Patrick Coburn of the Independent has reported that the US is threatening to seize $20 billion of Iraq reserves held at the New York Fed if the Iraqi government does not agree to a security agreement granting the US 50 military bases and freedom of action for the US military and legal immunity for both the US military and private US contracters in Iraq. US Ambassador Ryan Crocker has said the US is not demanding permanent bases, but has not denied the other parts and admits that a tough negotiation is going on.
Indeed, it appears that pretty much every political leader in Iraq opposes it, including Abdel-aziz al Hakim, leader of the largest party (SIIC) and part of the government, along with the most influential cleric, Grand Ayatollah Ali Sistani, and even Premier al Maliki's party, al-Da'wa, has split over it according to Juan Cole today. For Coburn's story see "US issues threat to Iraq's $50bn foreign reserves in military deal".
Saturday, June 7, 2008
Friday, June 6, 2008
Prediction Markets: October Surprise
I remember how John Poindexter wanted to use prediction markets to learn about terrorism. Maybe he was on to something. Some of the run-up in oil prices seems to relate to the dangers of a conflict in Iraq. Would believers in rational expectation accept that Bush may be readying an October Surprise?
Teaching the Professors
by the Sandwichman
"Mr. Sargent has been getting out letters, collecting data, making addresses, and holding debates with eminent representatives of the other side of the question, making addresses in our colleges and universities, and he has attracted a great deal of favorable attention from our seats of learning in this country. He is teaching the teachers. He is teaching the professors and college presidents."
That is how National Association of Manufacturers President John Edgerton introduced Noel Sargent, manager of the Open Shop Publicity Bureau (subsequently renamed the Industrial Relations Department) at the NAM's 1923 convention. Prior to working for the Association, Sargent was a professor of economics at the University of Minnesota.
How accurate was Edgerton's boast, "he is teaching the professors and college presidents," and what conceivable relevance could it have for economics in the 21st century?
Among the contributors to NAM "educational literature" were Harvard University President Charles W. Eliot and University of Chicago economics professor, founder of the Journal of Political Economy, J. Laurence Laughlin. Other conspicuous advocates of the NAM open shop policy included Chancellor James Roscoe Day of Syracuse University, President George B. Cutten of Colgate University and Dean Robertson of New York University. In 1922, the Open Shop Publicity Bureau "supplied 1,500 colleges and university teachers of economics and sociology with material.... Practically all of the college and university teachers of sociology, government, and economics receive our publications."
Sending materials to university professors provides no guarantee they will read them or pass on the message to their students. The substantial quantity of non-NAM publication by economists echoing the NAM talking points (in defiance of conclusive evidence contradicting NAM assertions) is strong circumstantial evidence that economics professors did read and adopt the NAM party line. Also, the well-documented pressure tactics of the Association in its dealings with the press and Congress offer a clue to how the Open Shop Publicity Bureau probably would have added "legs" (and a strong arm) to its message.
In its relations with the press, the Association sent out materials to newspapers, monitored the take-up of these stories by the papers, rewarded (with advertising revenue) those newspapers who towed the line and punished those who didn't through blacklists and boycotts. It made no secret of those activities; rather it extolled them as the organization's sacred and patriotic duty to uphold the US Constitution and the Ten Commandments of the Old Testament. The hyperbole is not Sandwichman's but President Edgerton's in a 1920 address to the Tennessee Manufacturers Association. "When the people of this enlightened country surrender to the absurdity of the argument for the so-called closed shop and accept it as an established institution, they will owe it to the devil to repudiate the Decalogue and repeal the Constitution of the United States."
On the other hand, its dealings with Congress were handled somewhat more discreetly. It took a Congressional investigation in 1913 to expose the machinations of the "invisible government" that the NAM orchestrated.
The case for the NAM's virtual authorship of economic textbook dogma on shorter hours relies on the following assumptions:
1. That the NAM actually carried out the intentions with respect to college teaching of economics that it publically proclaimed. "We must point out to the people that all this legislation that is going on affects them; shorter hours increases the cost of living, raises taxes, creates a condition for them that is really worse than it is for the manufacturers. We owe it to them. We must do it. That is the important thing for this organization to do."
2. That the NAM used strategies toward that end consistent with the strategies it employed in its other endeavors.
3. That in practice, the NAM strategies would have been virtually identical to those documented by FCC investigation in the case of the Missouri and Illinois committees on Public Utilities Education.
