Month: July 2015

One of the puzzles of economic history is why, given that Orville and Wilbur Wright invented the airplane and received a patent, why did the US economy almost immediately fall behind in actual manufacturing of airplanes?

The standard answer has been to blame the patent system: in particular, the Wright brothers put a huge amount of time and energy into trying to defend their 1906 patent for a flying machine against Glenn H. Curtiss and others who were seeking to manufacture planes. The argument goes that both firms put so much time into the patent battles that they lost their focus on actually manufacturing planes. An example of this argument from a 2014 opinion piece in the Wall Street Journal is here.
(Ironically, the Curtiss-Wright company would later be formed in 1929 from the merger of these two firms.)

In \”Blaming Wilbur and Orville,\” Tom D. Crouch reviews a couple of recent books on the Wright brothers and the shortcomings of the Wright Company in the Summer 2015 issue of the Business History Review (89:2, pp. 339-343). He writes:

\”That America had fallen far behind Europe in aviation by 1917 is beyond doubt. Every American airman who flew into combat in the “war to end all wars” did so in an airplane entirely designed and almost entirely built in Europe, except for those naval aviators operating Curtiss flying boats in search of enemy U-boats. … 

In fact, while there was much concern at the time, little solid evidence exists to indicate that the patent suits had any serious impact on American aviation. How then are we to explain the fact that the nation that had given birth to the airplane had fallen so far behind?

The answer lies in a 1913 congressional study of aeronautical expenditures by the nations of the world. Germany led the world, with $28,000,000 spent on aviation between 1908 and 1913. France, Russia, Italy, and Austria followed close behind, with England in sixth place with a total national expenditure of $3,000,000 for aeronautics. Having spent only $435,000 for all flight-related activity during that five-year period, the United States was in thirteenth place, behind Japan, Chile, Greece, and Brazil. (All figures are from Aeronautics in the Army, hearing before the Committee on Military Affairs, U.S. House of Representatives, sixty-third Congress, first session, 1913.) In addition to official appropriations, several leading aeronautical powers had also established national subscriptions that provided an additional $7,100,000 in private financial support for their aeronautical industries. Once again, Germany led the way, with $3,500,000 in private funds, followed by France ($2,500,000), Italy ($1,000,000), and Russia ($100,000). According to official U.S. government estimates, the other nations of the world had spent a total of $93,620,000 in public and private funds on aviation between 1908 and 1913. 

That money was spent on direct purchases of aircraft and engines and on government-sponsored research and development programs. Each of the European powers that went to war in 1914 already maintained sophisticated aeronautical research laboratories. In the United States, the National Advisory Committee for Aeronautics was not authorized by Congress until 1915, and its first flight laboratory was not established until 1917. 

In America, … flying was the domain of aerial showmen out to thrill the crowds at local meets and air shows with old-style pusher biplanes. In Europe, on the other hand, rich prizes were established to promote improvements in airframe and engine technology. Competition encouraged the development of aircraft that could fly higher, faster, and farther. … With war clouds glowering on the horizon, European nations had invested heavily in a set of new technologies with military potential. Americans, an ocean away from potential conflict, did not see the need to support the embryonic industry. … [T]he failure of other American aircraft builders to keep up with advances in Europe had little to do with the patent wars and everything to do with a limited market and the low level of public and private investment in flight technology.

I think the overall lesson here is that patents matter, and so do resources expended in fighting over patents. However, a more fundamental determinant of who ultimately wins in market competition isn\’t about who gets the first patent, but who makes the continual investments in production and in follow-up improvements.

There\’s a long-standing metaphor in monetary policy that the central bank \”can\’t push on a string.\” It means that while a central bank can certainly slow down an economy or even drive an economy into recession with an ill-timed or too-large increase interest rates, the power of monetary policy is not symmetric.  When a central bank reduces interest rates in an attempt to stimulate the economy, it may not make much difference if banks don\’t think it\’s a good time to lend or firms and consumers don\’t think it\’s a good time to borrow. In other words, monetary policy is like a string with which a central bank can \”pull\” back the economy, but pushing on a string just crumples the string.

The \”can\’t push on a string\” metaphor appears in many  intro-level economics texts. It has also gotten a heavy work-out these last few years as people have sought to understand why either economic output or inflation wasn\’t stimulated more greatly by having the Federal Reserve\’s target interest rate (the \”federal funds\” rate) near zero percent for going on seven years now, especially when combined with \”forward guidance\” promises that this policy would continue into the future and a couple trillion dollars of direct Federal Reserve purchases of Treasury debt and mortgage-backed securities.

