Matt Nolan

In the long-run is happiness constant?

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I was just reading the dirty old (note dirty old is a complement from me) Dilbert blog, when I happened upon a post he called Happiness smoothing. Now in this blog post he discusses how individuals choose to interact with people in a way that is inversely related to the persons current success. So if you see a successful person you rip them down, if you see a downtrodden person you help them out (all other things equal). This is similar to tall poppy syndrome and empathy all rolled into one.

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Matt Nolan

RBA lifts rates to 6.75%

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It will come as no surprise to anyone that the RBA lifted its cash rate to 6.75%. Glen Stevens statement was relatively hawkish, noting that underlying inflation would likely leave the target band and stating the growth would need to moderate before inflationary pressures would ease.

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jamesz

Supply siders on climate change

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Most debate surrounding climate change focuses on the best method of suppressing demand for carbon intensive technologies. However, as Hans-Werner Sinn points out at VoxEU, reductions in demand for carbon could result in perverse incentives on the supply side. In particular, the suppliers of oil, coal and other non-renewable, carbon rich resources could face an incentive to increase their rate of extraction.

This arises because of the special nature of exhaustible resources: since there is a finite quantity of the resource to make profits from, the extractor tries to sell it when the price is highest. If carbon reduction policies are successful then we should observe declining demand for these resources over time. Decreasing demand will cause prices to fall and, since the extractors of oil can anticipate the price drops, they’ll try to sell as much now as possible. The increase in supply will cause prices to drop straight away which will trigger countries who have not signed up to Kyoto to consume more carbon rich fuels now.

The two ways this could be avoided are to either force the entire world to conform to the same Kyoto-type standards, or to forcibly restrict the supply of carbon rich fuels. Failure to do either of these things could result in global carbon emissions actually rising as momentum builds behind the environmental movement. Sinn thinks that the only way to cope is to invest heavily in afforestation to offset the extra emissions. Given the rate of global deforestation it can only be hoped that political pressure and reputation effects will be enough to prevent cheap oil flooding the world market. Thankfully oil prices show no signs of diving since the advent of the Kyoto protocol. So far at least…

jamesz

Jocks don’t trust geeks?!

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This is why I don’t believe people who claim that overcoming one’s biases isn’t important. David Romer gives a football coach solid evidence that he could win more games by running or passing on fourth down and what happens?

“It used to be that going for it on fourth down was the macho thing to do,” Romer said. But after his findings were widely publicized in sports circles, he said: “Now going for it on fourth down is the egghead thing to do. Would you rather be macho or an egghead?”

Yeah, they STOP running and passing because that would be the ‘geeky’ thing to do! Now that’s an example of a seriously costly bias if ever I heard one.

The article quotes Wayne Stewart, an associate professor of management at Clemson University, describing this as a principal-agent problem: the team owner wants to win games but the coach just wants to avoid risky plays that might make him look bad. Or geeky plays that might get him a ribbing at the bar after the game, apparently.

jamesz

Caps, taxes and The Man

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Cato’s Regulation magazine has a fairly detailed comparison
of cap-and-trade and carbon tax systems in their latest issue. A couple
of commentators have interpreted the article as supporting their preference for a cap-and-trade system. They say that the two greatest benefits of taxes are revenue recycling and price stability but claim that the money could be wasted by the government and so it’s better to set up a permits scheme that mimics the outcome of a tax. I don’t have a problem with their conclusions but I do have a quibble with their assessments of the relative merits of each system.

The root of this issue is the question of how much to trust the government. The biggest problem with carbon regulation schemes is
that they are regressive: the poorest tend to spend the largest proportion of their incomes on energy and are thus disproportionately
penalised (although perhaps not in developing countries). This happens under permit trading and taxation since both schemes essentially seek to raise the price of engaging in carbon intensive activities. A tax scheme raises revenues that can be used to redistribute wealth and offset the regressive nature of the carbon regulation. Permit schemes which involve grandfathering of permits do not raise any revenues and so cannot redistribute the burden of emissions reduction. Schemes which either lease or auction the permit rights should raise the same revenues as a taxation scheme; however, this makes them just as susceptible to the critique about government wastage as taxation. The only way to avoid the potential for pork barrel spending is to accept a scheme that hurts the poor.

The second issue is price stability. The problem with taxes is that it’s difficult to accurately set the tax in the first place, and the same holds true for setting the lease price permits. Of course it can be adjusted later but then one can hardly call price stability a benefit of taxation. On the other hand permits guarantee a reduction in emissions, which is after all the goal of any such regulatory scheme. If the market is fully informed about the number of permits available then it can price the permits based on all the available information. If the market is efficient then the price will accurately reflect the cost of reducing emissions to the target level. An accurate tax will settle at the same level but any error in the government’s calculations will result in either changing taxes or over-pollution.

This really all boils down to how much you trust the government to get things right. Attempting to design a permit scheme that mimics a tax scheme opens it up to the same criticisms that are made against taxes. Either the government is effective and can tax carbon at the right price and redistribute revenues efficiently, or it can’t and should leave things up to the market through a permit scheme but accept that the poor will suffer.

jamesz

Helping me to help me

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Matt and I recently discussed whether we thought the government should intervene to correct intra-personal externalities that arise from time inconsistency in peoples’ behaviour. We particularly talked about smoking: models of smoking which incorporate hyperbolic discounting predict that people will want to quit in the future but will never be able to quit when the time comes (and here I’ve horribly conflated two different causes of dynamic inconsistency in the interests of simplicity). I wasn’t able to persuade him that it is in the public interest to correct such externalities, but perhaps this paper(NBER) cited on MR provides a harsher example of the consequences of time inconsistency (and, yes, I know I’m horribly mangling together two different causes of dynamic inconsistency).

The authors find that

…women who are the victims of domestic violence often leave and return multiple times. … We present supporting evidence that women in violent relationships display time inconsistent preferences… We find that “no-drop” policies — which compel the prosecutor to continue with prosecution even if the victim expresses a desire to drop the charges — result in an increase in reporting. No-drop policies also result in a decrease in the number of men murdered by intimates suggesting that some women in violent relationships move away from an extreme type of commitment device when a less costly one is offered.

The problem here is that there is no device available to the women that allows them to commit to leaving the relationship and force their ‘future self’ not to return. A no-drop policy on the part of prosecutors gives them that precommitment power and prevents them from reneging on their desire to leave the abusive relationship. By restricting the womens’ future choice set the state can make them better off. I feel bad talking about domestic violence in such dry terminology, but I think this is a really good example of how economic theory can help understand important ‘real world’ problems. Policies such as taxation of smoking and no-drop prosecution of domestic violence are not examples of government interference in peoples’ lives: they are examples of the government helping people to help themselves.