 11:45 AM · Economics · Comments (0) · TrackBack (0)

June 24, 2006

Business Taxes and Outsourcing

If Craig Barrett is correct, the Democrats are about to run into a hard choice in their campaign against outsourcing. Barrett is the Chairman of the Board for Intel, and he explained to the House Ways and Means Committee that relative tax burdens play a huge part in his company's plans to build new plants. According to Mr. Barrett, it costs Intel approximately $1 billion more to build a wafer fabrication plant in the United States as opposed to building it in China, and roughly 70% of those costs are in taxes. Given that is almost one-third the cost of a new plant, Intel would be foolish to construct the plant in the United States rather than in China.

The dilemma for the Democrats is clear: they're unlikely to favor reductions in the corporate tax rate, but they certainly don't want to see more U.S. companies building overseas simply because there are competitive advantages to doing so. Republicans can utilize this kind of news to pressure the Democrats to choose one or the other: fight outsourcing by making the U.S. business climate more amenable to business investment, or give up on their claims that they're committed to keeping jobs in the U.S. While the U.S. economy is currently on reasonably solid ground, fears of job losses overseas are a continuing problem for both parties, and this offers a means to fighting the problem.

The converse to this is that Mr. Barrett is a corporate executive who is trying to get governments to fight over his investment dollars. Corporate rent-seeking is a time-honored tradition in our system (ask yourself why almost all this country's major banks are incorporated in Delaware, or why insurance companies cluster in Connecticut), and it is in Mr. Barrett's best interests to convince the government to offer him as many tax breaks and other incentives as possible to reduce his costs. This is precisely what the overseas governments are doing. According to Mr. Barrett, other nations are offering the following:

• Malaysia – providing a 10-year tax holiday, and tax depreciation for capital building and equipment costs equal to 160% of their cost;
• Ireland – with a 12.5% corporate tax rate, and a 20% research tax credit;
• Israel – paying up to a 20% capital grant, with a 10% tax rate and a two-year tax holiday; and
• China – granting a 5-year tax holiday, followed by 50% of the normal tax rate for 5 more years.

Ireland appears to be the only country that's competing simply by creating a good business climate. The other nations all offer various tax holidays and capital grants to lure business into their countries, since once a capital-intensive plant is in place, it's difficult for a company to pick up stakes and move.

That makes Ireland a good model to follow, in my opinion. Rather than offering various companies certain incentives to build in the United States, amounting to little more than government bribery of the business world, establish a system that makes it reasonable for businesses to set up shop within the United States. It's important to remember that the U.S. offers a lot to businesses; we have solid infrastructure already in place, an educated work force, stability, and proximity to the biggest market in the world. We don't necessarily have to have the most attractive tax climate to convince businesses to stay in the U.S. Incentives like China's work as long as we're willing to offer them, but a simplied and competitve business tax regime is a better solution because it takes the government out of the business of trying to bribe businesses to stay here. Maintaining a good climate for business strikes me as a wise use of government power. Actively working to convince businesses to stay in the U.S. strikes me as a good way to further corrupt our political system, as businesses will spend a few dollars on politicians in exchange for bills that give them the incentives they crave, meaning the businesses that stay will do so not because it makes economic sense, but because they're better at playing the game.

Hat tip: Cato-at-Liberty.

Posted at 08:55 AM · Economics · Comments (1) · TrackBack (0)

May 02, 2006

Some Things Never Go Out of Style

You'd think that, if there's one lesson of the 20th century, it would be that government-controlled economies don't work. Russia's still an economic basket case more than 15 years after the USSR gave up the ghost, Cuba will probably need decades to recover from 45+ years of Castro, and even the Chinese are fighting the difficult battle of trying to maintain an authoritarian regime while providing sufficient economic freedom to let the economy grow. Yet it seems the allure of socialism and communism is too great for mere facts to stand in their way, as Bolivia demonstrated yesterday with its decision to nationalize its natural gas fields.

Sure, in the short term, this will probably provide a windfall for the Bolivian government. Despite the fact Bolivia couldn't extract ten cubic feet of natural gas without outside help, the foreign companies will almost certainly go along with the takeover because their options are lousy: they can take what Bolivia offers them and get some minimal return on their investment, or they can abandon Bolivia to its richly deserved fate and guarantee they won't get anything from the money they've already spent there. So they'll continue to extract natural gas and give the Bolivian government its wholly unearned cut of the profits as long as they're at least making more money than they're spending.