The first use of \”pushing on a string\” in a monetary policy context may have occurred in hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough (D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p. 377, during a discussion of what the Fed might be able to do to end deflation.

Governor Eccles: Under present circumstances there is very little, if anything, that can be done.
Mr. Goldsborough: You mean you cannot push a string.
Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and, as I have said several times before this committee, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation monetary action can very effectively curb undue expansion.
Mr. Brown: That is a case of pulling the string.
Governor Eccles: Yes. Through reduction of discount rates, making cheap money and creating excess reserves, there is also a possibility of stopping deflation,  particularly if that power is used combined with this broadening of eligibility requirement.

Later in the hearings, several other speakers refer back to the \”push on a string\” comment, which clearly had some resonance. Although I have seen the \”can\’t push on a string\” metaphor attributed to John Maynard Keynes in a number of places, I haven\’t seen an actual primary source where Keynes used the phrase.

 For those who like digging into monetary policy metaphors, here\’s a post about the speech where William McChesney Martin coined the metaphor that the job of a central bank is, when the party is just starting to heat up, to take away the punch bowl.

When the BP Statistical Review of World Energy is published each year, I skim through the figures and tables as a way of grounding myself in some basic facts. Here\’s are a few things that caught my eye this year.

Here\’s a figure showing the primary global sources of energy and how they have evolved over time. For comparison, the different types of energy are all converted to \”oil equivalents.\” The green area at the bottom is oil; red is natural gas; light orange is nuclear; blue is hydroelectric; darker orange is the non-hydro renewables like solar and wind; and the gray on top is coal. As the report notes: \”Oil remains the world’s dominant fuel. Hydroelectric and other renewables in power generation both reached record shares of global primary energy consumption (6.8% and 2.5%, respectively).\”

A more detailed breakdown of these sources of energy offers some additional insights. As Bob Dudley notes in his introduction to the report: \”The US replaced Saudi Arabia as the world’s largest
oil producer – a prospect unthinkable a decade ago. The growth in US shale gas in recent years
has been just as startling, with the US overtaking Russia as the world’s largest producer of oil and gas.\” For oil, the big recent shift is the fall in prices, due both to this rising supply and because \”[g]lobal primary energy consumption increased by just 0.9% in 2014, its slowest rate of growth since the late 1990s, other than immediately after the financial crisis.\” Here\’s the long-term pattern of oil prices, with the inflation-adjusted price in light green. The current price is now under $60/barrel, so you need to imagine that what looks like a relatively small drop in oil prices on the right-hand side of the figure just keeps falling.

For natural gas prices, the interesting fact is that unlike oil, there isn\’t a single global price. It\’s much more costly to ship natural gas all over the world, and so the surge of natural gas supply in the US has kept US natural gas prices lower than prices elsewhere in the world, giving US producers who consume energy a competitive advantage. The US price for natural gas is shown by the red line.

The quantity of coal consumed has been rising sharply, especially in Asia, in a way that if it continues will make it essentially impossible to achieve a significant reduction in global carbon emissions.

The quantity of nuclear power has declined in the last five years or so, especially in the Asia-Pacific region after the Fukushima disaster in Japan in 2011.

Hydroelectric power is also on the rise, especially in the Asia-Pacific region. It is notable how little hydro power there is in Africa, a region that desperately needs more and more reliable electrical power.

While non-hydro remain small slice of total global energy production, if one focuses just on their role in producing electricity, their share is somewhat higher–now above 10% in the Europe and Eurasia region.  Within the EU region alone, the report notes that non-hydro renewables now provide 17% of electrical power (although this has been achieved through hefty public subsidies that are now under reconsideration in a number of countries).

After each national election, the US Census Bureau asks questions in its Current Population Survey about whether people voted, and if not, why not. Thom File wrote the July 2015 report called \”Who Votes? Congressional Elections and the American Electorate: 1978–2014.\”  Probably the headline finding of the report is that the percentage of Americans who voted in the 2014 federal elections was the lowest in an off-presidential-year election since the start of this data series in 1978.  The percentage of Americans who voted in presidential elections had been dropping up until about 2000, but since then has rebounded a bit.

The report includes lots of detail on voting rates by different demographic groups, but what caught my eye back in the statistical tables was a listing of the main reasons given by those who didn\’t vote. The total of 47.6 million is the number of registered citizens who reported not voting: that is, the total doesn\’t include those who said \”don\’t know\” or refused to answer.  Here\’s the list of reasons for not voting from Table 10 of the most recent data:

For comparison, here\’s the list of main reasons for not voting (again, among registered citizens who answered this question) after the 2012 presidential election.

