Friday, January 14, 2011

SO2 Emissions: Stocks vs. Flows

I saw Frank Stephenson's post on Division of Labour, referring to this post by Shawn Regan, which refers to this post by Stephen Hayward. To put it briefly, Hayward points out that SO2 has been falling for a long time, and the 1970 Clean Air Act (CAA) hasn't had a measurable effect on SO2 levels. I found this puzzling for two reasons. First, I was under the impression that the 1970 CAA, while identifying SO2 as a major pollutant, didn't actually do much about it. Second there is a strong consensus among environmental economists that the SO2 cap-and-trade program (a result of the 1990 amendment to the CAA) has been wildly successful, reducing emissions quickly at a much lower cost than expected. I did some digging, and I think I finally figured out why Hayward is saying the Clean Air Act hasn't mattered, while environmental economists think it has: they're looking at different things.

Hayward is looking at ambient concentrations of SO2. That is, he is looking at the stock of SO2 in the air, which is a result of past pollution. The stock of SO2 is important; the more there is, the larger the (negative) health effects and the more acid rain. Environmental economists, however, have been looking at the flow of SO2 into the air--that is, the emissions of SO2. This is also important. If we decrease the amount of SO2 we're adding into the air, the stock of SO2 will fall (or fall more quickly). What does the path of emissions look like?

You can get that data from the EPA here. Note that the data is in five-year increments until 1995. It's hard to say much, due to the lack of annual emissions data prior to 1995, but it looks to me like emissions fall more quickly after the 1990 Clean Air Act Emissions, if one were to draw a trend line for the data before and after 1990.

There are a few puzzles, such as the jump in emissions in 1995 (when the first stage of the cap-and-trade market started, and was focused on the 110 largest existing sources) and in 2003, but they're followed by even steeper declines. It turns out that the increases are due to sources that would be regulated under the second stage of the cap-and-trade program in 2000 (which applied to the other large existing sources and all new sources). It makes some economic sense: Squeezing the emissions of big polluters, without constraining the small ones, resulted in a shift of production, and therefore emissions, to those smaller sources. Why did emissions rise, then, and not just stay constant? This is just a conjecture, but I would guess that it is because those slightly smaller producers (of energy or whatever) were initially less efficient; for a given amount of output, they probably produce more SO2. I'm not sure why emissions stabilize from 2002 to 2005, rather than just falling. I could tell some more just-so stories, but they wouldn't be very satisfying.

My point is that environmental economists are, I think, right to view SO2 cap-and-trade as a success story, in terms of emissions. Emissions have fallen at a faster rate as a result of the program. Has this had an effect on ambient SO2? I can't really tell from Hayward's graph. It looks to me like ambient SO2 may have fallen faster after 1990, but to me, the interesting question is "what happened after 1995?"--and his chart only has three years of data there. Here are the EPA's charts of ambient SO2:

No matter which graph one looks at, it doesn't appear to me that there's a clear effect of the SO2 cap-and-trade program on ambient SO2. There's a pronounced drop from 1994 to 1995, but that's it. It looks like SO2 just keeps falling steadily. I don't know much about the physical science involved here, though. Is there a lag between the reduction in emissions and an effect on the stock of SO2? Is there something else going on that I don't understand? 

Maybe, when I get some time (which could be some time from now), I'll look at some of the empirical papers on this. If I'm totally off-base, hopefully someone will correct me in the comments. 

Wednesday, December 22, 2010

Sour Grapes--er, Milk

When hearing a story about ethanol subsidies diverting corn from cattle feed and raising its price, angering dairy farmers, I confess my reaction was uncharitable. In fact, my reaction was something like "Oh, are the poor dairy farmers being forced to pay an artificially elevated price for something important to them? Poor babies. I know they would never support anything like that."

Of course, the ethanol subsidies are a terrible idea, too; it's just interesting to see such hypocrisy without any sense of self-awareness or irony.

Sunday, December 19, 2010

Fun with Google Ngrams

I saw a link on Marginal Revolution to the Google Ngram Viewer. It tells you how often a phrase occurred in the books contained in Google Books. My first thought was that Deirdre McCloskey should play around with it a bit, since her most recent work deals with the importance of language and other factors in allowing the industrial revolution and economic growth. For example, consider this ngram of bourgeoisie. Or maybe don't; it only shows how many times the word occurs. McCloskey would be interested in how the word is used--is it an epithet or used to praise?

So then I started wondering who's been mentioned more in recent years, and I decided to type in those two figures who towered over economics in the 20th century, Milton Friedman and John Maynard Keynes. Here's what you get. I recommend clicking the link; the graphs below are tiny by comparison.