This means that all power companies are going to have to take a very hard look at whether or not they want to invest any more money in South America, though. As populism once again takes hold in South America, the investment climate is looking increasingly shaky. Bolivia and Venezuela may be the only countries nationalizing industries now, but it's far from certain populist governments won't take hold in other countries of the region over the next few years. That means people are going to look for smarter places to spend their money. It means that companies certainly aren't going to go into Bolivia looking for additional places to invest, because they'd simply be spending their capital to help the government figure out what to nationalize next.

When property rights are no longer secure, countries see their economy fail. Few will waste their time and effort working their property only to see the state step in and take their work for its own gain. It happened in Russia. It happened in China. It will happen in Bolivia and Venezuela.

That having been said, there's absolutely nothing the United States should be doing about it, other than perhaps expressing disappointment in the decision. As H.L. Mencken observed, democracy is the theory that the people know what they want and deserve to get it good and hard. The citizens of Venezuela and Bolivia have sown the wind; they deserve a chance to reap the whirlwind.

Posted at 07:52 AM · Economics · Comments (0) · TrackBack (1)

April 12, 2006

Science and Incentives

McQ at QandO points to another issue that affects my discussion of global warming from yesterday: incentives. Scientists are rarely, if ever, just handed money and told they can use it to do whatever research they'd like to do. Instead they are expected to approach donors with proposals for what they intend to look for and what they expect to find. This leads to problems.

When someone is looking for a particular result, they tend to find it. This has been observed in studies where graduate students are asked to observe a particular activity. Some students are told that they should see a certain phenomonon, while others are told only to record what they see. The students who are told what they will see inevitably see more of that phenomon than those who are sent in without any preconceived notions. It will therefore come as no surprise, then, that scientists tend to find precisely what they expect to find when they conduct experiments. This is why peer-review is so important, and why consensus is so damaging to science. Part of what helps science forward is humanity's perverse need to prove other people wrong, something scientists get to do and even pretend to be helpful by calling it peer-review. But when everyone agrees that you're supposed to find X when you perform experiment Y, we can miss out on errors. (Please note that there is no evidence of which I am aware that this process is a conscious one: the vast majority of scientists set up their experiments and observe them with the intention of recording what happens even if it doesn't concur with what they expect to see. Finding what they're looking for is a result of the subconscious, not proof of venality.) So when a scientist comes to a source of funding and says he wants money to see if, as he expects, secondhand smoke causes cancer, the odds are pretty good he'll find what he's looking for.

This problem is exacerbated by the fact donors will not keep paying money for science that doesn't produce the results they're looking for. The American Lung Association is not going to give you money if your last study showed that cigarette smoke may not be as dangerous as is commonly believed, and Phillip Morris isn't going to pay you a dime if you're in the habit of noting the hazards of secondhand smoke. There is therefore a rather significant fiduciary incentive for scientists to find certain results if they want to continue to be paid for their research. Combine this knowledge with the above-noted tendency to find what you're looking for, and the tendency of the press to note when scientific studies are released by interest groups is seen to be a wise one. Although it would be wiser if they were to note it every time a study was released, and not only when studies are released by organizations the press considers suspect (the American Lung Association has the same tendency towards bias as Phillip Morris albeit in the opposite direction).

We find other problems with how the government tends to fund much scientific research, as John Stossel notes in the article flagged by McQ. If something is a big problem, it's easy to get funding for it. If a scientist using government funds discovers that there really is no need for government to get involved with an issue, that means bureaucracies don't get to expand and people don't get extra powers for dealing with the threat. As Emory University psychologist Claire Coles notes in the article, "If you go to an agency and say, 'I don't think there's a big problem here, I'd like you to give me $1 million,' the probability for getting the money is very low." Again, that doesn't necessarily mean that any one piece of government research is incorrect, only that the incentives run in only one direction: to find problems that government can then fix. This is not a good way to incentivize science, because sometimes there really are situations where government intervention is not warranted.

Again, I want to emphasize that none of the above proves that any particular piece of science is good or bad. Scientists generally are honest people trying to come up with the right answers. But people respond to incentives, even without realizing it, and the incentives for science in this day and age are to find bad things, from nuclear winter to global warming and a host of lesser subjects. That is a good thing to keep in mind when evaluating science, not to debunk it, but only to view it with the proper degree of skepticism.

Posted at 04:55 PM · Economics • · Global Warming · Comments (0) · TrackBack (0)

February 18, 2005

Asking 'So What?'

I see that the implementation of the Kyoto Treaty has people talking about global warming once again. As seems to be the norm, the discussion is rotating around the questions is global warming occurring, and if so, is it anthropogenic. What is not being asked is, if anthropogenic global warming is occurring, what do we do next?