What strikes me about the list is, well, how obvious it is. Why don\’t people vote? Mostly because they are too busy, not interested, forgot, out of town, sick, or don\’t any of like the candidates. The harder question is whether it should be viewed as an important policy goal to raise the voter turnout rate; at some times and places, voting has even been mandatory. As we endure the steady diet of polling data during the next 16 months of run-up to the November 2016 election, it\’s worth remembering the old truth that what matters isn\’t what\’s said to pollsters, but rather who actually turns out a casts a ballot.

Tobacco use could lead to 1 billion premature deaths in the 21st century. That\’s the estimate of Prabhat Jha and Richard Peto in their 2014 review article in the New England Journal of Medicine, \”Global Effects of Smoking, of Quitting,and of Taxing Tobacco\” (January 2, 2014, 370: pp. 60-68).  They write (footnotes omitted):

\”On the basis of current smoking patterns, with a global average of about 50% of young men and 10% of young women becoming smokers and relatively few stopping, annual tobacco-attributable deaths will rise from about 5 million in 2010 to more than 10 million a few decades hence, as the young smokers of today reach middle and old age. …There were about 100 million deaths from tobacco in the 20th century, most in developed countries. If current smoking patterns persist, tobacco will kill about 1 billion people this century, mostly in low- and middle-income countries. About half of these deaths will occur before 70 years of age.\”

What might be done about it? The World Health Organization offers an overview of policy choices in \”WHO REPORT ON THEGLOBAL TOBACCO EPIDEMIC, 2015: Raising taxes on tobacco.\” Here\’s a figure from the report showing prevalence of smoking around the world. The obvious concern is that rates of smoking will rise as the economies of low-income and middle-income countries grow.

The WHO report looks at a suite of policy options, shown below, but the main emphasis of this year\’s report is on raising tobacco taxes to at least 75% of the retail price. Here\’s the full group of policies, and what share of the world population is affected by them.

Like many teachers of economics, I suspect, I use cigarette taxes as an example of elasticity of demand–that is, how does the quantity demanded shift with an increase in price. Here are some comments from the WHO report about tobacco taxes:

\”Despite the fact that raising tobacco taxes to more than 75% of the retail price is among the most effective and cost-effective tobacco control interventions (it costs little to implement and increases government revenues), only a few countries have increased tobacco taxes to best practice level. Raising taxes is the least implemented MPOWER measure – with only 10% of the world’s people living in countries with sufficiently high taxes – and is the measure that has seen the least improvement since we started assessing these data. …

\”Research from high-income countries generally finds that a 10% price increase will reduce overall tobacco use by between 2.5% and 5% (4% on average). … Most estimates from low- and middle-income countries show that a 10% price increase will reduce tobacco use by between 2% and 8% (5% on average). Studies from a number of countries typically show that half of the decline in tobacco use associated with higher taxes and prices results from reduced prevalence (i.e. from users quitting). The remaining half comes from reduced intensity of use (i.e. users consuming less by switching from daily to occasional smoking, or reducing the number of cigarettes smoked each day). 

\”In the United States of America (USA), cigarette prices rose nearly 350% between 1990 and 2014, in large part because of a five-fold increase in average state cigarette taxes and a six-fold increase in the national cigarette tax . During this time the number of cigarettes smoked per capita dropped by more than half, and the percentage of adults who smoke fell nearly one third. Tax and price increases in Brazil explain nearly half of the 46% reduction in adult smoking prevalence between 1989 and 2010.

\”Tobacco use among young people is very price sensitive, with reductions in tobacco use in this group two to three times larger with a given price increase than among adults.  … Tobacco use is increasingly concentrated in populations with the lowest income and socioeconomic status, and explains a large proportion of socioeconomic disparities in health. At the same time, lowest-income populations are also more responsive to price increases than higher-income users. The monetary burden of higher tobacco taxes falls more heavily on the wealthiest users, whose tobacco use declines less, while most of the health and economic benefits from reductions in tobacco use accrue to the most disadvantaged populations, whose tobacco use declines more when taxes increase. In Thailand, the Asian Development Bank estimates that 60% of the deaths averted by a 50% tobacco price increase would be concentrated in the poorest third of the population, who would pay only 6% of the increased taxes. …

\”In China, research suggests that raising taxes on cigarettes so that they account for 75% of retail prices –up from 40% of the share of price in 2010– would avert nearly 3.5 million deaths that would otherwise be caused by cigarette smoking.\”

With tobacco consumption, as with so many other vices that other people have, it\’s easy to slip into prohibitionist rhetoric. As an inveterate consumer of caffeine myself, and someone who likes a nice glass of wine or a hand-crafted bourbon from time to time, I\’m not a supporter of the prohibitionist impulse. There are negative social consequences of making it too highly profitable for producers to evade government rules and overly high taxes and supply something that many people want. But tobacco use poses an enormous public health danger, and I have no problem with government making real efforts to discourage it.

