Unsolicited Advice for the Bali Brigades

The eco-elite have descended on Bali to devise a successor regime to the Kyoto Protocol. I think most of them are asking the wrong questions and are likely to come up with the wrong answers.



To begin with, we should be clear on what the limitations of Kyoto are. They are not primarily the weak targets that were set for carbon reduction, nor were they the forbearance shown to developing countries. Why not?

The targets proved not to matter because they have not been met. In fact, there is no way at present to force a country to act decisively on curbing greenhouse gases, so discussion of specific targets is a sideshow. In any case, no country should pull back from taking aggressive action because an international treaty sets the bar several notches lower.

For the same reason, it was never a problem that Kyoto exempted low income countries from the expectations put on the industrialized world. Aside from the question of equity – climate change is driven by accumulated emissions, most of which came from us and not them – there is no way to force a country like China or India to make its development conditional on reaching carbon goals.

The one thing Kyoto did that “worked” shouldn’t have, carbon offsets. The evidence shows that much of the offsets actually offset nothing at all: they are fictitious carbon reductions. And others take money to mitigate one environmental hazard by creating another, like tree plantations that replace living forests.

So the first thing an enlightened eco-diplomat in Bali should understand is that Kyoto should not be fixed; it should be scrapped. I appreciate its symbolic value, but surely the time for symbolism is past.

What to do then? The starting point for reasonable negotiation is the awareness that the majority of the world’s people will be direct financial beneficiaries of controlling climate change, if the job is done properly. Any country that sets up a system of carbon permits, auctions them off and rebates the money to its citizens on a per capita basis will find that most will come out ahead. This is because climate-bashing consumption is disproportionately done by the rich. Make them pay for it, and distribute the proceeds equally; the lower- and middle-consumption majority will get back more than they pay in. To put it another way, societies have been giving away their crucial environmental resources, like the atmosphere in its role as a waste sink, for free to anyone who wants to take them. Charging a price puts money in the pockets of the owners – us.

Implication: we don’t need a global treaty for countries to set up serious carbon emission controls. That’s not what Bali should be about.

What it can do are two things. First, by far the most efficient point at which to control carbon is where it enters the economy, as oil, coal or gas at the mine or wellhead. This is far less complicated than trying to track it down in its myriad uses, and it leaves the fewest loopholes. For any individual country this will mean requiring permits to bring fossil fuels across the border. Negotiators of a new international framework can work to standardize these permits, so that their markets can be international. This would minimize disruption to cross-border economic life. (I’m a rootless cosmopolitan and favor this sort of thing.)

The most important topic to discuss, however, is how to insulate national economies from the possibility that carbon control could raise domestic costs of production, hurting domestic producers in international markets. (Yes, I know the argument from trade theory that says this is not a problem, and no, I don’t believe it.) It is becoming clear that this will have to take the form of carbon adjustment tariffs (CAT’s), something I weighed in on a few posts back. I think there is a real risk that lobbyists would swarm all over the process of deciding how large a tariff is needed to offset carbon cost differences, and that an internationally negotiated schedule would have more integrity. That, more than anything else, is what Bali should be about, setting up a framework for negotiating such tariff schedules, so that each country can decide for itself how aggressive to be in carbon policy without worrying about getting too far out front.

What Bali should not do is convey to anyone anywhere that local or national action has to wait until a worldwide consensus has been reached.

President For Life

How often recently have you heard from the media that Hugo Chavez was trying with the latest referendum (which he lost) to become President-for-Life, to entrench dictatorship - instead of dropping Presidential term limits from the Constitution? It would seem to follow that prior to the passage of the 22nd Amendment in 1951, the US was a dictatorship.

The Ethics of Elite Professors

I just read a fascinating study of the way Harvard professor (especially Dershowitz) rely on untrained assistants to do their work for them to allow the elite academics become public intellectuals, while doing shoddy work.

