Econversations is Back!

Econversations will resume in Fall 2019 from September 25 onward. As usual, we will meet outside Davis Café in the Alvarez Student Union from 3:50pm to 4:50pm.

However, Econversations Blog will remain suspended until next academic year.

Pro-Space Post

In 1957, Sergei Pavlovich Korolev was building ICBMs for the Soviet Union. He wasn’t a fervent communist, as Stalin had sent him to the Gulags in 1938, where he stayed until 1945.

Anyway, none of the ICBMs he built were functional. He was using liquid fuel, which was much more powerful but less stable. Liquid fuel rockets had to be filled with fuel immediately before launch because they were liable to explode randomly if left fueled. This is in contrast to solid fuel rockets, which are less powerful but can be launched on command, precisely what is needed for an ICBM. Luckily for the world, Sergei Pavlovich didn’t care about the Soviet ICBM program. He just wanted to explore space. So he built terrible ICBMs but made incredible technological breakthroughs. I am convinced he is why we’re alive, because Khruschev was a trigger happy lunatic. (3) Think of how much worse the Cuban Missile Crisis would have been if he actually had something to back it up. (1)

Anyway, after a rocket launch, Sergei Pavlovich begged Khruschev to let him shoot a radio into orbit. Khruschev said something along the lines of “but there are bigger problems on earth, what if the capitalist West take all the space benefits for themselves?” But Sergei Pavlovich kept bothering him, and since Khruschev didn’t care he finally said yes. That was sputnik.

I hate to paint with a broad brush, but every single space cynic in the world is myopic and a thief of joy. I don’t know what else to say, it’s not a difference in opinions or values, you are simply wrong. You are Khruschev, and I am someone fangirling outside Sergei Pavlovich’s dacha.

I’ll respond to a few of the most common attacks against space research/colonization.

1) There are still problems on Earth.

What an astute observation. However, at what point would you consider Earth post-problem enough to justify this scientific research? Because I would argue that from a caveman perspective, we are essentially post-scarcity and post-problem. But due to relativism, the goalposts keep changing, so this line of argument is intended to put space to bed permanently. But why single out space research specifically? Humans still have problems, so why spend money on PETA? GreenPeace? There are still problems in the US, so why spend anything on foreign aid? Space research is just scientific research, which I imagine many liberal space cynics will be in favor of. Also, where do you think this money is being spent? It’s all on earth. Check out the next section for the space research benefit multiplier. All this research will have dual use applications back on earth. To survive in space, new medical, engineering, and AI research will need to be done, all of which will transform life here on earth.

2) What if there are no spillovers and the goods are all taken for rich people?

I’m going to use the example of genetically engineered super babies from our meeting. The typical product cycle is that goods are available early on for rich people exclusively because of high prices, but as the cost falls, it moves into a mass market. I don’t see why this is inherently evil. I also don’t see why this argument is reserved for space-related things. I would argue that microwaves and cars made a bigger immediate impact than this (gene editing) will, but few (if any) people argued to restrict these goods because they were going to rich people first. Profit is just a marker of value. You heard it here first, the first trillionaire is going to be an asteroid miner. Once this is done, earth destroying resource extraction will be done less and less until it disappears entirely. Manufacturing can also be exported past earth’s orbit.

A 1992 report by a research journal named Nature found that NASA expenditures had a regional effect multiplier from direct and indirect sources of up to 8. The header of the paper reads “The economic benefits of NASA’s programs are greater than generally realized. The main beneficiaries (the American public) may not even realize the source of their good fortune.” NASA has transitioned away from being a direct research organization to what that provides resources and forms partnerships with businesses and outside research groups. A compelling case could be made that this will increase that multiplier.

(2)

“But Jake, what if the private companies take their proprietary technology for themselves? That’s not what NASA did!” True, but that is the case for all private R&D, which is not really what this is. There is a complex ecosystem required in space. Any company that figures out how to do something profitable in space will require a great number of inputs to operate successfully. Even Lockheed Martin, Boeing, and the like have to subcontract out to finish their rockets… even though their job is literally to build rockets. Then you add in habitation facilities, communications, life support, etc. into the mix, and you can imagine how widely the benefits would flow. The only way to profitably do space research is to have the end product have useful applications here on earth, which will entail selling it here.

3) Rich people will all leave earth and dominate space.