4. That the publication of hundreds of economics textbooks and other publications echoing the NAM claims would be more difficult to explain in the absence of a NAM campaign of carrots and sticks.
"Mr. Sargent has been getting out letters, collecting data, making addresses, and holding debates with eminent representatives of the other side of the question, making addresses in our colleges and universities, and he has attracted a great deal of favorable attention from our seats of learning in this country. He is teaching the teachers. He is teaching the professors and college presidents."
That is how National Association of Manufacturers President John Edgerton introduced Noel Sargent, manager of the Open Shop Publicity Bureau (subsequently renamed the Industrial Relations Department) at the NAM's 1923 convention. Prior to working for the Association, Sargent was a professor of economics at the University of Minnesota.
How accurate was Edgerton's boast, "he is teaching the professors and college presidents," and what conceivable relevance could it have for economics in the 21st century?
Among the contributors to NAM "educational literature" were Harvard University President Charles W. Eliot and University of Chicago economics professor, founder of the Journal of Political Economy, J. Laurence Laughlin. Other conspicuous advocates of the NAM open shop policy included Chancellor James Roscoe Day of Syracuse University, President George B. Cutten of Colgate University and Dean Robertson of New York University. In 1922, the Open Shop Publicity Bureau "supplied 1,500 colleges and university teachers of economics and sociology with material.... Practically all of the college and university teachers of sociology, government, and economics receive our publications."
Sending materials to university professors provides no guarantee they will read them or pass on the message to their students. The substantial quantity of non-NAM publication by economists echoing the NAM talking points (in defiance of conclusive evidence contradicting NAM assertions) is strong circumstantial evidence that economics professors did read and adopt the NAM party line. Also, the well-documented pressure tactics of the Association in its dealings with the press and Congress offer a clue to how the Open Shop Publicity Bureau probably would have added "legs" (and a strong arm) to its message.
In its relations with the press, the Association sent out materials to newspapers, monitored the take-up of these stories by the papers, rewarded (with advertising revenue) those newspapers who towed the line and punished those who didn't through blacklists and boycotts. It made no secret of those activities; rather it extolled them as the organization's sacred and patriotic duty to uphold the US Constitution and the Ten Commandments of the Old Testament. The hyperbole is not Sandwichman's but President Edgerton's in a 1920 address to the Tennessee Manufacturers Association. "When the people of this enlightened country surrender to the absurdity of the argument for the so-called closed shop and accept it as an established institution, they will owe it to the devil to repudiate the Decalogue and repeal the Constitution of the United States."
On the other hand, its dealings with Congress were handled somewhat more discreetly. It took a Congressional investigation in 1913 to expose the machinations of the "invisible government" that the NAM orchestrated.
The case for the NAM's virtual authorship of economic textbook dogma on shorter hours relies on the following assumptions:
1. That the NAM actually carried out the intentions with respect to college teaching of economics that it publically proclaimed. "We must point out to the people that all this legislation that is going on affects them; shorter hours increases the cost of living, raises taxes, creates a condition for them that is really worse than it is for the manufacturers. We owe it to them. We must do it. That is the important thing for this organization to do."
2. That the NAM used strategies toward that end consistent with the strategies it employed in its other endeavors.
3. That in practice, the NAM strategies would have been virtually identical to those documented by FCC investigation in the case of the Missouri and Illinois committees on Public Utilities Education.
4. That the publication of hundreds of economics textbooks and other publications echoing the NAM claims would be more difficult to explain in the absence of a NAM campaign of carrots and sticks.
Globalization, Imperialism, and Power
I was just invited to deliver a paper in Mexico in a few days. I have to send it off even earlier, but what I have is a very rushed effort, thrown together in two mornings. Any quick pointers would be appreciated. Thanks in advance.
http://michaelperelman.wordpress.com/files/2008/06/global.doc
http://michaelperelman.wordpress.com/files/2008/06/global.doc
Wednesday, June 4, 2008
Market Lunacy
Property rights attract private capital and, with government space programs stagnating, a lunar land rush may be just what we need to get things going again. I'll take a nice parcel near one of the lunar poles, please, with a peak high enough to get year-round sunlight and some crater bottoms deep enough to hold ice.
Reynolds, Glenn Harlan. 2008. "Who Owns the Moon? The Case for Lunar Property Rights." Popular Mechanics (June).