Kyoto would not work even if it wasn't a dead letter. Beyond the fact the United States is not going to ratify the treaty and beyond the fact the countries that will emit the most carbon over the next century (India and China) aren't constrained by the treaty, all the treaty would do if completely implemented would be to cut global warming by 0.1 degrees Centigrade over 100 years. Since the current projections place total global warming over that period at 1.4-5.8 degrees, 0.1 is probably not going to really be noticed.

Given how important carbon is to the global economy, trimming global warming appreciably would effectively cripple the world's economic growth. That may not be enough to make that option a good one for some, but for the majority of the voters crippling our economy is not going to be a viable option unless and until there are clearly disastrous effects caused by global warming (at which point cutting emissions won't help anyhow). Politics by its nature is bad at dealing with the future. When you're talking about something measured in centuries, politics can safely be assumed to have no real interest in it. Barring some major changes in how democracy works, we can leave massive carbon emission reductions off the list of feasible alternatives for addressing global warming.

Nor am I convinced doing so would be a good idea even if it were possible. Environmental protection is an outgrowth of a strong economy. Rich countries have the money and leisure time to worry about the environment. Poor countries do what they have to do to survive without concern for the consequences to the environment. I should hate to see all of the progress we've made in environmental protection lost because we've crippled our economy in hopes of forestalling global warming.

Nor have I seen much discussion about the net effect of global warming on the world. There is a great deal of discussion about rising sea levels and El Nino, but very little about what a warmer globe could do to help people. How much additional food could be produced with longer growing seasons? How many resources could be culled from currently difficult to reach locations like Siberia? I'm not saying that the net result would necessarily be positive; I don't have the grounding or the time to properly research that. But I do think it's a question that needs to be asked.

We also ought to be looking at alternative responses to global warming. Right now the debate appears to present a binary set: we either do nothing, or we do everything we can to prevent global warming. But I suspect there are numerous other alternatives open to us. Maybe we could try to build walls to prevent the encroachment of the oceans into our seacoasts. Maybe we could move people inland, or occupy colder areas that will become habitable as the globe warms. Or maybe there's another way to forestall global warming by placing reflective material in orbit to reduce the amount of sunlight the planet's surface receives. The point is, there are a number of alternative possibilities rather than cutting carbon emissions drastically and hoping for the best. The one thing they all have in common is, they're not cheap. So intentionally trimming our economy in one roll of the dice is not only politically impossible, it's a high-risk venture; if that move doesn't work, we won't have the money to do much else to address the problem.

Research into global warming will continue, as it should. But perhaps it's time we start thinking a little more creatively about what to do about it if it is anthropogenic, rather than simply arguing that yes it is, no it isn't.

Posted at 12:43 PM · Economics · Comments (3) · TrackBack (0)

January 20, 2005

PETA vs. The World

In the 1971, a man named Paul Erlich released a book called The Population Bomb. Erlich's thesis was simple: because the world's population was surging (it more than doubled in the 20th Century), humanity would not be able to feed itself and millions of people would starve in the 1980s. Needless to say, his dire projection missed the mark by a considerable margin: even now, in the 21st Century, humanity produces enough food for every mouth on the planet. (Distribution of said food is another matter.)

We avoided the horrors of starvation not by slowing or stopping our population growth but by learning how to grow more food. Breakthroughs in pesticides, fertilizers, farm machinery and land use allowed us to create many times the calories with the same acreage. Were it not for these advantages, we simply would not be able to sustain the world's population and millions or even billions would starve.

Given that, it's hard to know what to make of the brochure Radley Balko received from a PETA activist in San Francisco. The brochure purports to demonstrate the superiority of using livestock for farming rather than machinery. Is PETA actually run by people who don't realize that such a move would result in millions of deaths? Is their devotion to protecting animals so great that they'd prefer to see millions of humans die? Or are they simply so cynical that they're hoping to convince the gullible?

Progress can be frightening, and it can severely disrupt people's lives when it occurs. But in the long run, technology is what stands between civilization and barbarism. People who long for a return to the mirage of a simpler past would do well to wake up and realize just how many people would have to suffer to make that 'dream' come true. Not to mention how unpleasant such people would find their dream to be once they realized that the simple life of yore was what Hobbes referred to when he call life 'nasty, brutish, and short.'