I saw Elysium too, but it’s off in a variety of ways. First, space is cold, dark, inhospitable, and runs in opposition to our biological makeup. Human beings were molded and shaped on Earth. Space is not that, and it will suck. The people who will be forced into space will be poor people displaced by war, climate change, or some other disaster, in the same way that European immigrants to the New World were the poor and huddled masses. It’s an equilibrium restoring mechanism.

Space is great, and for a full explanation please see the following link: https://www.youtube.com/watch?v=ilcRS5eUpwk

There may or may not be a rebuttal post coming from a space cynic in the coming days.

References:

(1) http://www.astronautix.com/k/korolev.html

(2) https://www.nature.com/articles/355105a0.pdf

(3) https://www.cia.gov/library/readingroom/docs/CIA-RDP80T00246A030100210001-3.pdf

Command and Control vs. Cap and Trade

A few weeks ago, Shyam made an interesting point that has been bouncing around my mind. We were in the Union, and after buying an organically sourced soy milk product he said something to the effect of “I don’t want to have to do research about what are good (as in morally responsible) products/companies, I want everything to be already factored into the price.”

While I can’t be certain, and this was not the subject of conversation, I am still fairly confident that the idea of carbon taxes played into Shyam’s comment. Because the Nobel Prize for Economics was recently awarded to two climate economists, I will make this post about carbon taxes. Admittedly, I know little about the two economists who won, so instead I will turn to a research binge I did over the summer on this subject.

Let’s start with command and control regulation. Best available technology (BAT) is any regulation that requires companies to acquire (you guessed it) the best available technology to reduce emissions. A literal interpretation would require a company to acquire the technology or equipment without reference to a cost-benefit analysis. This is uneconomic. More frequently, BATs are interpreted in terms of practicable acquisition of technology, which is a bit of a gray area, and accordingly the policy is less effective. In the US, BAT terminology is used in the Clean Air Act and the Clean Water Act. This is clearly not a comprehensive list of command and control regulation, but rather just one example that is practiced in the context of the US.

Carbon taxes are an example of a market-based incentive away from carbon emissions, albeit a feeble one. Governments can unilaterally decide to implement a tax per ton of carbon dioxide released into the atmosphere. This is an example of a Pigovian tax, a tax used to discourage an activity based on the negative externalities an activity or good produces. Theoretically, the tax should be equal to the negative externality (the social cost) associated with that activity, so that the offending firm internalizes all of the cost. However, this method is largely ineffective. The social cost of carbon emissions is global, and governments only have the incentive to tax the social cost that is incurred within that country. With the exception of Sweden, this is exactly the result that is realized: carbon taxes are set far too low to be effective.

Cap and trade regulations create “tradable emission rights” (or pejoratively, “rights to pollute”) that allow economic agents to trade for carbon emissions in a market. The governmental authority sets a ceiling on what level of pollution is permissible, and then issues permits according to that ceiling. Economic agents can then trade them. This system incentivizes agents to reduce their carbon emissions, since they can then sell them to other agents that are not able to do so.

Additionally, the cost of emitting carbon would be captured in the price of any good that creates carbon emission. Let’s take Union soymilk as an example. It’s unlikely that the producer of that soymilk purchases any carbon permits directly. But it would have to buy transportation services to get its product to market, and it would pay higher prices for these services, as those firms would have to pay for permits or pay more for gasoline. This added cost would ultimately be passed on to the consumer. The emissions associated with that soymilk would be included in its price, eliminating the need for consumers to independently research the emissions effect of the soymilk. This would go for all goods and services.

Let’s suppose there are companies A & B in completely different industries. Let’s assume that technology is out there that will enable company A to reduce emissions by 75%, but at substantial and previously uneconomic cost X. Let’s assume that company B can reduce emissions by only 5% at cost X. Cap and trade in this example would make it economical for Company A to incur cost X and sell its surplus credits to company B (and others like it.) Cap and trade has the effect of incentivizing those agents that can reduce their emissions the most to do so, something that maximizes the effectiveness of emission-reducing spending.

However, there is a substantial need for all countries to implement cap and trade regulation. Without a functioning global market, high polluting agents would be expected to simply relocate to nations that do not tax pollutants. Since the negative externalities associated with emissions are global, this would imply no meaningful positive change.