Russell, Jacob Hale. 2007. "A Million Little Writers." 02138 (November/December): p. 78.

http://www.02138mag.com/magazine/article/1763.html

Thanks regarding The Perverse Imbalances between Town and Country

I wanted thank everybody who commented on the papers. Your contributions were very informative.

Thanks again,

Michael

For ye have the poor always with you

In the news:

December 1, 2007 / New York TIMES
As Always, an Unequal Pie
By DAN MITCHELL

The distribution of wealth lies at the heart of political economics. Nations and empires have risen and fallen, and millions have died, as a result of humanity's struggle to decide how (or whether) to divide wealth.

But for all that, the level of wealth inequality has remained remarkably consistent over the last 2,000 years, according to a recent study by Branko Milanovic, a researcher with the World Bank, and two economics professors, Peter H. Lindert of the University of California, Davis, and Jeffrey G. Williamson of Harvard University.

While "human civilization has advanced by leaps and bounds over the past two millennia, income inequality has stayed relatively the same," Zubin Jelveh of Portfolio.com wrote about the study.

The "inequality extraction ratio" is basically the share of the wealth difference taken by "elites." Since the United States is the wealthiest nation in history, the potential for elites taking a bigger share of the wealth (without allowing mass starvation) is greater.

initial comment: This does not follow logically. Just because total wealth production is larger (making "the U.S. the wealthiest nation in history") does not mean that the rich have the ability to take a larger share. Just because the pie is larger does not mean that the rich automatically have the ability to grab a bigger percentage of that pie.

The way this can make sense is if the "total wealth" is defined by the amount of wealth produced beyond a given subsistence level and the "share" going to the rich is defined as a fraction of total production (including the subsistence level). That is, as the pie grows relative to the minimum size of the pie needed for human survival, there is more room for the rich to grab a bigger piece of the total without cutting into that minimum subsistence part of the pie. The rich can gain while the non-rich do better than subsistence.

[In math: let "total wealth" produced per person be equal to W, the rich elite's per-person part of that total be R, and the production necessary to produce a subsistence living standard for one person be M (standing for "minimum"). The rich elite's percentage share -- also known as the "inequality extraction ratio" -- would equal R/W. Assume that M is constant. Having W be below M would have dire consequences (starvation, plague, revolution, etc.)

As W rises, there is a greater "surplus" above subsistence (S = W - M). Some of this broadly-defined surplus is received by the workers and peasants (call this extra per person income E). Ignoring the rich elite's attainment of subsistence, the total per-person income of the lower classes would be E + M.

On the other hand, the total surplus S would equal the total above-subsistence incomes of both classes, R + E. As S/W rises, there is more room for both a bigger share of total wealth production to go to the rich (R/W rising) and for the above-subsistence incomes of workers to represent a larger piece of the total pie (E/W rising).

Alternatively, note that by definition, total production W = R + E + M. Dividing through by W, this means that (the share of the rich, R/W) plus (the share of above-subsistence wages, E/W) plus (the share of subsistence income, M/W) equals unity. The rise in the surplus relative to W means that M/W falls. So both R/W and E/W can rise.]

In prose (whew!), if a country is at or near the subsistence level, there's no room for the rich to skim the cream. But if the country is far above subsistence, the rich can do so without empoverishing the rest, i.e., pushing them toward or below subsistence.

The role of subsistence is not discussed in the NYT. But this issue does appear in the original article: for example, the authors say that "As hunter-gathers slowly evolved into ancient agricultural settlements with surpluses above subsistence, income inequality must have risen."

This is very revealing. I can't claim to have read the whole (88 page) article which the basis for the pontifications of Mitchell and others, but it seems that "subsistence" is defined according to the standard of living of hunter-gatherers. Then, as we get further and further from producing at that level, the rich have more room to rob. The fact that they have not taken more is then used to praise them for being wise, moderate, or generous (see below). The share of total wealth production going to the rich has not risen, so the workers and peasants have seen their standards of living rise relative to subsistence.

[In math, R/W has been (roughly) constant. So the rising surplus as a percentage of total production (S/W) has been translated into a rising share of above-subsistence incomes of the workers and peasants in total production (E/W).)]