For a US-focused discussion of trends in smoking since the release of the Surgeon General\’s report that smoking is hazardous to your health, see \”Smoking, 50 Years Later\” (January 28, 2014). For a discussion of the recent controversies over e-cigs and vaping, see \”E-cigs: The Bootlegger/Baptist Opposition\” (May 21, 2015)

[Note: The discussion paper discussed below was later published in the National Tax Journal, March 2016, 69 (1), 171–216.]

Controversies over a financial transactions tax have a long history in economics (going back Keynes\’ advocacy of such a tax in the 1930s) and public policy (the British have imposed a \”stamp duty\” on stock transfers over more than three centuries from 1694 to the present). Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns, and Steve Rosenthal take stock of the issues in \”Financial Transaction Taxes in Theory and Practice,\” published as a June 2015 discussion paper by the Tax Policy Center. Here\’s the summary of the arguments for and against (citations omitted):

\”Proponents advocate the FTT [financial transactions tax]on several grounds. The tax could raise substantial revenue at low rates because the base—the value of financial transactions—is enormous. An FTT would curb speculative short-term and high-frequency trading, which in turn would reduce the diversion of valuable human capital into pure rent-seeking activities of little or no social value. They argue that an FTT would reduce asset price volatility and bubbles, which hurt the economy by creating unnecessary risk and distorting investment decisions. It would encourage patient capital and longer-term investment. The tax could help recoup the costs of the financial-sector bailout as well as the costs the financial crisis imposed on the rest of the country. The FTT—called the “Robin Hood Tax” by some advocates—would primarily fall on the rich, and the revenues could be used to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt. 

\”Opponents counter that an FTT is an “answer in search of a question”. They claim it would be inefficient and poorly targeted. An FTT would boost revenue, but it would also spur tax avoidance. As a tax on inputs, it would cascade, resulting in unequal impacts across assets and sectors, which would distort economic activity. Although an FTT would curb uniformed speculative trading, it would also curb productive trading, which would reduce market liquidity, raise the cost of capital, and discourage investment. It could also cause prices to adjust less rapidly to new information. Under plausible circumstances, an FTT could actually increase asset price volatility. An FTT does not directly address the factors that cause the excess leverage that leads to systemic risk, so it is poorly targeted as a corrective to financial market failures of the type that precipitated the Great Recession. Opponents claim that even the progressivity of an FTT is overstated, as much of the tax could fall on the retirement savings of middle-class
workers and retirees.\”

Their paper offers an overview of the current uses of a financial transactions tax and the existing evidence on these various claims. Without attempting to be in any way exhaustive, here are some of the points that caught my eye:

The US has had financial transactions taxes in the past, and continues to have such a tax at a low level today. 

\”From 1914 to 1966, a federal FTT was levied on sales and transfers of stock. The rate
was originally 0.02 percent of the stock’s par value …In 1959, after firms had become practiced at manipulating par value to avoid tax, the base was changed to market value, and the rate was cut to 0.04 percent. From 1960 to 1966, stocks were taxed at the rate of 0.10 percent at issuance and 0.04 percent on transfer. … In 1934, the Securities Exchange Act (Section 31) granted the SEC the authority to fund its oversight operations with fees on self-regulatory bodies such as the New York Stock Exchange. At present, a 0.00184 percent fee is levied on sales of securities, and a $0.0042 fee per transaction is levied on futures transactions. Debt instruments are exempt from the tax.\”

Many other high-income economies have financial transaction taxes now, although others have recently repealed such taxes. 

\”Many G20 countries tax some financial transactions. The most common form is a tax on secondary market equity sales at a rate of 0.10 to 0.50 percent. Such taxes were imposed, as of 2011, in China, India, Indonesia, Italy, South Africa, South Korea, and the United Kingdom. Italy, Russia, Switzerland, and Turkey imposed taxes and/or capital levies on debt financing, typically on issuance rather than on secondary markets. But many developed nations have repealed FTTs in recent decades, presumably because of competitive pressures stemming from globalization and technological changes that have made remote trading less costly. Germany, Italy, Japan, the Netherlands, Portugal, and Sweden have repealed STTs [securities transaction taxes] in the last 25 years.\”

The design of a financial transactions tax requires answering a number of questions, and just listing the questions helps to understand the possibilities for shifting and reformulating financial transactions in ways that would reduce the reach of such a tax. 

