While there is much debate about whether we should respond to global warming by taxing CO2 emissions at $2 per ton or $140 per ton, there are countries with policies that are roughly equivalent to rewarding CO2 emissions at levels that appear to exceed $100 per ton.
I’m referring to gasoline pricing rules that keep gas prices at the local consumer level way below the global market price. Venezuela is a dramatic example, China has prices that are modestly below the market price, but that applies to an important fraction of the world’s gas use, and last I heard Iran and Iraq were practically giving away whatever gas became available to their consumers (it’s sad that Iraq was invaded by a government that didn’t think freer markets would help Iraq). These policies would be wasteful even if CO2 emissions were good (e.g. due to causing long lines to get gas).
Even if those low prices are implemented in a way that helps the poor in those countries, it causes nontrivial increases in gas demand which drive up gas prices in the rest of the world (at least in the short run; the long run price changes depend on the cost of finding new oil).
People who care enough about global warming to make modest efforts to slow it should put pressure on these countries to charge market prices for gas. In addition to traditional techniques, one obvious response is to exploit the inherent instability of these price differentials by giving as much aid and protection as is practical to the heroic businessmen who smuggle gas from low price regions to regions where marker prices prevail. If governments of Europe and the U.S. cared enough about global warming, they could probably enable enough smuggling to measurably reduce the waste of gas in many smaller countries. But that would probably still leave significant waste in China, and I’m not sure what can be done about that.
Politics
Bernie Sanders has introduced a bill to replace patent monopoly protection for drugs with awards based in part on Quality Adjusted Life Years added by the drugs.
This would eliminate the harm due to monopoly pricing. It might also cause some research to be redirected from “me-too” drugs to more innovative drugs. But I suspect that it’s common enough for what initially looks like a “me-too” drug to end up having valuable advantages that such an effect will be minor.
It would probably be a bigger help to people in developing nations than all the government spending misleadingly labeled as foreign aid.
Because politics will ensure that the idea is implemented suboptimally, I would prefer that something similar (e.g. patent buyouts) be implemented by a more responsible institution such as the Gates Foundation. But the patent system has enough problems that even this imperfectly written bill might improve on the status quo.
One strange effect of political reality is that the rewards are apportioned according to either benefits to U.S. patients or world patients, and the bill provides an awfully vague description of which rule will apply to which drug.
The bill allocates 10% of the rewards to orphan drugs, presumably because the lives of people with those diseases are worth more than those with common diseases.
The bill claims generics cost 85% less than patented drugs, but gets that figure from comparing overall generic prices with overall patented prices. If the cost of manufacturing drugs differs for old and new drugs, that will be misleading. The estimates I’ve found for same-drug price declines after generic competition starts suggest the price decline is more like 30% to 50%. So the bill’s claim that it can be financed by the reduced Federal government drug spending appear to be fiction.
Besides, if it were self-financing that way, wouldn’t it indicate a big reduction in the rewards to drug development? I want to see a good analysis of why $80 billion a year is adequate to substitute for patent exclusivity. My crude attempts at analyzing it suggests it’s too low, but not by a large amount.
(HT Alex Tabarrok)
Up to two months ago, I was not too excited by the claims of a bubble in the Chinese stock market. Maybe the stocks that trade only in China were at bubble levels, but the ones that trade in the U.S. or Hong Kong still looked like mostly good investments.
Much has changed since then. On October 17, PetroChina rose 14.5%, more than doubling in about two months. That was a one day gain in market capitalization of almost $60 billion, and a two month gain of $247 billion (doubling the market capitalization). I’ve seen similar but less dramatic rises in smaller Chinese stocks that trade in the U.S., but less on the Hong Kong stock exchange.
By comparison, the largest rises in market capitalization that I’ve been able to find in the technology stock bubble of 1999-2000 were a $50 billion one day rise in Microsoft on December 15, 1999, and a $250 billion rise (doubling) in Cisco which took four months.
I’m not saying that Chinese stocks are clearly overvalued yet, and I’m still holding some stocks in smaller Chinese companies that I don’t feel much urgency about selling. But the unusually strong and long lasting Chinese economic expansion, combined with the unusually frothy action in the stock market, are what I’d expect to be causes and symptoms of a bubble.
Bubbles in the U.S. have peaked when real interest rates rise to higher than normal levels. The Chinese government is keeping real interest rates near zero, and seems to think it can keep nominal interest rates stable and reduce inflation. That would be an unusual accomplishment under most circumstances. When combined with a stock market bubble, I suspect it could only be accomplished with drastic restrictions on economic activity, which would involve instabilities that the Chinese government has been trying to avoid by stabilizing things such as interest rates.
Without a rise in interest rates or drastic restrictions of some sort, it’s hard to see what will stop the rise in Chinese stocks. So I’m guessing we’ll see a bigger bubble than the U.S. has experienced. It’s effects will likely extend well beyond China.