Obama and Shorter Working Time
by the Sandwichman
My premise is that the US Presidency is 90% symbolism and 10% muddle. As far as I know, Barack Obama has taken no major policy positions addressing the hours of work. But in the realm of symbolism, Obama's nomination throws open a door that has been tightly shut for 150 years: American exceptionalism.
One persuasive answer to the old question of why no formidable socialist or labor political party ever emerged in the United States has to do with the legacy of slavery and the faux "work ethic" ideology of white working men. Historically, rather than viewing themselves as antagonistic to the robber barons and captains of industry, a large portion of white working class men have derived their identities from being "not slaves". "I work hard because I believe in hard work. It is my choice to work hard, that is how I know I'm not a slave. What is hard work? Working hard!" The white work ethic hints at the same confused and ashamed closet that homophobia dwells in (this is not to indict the work ethic per se, but an exclusivist version of it peculiar to white males).
Whiteness, itself, is simply a negative residual of being not black. There is no such thing as white culture. There's Italian cooking, English theatre, Irish pub music and Dutch painting but no white culture. Coincidentally, there's no such thing as black culture, either. There is, however, a parody and representation of plantation entertainment that generated the stereotype of black culture -- the black-face minstrel show of the 19th century. The really odd thing about the minstrel show is that the slave entertainments the minstrel shows parodied often themselves already performed parodies of the plantation masters' peculiar folk ways. So the Northern white man's fantastic image of Southern black slave culture was itself already a parody of a parody.
Hegel once said something about great events and persons in history happening, as it were, twice. Marx added that the duplication appeared the first time as tragedy, the second as farce. The great tragedy of American exceptionalism is that it has been farce all the way down. It should go without saying that slave labor was a form of labor. Moreover, American slavery was a variety of capitalism. The New York merchant bank of Brown Bros. & Co. -- subsequently Brown Bros. Harriman, employer of Bush Grampa Prescott -- owed its fortune to financing Southern plantations in their purchase of slaves and trade in cotton.
One of the delicious ironies of the work-ethic ideology is that it ascribes financial success to individual effort and poverty to sloth. Thus, it was presumably George and John Brown who planted and picked all that cotton while their slaves were too busy shuckin', jivin' and eatin' watermelon to do a lick of work. And yes, I know that Barack Obama is not descended from slaves but false stereotypes don't bother with such distinctions.
The miracle of the African-American experience under slavery is that people retained their humanity -- even their sense of humor -- through harsh, inhuman, conditions. I wonder if perhaps the initial impulse of the black-face minstrel show wasn't more a celebration of this triumph than a disparagement. Somewhere along the line, though, audiences forgot they were watching burlesque and starting mistaking it for documentary. It is inevitable in the coming election season that a lot of creepy-crawlies are going to come out from under their rocks. On the one hand, that is deplorable. On the other hand, though, airing the potency and taken-for-grantedness of the tradition of American racism may provide just the innoculation needed to move on to other questions that have been perpetually sidelined by the racist agenda.
So what does that have to do with shorter working time? It's a complicated argument but the starting point is in the anti-slavery origins of Ira Steward and the eight-hour movement in the 19th century. Steward's arguments for the eight-hour day derived initially from his analysis of slavery. More recently, David Roediger has written histories both of the movement for shorter working time, Our Own Time as well as of the role of racism in American exceptionalism, The Wages of Whiteness. Rather than recapitulate Roediger's analysis or Steward's, I will simply end this note with the hope that the symbolism of an Obama presidency -- even its mere possibility -- will proclaim America's emancipation from the ideological and political chains of racism.
My premise is that the US Presidency is 90% symbolism and 10% muddle. As far as I know, Barack Obama has taken no major policy positions addressing the hours of work. But in the realm of symbolism, Obama's nomination throws open a door that has been tightly shut for 150 years: American exceptionalism.
One persuasive answer to the old question of why no formidable socialist or labor political party ever emerged in the United States has to do with the legacy of slavery and the faux "work ethic" ideology of white working men. Historically, rather than viewing themselves as antagonistic to the robber barons and captains of industry, a large portion of white working class men have derived their identities from being "not slaves". "I work hard because I believe in hard work. It is my choice to work hard, that is how I know I'm not a slave. What is hard work? Working hard!" The white work ethic hints at the same confused and ashamed closet that homophobia dwells in (this is not to indict the work ethic per se, but an exclusivist version of it peculiar to white males).