\”The first design question is the geographic reach of the tax. Should the application of the tax turn on the residence of the issuer of the security; the residence of the buyer, seller, or intermediary; or the location of the trade? … Second, which securities are covered by the tax: stocks, bonds, derivatives? … A third issue is which financial markets are subject to the FTT. Does the tax apply only to exchange-based transactions or also to over-the-counter transactions? … A fourth issue is whether the tax excludes market makers. … Most recent proposals choose to tax market makers. A fifth issue is whether the tax exempts government debt. … Turning to the tax rates, there are further questions. Is the tax ad valorem or a flat fee per share traded? … A final issue is whether the tax is coordinated internationally.\”

The question of whether a financial transactions tax would hinder financial markets from working well or would discourage speculative trading and pointless volatility is undecided in the research literature. 

\”[A]lthough empirical evidence shows clearly that FTTs reduce trading volume, as
expected, it is unclear how much of the reduction occurs in speculative or unproductive
trading versus transactions necessary to provide liquidity. The evidence on volatility
is similarly ambiguous: empirical studies have found both reductions and increases in
volatility as a result of the tax.\”

Overall, the dogmatic argument that a financial transactions tax is unworkable is clearly false. It operates in a lot of countries. The wide-eyed hope that such a tax can be a truly major revenue source also seems to be false. In part because of concerns over the risk of creating counterproductive incentives–either just to structure transactions in a way that minimizes such a tax or even to react in a way that reduces liquidity and increases volatility in financial markets–the rate at which such taxes are set is typically pretty low. As the authors write, \”the idea that an FTT can raise vast amounts
of revenue—1 percent of gross domestic product (GDP) or more—has proved inconsistent with actual experience with such taxes.\”

The question with any tax is not whether it is perfect, because every real-world tax has some undesirable incentive effects. The question is whether a certain tax might have a useful role to play as part of the overall portfolio of real-world taxes. For what it\’s worth, this particular review of the evidence leaves me skeptical that expanding the currently existing US financial transactions tax from its very low present level would be a useful step. The authors of this paper are careful to adopt a fairly neutral on-the-one-hand, on-the-other hand pose, without making any firm recommendation. But in the conclusion, they do write:

An FTT at the rates being proposed and adopted elsewhere would discourage all trading, not just speculation and rent seeking. It appears as likely to increase market volatility as to curb it. It would create new distortions among asset classes and across industries. As a tax on gross rather than net activity, and as an input tax that is not creditable and thus cascades, the FTT clearly can most optimistically be considered a second-best solution. Over the long term, it appears poorly targeted at the kinds of financial-sector excesses that led to the Great Recession.

Behavioral economics builds on insights from psychology that show a number of specific ways in which people (spoiler alert!) are not fully rational decision-makers. For example, people have limited self-control, so they may neglect to save money or exercise or invest in the training in such a way that they later come to regret their decisions. People can have a hard time understanding complex decision problems, so when it comes to making decisions about the form of their mortgage or insurance policy or when to start drawing Social Security, they may tend to use rules-of-thumb or stick with a default option even when that approach might not serve them well. People\’s preferences often have features that are not fully rational, like \”loss aversion\” in which people value losses as worse than same-sized gains. For example, it turns out that people are less likely to sell stocks or homes that have declined in value, because we are averse to accepting that a loss has in fact occurred.

The writing on behavioral economics often follows this pattern: first explain why people aren\’t rational, and then suggest a government policy–sometimes called a \”nudge\”–that could help people to overcome their irrationality by providing certain kinds of information structured in a certain way, or by specifying default options that would work better for most people. But what happens if the insights of behavioral economics are also applied to government? After all, if we are going to take into account that people often display a lack of self-control, have difficulties in understanding complex situations, and preferences that appear quirky in certain situations, then it makes sense to apply these same insights to elected officials and regulators.