I think it nicely reflects their roles over the last century, up until the last few years, when Keynes has made a resurgence. The graph doesn't seem to reflect that, at least, not in 2007 and 2008. Hyman Minsky is barely visible by comparison to both of them, so I won't even include that graph here.

I wondered how some other famous economists would compare. My expectation was that Adam Smith would be big, but I didn't realize how big:

Wow. He's surpassed by Marx in the 60s until the 90s (which fits with the times, I suppose, but is nonetheless frustrating), but otherwise Adam Smith seems to tower over the other big names. I was sad to see David Ricardo with so few mentions. For the sake of Austrians out there I threw Ludwig von Mises in, too. Sorry, Austrians; even Paul Krugman is getting more mentions than Mises nowadays (note that the frequency with which an economist is mentioned does not suggest that they are wiser or more correct).

Who are the other big names I should be putting in here? It would probably be best to drop Adam Smith and Karl Marx from any comparisons you do with any modern economists; they are mentioned so often that they make modern economists hard to see on the graph.

Friday, November 19, 2010

Airline Safety is Simple

My god, I haven't updated since September. Life is kicking my ass lately.

The big story in the news lately is the TSA's increasingly invasive search procedures. My friend Art Carden has called for abolishing the TSA. This article points out that the TSA doesn't seem to actually catch any terrorists, and it's not clear why the mere existence of the TSA would deter terrorists more than the private contractors that provided security before the creation of the TSA. 

Here's what I really don't understand: Why does it make sense to have a government agency providing security? As Art points out, airlines have an incentive to provide security, if only because they don't want to lose planes and pilots to terrorists. If you think that's not enough incentive, then make airlines legally liable for damage caused by their planes and for the deaths of passengers on their planes. Then step back and let the airlines provide security. They will search for and find the right balance between annoyance and safety--that is, they will provide safety up to the point where the marginal cost to passengers, in terms of annoying safety procedures, is equal to the marginal benefit to society (in risk of death and financial loss). 

Contrast this with the TSA: What incentive do they have to worry about passenger convenience? They only face weak pressure filtered through the political process. Suppose something slips through, and someone gets hurt; the agency is not going to lose money as a result. It will face political pressure to do a better job, but it would likely get more funding as a result. The TSA faces perverse incentives. 

This reminds me of Mixon's Law (named after Wilson Mixon): Government agencies can always justify funding increases. There are two reasons to increase funding for a government agency. 
1) The agency is doing really well, and should be rewarded with more funding. That way it can do more great stuff.
2) The agency is doing a terrible job, and should be given more money so that it can do a better job. 

Thursday, September 16, 2010

Good Questions From My Students

I've been teaching two introductory classes, and my students have asked me some really good questions, which is part of what makes teaching worthwhile. For example:

Why are there price supports for milk, but not for, say, steak? I don't know; the just-so story I suggested was that milk is sold primarily directly to consumers, who are a very dispersed interest group (so they find it difficult to organize to oppose the regulation). Steak is an important input for many restaurants, so perhaps they form an effective counter-lobby against ranchers. Bryan Caplan's answer to why such a clearly inefficient regulation would exist would be (in part) "voters are rationally irrational and support the policy", but I don't think that's true here. I don't think most voters are even aware milk price supports exist. It has to be some sort of classic lobbying battle.

Is there regional variation in minimum wage laws that correlates with homelessness rates? One student said that she had lived in Hawaii, where the minimum wage exceeded the federal wage and homelessness was rampant. I guessed that if one were to run the data, one would not find a relationship (although I don't think there'd be a causality problem--how would high rates of homelessness cause a higher minimum wage?), but it sure would be interesting to check. 

Why do some cities have rent control, but not others? Why New York and Santa Monica, but not Atlanta? I don't really have any good answer here. Anyone have any ideas I could run by the students?

Friday, September 03, 2010

David Friedman On Macro

I am teaching an introductory Macro class this semester, and it always makes me feel like a snake-oil salesman. David Friedman has a great new blog entry on Macro. I have two additional thoughts on the subject.

1) I have another objection to Macro: we cannot see the counterfactuals; there are no good natural experiments to test hypotheses. When some states do one thing, and others do a different thing, we end up with lots of different observations that can be used to test a hypothesis. We can see how two similar states that do two different things differ from each other, and this tells us something about the effects of policy. With the U.S., however, there are no other data points--different countries are too dissimilar to make direct comparisons. As a result we cannot know what would have happened if macro policy had been different. What would have happened without TARP, or the stimulus bill? We don't know. There's no way to know. Combine this with the poor predictive power of macro theory in its current state and you get something that is of dubious scientific value. Aside from "Inflation is always and everywhere a monetary phenomenon," there's not a lot of Macro that I would be willing to stand behind firmly.