Whiteness, itself, is simply a negative residual of being not black. There is no such thing as white culture. There's Italian cooking, English theatre, Irish pub music and Dutch painting but no white culture. Coincidentally, there's no such thing as black culture, either. There is, however, a parody and representation of plantation entertainment that generated the stereotype of black culture -- the black-face minstrel show of the 19th century. The really odd thing about the minstrel show is that the slave entertainments the minstrel shows parodied often themselves already performed parodies of the plantation masters' peculiar folk ways. So the Northern white man's fantastic image of Southern black slave culture was itself already a parody of a parody.
Hegel once said something about great events and persons in history happening, as it were, twice. Marx added that the duplication appeared the first time as tragedy, the second as farce. The great tragedy of American exceptionalism is that it has been farce all the way down. It should go without saying that slave labor was a form of labor. Moreover, American slavery was a variety of capitalism. The New York merchant bank of Brown Bros. & Co. -- subsequently Brown Bros. Harriman, employer of Bush Grampa Prescott -- owed its fortune to financing Southern plantations in their purchase of slaves and trade in cotton.
One of the delicious ironies of the work-ethic ideology is that it ascribes financial success to individual effort and poverty to sloth. Thus, it was presumably George and John Brown who planted and picked all that cotton while their slaves were too busy shuckin', jivin' and eatin' watermelon to do a lick of work. And yes, I know that Barack Obama is not descended from slaves but false stereotypes don't bother with such distinctions.
The miracle of the African-American experience under slavery is that people retained their humanity -- even their sense of humor -- through harsh, inhuman, conditions. I wonder if perhaps the initial impulse of the black-face minstrel show wasn't more a celebration of this triumph than a disparagement. Somewhere along the line, though, audiences forgot they were watching burlesque and starting mistaking it for documentary. It is inevitable in the coming election season that a lot of creepy-crawlies are going to come out from under their rocks. On the one hand, that is deplorable. On the other hand, though, airing the potency and taken-for-grantedness of the tradition of American racism may provide just the innoculation needed to move on to other questions that have been perpetually sidelined by the racist agenda.
So what does that have to do with shorter working time? It's a complicated argument but the starting point is in the anti-slavery origins of Ira Steward and the eight-hour movement in the 19th century. Steward's arguments for the eight-hour day derived initially from his analysis of slavery. More recently, David Roediger has written histories both of the movement for shorter working time, Our Own Time as well as of the role of racism in American exceptionalism, The Wages of Whiteness. Rather than recapitulate Roediger's analysis or Steward's, I will simply end this note with the hope that the symbolism of an Obama presidency -- even its mere possibility -- will proclaim America's emancipation from the ideological and political chains of racism.
Free At Last
I am happy to announce that my new local assemblyman -- the winner of the Republican primary is certain to win in November -- made as his overriding issue the importance of protecting our borders. I assume that he will be overseeing the erection of a major wall surrounding his district, which encompasses parts of several counties. At last I am free from the threat of an invasion by a fleet of taco trucks.
One Party’s Poison
Do you want an honest picture of the political challenge we face in getting sensible policy on climate change? Towards the end of a report on the start of Senate deliberation on Boxer-Warner-Lieberman, we read this about Bob Corker, Republican from Tennessee:
Poison? These are exactly what we need. Rather than sensing the opportunity to build a coalition with conservatives like Corker who rightly understand that we need a strong cap with minimal government meddling, Democrats can think only of showering business with giveaways. Of course, to have exemptions, offsets, freebie allocations and other goodies to pass out, the politicians have to push a plan riddled with loopholes.
The Democratic Party, as it now functions, is too wedded to narrow business interests, a proclivity it fine-tuned during the Clinton years, to grapple with a genuine public imperative like preserving a liveable planet. That’s what I would call an inconvenient truth.
Mr. Corker is proposing a string of amendments that Democrats characterize as “poison pills” that would undermine the purpose of the legislation. His amendments would return more of the receipts from the carbon permits directly to taxpayers, eliminate the issuance of free permits and do away with the ability of American companies to meet their emissions targets by buying offsets overseas.
Poison? These are exactly what we need. Rather than sensing the opportunity to build a coalition with conservatives like Corker who rightly understand that we need a strong cap with minimal government meddling, Democrats can think only of showering business with giveaways. Of course, to have exemptions, offsets, freebie allocations and other goodies to pass out, the politicians have to push a plan riddled with loopholes.