W. Kip Viscusi and Ted Gayer offer a some early analysis and discussion toward a theory of \”Behavioral Public Choice: The Behavioral Paradox of Government Policy,\” recently published in the Harvard Journal of Law & Public Policy (38:3, pp. 973-1007). For example, they write (footnotes omitted):

\”[T]he behavioral economics literature .. frequently recommends “soft paternalism” policies that seek to change the structure of the choices available to individuals in order to encourage a more desirable outcome. But, as behavioral agents themselves, policymakers and regulators are subject to the same psychological biases and limitations as all individuals. Many, although certainly not all, behavioral economics papers focus on the biases and heuristics of ordinary individuals, while seemingly ignoring that regulators are people too and thus subject to the same psychological forces. One study finds that, of the behavioral economics articles proposing paternalistic policy responses, 95.5% do not contain any analysis of the cognitive abilities of policymakers …  Professor Cass Sunstein observes, “For every bias identified for individuals, there is an accompanying bias in the public sphere.”

Indeed, Viscusi and Gayer point out a number of reasons why less-than-rational behavioral responses may be more prevalent among government decision-makers than for economic actors in the private economy. Here are some examples: 1) Private actors (like consumers and firms) need to bear the immediate costs of their decisions in a direct way, while elected officials and regulators do not. 2) Public policies are often influenced by the loud voice of concentrated special interests, who can overwhelm the quieter and more diffuse voices for the general interest. 3) Market actions evolve from an interaction of many buyers and sellers, and the checks and balances that such a process provides, but government actions can evolve from a much smaller number of potentially overconfident technocrats, who have a personal and career interest in pushing their own agendas.

When you combine these sorts of factors with the behavioral economics insights, it\’s easy enough to suggest examples where behavioral factors may be potentially leading government policy astray. Here are a few examples drawn from Viscusi and Gayer:

• People often overestimate risks that have an objectively low probability, but underestimate risks that have an objectively high probability. At an extreme, people worry much more about airplane crashes and shark attacks than the statistics would justify, but worry less about car crashes and high blood pressure. If people driven by news media coverage become highly concerned in the short term about what looks like an objectively small risk, do government regulators act in the same behaviorally driven way? 
• People are often severely adverse to facing losses, even with the potential for even larger gains. Is the Food and Drug Administration, for example, too loss-averse when it thinks about allowing approving potential new drugs–worrying so much about losses that it doesn\’t give sufficient weight to potential gains? 
• People can get tunnel vision, thinking about risk and costs in one context in a way that they wouldn\’t be comfortable applying in other contexts. Examinations of government regulations suggest that some impose a social cost of $3 million or less per life saved, while others impose a social cost involving billions of dollars per life saved (like the cost of the Environmental Protection Agency Superfund clean-up program). If government regulators across all areas applied a common cost-benefit standard, we could ramp up the cost-effective regulations, cut back the cost-ineffective regulations, and save more lives at lower cost. 

Most of the examples in the paper are draw from government regulatory decisions about health and safety issues, but the arguments they present may have an even broader application. For example, think about elected officials and regulators in the spirit of behavioral economics: they often lack self-control; have a difficult time evaluating complex situations; tend to stick with rules-of-thumb and default options rather than accept the cognitive and organizational costs of re-evaluating their positions; do not evaluate costs and benefits in a consistent way across different contexts; are not good at evaluating risks accurately, instead often respond to limited information and hype; and are overly averse to the risk of taking responsibility for decisions that might turn out poorly.  This perspective must have widespread implications for decisions involving the complexities of the tax code or government budgets, policies affecting the workforce and the environment, openness to new sources of domestic and foreign competition, and foreign policy as well.

Insights from behavioral economics applied to consumers, workers, savers, investors, and firms often suggest some basis for government actions to \”nudge\” behavior in other directions. But it seems plausible to me that behavioral economics as applied to government will suggest that a number of existing government actions are misdirected or misconceived. And when that happens, it\’s not clear who will \”nudge\” government in appropriate directions. Just as the \”nudge\” policies applied to consumers may sometimes specify what default options should usually be taken, or perhaps limig the number of options available, perhaps behavioral economics as applied to elected officials and regulators suggests the potential importance of specifying their default actions and limiting their choices.

Of course, the problem here is a classic one in political economy. Here\’s the formulation from the Federalist Papers #51, typically attributed either to James Madison or Alexander Hamilton,

\”But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.\”

A modern behavioral economist with a focus on public policy might write, \”If angels were to govern people, neither external nor internal controls on government would be necessary. But if voters under the influence of behavioral economics elect political leaders who have this same focus, and if those leaders appoint regulators and administrators who are also under the influence of behavioral economics, you must find ways to oblige such a government to control itself.