2) Friedman suggests that insufficient attention has been paid to regime uncertainty--the reluctance of individuals and firms to make costly economic decisions when policy is uncertain. Bob Higgs has been writing about this topic for some time. I blogged about it once. Here's Jerry Jordan, former Fed bank president, making the same point. Here's Don Boudreaux reading James Madison on the subject. Here's Russ Roberts (after an interview with Higgs) on the subject, and again here. Here's Scott Sumnerdismissing the idea. Finally, here's Tyler Cowen on regime uncertainty (he calls it "policy uncertainty"), and not atypically, he takes a muddy position. My point here is that I'm not sure if insufficient attention has been paid to this topic. Lots of economists are aware of it. How much attention should the topic receive? I don't know. Given that it's so very difficult to test macro hypotheses, would paying attention to the topic of regime uncertainty make any difference at all?

Sunday, August 15, 2010

Subsidies for Electric Cars Are Also a Bad Idea

In June Art Carden and I argued that subsidies for nuclear power were a bad idea, not because there's anything wrong with nuclear power, but because we cannot know the best way to generate cleaner energy--it takes a market with prices to figure that out.

Daniel Gross argues in this piece in Slate that people who oppose subsidies for electric cars misunderstand "the process of innovation, economic history, and the current macroeconomic situation". For someone who is writing with such confidence, I would say Gross is the one displaying staggering misunderstanding. Yes, costs of building electric cars will probably come down with economies of scale, and yes, that process has repeated many times through history. None of that suggests that subsidies are a good idea, and Gross doesn't even begin to justify subsidies. How can the government know that electric cars are the best solution? What about small turbocharged clean diesels, or hydrogen, or some other technology? How can the government know which is the best one into which to sink billions of dollars? It can't. With a subsidy, however, it is making that very expensive bet.

If we want cleaner cars, a gasoline tax is the way to go. Car producers will experiment with a variety of techniques in an attempt to find the cheapest way to reduce gasoline usage. We'll also get responses from consumers, who move closer to work, carpool, and find other ways to reduce fuel usage (thereby reducing pollution). Government subsidies for new car technologies make as much sense as subsidies for, say, new MP3 players or new vacuum cleaners--that is to say, they make no sense at all. Markets are great at technological innovation; rather than ramming one form of innovation down our throats, why not give everyone the incentive to innovate in a variety of ways until we find the best solutions?

Nashville Bike Share--Will It Be Berry Bikes All Over Again?

Personal stuff has kept me from blogging recently; I've just been too busy. I hope to slowly get back into things over the next few weeks.

Nashville has started a bicycle program called Nashville Bike Share to encourage people to ride bicycles rather than drive. My first thought upon hearing this was "This will be the Berry Bikes disaster all over again". In 1998 Berry College's student government placed bicycles around campus; anyone who wanted to use one could hop on and ride it to class for zero price. As detailed by Frank Stephenson and Daniel Alban in this Freeman article, it didn't turn out very well. Riders treated the bicycles poorly, and within weeks they were unusable. Why? They were common property; because everyone owned them, no one owned them, and because no one owned them, no one had an incentive to take care of them. No individual bore a significant portion of the costs of damage to a bicycle. This is the classic Tragedy of the Commons. The program was eventually abandoned.

I don't think the Nashville Bike Share will end up faring quite so poorly. Riders must check out the bicycles and return them to the checkout one hour before the checkout location closes, and hefty late fees are assessed if riders fail to do so. I don't see anything on the site about fees for damage to the bicycles, but with the riders being individually identifiable, simple legal remedies should work. It will ultimately come down to how diligent the bike share workers are in chasing down bicycle abusers. This is a huge improvement on the Berry Bikes.

Does this mean the program is a good idea? It's hard to say. On the one hand, if there is sufficient demand for bicycles for rent, then it should be profitable for someone to provide those bicycles. The fact that no one is doing so suggests that this is not a wise use of government funds (I'm guessing it's a government program--it doesn't actually say so on the site, so I'm not sure, and in any case, it could also be a poor use of private charitable funds). On the other hand, if there are unpriced negative externalities from non-bicycle transportation (air pollution and congestion from cars, for example) then more bicycle use could be efficient. If that is the case, however, then it makes more sense to raise the gasoline tax, since that allows individuals to find the lowest-cost ways of reducing externalities. 

Wednesday, June 16, 2010

The Economics of Information Security

I have uploaded a paper that I've just finished that surveys the literature on the economics of information. It discusses malware, botnets, and other attacks, and the defenses against them.

Frankly, I think it's pretty dry stuff. I initially thought it was going to be about encryption and online retail security, but it seems there's not a lot of economics there, and that particular problem is mostly solved.