One reason why a global carbon tax is impossible

Consequently, from a regional perspective, there are large disagreements about the welfare effects of carbon taxes: when a uniform carbon tax is imposed across all regions, with revenues redistributed locally as a lump sum so that there are no interregional transfers, some regions gain and others lose, often by large amounts that swamp the globally-averaged benefits of carbon taxes.

The microfoundations of that claim are interesting:

At the regional level, the optimal annual average temperature (at which the calibrated inverse U -shape governing how labor productivity varies with temperature reaches its peak) is approximately 12 degrees Celsius (C); an increase of regional temperature from 10 C to 12 C increases a region’s total factor productivity (TFP) by about 1%, while a further increase in annual average temperature from 12 C to 14 C reduces its TFP by about 2%.

Here are some bottom-line numbers on the global costs of climate change, with and without a carbon tax regime:

Without taxes global GDP reaches its nadir (relative to trend) just after 2190, when it is about 7.3% below the trend that would have obtained starting in 1990 without further global warming. With taxes, global GDP reaches its nadir just before 2190, at about 5.5% below trend.

Again, the costs of climate change are a few years of global economic growth.  That is a big deal, and worth attending to, but far from an existential risk.

Here is the 160 pp. NBER working paper by Per Krusell and Anthony A. Smith Jr.

A new study of the European Research Council

I find these results not entirely surprising:

We examine whether the ERC selected researchers with a track record of conducting risky research. We proxy high-risk by a measure of novelty in the publication records of applicants both before and after the application, recognizing that it is but one dimension of risk. We control and interact the risk measure with high-gain by tracking whether the applicant has one or more top 1% highly cited papers in their field. We find that applicants with a history of risky research are less likely to be selected for funding than those without such a history, especially early career applicants. This selection penalty for high-risk also holds among those applicants with a history of high-gain publications.

And this:

To test whether receiving a long and generous prestigious ERC grant promotes risk taking, we employ a diff-in-diff approach. We find no evidence of a significant positive risk treatment effect for advanced grantees. Only for early career grantees do we find that recipients are more likely to engage in risky research, but only compared to applicants who are unsuccessful at the second stage.

You will note that the ERC was originally intended to encourage risk-taking in science.  Here is the full paper by Reinhilde Veugelers, Jian Wang, and Paula Stephan.  It is good to see the economics of science making so much progress as of late.

A better way to think about wage pressures than the Phillips curve

Most economists maintain that the labor market in the United States is ‘tight’ because unemployment rates are low. They infer from this that there is potential for wage-push inflation. However, real wages are falling rapidly at present and, prior to that, real wages had been stagnant for some time. We show that unemployment is not key to understanding wage formation in the USA and hasn’t been since the Great Recession. Instead, we show rates of under-employment (the percentage of workers with part-time hours who would prefer more hours) and the rate of non-employment which includes both the unemployed and those out of the labor force who are not working significantly reduce wage pressures in the United States. This finding holds in panel data with state and year fixed effects and is supportive of a wage curve which fits the data much better than a Phillips Curve. We find no role for vacancies; the V:U ratio is negatively not positively associated with wage growth since 2020. The implication is that the reserve army of labor which acts as a brake on wage growth extends beyond the unemployed and operates from within and outside the firm.

We are the reserve army of the unemployed!  Here is the full paper from David G. Blanchflower, Alex Bryson, and Jackson Spurling.  The results also suggest that getting inflation under control will be easy than some alternative accounts might indicate, and in that sense this is mild cause for macroeconomic optimism, relatively speaking that is.

These ten veteran ex-Lakers from the 2021-2022 season, however, are still unemployed (ESPN).

Tuesday assorted links

1. The economics of lithium constraints (FT).  Augmenting supply is tough, and projects can take from six to nineteen years to pay off.