The Democratic Party, as it now functions, is too wedded to narrow business interests, a proclivity it fine-tuned during the Clinton years, to grapple with a genuine public imperative like preserving a liveable planet. That’s what I would call an inconvenient truth.
Tuesday, June 3, 2008
Is Supporting Preserving Social Security As Is While Advocating Combatting Global Warming Hypocritical Confusion?
This is the charge made by Arnold Kling at econlog and in more detail by Andrew Biggs. Biggs is former Bush hit man on social security, and he and Kling both see those who doubt that social security is "in crisis" and those who doubt that global warming "is a problem" as being somehow similar, namely confused, and if one is supporting one and not the other, not just confused, then (implicitly, although neither used this word) hypocritical.
I have commented on Biggs's blog that I think it is not unreasonable to support social security as is while supporting doing something about global warming. He claims that changes to social security are "permanent" (as are changes to global climate), and of course supports the usual pessimistic forecasts. I argue that on social security that a) the pessimistic forecasts have not done too well so far, and b) social security can be changed at any time if indeed things go bad. However, with global warming, the downside is much worse and the lead times are much longer. Also, they do not have the same probability distributions, with social security essentially more of a normal distribution, but with global warming, as Martin Weitzman has pointed out (and similar to financial market returns), there are these non-normal "fat tails," too high a chance of extreme events due to nonlinearities and positive feedbacks in the system, with the geological record supporting the idea that very rapid temperature change has happened in the past. So, we must worry about those non-trivial catastrophic outcome possibilities, much more serious than possible underfunding of the US social security system.
I have commented on Biggs's blog that I think it is not unreasonable to support social security as is while supporting doing something about global warming. He claims that changes to social security are "permanent" (as are changes to global climate), and of course supports the usual pessimistic forecasts. I argue that on social security that a) the pessimistic forecasts have not done too well so far, and b) social security can be changed at any time if indeed things go bad. However, with global warming, the downside is much worse and the lead times are much longer. Also, they do not have the same probability distributions, with social security essentially more of a normal distribution, but with global warming, as Martin Weitzman has pointed out (and similar to financial market returns), there are these non-normal "fat tails," too high a chance of extreme events due to nonlinearities and positive feedbacks in the system, with the geological record supporting the idea that very rapid temperature change has happened in the past. So, we must worry about those non-trivial catastrophic outcome possibilities, much more serious than possible underfunding of the US social security system.
The Climate Action Partnership: A Negative Heuristic
This report from the front shows how important it is to get the basics right in climate change policy. The more discretion the federal government has in how many permits to allocate to which industry, and how many should be given away and to whom, the more the whole program will be swallowed up in political gridlock and rent-seeking. There are five big principles to follow if we want to avoid this nightmare scenario:
1. Cap carbon as upstream as possible, at its source rather than its use. Any entity bringing coal into the economy, by mining or importing it, should have to have a permit. Don’t put the government into the position of deciding who should be given a special dispensation to burn it.
2. Auction all the permits. As soon as you accept the idea that some of them should be given away, you have to pick the lucky recipients. These permits will be worth real money, and so will political influence. (Corollary: recycle the revenue, so households are protected from price increases, and to lock in political support for serious emission limits.)
3. Don’t allow offsets. Measurement of how much carbon the offsets really offset will always be fuzzy, and wriggle room will be sold to the highest bidder.
4. Tax imports that aren’t produced under a carbon cap. If other countries delay in setting up their own policies, adopt a transparent tariff schedule based on embodied carbon content, ideally under the auspices of an international, disinterested body. This will address much of the competitiveness fear, while producers gear up for long-term advantage based on innovative responses to emissions caps that will eventually be adopted worldwide.
5. Adopt sector-specific technology subsidies and mandates. Don’t fall into the either/or trap: carbon capping provides the architecture, but there is still a need for policies that mobilize a coordinated response in dimensions like research, infrastructure and breaking down the institutional barriers to innovation. Fuel and appliance efficiency standards, large-scale public investments in new technology, installing a higher-tech electrical grid, mass transit—these are the kinds of measures that will make it possible for us to make a reasonable life for ourselves under an ever tightening carbon cap.
1. Cap carbon as upstream as possible, at its source rather than its use. Any entity bringing coal into the economy, by mining or importing it, should have to have a permit. Don’t put the government into the position of deciding who should be given a special dispensation to burn it.