But what if the subsistence is not constant? The rise of civilization (as we know it) has been associated with an increase in all sorts of needs. (Needs, in my book, refer to the costs that must be paid to be a human living in society.) Nowadays, I "need" to have a car to get to work (because I live in Los Angeles), while I "need" to have indoor plumbing (by law). I cannot communicate with others without a telephone or some other electronic system. Living in an alienated society, I must have Prozac or some other drug. Etc. The costs of being a human being always seems to be rising. (It was relatively easy to be a hunter-gatherer.)

Rising subsistence means that the cost of maintaining the workers and peasants has been rising over time. The production of an economic surplus -- which is the source of the income for the rich -- likely has not increased as quickly as total production. The fact that the share going to the rich has not risen may not be a sign of their generosity or moderation at all. It might be the result of a rising subsistence level. As noted below, it might also be the result of efforts by the lower classes to resist the power grab by the rich.

The article continues:

But they have not done so. "Thus," the researchers write, "the social consequences of increased inequality may not entail as much relative impoverishment, or as much perceived injustice, as might appear."

Tim Harford of Slate.com, writing about the same report, called this"faint praise for the United States, perhaps." But, he added: "It is interesting to observe that while modern societies are rich enough to be much more unequal than their predecessors, they show similar patterns of income inequality. Perhaps — I am speculating wildly —human societies have some hard-wired tolerance for inequality?"

Or perhaps, no matter how wealthy a society, there will always be income inequality, whether or not we are "hard wired" for it.

final comment: Or perhaps every time the working and poor classes start raising the share of the product they receive, the "elite" calls in the big guns (General Pinochet and his ilk) to suppress them? And every time the rich elite gets too greedy, it leads to a 1929-33 type collapse, a massive upsurge in class struggle from below, or something similar? But the time scale of this data does not allow anyone to conclude anything at all about the causes of the stability of the numbers. In any event, we cannot assume that society is "hard wired" in any way.

There are also more measurement problems than one can shake A Sunday New York TIMES at. How, for example, is the product of a self-sufficient peasant measured? it may be possible nowadays, but what about for one 1000 years ago? In the original article, the authors quote the SRPE winning economist, Simon Kuznets: “Do you really think you can get good conclusions from bad data?” The question is still apt.

Jim Devine

Iran and North Korea: The Role of China?

In today's Washington Post there is mostly sensible column by Zbigniew Brzezinski (he engages in some unnecessary Russia-bashing, although I am no fan of Putin's recent anti-democratic conduct). In it he argues that as it did with North Korea, China may well be able to serve as a negotiating conduit between the US and Iran. He reports, after visiting China, that they accept the Iranian claims that they are not currently actively pursuing nuclear weapons, and that a reasonable and mutually face-saving agreement is possible, assuming that the the US does not push too hard to an unavoidable military option by insisting on sanctions against Iran that will not work and will only push the Iranians towards building nuclear weapons, rather like the stupid Bush policies against North Korea led to that outcome, with more recent reasonable policies having been brokered significantly by China.

It is worth remembering how badly Bush screwed up with North Korea. Clinton made a deal with the North Koreans that they would shut down plutonium production, which they did, although we were not fulfilling our side of the deal fully. North Korea continued to enrich uranium, as Iran is doing, not explicitly part of the deal, although the Bush people declared it a violation when it was revealed, even though now it is recognized it was not at a level to lead to nuclear weapons. Two months into Bush's first term, South Korean President Kim Dae Jung visited the White House, and after being assured by Colin Powell the administration would continue to follow the Clinton policy, was suddenly rebuffed and humiliated when Bush changed his mind under the influence of Cheney and Rumsfeld, who argued that a tough policy would bring the collapse of the North Korean regime. Instead, the South Koreans now hate our guts, and the North Koreans withdrew from the NPT, restarted their plutonium production, and built and tested fission bombs, all without their regime collapsing. After much effort, especially with the help of the Chinese, we are now back to something like what Clinton had achieved, except that now the North Koreans have nuclear weapons.