2. Dropbox for babies? (NYT)

3. Gideon Lewis-Kraus New Yorker profile of Will MacAskill, with a cameo appearance by the MR comments section.

4. American historian David McCullough has passed away (NYT).

5. Dylan Matthews on the rise of the EA movement.

6. What was the relative welfare gain from tobacco? (speculative)

Evolution and the Poorly Designed Human Eye

The human eye is marvelous but also very poorly designed. The poor design is evidence against intelligent design and in favor of the “unguided, unplanned, messy, quirky, and historically contingent” process of evolutionary design. A short piece from 2008, Suboptimal Optics: Vision Problems as Scars of Evolutionary History, does a nice job explaining.

Most well known is that the wiring is backwards.

The most obvious design flaw of the retina is that the cellular layers are backwards. Light has to travel through multiple layers in order to get to the rods and cones that act as the photoreceptors. There is no functional reason for this arrangement—it is purely quirky and contingent.

Even in a healthy and normally functioning eye, this arrangement causes problems. Because the nerve fibers coming from the rods and cones need to come together as the optic nerve, which then has to travel back to the brain, there needs to be a hole in the retina through which the optic nerve can travel. This hole creates a blind spot in each eye. Our brains compensate for this blind spot so that we normally do not perceive it—but it is there.

From a practical point of view, this is a minor compromise to visual function, but it is completely unnecessary. If the rods and cones were simply turned around so that their cell bodies and axons were behind them (oriented to the direction of light), then there would be no need for a blind spot at all.

Cephalopod’s like octopuses took a slightly different evolutionary path and have a better design:

But the reversal of the wiring isn’t the only design flaw.

The arrangement of the extraocular muscles—the muscles that move the eyes—is also difficult to explain without appealing to evolutionary contingency. There are more muscles than are minimally necessary and yet there is no functional redundancy. In order to move a sphere in any direction, only three muscles would be necessary, evenly spaced like the legs of a tripod. The human eye has six—the superior, inferior, lateral, and medial rectus, and the superior and inferior oblique. And yet, despite the extra three muscles, the loss of function of any one muscle causes an impairment of eye movement and results in double vision or displaced vision. A more frugal design with only three muscles would be more efficient and less prone to malfunction, as there are fewer components to break down.

If the eye were to be designed with more than the minimal three muscles, then it would make sense to arrange the muscles so that the loss of one or even more would not impair eye movement.

Read the whole thing.

Hat tip: Paul Kedrosky.

Pharmaceutical drugs redux

In 2019 I presented this excerpt:

Humans are living longer, better lives thanks to innovations in prescription drugs over the past three decades, according to several new studies by Frank Lichtenberg, the Courtney C. Brown Professor of Business.

Every year, according to Lichtenberg’s research, drugs launched since 1982 are adding 150 million life-years to the lifespans of people in 22 countries that he analyzed. He calculated the average pharmaceutical expenditure per life-year saved at $2,837 — a bargain, he says.

“According to most health economists and policymakers, if you could extend someone’s life by a year for less than $3,000, that is highly cost effective,” says Lichtenberg, who gathered new data for these studies to cast a never-before seen view of the econometrics of prescription drugs. “People might be surprised by how cost-effective drugs appear to be in general.”

…To tease out the answer, the professor gathered data on drug launches and the age-standardized premature mortality rate by country, disease, and year. Drawing on data from the World Health Organization, the United Nations, consulting company IQVIA, and French database Theriaque, Lichtenberg was able to identify the role that pharmaceutical innovation played in reducing the number of years of life lost due to 66 diseases in 27 countries. (“Years of life lost” is an estimate of the average years a person would have lived if he or she had not died prematurely.)

OK, now a simple economics question: given such numbers, should we be spending more on pharmaceutical drugs, or less?  I might add that biomedicine has made some spectacular advances as of late, so the notion that these are average costs, and the marginal cost slants sharply upward, probably is not true.

Here are further MR posts on this line of research.  Here are Lichtenberg’s NBER working papers.

How many of you got the simple economics question right?