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January 16, 2005

Cracking the Hydrogen Code

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April 01, 2004

It's the Little Things

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March 09, 2004

Making a Bad Situation Worse

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February 22, 2004

The Costs of Not Outsourcing

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January 12, 2004

Hayek Revisited

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January 10, 2004

Outsourcing Costs

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January 05, 2004

Outsourcing Revisited

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December 24, 2003

Where the Jobs Are

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December 09, 2003

The Jobs Shift

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January 31, 2003

The Hydrogen Boondoggle

In my comments on the State of the Union address, I briefly criticized President Bush's proposal to use tax dollars to research hydrogen fueled vehicles. That criticism was based on the near-certain knowledge that the environmental types won't give a Republican credit for anything on the environment, because it's against their religion. However, there's an even bigger reason why hydrogen cars are a bad idea: they're not going to actually reduce greenhouse gas emissions.

People promoting hydrogen cars always fixate on the emissions they will produce: water vapor. That's true, as far as it goes, but they never seem to follow that train of thought any further. Although hydrogen is incredibly plentiful, there is little or no free hydrogen anywhere on Earth. Most of it, of course, is bound to oxygen molecules as water, but there's plenty elsewhere. To use hydrogen as a fuel source, it will be necessary to separate it from whatever it's bound to. No doubt you can see where this is going: separating hydrogen from water requires energy. This leads to two separate problems.

One, where will the energy to create free hydrogen come from? Either fossil fuels or nuclear power, both of which are major no-goes for the environmental movement. In all likelihood, however, the plants that create hydrogen will be powered by fossil fuels, which means there will still be greenhouse gas emissions associated with cars, just not generated by the individual cars any longer. Two, power generation is never 100% efficient, and in fact it is often well below 50% efficiency. What does this mean? It means that we'll get less power from the separated hydrogen than the power we expended creating it. Which means, in turn, we will need to use at least twice as much power to move hydrogen cars as we do to move gasoline-powered cars. Since we've already established that those plants will probably be using fossil fuels, does this suggest hydrogen cars will reduce greenhouse gas emissions? In fact, they're more likely to increase those emissions, because of the inefficiency of the power transfers. Suddenly hydrogen-powered cars don't sound so good after all.

UPDATE (1/31/03): Jane Galt has a good discussion going about hydrogen-powered cars.

UPDATE (1/31/03): Jim Henley asks another good question (one my wife asked last night, in fact) about what the effect of all that water vapor would be on local climates.

UPDATE (3/24/03): Lynne Keisling offers a good synopsis of the issues with hydrogen technology.

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January 06, 2003

Stimulus Games

President Bush's new economic stimulus package is a marvelous political maneuver. There's absolutely nothing in it that, by itself, will provide immediate stimulus to the economy, yet by so packaging it, the President may well succeed in pushing through some valuable revisions to the tax code that will help the economy in the long term.

For a stimulus package to work in the short term, it has to be tightly focused on the short term. Whatever tax breaks or other benefits it offers must be tied to a time limit, to ensure people and businesses will take advantage of the package while it lasts. If the package is permanent, there is no reason for people or businesses to take immediate advantage of it, because they can save their money until better economic times arrive. The President's plan has no sunset provisions, and is therefore unlikely to help the economy in the short run.

In the long run, however, the elimination of double taxation on dividends could be a significant boost to the economy. Eliminating taxation on dividends, in particular, should provide some significant assistance to the economy for years to come, as government takes one less bite from the investment dollars needed to create jobs. In the long term, the President's plan could be the biggest boon to the economy in years.

But let's not fool ourselves and pretend it will do much to help with our current economic doldrums.

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November 29, 2002

United's Bankruptcy

As United Airlines grows closer to bankruptcy, there will no doubt be calls for the federal government to step in to keep United afloat. Here's hoping that President Bush actually clings to some tattered remnants of his belief in the free market and lets United fail.

Yes, it's entirely possible that United would not have failed if it were not for the September 11th attacks, but the airline industry was already in dire straits prior to 9/11. Mismanagement and poor customer service are the true culprits for the troubles the industry now faces, and the federal government has no business stepping in to try and forestall needed reforms in the industry with infusions of cash. I have no doubt that, should United fail, it will be painful for the industry. But I'm just as sure that such a failure will be good for the industry in the long term, because it will force airlines to find better ways of doing business. Better some pain now than many more years of chronic pain later.

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November 12, 2002

Universal Health Care

One of the ideas I've seen bandied about by Democrats seeking relief from their recent debacle is a call for the Democratic Party to bring back universal health care as a campaign issue. Doing so, the argument goes, would give the Democrats something to point to as a positive program they could offer America, therefore helping to both delineate the differences between the parties and to allow the Democrats to shape the national debate.