Handicapping Profits

In The Confiscation of American Prosperity, I looked at the correlation of poor corporate profitability with CEO's low golf handicaps, as well as the use of corporate jets, and membership in far off country clubs.
Later, I learnt of the relationship between CEO's oversize mansions and negative corporate performance.

Liu, Crocker and David Yermack. 2007. "Where Are The Shareholders' Mansions? Ceos' Home Purchases, Stock Sales, and Subsequent Company Performance."

http://ssrn.com/abstract=970413

Now I see that Business Week has found a similar relationship (though not statistically analyzed between gold handicaps and subprime mortgage losses.




"... we started with Golf Digest's inaugural ranking of the top 150 golfers in finance (October 2007). We then averaged the handicap indices of the best three at each firm. At the head of the list is Bear Stearns. The company and its CEO, James Cayne, have been in the news as two of their hedge funds melted down in the subprime mortgage crisis."

At the time of the subprime meltdown, with banks bleeding money, Here is the Handicap index for the top firms: Bear Stearns, 0.3; Morgan Stanley, 1.3; Lehman Brothers, 1.5; Merrill Lynch, 1.9.

Foust, Dean. 2007. "Wall Street's Leader Board." Business Week (12 November): p. 102.

Oil Divides Iraq Even More

Hopefully I am back, folks.

So, the de facto independence of the Kurdistan Regional Government within Iraq seems to have proceeded considerably further recently, with Ben Lando at http://iraqoilreport.com providing lots of juicy details. These include: 1) The Iraqis are charging that the Kurds have used their military to block Iraqi production in the large Kirkuk oil field, under dispute between the two. 2) Iraqi Oil Minister al-Shahristani has not only declared illegal the 18 or so contracts the KRG has signed with various international oil companies (most of them small and odd minors, except for Hunt Oil of Dallas, Texas, with its deep Bush links), he has now declared these contracts "null and void." The KRG and the companies seem to be ignoring this declaration and proceeding forthwith. 3) Meanwhile, in the absence of a new national oil law for Iraq, the central government is now signing deals under the Saddam-era law, with the de facto approval of the Bush administration. This has led Russia's giant Lukoil to demand rights to proceed to develop the largest oil field in Iraq under an old existing contract from the Saddam era. 4) Two leading KRG oil figures, including their regional oil minister, Ashti Abdullah Hawrami, are making an informal visit to the US, meeting with various influential, but non-governmental figures in Washington and also oil company executives in Houston. 5) The KRG predicts that oil production in Iraqi Kurdistan will be at 1 million barrels per day, equal to about half of overall Iraqi oil production, which has recently been rising somewhat, although still below that of the Saddam era. 6) Saudi production is up about 250,000 barrels per day (this from Econbrowser), which along with Iraqi increases may bode some easing of price pressure in the oil markets.

In any case, it now looks like Iraqi Kurdistan is de facto independent in the most crucial of economic matters from the central government of Iraq. What is partly allowing them to get away with this is that their political parties are part of the ruling coalition, now under severe pressure. So, Iraqi PM al-Maliki is not going to do anything about their oil deals, despite all the declarations of his oil minister.

The Perverse Imbalances between Town and Country

I am writing this paper for a seminar I will give at Yale. Any comments would be appreciated. It still needs work.

Click on text below to read:
The Perverse Imbalances between Town and Country

State and Local Tax Burdens in Three States

Kevin Drum is not happy with California’s spend and borrow governor. An interesting set of comments followed with one person saying we Californians have a high state and local burden. Given the recent spat between Huckabee (former Arkansas governor) and Romney (former Massachusetts governor), maybe a little data is in order.





Courtesy of the Tax Foundation handy information, we have plotted their measure of the tax burden for each state for the period since 1996. It does seem that the tax burden did rise in the latter part of Governor Huckabee’s Administration, but it is not as high as California’s. And the Tax Foundation is not counting the deferred taxes created by the spend and borrow but never tax attitude of Governor Schwarzenegger.