Ireland facts of the day

The republic is enjoying a €8bn corporate tax windfall after bumper pandemic-enhanced revenues from tech and pharmaceutical companies. The tax take from companies attracted by Ireland’s 12.5 per cent corporate rate has soared since 2015 and leapt a further 30 per cent last year compared with 2020.

Ireland’s economy expanded by 6.3 per cent over the second quarter, against an EU average of just 0.6 per cent. So great was the impact from multinationals that Ireland’s numbers distorted EU figures, despite the nation of 5.1mn making up less than 3 per cent of the region’s economy.

Here is more from the FT.

Well-being average is over?

Jon Clifton, the head of Gallup, which has been tracking wellbeing around the world for many years, notes a polarisation in people’s life-evaluations. Compared with 15 years ago (before the financial crisis, smartphones and Covid-19) twice as many people now say they have the best possible life they could imagine (10 out of 10); however, four times as many people now say they are living the worst life they can conceive (0 out of 10). About 7.5 per cent of people are now in psychological heaven, and about the same proportion are in psychological hell.

That is from Tim Harford at the FT.  There will be more in Clifton’s forthcoming book Blind Spot.

Monday assorted dystopian links

1. Guests might pay up to 50k to be on a podcast (Bloomberg).

2. “This startup wants to copy you into an embryo for organ harvesting.

3. UK wants criminal migrants to scan their faces up to five times a day using a watch.

4. “However, echo chambers are minimal, and the most avid readers of false news content regularly expose themselves to mainstream news sources.

5. How China normalizes censorship.

6. Why does Colleen Hoover dominate the bestseller lists?

The tax provisions of the new climate and taxes bill

I can’t quite bring myself to call it the Inflation Reduction Act.  One thing I have learned from experience is how hard it is to judge such bills upfront.  For instance, I just learned that the electric vehicle tax credits do not currently apply to any electric vehicle whatsoever, nor will they obviously apply to any electric vehicle to be produced in the near future.  Now the United States might take a larger role in battery production, or perhaps the law/regulation will be modified — don’t assume these standards will collapse.  Still, the provisions are going to evolve.  Or maybe there is a modest chance that provision of the bill simply will never kick in.

I don’t know.

How about the corporate minimum tax provisions?  It sounds so simple to address unfairness in this way, and how much opposition will there be to a provision that might cover only 150 or so companies?  But a lot of the incentives for new investment will be taken away, including new investment by highly successful companies.  (You can get your tax bill down by making new investments, for instance, and that is why Amazon has paid relatively low taxes in many years.)  Most of the companies covered are expected to be manufacturing, and didn’t we hear from the Democratic Party (and indeed many others) some while ago that manufacturing jobs possess special economic virtues?  Furthermore, some of the tax incentives for green energy investments will be taken away.  Has anyone done and published a cost-benefit analysis here?  That is a serious question (comments are open!), not a rhetorical one.

Here are some other concerns (NYT):

“The evidence from the studies of outcomes around the Tax Reform Act of 1986 suggest that companies responded to such a policy by altering how they report financial accounting income — companies deferred more income into future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year. “This behavioral response poses serious risks for financial accounting and the capital markets.”

Other opponents of the new tax have expressed concerns that it would give more control over the U.S. tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.

“The potential politicization of the F.A.S.B. will likely lead to lower-quality financial accounting standards and lower-quality financial accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a University of North Carolina professor, wrote in a letter to members of Congress last year that was signed by more than 260 accounting academics.

How bad is that?  I do not know.  Do you?  My intuition is that the book profits concept cannot handle so much stress.  By the way, kudos to NYT and Alan Rappeport for doing that piece.  It is balanced but does not hold back on the skeptical side.

And here’s one matter I haven’t seen anyone mention: the climate part of the bill, and indeed most of the accompanying science and chips bill, assume in a big way that private sector investment is deficient in solving various social problems and needs some serious subsidy and direction.

