Chapter five of Common Wealth is called "Securing Our Water Needs," an important topic but one neglected by most economists.  One lesson is that climate change will put a big stress on water supplies.  So far, so good, but the recommendations start with greater international cooperation:

A first step, at least, would be to focus on the hardest-hit lands, specifically the world’s drylands.  Fortunately, these are covered by the UN Convention to Combat Desertification, which has 191 member governments as signatories.  Unfortunately, the treaty as it now stands is little known and has little clout and financial backing.  Rather than reinvent the treaty, however, it would be better to reinvigorate it.

I would say it needs invigoration, not reinvigoration.  It is no accident that the Convention has little clout and little financial backing.  Many such Conventions are toothless objects, designed to appeal to a least common denominator within the process of the Convention itself (recall, it has 191 signatories).  No one is opposed to "international cooperation" but it is no accident that truly international bodies have to either find a way to make profit (e.g., the World Bank lends to China) or they are usually very strapped for funds.  That’s just not where the political rents are and that isn’t going to change.

Since Sachs calls this a "first step," his position is in some sense invulnerable.  Whatever you really think should be done can be called the next step.  Sachs writes, however, that the next step is more finance if I understand him correctly he wants to increase funding by more than a factor of 100).  I would prefer finance from national governments, or even from the states or provinces, than finance at the level of international organizations.  Most of the 191 signatories just aren’t that good at R&D, funds accountability, or even technology adoption.

I might add that national governments are the ones that subsidize the price of water to ridiculously low levels, most of all for agriculture.  My first step is to remove all these water subsidies, allow water prices to rise, institute more water trading, and then see which innovations the private sector decides to finance (hmm…those are my first four steps).  One role for government would be to ensure that patent law does not hinder international transfer of worthwhile innovations, a point which Sachs makes in other contexts.  That sounds less glamorous than a big international plan, but I think it has a better chance of succeeding.

America’s inequality problem — and I mean the stagnation at the lower end, not the hedge funds guys at the top — does indeed seem to stem from dysfunctional families and bad education:

We examine changes in the characteristics of American youth between the
late 1970s and the late 1990s, with a focus on characteristics that
matter for labor market success. We reweight the NLSY79 to look like
the NLSY97 along a number of dimensions that are related to labor
market success, including race, gender, parental background, education,
test scores, and variables that capture whether individuals transition
smoothly from school to work. We then use the re-weighted sample to
examine how changes in the distribution of observable skills affect
employment and wages. We also use more standard regression methods to
assess the labor market consequences of differences between the two
cohorts. Overall, we find that the current generation is more skilled
than the previous one. Blacks and Hispanics have gained relative to
whites and women have gained relative to men. However, skill
differences within groups have increased considerably and in aggregate
the skill distribution has widened. Changes in parental education seem
to generate many of the observed changes.

Here is the paper., ungated version here.  The authors use a different method but their results suggest that the earlier Goldin and Katz paper, which focuses on the connection between inequality and the inability to spring into higher levels of education, is essentially correct.  The problems with lower income stagnation do not stem fundamentally from trade, weak labor unions, or for that matter technical change.  I won’t call this question settled, but the Goldin and Katz result is looking increasingly strong.  I would also say that we, for better or worse, have more separating equilibria in today’s world.

Here’s an intuitive way to grasp the hypothesis  Let’s say that today you are a young Korean-American, perhaps even a Korean-American from a non-wealthy family.  Are your future income prospects good or bad?  Is upward mobility still there for you, if you want it?  Most people don’t even have to go to the numbers to answer these questions.

Here is a not unrelated article about the prospects for affirmative action.  And, if you’re more worried about the growth in income inequality that comes from gains at the top, well, the last few months have remedied that just a bit.

Paul Krugman today bemoans the fact that on the housing crisis and especially on Iraq the people who get the most media attention are those who got it wrong.

It’s even worse, of course, on the matter of Iraq: just about every one of the panels convened to discuss the lessons of five disastrous years consisted solely of men and women who cheered the idiocy on.

(Brad DeLong, Dean Baker and others have made similar complaints.)  I think the fact is correct so what is going on?