Support U.S. troops by paying attention to their views on the presidential candidates and voting accordingly.
Ron Paul has received the most donations from people identified as current and retired military personnel of any presidential candidate, followed by Obama and McCain. That suggests withdrawal from Iraq may be more popular with the military than it is with other voters. McCain’s strength might be a response to his military experience and/or his opposition to torture. (HT Andrew Sullivan).
I’ve occasionally heard claims about Africa being poor because it was exploited by Europeans and Americans, and I’ve dismissed those claims because they were clearly based on superstitions.
Recently I’ve come across some scholarly writings on the effects of interactions between these cultures.
A paper on Colonial legacies and economic growth confirms my suspicions that areas which were colonized for longer times have higher economic growth.
As I mentioned recently, the book The Bottom Billion shows a connection between poverty and sale of natural resources, but explains several mechanisms by which the revenues could make bad governments more likely, independent of whether the buyers of those resources exploit the sellers. This suggests it’s not easy to resolve claims that such exploitation caused harm.
The most interesting study is The Long-Term Effects of Africa’s Slave Trade (via Freakonomics and Andrew Sullivan), which demonstrates that slave trade between Africa and other continents between 1400 and 1900 is significantly correlated with poverty now. The paper presents a good argument that the causal connection was mainly increased violent conflict due to rewards for enslaving people from neighboring villages (as opposed to prior forms of slavery which resulted from conquest by ethnic groups from somewhat farther regions). This caused social and ethnic fragmentation and corruption. I have doubts about whether the details of the paper’s causal model are correct, but they appear to be approximately correct.
Book review: The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It by Paul Collier
This very eloquent and mostly thoughtful book about the world’s poorest countries will offend ideologues of all stripes. Collier’s four different explanations for poverty traps (war, presence of natural resources, bad neighbors blocking trade routes, and corruption) clearly place him as a fox rather than a hedgehog without being complex enough that they can rationalize any result (although they can probably rationalize more results than an ideal set of explanations would). He blames both villains in poor countries and thoughtless voters in wealthy countries.
Collier sees that globalization has benefited most nations, but provides plausible mechanisms by which globalization can harm some (e.g. through enabling capital flight).
Collier mostly thinks like a good economist, but his prior work for the World Bank biases him to be overly optimistic about improving such institutions. He recognizes the incentives that cause bureaucrats to be too risk averse, but then makes a cryptic claim that the British government understands the problem and is spending money to fix it. He vaguely implies that this is a venture capital-like fund, but fails to say whether they replicated the key venture capital feature of providing unusually large rewards to employees who produce unusually good results. His silence on this subject leads me to suspect that he’s asking us to blindly trust institutions that have a long track record of avoiding results-oriented incentives.
He also shows misplaced faith in authority when he tries to calculate the value to the world of rescuing a failed state by using George Bush’s calculation that the benefits of installing a good government in Iraq exceeded the expected $100 billion cost. That might be a good argument if Bush had been spending his own money to help Iraq, but his willingness to spend other peoples’ money doesn’t say much.
Collier says it is “surely irresponsible” to leave Somalia with no government. Yet most evidence I’ve seen says Somalia improved by most standard criteria such as life expectancy when it had no government. I don’t know how reliable that evidence is, but Collier’s apparent assumption that we don’t need to look at the evidence makes his opinion suspect.
The book’s biggest shortcoming is the absence of anything resembling footnotes. Collier implies this is too make the book more readable, but he could have put a section of notes at the end referencing individual pages without altering the main text in any way. Instead he only gives a fairly large list of papers he’s written. But I can’t tell without tracking down and reading a large fraction of them which of them if any support his controversial claims (e.g. that giving money to the poorest countries helps them a bit but that doubling it would reach a limit beyond which further money would be wasted).
But his advice is good enough that its value doesn’t depend much on those controversial claims being right. Following his advice to condition aid on results (e.g. sending money to countries when they stop wars, cutting it off if they have a coup or resume war) would provide incentives that would make aid beneficial.
I had previously suspected that large countries have tended to escape poverty more easily in the past few decades because “aid” organizations had enough money to prop up small corrupt governments but not enough to affect a government such as India’s. Collier presents a good alternative theory: being a large country pretty much guarantees access to the sea, and by increasing the number of neighbors, increases the chance of having a neighbor which is open to trade.
Another good tidbit is this point on Fair Trade: farmers “get charity as long as they stay producing the crops that have locked them into poverty.”
One way to find evidence concerning whether a politicized theory is being exaggerated or being stated overconfidently is to look at how experts from a very different worldview thought about the theory. I had been under the impression that theories about global warming were recent enough that it was hard to find people who studied it without being subject to biases connected with recent fads in environmental politics.
I now see that Arrhenius predicted in 1896 that human activity would cause global warming, and estimated a sensitivity of world temperature to CO2 levels that differ from current estimates by about a factor of 2. The uncertainty in current estimates is large enough that they disagree with Arrhenius by a surprisingly small amount. This increases my confidence in that part of global warming theory.
