Author: Tom

Kids on the Bailout

I got a silly chain email, which proposed taking the $85 billion needed for the AIG bailout and distributing it among all 200 million taxpayers, so that we’d each get $425,000 to play with. I decided to test this idea on my boys, who are seven and eight. Ignoring the fact that $85B divided by 200M is $425, not $425,000, we had a conversation about what would happen if the government distributed half a million in cash to every American:

Kid1: That would be generous.

Kid2: That would be hard. There are like 150,000 people just in Bozeman.

Me: Where would the government get that kind of money?

Kid1: Make it (by printing).

Kid2: Steal it from another country.

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Jay Forrester honored in POMS

Production and Operations Management 17(4) honors Jay Forrester as an important person in the history of operations management. He joins Kenneth Arrow, Ronald Coase, and William Cooper in the distinction this year. Congratulations Jay!

Hat tip to John Sterman on the SD email list. I don’t have fulltext access to the journal, but if someone sends me a snippet, I’ll post it.

Bailout MetaRoundup & Alternatives

MetaRoundup:

Several of the economics blogs I read have had useful roundups of bailout commentary. A few I find found useful:

Do we need to act now? on Economist’s View

9/26 Links on Economist’s View

NYT Economix’ analyst roundup

Greg Mankiw’s roundup of commentary

Update 9/29:

Real Time Economics’ Secondary Sources

Update 10/1: 

Greg Mankiw with more commentary

Alternative Plans:

Economists Against the Paulson Plan

Brad de Long on Krugman on the Dodd plan

WSJ Real Time Economics’ Text of Lawmakers’ Agreement on Principles

Thomas Palley on Saving the Financial System

Marginal Revolution on the Republican plan to rescue mortgages instead of buying mortgage assets

Marginal Revolution with a Modest Proposal (finding and isolating toxic assets)

Update 9/27:

Marginal Revolution with substitute bridges

Greg Mankiw with a letter from Robert Shimer with a nice analysis, including problems with Paulson, the lemons problem, and the Diamond, Kaplan, Kashyap, Rajan & Thaler fix

Update 9/28:

Real Time Economics on securitization

Brad deLong on nationalization (the Swedish model)

Update 9/29:

The Big Picture with Stop Targeting Asset Prices

Marginal Revolution asks, is the Sweden plan better?

WCI Design Recommendations

Yesterday the WCI announced its design recommendations.

Update 9/26: WorldChanging has another take on the WCI here.
I haven’t read the whole thing, but here’s my initial impression based on the executive summary:

Scope

Major gases, including CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.

What? In scope? How/where?
Large Industrial & Commercial, >25,000 MTCO2eq/yr

Combustion Emissions

 Yes Point of emission

Process Emissions

 Yes Point of emission
Electricity Yes “First Jurisdictional Deliverer” – includes power generated outside WCI
Small Industrial, Commercial, Residential Second Compliance Period (2015-2017) Upstream (“where fuels enter commerce in the WCI Partner jurisdictions, generally at a distributor. The precise point is TBD and may vary by jurisdiction”)
Transportation

Gasoline & Diesel

 Second Compliance Period (2015-2017) Upstream (“where fuels enter commerce in the WCI Partner jurisdictions, generally at a terminal rack, final blender, or distributor. The precise point is TBD and may vary by jurisdiction”)

Biofuel combustion

 No
Biofuel & fossil fuel upstream To be determined ?
Biomass combustion No, if determined to be carbon neutral  
Agriculture & Forestry No  

(See an earlier Midwestern Accord matrix here.)

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Bailout without Representation

The NYT has the draft text and an explanation of the Bush administration’s $700 billion bailout proposal. It audaciously creates a budget authority almost as big as the federal government’s total discretionary spending and bigger than every on-budget agency, seven times the California state budget, without any checks and balances at all:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

We used to dump tea in harbors for things like this.

A New Method of Macarony Making, As Practiced at Boston

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How To Fix A Carbon Tax

Imagine that you and I live in a place that has just implemented a carbon tax. I, being a little greener than you, complain that the tax isn’t high enough, in that it’s not causing emissions to stabilize or fall. As a remedy, I propose the following:

  • At intervals, a board will set targets for emissions, and announce them in advance for the next three years.
  • On a daily basis, the board will review current emissions to see if they’re on track to meet the annual target.
  • The daily review will take account of such things as expectations about growth, the business cycle, weather (as it affects electric power and heating demand), and changing fuel prices.
  • Based on its review, the board will post a daily value for the carbon tax, to ensure that the target is met.

Sound crazy? Welcome to cap and trade. The only difference is that the board’s daily review is distributed via a market. The presence of a market doesn’t change the fact that emissions trading has its gains backwards: rapid adjustment of prices to achieve an emissions target that can only be modified infrequently (the latter due to the need to set stable quantity expectations). Willingness to set a cap at a level below whatever a tax achieves is equivalent to accepting a higher price of carbon. Why not just raise the tax, and have lower transaction costs, broader sector coverage, and less volatility to boot?

Certainly cap and trade is a viable second-best policy, especially if augmented with a safety valve or a variable-quantity auction providing some supply-side elasticity. However, I find the scenario playing out in BC quite bizarre.

Update: more detailed thoughts on taxes and trading in this article.

The GAO's Panel of Economists on Climate

I just ran across a May 2008 GAO report, detailing the findings of a panel of economists convened to consider US climate policy. The panel used a modified Delphi method, which can be good or evil. The eighteen panelists are fairly neoclassical, with the exception of Richard Howarth, who speaks the language but doesn’t drink the Kool-aid.

First, it’s interesting what the panelists agree on. All of the panelists supported establishing a price on greenhouse gas emissions, and a majority were fairly certain that there would be a net benefit from doing so. A majority also favored immediate action, regardless of the participation of other countries. The favored immediate action is rather fainthearted, though. One-third favored an initial price range under $10/tonCO2, and only three favored exceeding $20/tonCO. One panelist specified a safety valve price at 55 cents. Maybe the low prices are intended to rise rapidly (or at the interest rate, per Hotelling); otherwise I have a hard time seeing why one would bother with the whole endeavor. It’s quite interesting that panelists generally accept unilateral action, which by itself wouldn’t solve the climate problem. Clearly they are counting on setting an example, with imitation bringing more emissions under control, and perhaps also on first-mover advantages in innovation.

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