From a political standpoint, I think the Democrats are on solid ground here. Speaking as someone who's been without health care for going on eight months, I can sympathize with those who would like to see a national health care system. Bringing that issue to the fore would certainly force Republicans to either cave on their principles (likely, though not a sure thing) or force them to explain why they don't want a national health care system (though the Democrats will surely explain it as simple callousness). If the Democrats could make health care a major campaign issue, it seems reasonable it would help them pick up some votes.

That having been, said, I hope they fail for an entirely different reason. The idea of the U.S. government taking over our national health care system fills me with dread. The simple prescription drug plan that President Bush is almost certain to ram through Congress will lead to a downturn in research funds for new drugs, meaning a decline in future health care even as it may help some people right now. Were the government to fully nationalize health care, the consequences would be far worse.

Already, many doctors are refusing to treat Medicare patients because the government-mandated compensation levels are too low to properly reimburse the doctors for their time. Were the government able to set those levels uniformly across the country, doctors might have no choice but to care for patients or go out of business, but would it be likely that many people would choose to go into medicine in the future? Becoming a doctor is a very difficult and time-consuming process. It takes roughly a decade to produce a doctor, and that decade is packed full of long hours and incredibly difficult and stressful work. But many people go into medicine because they want to help people and because the financial rewards for being a successful doctor are commensurate with the effort required to become one. A government health care system would remove the financial rewards from the equation, leaving us with fewer doctors over time.

As the number of doctors declined, the number of patients would increase. As any student of economics knows, the cheaper a product is, the more likely people are to buy it. If I sell cars for $15-$40,000 a pop, demand will stay steady at around 60-100 cars a month (for our store, not nationally). Were I to cut the prices on cars to $1500-$4000 a copy, demand would surge incredibly. I couldn't keep the cars on the lot, in fact, at those prices. By that same token, were medical care made to appear free, by nationalizing health care, far more people would take advantage of all medical options available to them. Whereas now people might simply take some asprin or slap a band-aid on a cut, if their perceived costs were close to zero, they would be far more inclined to see a doctor for even minor injuries, just in case. This is not theoretical, as residents of Canada and England can attest. Getting an appointment to see a doctor in those countries, with their national health care plans, requires months of advance planning. Emulating those systems seems an unwise decision to me.

But, proponents will argue, we could do it differently. We could ensure that there wouldn't be long waits like that. OK, I'll bite. How?

We could ration health care, of course. You only get so many visits per year, so you'd better save them for when you need them most. Sounds terrific, except some people need to go to the doctor far more often than others. I could probably get by with a yearly checkup, as I'm reasonably fit and healthy. Someone with a serious disease, conversely, might have to see a doctor weekly, or even more often.

No problem, I can hear the health care advocates cry. We'll just ration it according to need. If you're sick, you'll get the visits you need. Problem solved, right?

Not yet. Who determines which sicknesses require how many visits? It should be doctors, right? After all, Joe Bureaucrat is hardly qualified to determine if breast cancer calls for weekly visits or monthly visits. So what do we do when demand outstrips supply? Doctors would probably prefer to use the precautionary principle in visit frequency, since it's better to have a patient come in to learn there's nothing wrong than for the patient to stay home and not be properly diagnosed. Sooner or later, and almost certainly sooner, there will be more patients visits required than doctors' time available. Then what?

Simple. We have to ration the health care. Some people won't get as much as they need, some people will get more than they need. I don't see this as being an improvement on our current system.

Hold on now, Andy, you say. Under our current system, costs for health care are skyrocketing. At least a national health plan could keep costs under control.

How? By mandating what doctors receive for certain procedures? If that cost is less than their cost for performing the procedure, they'll simply stop performing that procedure. No help there. Mandating cost caps on prescription drugs may make current drugs cheaper, but it will also ensure there are few, if any, new drugs that come to market in the future by eliminating the incentive to research. The same goes for medical equipment. Machines like MRIs are extremely expensive, to pay for the research required to develop them and the actual costs of constructing them. If government decides to set caps on their costs, they will once again eliminate the motive for developing new and better procedures.

And none of this takes into account how poorly the government's track record is on creating bureaucracies like this. Name a single government bureaucracy that does it's job to standard and under budget consistently. Go ahead, I'll wait.

A national health care plan might well make health care cheaper in the short run. But it would do nothing to make it better. In the long run, government health care would only stagnate progress in the field of medicine, leading to greater health problems in the future. I don't know what the solution to health care is, but I'm confident that nationalizing it would not be the right answer.

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