Uh Oh

This is serious:





The blue stuff is private sector financing of the US current account deficit; the red stuff is life support from foreign central banks and SIV’s (sovereign investment funds). Brad Setser points out, as he has from the beginning of his blog, that official flows (red) are greatly underestimated; by arithmetic logic they have to make up the difference between private flows and the current account.

But the point is clear: if the US were any other country (i.e. too big to fail), we would be in the grips of an economic crisis at this very moment. Foreign exchange would freeze up, essential goods would be unavailable, mass layoffs would ripple across the land, while the dollar would sink like a stone. This would be Mexico 1994, Argentina 2001.

But it’s not, at least not right now. By the grace of central bankers and oil fund managers we in the US get to sip our latte (or in my case Darjeeling) and muse on this question in tranquility. But the dollar keeps going down, and the governments that prop us up are taking really big losses. The talk now is of Wiley E. Coyote and Hyman Minsky.

OK, this is scary, but those of us who have followed the situation have been scared for years, and yet the crisis still hasn’t come. Maybe this is another false alarm. We have been in bailout mode for a long, long time.

Still, the risk of a rupture is real. My advice: progressive people need to start thinking systematically about the political environment we are likely to find ourselves in if all hell breaks loose. What narratives, based in reality or fantasy, will make sense of this catastrophe for the general public? Who will step forward to manage the crisis? How can we minimize the risk of an authoritarian surge?

And you think you’re paranoid?

Sowell: Everyone’s Rich – But Just for a Day

Now Greg Mankiw endorses silliness from Thomas Sowell. Now I’m willing to concede that some of the observed variability in current income is from transitional income, which implies that the variability of permanent income is a bit less. Sowell goes further by arguing that most of the variability in current income comes from transitional income. Let’s take a look at his impressive analytical skills that combines anecdotes and cherry picked statistics.

Virtually anyone who owns a home in San Francisco, no matter how modest that person's income may be, can join the top one percent instantly just by selling their house.

Really? The selling price must be the same thing as my investment income for that year? Let’s say I purchased a house in 2005 for $3 million that was financed by $2.7 million in debt where I paid interest only. If I sold this house today, I’d be lucky to cover the mortgage. Sure – some folks recently made good income by selling their houses, but something tells me that this does not fully explain the observed variability of income. Sowell continues:

This may help explain such things as hundreds of thousands of people with incomes below $20,000 a year living in homes that cost $300,000 and up. Many low-income people also have swimming pools or other luxuries that they could not afford if their incomes were permanently at their current level.

Gee – the Irvine Housing Blog has another explanation for this one. Finally, let’s check this out:

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Falling out of the top one-hundredth of one percent for household income basically means I went from being number 9999 to number 10,001. Such a person is not exactly on the street.

Addendum: As I returned to correct one typo, I also have wonder what Sowell really means when he says most Americans do not remain permanently in the top one percent. Could it be that most Americans never get to be in the top one percent in the first place?

A note from a careful observer of US financial conditions

569: "I fancy that the great New York (banking) institutions have more skeletons in their cupboards than anyone yet knows about for certain, and that their concealed anxieties cramp their action more than is admitted."

Keynes. 1930. "A Note on Economic Conditions in the United States: A Memorandum for the Economic Advisory Council." CW 20, pp. 561-94.

Dollar Devaluation and Next Exports on Black Friday

Jenn Abelson reports on all the Europeans shopping at Wrentham Village Premium Outlets:

Kinsella is one of a record 1,000 international tourists who scheduled organized shopping trips yesterday to Wrentham Village Premium Outlets - more than double the number last year. Hundreds more were expected to come on their own, according to Beth Winbourne, the outlet's general manager ... But now American wares are even more of a bargain as the slowing US economy has weakened the dollar. Further, as the Federal Reserve has cut interest rates to boost the economy, the dollar has lost even more value, and global investors have realized they won't earn as much when they park their cash in greenbacks. As a result, the euro has shot up by 33 percent compared with the dollar since 2002, so Europeans who exchange 1,000 euros now get close to 1,500 US dollars. And the Canadian dollar is worth as much as the US dollar for the first time in three decades.