Now the direction of that investment is a separate matter, but when it comes to the subsidy do you recall Kenneth Arrow’s classic argument that the private sector does not invest enough in risk-taking?  Private investors see their private risk as higher than the actual social risk of the investment.  This argument implies subsidies for investments, as much of the rest of the bill and its companion bill provide, not additional taxes on investment.  This same kind of argument lies behind Operation Warp Speed, which most people supported, right?

And yet I see everyone presenting the new taxes on investment in an entirely blithe manner, ignoring the fact that the rest of the bill(s) implies private investment needs to be subsidized or at least taxed less.

Overall the ratio of mood affiliation and also politics in this discussion, to actual content, makes me nervous.  The bills went through a good deal of uncertainty, and so a significant portion of the intelligentsia has been talking them up.  Biden after all needs some victories, right?  And at some point the green energy movement needs some major legislative trophies, right?  What I’d like to see instead is a more open and frank discussion of the actual analytics.

It is very good when a top economist such as Larry Summers has real policy influence, in this case on Joe Manchin.  But part of that equilibrium is that other economists start watching their words, knowing some other Democratic Senator might fall off the bandwagon.  There is Sinema, Bernie Sanders has been making noise and complaining, someone else might have tried to extract some additional rents, and so on.

The net result is that you are not getting a very honest and open discussion of what is likely to prove a major piece of legislation.

How on-line education affects grading

This paper examines the role of student facial attractiveness on academic outcomes under various forms of instruction, using data from engineering students in Sweden. When education is in-person, attractive students receive higher grades in non-quantitative subjects, in which teachers tend to interact more with students compared to quantitative courses. This finding holds both for males and females. When instruction moved online during the COVID-19 pandemic, the grades of attractive female students deteriorated in non-quantitative subjects. However, the beauty premium persisted for males, suggesting that discrimination is a salient factor in explaining the grade beauty premium for females only.

That is from a new Economic Letters piece by Adrian Mehic.  Via tekl.

Sunday assorted links

1. My podcast with Scott Galloway.

2. Redux for a survey request on which are your most underappreciated works.

3. Can dolphin immigration succeed?

4. AGM reviews Balaji’s new book.

5. The new Roland Fryer VC firm.

6. Wrongheaded but interesting thread on AI regulation and policy risk.

7. Pilot testimony.  Cites the data too.  Virginia Beach area!

8. Ezra Klein thoughts on television and tech (NYT).

The new class of “insider” trader?

Then, crucially, the government stepped in with covid-relief funds, which were somehow granted to prisoners. (Congress did not bar us from getting stimulus cheques, though the Internal Revenue Service tried to.) That windfall came as a total shock…

Stimulus payments meant people habituated to scarcity suddenly had $1,200 in their hands (then $2,000 more as the government approved two additional payouts). And rather than splurge on items we usually go without – honey buns ($1.10 each), king-size chocolate bars ($2.40) or high-end toothpaste ($5.28) – more than a few of us chose to invest.

Cryptocurrencies have been popular too.  Here is the full Economist/1843 story.  And get this:

The perverse incentive structure of prisoner accounts makes things worse. The prison does not touch account balances below $25, the threshold at which a prisoner is considered indigent. But for those with more than $25, the prison deducts onerous fees totalling 55% of incoming transfers. “Every week I have to max out my commissary order and zero out my account,” Steve said. Prisoners are being conditioned to live pay cheque to pay cheque.

The authors are themselves incarcerated in Washington state.  Via Mike Rosenwald.

Colombian supply curves slope upwards

The most shocking revelations were that soldiers killed civilians and dressed them up as guerrillas to inflate their body counts. In return, they received benefits and promotions. Last year, a tribunal identified more than 6,400 of these so-called “false positive” killings dating from the 2002-2010 rule of hawkish rightwing president Álvaro Uribe, who is under investigation in an unrelated case and could come under further scrutiny with Velásquez as minister.

Here is more from the FT.  This is also an object lesson in why we do not use direct incentives to achieve all tasks.