The answer is media incentives.  It wasn’t just the experts who were wrong, the majority of the American people got Iraq and housing wrong.  The war was popular in the beginning and people continued to buy houses even as prices rose ever higher.  So what does the American public want to hear now?

The public wants to hear why they weren’t idiots.  And who better to explain to the public why they weren’t idiots than experts who also got it wrong?

Megan McArdle ponders.  I’ll again mention one suggestion: make sure that financial institutions cannot use off-balance sheet activity to escape standard capital requirements.  Many people asked about this in the comments but my view is simple:

1. As long as the Fed and Treasury are providing a safety net, insisting on capital requirements is entirely reasonable and it lowers moral hazard.  If you’re going to bail out your friend in a poker game, you can ask him not to bet too much beyond his chips.

2. When the "shadow banking system" does not have capital requirements, normal financial activities, as regulated by the Fed, are inefficiently taxed and too much of an economy’s leverage ends up in the unregulated shadow banking sector. 

3. If you are anti-regulation on this issue, make the capital requirement relatively low but still impose it symmetrically across financial sectors.

4. Ideally capital requirements should be adjusted for risk.  That probably implies higher capital requirements for shadow banking activity, not lower requirements.

5. Regulatory issues aside, market participants are less sure of themselves in the shadow banking sector.  Derivatives are non-transparent, for a start.  That’s another reason not to push too much financial activity into the shadow banking sector.

6. A final solution to excess risk-taking and leverage has to come from shareholders; regulation can only do so much and of course capital requirements are only a small part of regulation.  But in the meantime I think the case for more symmetric capital requirements is a strong one, recognizing all the usual comments about horses and barn doors, etc.

I was thinking of writing a science fiction story.  In this world human capital is incredibly valuable.  Even if you lose all your wealth you can earn back lots very quickly, at least if you are talented and well-educated.  In fact, even if you stay poor, wealthy friends or a spouse will take care of you and you can have fun watching cable TV or playing Second Life.  The only way to get above this baseline level of happiness is to succeed at "winning" and gaining relative status among your peers by superior earnings.

The level of risk-taking is very high and capitalist enterprise starts to collapse.  (Credit markets disappeared in 2081.)  Every manager plays metaphorical or perhaps even literal roulette with the money of the shareholders.  The move toward unlimited liability for corporations only postpones the dissolution of cooperation. 

Production resumes only when a) managers precommit to costly drug addictions, so that they again fear pecuniary losses, and b) shareholders find altruistic managers and also initiate charitable contributions to India.  They threaten to cut off those contributions if managers perform poorly.

Managers are addicts and blackmailable altruists.  The Indian poor flourish.  Most Americans remain unemployed.  At some point the world becomes poor enough to sustain cooperation once again.

Australia has a baby bonus.  The birth rate shot up on the day the bonus first went into effect, July 1, 2004.  As Andrew Leigh and Joshua Gans explained, over 1000 births were delayed from June to July and about 300 births were delayed by more than two weeks.

The bonus is scheduled to rise from $4,187 to $5,000 this July 1 and Leigh and Gans have pleaded with the government to phase it in order to prevent too much birth delay which they think could be unhealthy for the child.  Alas, the government has declined.

All of which leads Andrew to denounce, in delightful Aussie-speak, the bonus as an "unhealthy incentive for women to over-cook their babies."

I couldn’t agree more.  As a libertarian and a humanist I join with Andrew to denounce all government incentives to overcook babies.

Hat tip to Dave Undis.

Here is a good Sachs article, summarizing his views, namely that a carbon tax is not nearly enough to solve the problem.  He writes:

…low-emissions
technologies developed in the rich world will need to be adopted
rapidly in poorer countries. Patent protection, while promoting
innovation, could slow the diffusion of these technologies to
low-income countries unless compensatory actions are taken. As with
medicines, patent protection may be double edged: promoting innovation
but slowing diffusion to the poor.

Economists like to set corrective prices and then be done with it,
leaving the rest of household and business decisions to the magic of
the market. This hands-off approach will not work in the case of a
major overhaul of energy technology. We will need large-scale public
funding of research, development and demonstration projects;
intellectual property policies to promote rapid dissemination to poor
countries; and the promotion of public debate and acceptance of new
options. We will need to back winners, at least provisionally, to get
new systems moving.