Arrhenius disagreed with modern theorists about how fast CO2 level would rise (he thought it would take 3000 years to rise 50% or to double, depending on whether you believe Nature or Wikipedia), and about whether warming is good. That slightly weakens my confidence in forecasts of CO2 levels and of harm from warming (although as a Swede Arrhenius might have overweighted the benefits of warming in arctic regions).
Book review: Black Rednecks And White Liberals by Thomas Sowell.
Thomas Sowell is a pretty smart guy. It’s unfortunate that he wastes his skills on reinforcing peoples’ existing political opinions. Much of what he says in this book is right, but the new ideas it offers don’t seem like they ought to change the political opinions of anyone who has thought much about racial politics. And the old but wise arguments are written in a style that seems designed to turn off anyone who isn’t already a fan of Sowell’s ideas.
He presents interesting evidence that the culture of black ghettos came from parts of Britain that were uncivilized at the time its bearers moved to the southern U.S. This is the kind of subject where it’s virtually impossible for most readers to tell whether he’s being objective or selecting evidence to fit his biases. More importantly, it’s hard to tell why it matters. Some people pay lip service to the authenticity of black culture, but I find it hard to believe that the origins of the culture several centuries ago plays an important role in peoples’ choice to adopt the culture.
One interesting aspect of Sowell’s story is that the large migration from the rural south to the urban north after WWII did not result in the usual assimilation of the migrants into the culture of the area they moved to. How much of that was due to the number of migrants, to their culture, or to their race? Sowell ignores this subject.
Sowell’s argument that western civilization was responsible for the nearly worldwide abolition of slavery seems mostly right, but I’m disturbed by his exaggerations. He misleads readers into thinking that the first abolitionists were western, but a quick web search told me that Cyrus the Great wanted to abolish slavery worldwide two millennia earlier.
There are several places in the book where he makes confident, unsupported assertions as if they were certain, when I doubt anyone has enough evidence to make anything better than a rough guess. For instance, he thinks George Washington couldn’t have gotten a prohibition on slavery into the constitution without driving the south out of the union (plausible, but it depends on hard-to-verify assumptions about his powers of persuasion), and that slavery would have lasted longer without the union (a controversial enough claim that abolitionists such as William Lloyd Garrison seemed to reject it, claiming the north would be a better haven for runaway slaves if it seceded and repealed the Fugitive Slave Law). There are probably some leftists who unfairly attack Washington for failing to accomplish more than he could possibly accomplish, but I don’t see signs that they get respect from anyone who would listen to Sowell.
I’m quite suspicious of Sowell’s claim that Hitler’s pretenses of having been provoked into military action were intended only to fool people in Germany. Even if people in other countries had enough information to know Hitler was lying, it’s easy to imagine that a fair number of them were looking for a way to rationalize neutrality, and that Hitler was helping them to fool themselves.
Book review: Why Not?: How to Use Everyday Ingenuity to Solve Problems Big And Small by Barry Nalebuff and Ian Ayres.
This is a very entertaining and somewhat thought-provoking book. I’m uncertain whether it had much effect on my creativity. It certainly demonstrates the authors’ creativity, and gives some insights into how their creative thought processes work. But it’s probably more valuable as a collection of interesting ideas than it is as a recipe for creativity.
While they focus more on presenting interesting ideas than on evaluating how well they would work, the do a decent job of anticipating problems and understanding the relevant incentives.
Possibly the most important idea is mandating anonymity of political campaign contributions (see also the book Voting with Dollars) as an alternative way of ensuring that it’s hard for contributions to influence politicians votes, with plausible suggestions about how to ensure that it’s hard for donors to evade the anonymity rule.
Their examples often leave me wondering why the ideas they describe are so little known (e.g. the anonymity requirement has been tried in 10 states for judicial elections – why hasn’t that been reported widely?).
Another interesting idea is how tests of black boxes in cars (similar to those in planes) cause drivers to drive much more safely (20 to 66 percent declines in accident rates – “Fear of getting caught may be a more powerful motivator than fear of getting killed”).
I am disappointed that it doesn’t have an index.
Book review: How to Spend $50 Billion to Make the World a Better Place, edited by Bjorn Lomborg.
This book makes plausible and somewhat thought-provoking claims about how an altruist ought to spend money to provide the most benefit to the needy. It concludes that high priorities should include control of HIV, malaria, malnutrition, and trade barriers.
It appears to come close to being a good book. It addresses fairly good questions about important issues. Unfortunately, it has been simplified for readability to such an extent as to prevent it from accomplishing much. Its arguments aren’t sufficiently detailed or backed by references for me to evaluate them. So they were probably intended to be accepted as a result of the authors’ authority. But their credentials leave plenty of room for doubt about how much deference their authority deserves.
So I’m left unsatisfied, and highly uncertain whether I ought to read the more detailed version of this book (Global Crises, Global Solutions).