Or as the Roman poet Juvenal wrote long ago: \”Quis custodiet ipsos custodes?\” It\’s usually translated as \”who will watch the watchers?\” But for the combination of behavioral economics and political economy, perhaps the more apt translation would be: \”Who will nudge the nudgers?\”

One way to think about the issues involved in reducing global carbon emissions is to break down the underlying factors in this way. Consider what is called the Kaya decomposition (named after an author who used this approach about 25 years ago):

Carbon emissions = Population x GDP           x Energy used x Carbon  
                                                      Population    GDP                Energy used

This equation is an \”identity\”–that is, it\’s a statement that\’s true by definition, and its purpose isn\’t to prove anything, but only to organize one\’s thinking. In this case, even if population growth in the next few decades is lower than expected, global population isn\’t likely to drop in a way that would bring down carbon emissions. The second term is per capita GDP,  and it is not desireable for this to decline at the global level. As the World Bank reports: \”In all, 2.2 billion people lived on less than US $2 a day in 2011, the average poverty line in developing countries and another common measurement of deep deprivation. That is only a slight decline from 2.59 billion in 1981.\”

The ratio of energy used/GDP is sometimes called \”energy intensity.\” It tends to fall over time as an economy grows in size, and shifts away from manufacturing and toward service industries. The ratio of carbon/energy used is sometimes called \”carbon intensity.\” From a global perspective it had been declining for several decades, but now it has started rising. Jan Christoph Steckel, Ottmar Edenhofer, and Michael Jakob explain why in \”Drivers for the renaissance of coal,\” published online on July 6, 2016, by the Proceedings of the National Academy of Sciences.

Here are some of their figures showing some elements of the Kaya decomposition. The top line show the rise in carbon dioxide emissions over time. The use of primary energy has risen substantially. The bottom gray  line shows that energy intensity has been falling, thus acting to hold down carbon emissions. Carbon intensity was also falling for the global economy during much of the 1970s and 1980s, but started rising in the early 1990s.

Another figure shows patterns of energy intensity by region over time. The dots represent different years from 1971-2011. To get a feeling for what\’s going on here, look at the pink line showing the OECD90 countries–that is, essentially the high-income countries of the world. Over time, their per capita GDP is rising (the line goes from left to right, at least until the Great Recession and its aftermath in recent years) and their energy intensity is falling (the line goes from higher to lower). This is also the pattern for the world as a whole, and the pattern for Asia and for LAM (Latin America). The patterns for MAF (Middle East and Africa) and for EIT (\”economies in transition\”) look a little different–for example, the EIT group saw a decline in per capita income and rise in energy intensity in the 1990s.

Here\’s the pattern over time and across regions for carbon intensity. For the high income countries (OECD90), carbon intensity has been falling over time as GDP per capita generally increased. However, the world pattern is U-shaped, with carbon intensity first falling and then starting to rise. In Asia, in particular, carbon intensity was rising sharply until the last few years, but a similar if less extreme pattern also holds in the MAF (Middle East and Africa) region.

If you had to sum up the carbon intensity patterns in one word, it would be \”coal.\” Steckel, Edenhofer, and Jakob write:

\”In summary, in recent years non-OECD countries have relied increasingly on coal to meet their energy needs. The poorer a country is and the higher its rate of economic growth, the stronger is this effect. Both effects become more pronounced over time, suggesting that increasing coal use is a general trend among poor, fast-growing countries and is not restricted to a few specific countries. These results confirm the hypothesis of a global renaissance of coal. This conclusion is strengthened by the fact that excluding China and India … hardly affects the results … indicating that these two countries are not driving the results but rather are representative for the global sample … This renaissance of coal has even accelerated in the last decade; this acceleration can be explained by the low prices of coal relative to other energy sources. It is interesting that the availability of domestic coal resources does not seem to have a major influence on this result for poor countries, perhaps because coal can be imported in countries with low endowments …\” 

The authors make the point, bluntly and obviously, that if coal continues to rise, targets for reducing global carbon emissions will not be met.