While this makes a great deal of sense, I am already feeling the "yikes are we reallly up to that?" response.  Sachs also writes: 

Consider three potentially transformative low-emissions technologies:
carbon capture and sequestration (CCS), plug-in hybrid automobiles and
concentrated solar-thermal electricity generation. Each will require a
combination of factors to succeed: more applied scientific research,
important regulatory changes, appropriate infrastructure, public
acceptance and early high-cost investments to “ride the learning curve”
to lower costs in the long term. A failure on one or more of these
points could kill the technologies.

Again, this more than makes sense.  It is a sober breath of fresh air in a debate that too often looks for easy palliatives.  My worry, however, comes in Sachs’s fairly optimistic-sounding book.  He stresses that for no more than one percent of global gdp per year, we can avoid a doubling of carbon emissions, relative to pre-industrial levels, by 2050. 

I am much more pessimistic, partly for reasons Sachs already outlines.  I won’t recapitulate all of my previous writings on the topic (follow the links here), so let me give a kind of "splat" response: Chinese CO2 emissions are much worse than we had thought, China resists outside pressure, Chinese governance is often of very poor quality, China is currently subsidizing energy consumption, China thinks it is our problem to solve, China won’t automatically keep on becoming prosperous, the super eco-conscious Europeans in fact haven’t made much of a dent in the problem in terms of percentage change, the U.S. has done better on carbon emissions than most of the Kyoto signatories, the price of oil rose fivefold in a relatively short period of time without much helping, a gradual increase in carbon taxes (in a Hotelling model) can lead to more extraction today thus worsening the problem, and if the rich countries massively cut their carbon consumption the prices of coal and oil would plummet and the incentive for someone to buy and smoke the stuff will be all that much stronger.  Valuable stuff in the ground tends to be dug up and used.  And by the way, curing the ozone problem was easy and even a "simple" international organization such as WTO gets tied up in gridlock.

Did I mention that some of the world’s nations might even benefit from global warming, most of all Russia, and thus they might wish to sabotage various partial solutions and that Russia holds a permanent seat on the Security Council of the UN?  And that geo-engineering is massively risky and might be considered by some countries to be an act of war?

That’s not even all the arguments I can think of.  And no, they are not arguments for ignoring the problem but they are arguments against optimism.  As I read Sachs, the core message is: "We can solve this problem if we try."

I would sooner start with the list of these problems.  Yikes, and yes I know it might scare some people into simply letting things slide.  But if action is to have any chance of succeeding we need to understand the problem.  I’d like the book — and yes I know this is a popular book, but even popular books should advance the debate — to start with the tough stuff and tell us what to do.

Maybe the technical costs of Sachs’s fix are one percent of global gdp.  But when we consider the imperfections of institutions, I fear that the costs are much much higher.  At the end of Sachs’s article he writes:

By 2010 at the latest, the world should be breaking ground on
demonstration CCS coal-fired plants in China, India, Europe and the
U.S.; the wealthy nations should be helping to finance and build
concentrated solar-thermal plants in states that border the Sahara; and
highly subsidized plug-in hybrids should be rolling off the assembly
line. Only these steps will enable us to peer much farther down the
path of truly transformative change.

Under one meaning of the word "should," this may sound just right.  Under another meaning of the word "should," it’s further reason for thinking the proffered formula doesn’t have much chance of success.

JP MorganChase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns,
the beleaguered investment bank, in an effort to pacify angry Bear
shareholders, according to people involved in the negotiations.

More.  Last week we were wondering why the price was above $2 a share.  And last week some of you were calling this deal a bailout of Bear Stearns.  Now Bear shareholders are alleging they were coerced into taking this deal.  This is a) good news that the firm is worth more than we had thought, b) bad news for dealing with the next round of problems (it is harder for any subsequent solution to be viewed as legitimate), and c) another reason why the answer isn’t just more regulation.  By the way, note that JPMorgan isn’t actually paying that much more.