2. Auction all the permits. As soon as you accept the idea that some of them should be given away, you have to pick the lucky recipients. These permits will be worth real money, and so will political influence. (Corollary: recycle the revenue, so households are protected from price increases, and to lock in political support for serious emission limits.)
3. Don’t allow offsets. Measurement of how much carbon the offsets really offset will always be fuzzy, and wriggle room will be sold to the highest bidder.
4. Tax imports that aren’t produced under a carbon cap. If other countries delay in setting up their own policies, adopt a transparent tariff schedule based on embodied carbon content, ideally under the auspices of an international, disinterested body. This will address much of the competitiveness fear, while producers gear up for long-term advantage based on innovative responses to emissions caps that will eventually be adopted worldwide.
5. Adopt sector-specific technology subsidies and mandates. Don’t fall into the either/or trap: carbon capping provides the architecture, but there is still a need for policies that mobilize a coordinated response in dimensions like research, infrastructure and breaking down the institutional barriers to innovation. Fuel and appliance efficiency standards, large-scale public investments in new technology, installing a higher-tech electrical grid, mass transit—these are the kinds of measures that will make it possible for us to make a reasonable life for ourselves under an ever tightening carbon cap.
Workers of the World -- Relax!
by the Sandwichman
One of my Work Less Party peeps, Conrad has made a short film you should all see.
http://www.workersoftheworldrelax.org/
"What if we used our gains in productivity to slow down ? We could work less and produce less. It would also mean consuming less.
"If you like the film please forward this website to a world that desperately needs some slowing down."
One of my Work Less Party peeps, Conrad has made a short film you should all see.
http://www.workersoftheworldrelax.org/
"What if we used our gains in productivity to slow down ? We could work less and produce less. It would also mean consuming less.
"If you like the film please forward this website to a world that desperately needs some slowing down."
Monday, June 2, 2008
Another Oil Futures Market
"Tom McGee's business is surging faster than the price of gasoline. That's because PMP Corp. is one of the few places in the U.S. that gas stations can turn to when they need old-style gas pumps adapted to register prices over $4 a gallon. The mechanical dials on many vintage pumps can't register prices over $3.99 a gallon or ring up single sales north of $99.99."
"Many small-town stations, especially in remote, rural areas, can't afford to buy new pumps, which can cost as much as $10,000 each. PMP's retrofits are between $600 and $800."
"PMP has a 20-week backlog, up from three days in March, and Mr. McGee's 70 workers are doing maximum overtime. He has hired more temporary workers, but it is slow getting them up to speed. The labor-intensive work involves tasks such as printing new numbers on the spinning wheels that form the core of the pricing mechanisms. His suppliers are running out of crucial parts."
"The work is also done by pump manufacturers like Gilbarco Veeder-Root, part of industrial conglomerate Danaher Corp., of Washington, D.C. An estimated 8,500 of the nation's 170,000 gas stations have the old-style pumps."
Aeppel, Timothy. "For PMP, $4 Gas Is Great for Business: Firm Helps Service Stations Adapt Old Pumps for Higher Prices." Wall Street Journal (2 May).
http://online.wsj.com/article/SB121237038897536749.html?mod=todays_us_marketplace
"Many small-town stations, especially in remote, rural areas, can't afford to buy new pumps, which can cost as much as $10,000 each. PMP's retrofits are between $600 and $800."
"PMP has a 20-week backlog, up from three days in March, and Mr. McGee's 70 workers are doing maximum overtime. He has hired more temporary workers, but it is slow getting them up to speed. The labor-intensive work involves tasks such as printing new numbers on the spinning wheels that form the core of the pricing mechanisms. His suppliers are running out of crucial parts."
"The work is also done by pump manufacturers like Gilbarco Veeder-Root, part of industrial conglomerate Danaher Corp., of Washington, D.C. An estimated 8,500 of the nation's 170,000 gas stations have the old-style pumps."
Aeppel, Timothy. "For PMP, $4 Gas Is Great for Business: Firm Helps Service Stations Adapt Old Pumps for Higher Prices." Wall Street Journal (2 May).
http://online.wsj.com/article/SB121237038897536749.html?mod=todays_us_marketplace
A Challenge on CGE Modeling
I’m currently working with Sightline Institute in Seattle, monitoring the economic analysis phase of the Western Climate Initiative. WCI, which consists of seven US states and three Canadian provinces, is cooking up a common carbon emissions plan, and a consulting firm has been brought onboard to help clarify the economic implications of different policy alternatives. There are many issues specific to this project I may return to later, but for now I’d like to put the spotlight on the methodology WCI will be relying on, CGE modeling. I think these models are so dubious theoretically and unreliable in practice that there is no case for using them. In particular, I am issuing a challenge to their defenders: if no one can answer it, the case is closed.