But some are worried that the boost in sales will not be that great, while others have turned to advertising:

The Retailers Association of Massachusetts, for instance, predicts a mere 2.2 percent increase in holiday retail sales this year over the same period last year, about half the sales growth forecast by the National Retail Federation. And the federation's prediction of a 4 percent increase in sales to $475 billion would make this holiday the slowest for sales growth since 2002, when sales rose 1.3 percent. "The holiday sales season of 2007 will create competitive and profitability challenges for local retailers," said Jon B. Hurst, president of the state retail group. "There's no question that European and Canadian shoppers have been key targets of late." In fact, officials at Simon Property Group and General Growth Properties, two of the country's largest mall operators, said they have increased international advertising to promote shopping excursions for foreign travelers. And the weak dollar, coupled with promotions, seems to be working.

Whiskey is for drinking; water is for fighting

Brenda Rosser, in her comment today, brought up the importance of water, prompting this posting.

Mark Twain was ahead of this time in writing “Whiskey is for drinking …”, but in Californian open warfare for water seemed to be immanent. The threat of water war is far more pressing today.

Below is a frank statement from Ariel Sharon about the importance of control of water for Israel. Maybe some of you can find a map I once saw on the web that showed how much of the water supply in the region is found in the West Bank. Gaza seems to have less water, so is expendable.



Sharon, Ariel with David Chanoff. 1989. Warrior: The Autobiography of Ariel Sharon (NY: Simon and Schuster).

166: “While the border disputes between Syria and ourselves were of great significance, the matter of water diversion was a stark issue of life and death. A dry country with a critical water shortage, Israel enjoys only a brief winter of rainy weather. Other than that, the three principal sources of water are the Jordan River, various brooks and streams alone the coastal plain, and large aquifer that runs under the coastal plain and extends into Samaria and Judiah. Before 1967 a third of the entire water supply came from Jordan.”

167: “People generally regard June 5, 1967, as the day the Six-Day War began. That is the official date. But, in reality, the Six Day War started two and a half years earlier, on the day Israel decided to act against the diversion of the Jordan. From then on the Syrian border was tense.

What follows is another article that generalizes the water problem , but also refers back to Israel.Postel, Sandra L. 2006. “For Our Thirsty World, Efficiency or Else; review of Fred Pearce. When the Rivers Run Dry: Water — The Defining Crisis of the Twenty-First Century (Boston: Beacon Press).” Science, 313 (25 August): pp. 1046-7.

1046: “Irrigation accounts for the lion’s share of the world’s water consumption, 70 percent globally and 90 percent in many Asian countries, where nature doles out long dry seasons. One-fifth of China’s wheat and one-seventh of its corn are produced, in good years, in the coastal province of Shandong, which is last in line to receive the flow of the Yellow River. Farmers have already abandoned millions of acres of cropland in the water-stressed Yellow River basin, and in the summer of 2000 a mini-water war broke out in Shandong as thousands of farmers tried to siphon water slated for cities from a reservoir.”

1046: “As major rivers dwindle to a trickle, farmers and cities alike pump more water from underground. Globally as much as one-tenth of the world’s food may be produced with water drawn from declining aquifers. In India, at least a quarter of the farmers are overtapping aquifers, withdrawing water faster than those underground sources are recharging, and setting the stage for a “colossal anarchy” as more wells and fields are abandoned.”

1046: “Today each Palestinian in the occupied West Bank uses less than a quarter as much water as a neighboring Israeli. Palestinian families around Nablus spend between 20 and 40 percent of their incomes to buy water, while Israeli settlers enjoy green lawns and swimming pools. Pearce calls the 1967 Six Day War “the first modern water war.”

1046: “Before that war, less than a tenth of the Jordan River watershed was within Israel’s borders; by the war’s end, Israel controlled the vast majority of it, including Syria’s Golan Heights and key aquifers under the West Bank.”