\”Developing economies now account for such a large share of global energy use that the trend toward higher carbon intensity in these countries cancels out the effect of decreasing carbon intensities in industrialized countries. If the future economic convergence of poor countries is fueled to a major extent by coal, i.e., if current trends continue, ambitious mitigation targets likely will become infeasible.\”

A knee-jerk reaction to this situation is to find ways to restrict or ban coal use. But from a global perspective, making energy more expensive for the poorest people in the world as they try to develop their economies would have what the authors politely call \”severe distributional impacts.\” Instead, they emphaze two other steps. First, countries should be encouraged to pursue the self-interest of the their own citizens take the full social costs of coal into account, including the immediate short-term costs on health and output as a result of diminished air quality. If countries requiring the investment in equipment to reduce the immediate pollutants from coal, it will limit the spread of coal–and also help the health of their own citizens. Second, if coal isn\’t going to be the answer, other types of low-cost energy need to be encouraged. Possible alternatives in different areas need to consider everything, including dams for hydroelectric power, natural gas, oil, and even nuclear power, not just the choices popular among environmentalists in high-income countries like solar, wind, geothermal, and the like.

It is perhaps paradoxical, but also true, that if you aren\’t a big supporter of near-term, large-scale, non-coal methods of producing electricity around the world, you aren\’t really serious about reducing global carbon emissions.

In the world of competitive sports, \”bulletin board material\” refers to when you collect negative comments from others and post then in  public place to fire up your motivation. In my world, \”bulletin board material\” refers to comments that I print out and stick to the board beside my office door, in the hope that they will stir some thought among passers-by. In that spirit, here are some thought-provoking comments from Tom Goodwin, who is senior vice president of strategy and innovation at Havas Media.

\”Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening. …

The new breed of companies are the fastest-growing in history. Uber, Instacart, Alibaba, Airbnb, Seamless, Twitter, WhatsApp, Facebook, Google: These companies are indescribably thin layers that sit on top of vast supply systems ( where the costs are) and interface with a huge number of people (where the money is). There is no better business to be in. The New York Times needs to write, fact check, buy paper, print and distribute newspapers to get their ad money. Facebook provides a platform for us to write our own content, and Twitter monetizes the front page of newspapers, which happens to now be the Twitter feed. … The interface layer is where all the value and profit is. … The value is in the software interface, not the products. … In the modern age, having icons on the homepage is the most valuable real estate in the world, and trust is the most important asset. If you have that, you’ve a license to print money until someone pushes you out of the way.

The Freedom of Information Act passed back in 1967 allows people to request access to records held by federal government agencies. A number of journalists and other researchers often seek to mine these records, while government agencies often push back–either passively by responding very slowly to such requests or more actively by redacting and selecting among records before releasing them. The US government has just announced a pilot program in which any records released under the FOIA would be released pretty much simultaneously both to the party that made the request and also to the general public.

Teachers of intro econ will recognize the problem. As a society, we want people and firms to innovate, because over time that process drives improvements in the standard of living. But we fear that if anyone can just copy successful new innovations, then the rewards of innovation will be too low. Thus, we have laws about intellectual property–about patents, copyrights, trademarks, and trade secrets–that give innovators some partial insulation from competition for a time and thus help them to earn a reward.

Similarly, as a society we want people to delve into government records because it is part of the checks and balances that keep a democratic government accountable. However, the new FOIA policy raises the danger that if the results of such requests are immediately available to the public, then the incentive for journalists and other researchers to spend the time and energy to file and follow-up on such requests will be reduced. A paradox seems to arise here: Is this a case where making any government records from FOIA requests publicly available could lead to a situation where there is less incentive to request such records, thus leading to a situation where fewer government records actually become publicly available?

This paradox in markets for information is well-known among economists, with a classic 1980 paper on the subject by Sanford J. Grossman and Joseph E. Stiglitz titled \”On the Impossibility of Informationally Efficient Markets\” (American Economic Review, June 1980, pp. 393-408). The main argument of the paper is made in math, rather than in English, but let me suggest how it applies here.

The key insight of Grossman and Stiglitz is that if our society wants people to seek out information, then there need to be incentives for seeking out such information–basically, those who seek it out need to get paid. This basic notion holds true for information related to news coverage, but also for information related to, say, investing in the stock market. However, if all the available information is spread quickly and easily, then it will be very hard for those who seek out the information to get paid. As they write: \”There is a fundamental conflict between the efficiency with which markets spread information and the incentives to acquire information.\” In the case of the Freedom of Information Act, greater efficiency in spreading information–by making the results of all FOIA requests public–is in conflict with the incentive to acquire information.

The solution here seems fairly straightforward. The protection from conventional intellectual property law, like patents, is only supposed to be temporary. The innovation then passes into the public domain. Similarly, it would seem easy enough to give those who make an FOIA request access to that information for, say, three or six months, and then release it into the public realm. Sure, some journalists and researchers will say that they need exclusive access to the information for much longer. Innovators would like their intellectual property rights to be stronger and last longer, too. But a balance needs to be struck.