On a theoretical level, it is surprising that CGE modeling has become such a vibrant industry, since its underpinnings in general equilibrium theory have been systematically undermined over the past several decades. (1) CGE models use the technique of representative agents—vast numbers of households and firms are treated as if they were a single decision-making entity—when we now know that multiple agents cannot be modeled as if they were just one. (2) In particular, the Debreu-Sonnenschein-Mantel result demonstrates that full knowledge of all supply and demand relationships in an economy is not sufficient to predict the equilibrium the economy will arrive at when it is not there yet. (3) The behavioral assumptions of these models, typically resting on utility maximization or simple modifications of it, have been empirically falsified. (4) Production and utility functions are routinely chosen for their convexity properties, despite the widespread recognition that nonconvexities (that yield multiple equilibria) are rife. In short, if theory should inform practice, we shouldn’t be doing CGE.
Now for the challenge. As far as I know, there has never been a rigorous ex post evaluation of CGE models in practice, one that compares predicted to actual outcomes. Based on performance, is there any evidence that such models add value—that their predictions are any better than those derived from macro or sector-specific models, or even a random walk? Also, are CGE models employed by any private sector players who bet real money on the results, or is it only in academia and the public sector that CGE modeling is taken seriously?
My challenge is for those who think there is anything to CGE to come up with evidence that their forecasts add value—either careful retrospective analysis, market applications or both. If not, after more than three decades of experience to go on, why shouldn’t we draw the conclusion that this is a self-perpetuating enterprise promulgated by specialists who sell not an improved ability to make forecasts, but a patina of high-tech respectability for agencies with no stake in whether their policies will actually perform?
On a theoretical level, it is surprising that CGE modeling has become such a vibrant industry, since its underpinnings in general equilibrium theory have been systematically undermined over the past several decades. (1) CGE models use the technique of representative agents—vast numbers of households and firms are treated as if they were a single decision-making entity—when we now know that multiple agents cannot be modeled as if they were just one. (2) In particular, the Debreu-Sonnenschein-Mantel result demonstrates that full knowledge of all supply and demand relationships in an economy is not sufficient to predict the equilibrium the economy will arrive at when it is not there yet. (3) The behavioral assumptions of these models, typically resting on utility maximization or simple modifications of it, have been empirically falsified. (4) Production and utility functions are routinely chosen for their convexity properties, despite the widespread recognition that nonconvexities (that yield multiple equilibria) are rife. In short, if theory should inform practice, we shouldn’t be doing CGE.
Now for the challenge. As far as I know, there has never been a rigorous ex post evaluation of CGE models in practice, one that compares predicted to actual outcomes. Based on performance, is there any evidence that such models add value—that their predictions are any better than those derived from macro or sector-specific models, or even a random walk? Also, are CGE models employed by any private sector players who bet real money on the results, or is it only in academia and the public sector that CGE modeling is taken seriously?
My challenge is for those who think there is anything to CGE to come up with evidence that their forecasts add value—either careful retrospective analysis, market applications or both. If not, after more than three decades of experience to go on, why shouldn’t we draw the conclusion that this is a self-perpetuating enterprise promulgated by specialists who sell not an improved ability to make forecasts, but a patina of high-tech respectability for agencies with no stake in whether their policies will actually perform?
Ronald Findlay and Kevin O'Rourke
Ronald Findlay and Kevin O'Rourke published a fascinating book, entitled Power and Plenty: Trade, War, and the World Economy in the Second Millennium, which comes out in support of the historical policies of mercantilism. To my knowledge, neither author has any hint of leftist sympathies. Have I missed something?
Sunday, June 1, 2008
The Me Theory of Value
116: Jean-Claude Ellena perfumer for Hermes: "It's very important to understand that the price of perfumes is not the price of their materials. You pay for the creativity .... That has value as well, a value that I put into the perfume. This Marxist idea that the price of a thing is the price of its materials is false."
Burr, Chandler. 2008. The Perfect Scent: A Year Inside the Perfume Industry in Paris and New York (New York: Henry Holt).
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