There are also significant free rider problems associated. If country Z is responsible is responsible for 5% of total emissions, 95% of the benefit of any action it takes to reduce emissions would be captured by the rest of the world. Therefore, there would need to be concerted, global action to avoid free riding nations.

A fun and relevant example of successful cap and trade regulation is that of the EPA’s Acid Rain Program (ARP.) However, a chief difference in this program was that the environmental degradation was local and the United States was thus able to take unilateral action.

I confess to being biased in favor of a cap and trade solution, largely for reasons listed above. I will link a few articles that do not necessarily share my biases and are likely more compelling and informative than what I have shared here.

Here is a link to an article written by Gregory Mankiw that is in favor of carbon taxes rather than a cap and trade system. I found parts of the argument underwhelming, although in last week’s Econversation Shyam made a compelling argument in favor of carbon taxation (although I personally haven’t decided if I prefer it to cap and trade.) With respect to this article, Mankiw makes the point that emission rights might not be auctioned, which wouldn’t be ideal. However, he leaves the argument at that. Additionally, Mankiw doesn’t speak to the global nature of the emissions crisis, which would have to play into any system.

https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf

References:

https://academic.oup.com/reep/article/3/1/42/1530330

Internecine Conflict: Amygdala vs. Prefrontal Cortex

Jake ElSarhan reporting for Econversations.

In recent meetings, a topic that has been popping up consistently has been that of behavioral economics. For any statisticians following this page, be aware that this is largely due to yours truly biasing the sample by steering discussions to that very subject.

Over the past two weeks, two interesting examples of irrationality have been discussed. The one examined today is that of hyperbolic discounting. To begin with, let’s imagine that a student named Marisa has been offered the choice of $100 now or $200 in one month. What is the rational choice? Why? What is the more common choice? Why?

Before we get into that, I need to clarify the difference between discount rates and discount factors. A discount rate (r) refers to the interest rate that is used to determine a net present value (NPV) from a given set of cash flows. For businesses, r would be determined by weighted average cost of capital, for individuals it might be the cost of borrowing. Generally, the discount rate is determined by market/economic factors.

In economic analysis, the discount factor (beta) is the measure for how people value time. The most basic form of a discount factor is 1/(1+r). The r chosen for the discount factor can include more abstract considerations, such as need for resources, and psychic (as in psychological) considerations. When implicitly calculating the psychic utility gained from $100 now or $200 in one month, the discount factor is what compares the figures. Different people will have different discount factors, and the r in the denominator is typically quite high, far higher than the market interest rate.

Obviously, the rational choice is $200 in one month. The NPV of $200 a month from now is considerably higher than $100. However, repeated studies demonstrate that the more common choice is $100 now. (“Not me Jake! I’d choose $200 in a month!” That’s the great danger. Studies show this bias affects you. So does advertising.)

The reason for this is that people have an ingrained focus on the present at the expense of the future. To borrow the terminology of Professor Baker, we might say that we make decisions using an excessively high discount rate, maybe 30 or 40 or 500%. Thus, taking the $100 today becomes rational, even though the market discount rate might be only 8% or something.

Here is where it gets interesting. If we asked Marisa if she’d rather have $100 in 12 months or $200 in 13 months, she’d probably say $200 in 13 months. This is rationally incompatible with the former example, but it can be expected given what we know about human nature. Therefore, we can say that humans engage in hyperbolic discounting which is when valuations fall very quickly for a short period of time and then level off. This is inconsistent and a large part of behavioral economics.

What explains this? The constant battle between the amygdala and pre-frontal cortex. The amygdala is standard for mammals, and is responsible for baser functions, and takes over in moments of immediate crisis, like fight or flight. It governs our reaction to our immediate circumstances and short term thinking. The pre-frontal cortex is uniquely developed in humans (even among primates) and is responsible for long-term thinking and so-called rationality.

To put it simply, the amygdala is why people have a tendency to take $100 now over $200 in a month. If you start thinking hard about it and decide you’d rather have the $200, that’s probably the pre-frontal cortex taking over. When confronted with a situation far into the future, it’s the pre-frontal cortex that is calling the shots. This explains hyperbolic discounting. This is a real science, it’s called neuroeconomics.

Next time, we’re going to examine a hypothetical individual named Shyam who chooses $100 both times. I fear the answer will have to do with consistency in an attempt at self honesty (is that a word,) and that it will be a fascinating analysis having to do with an overdeveloped pre-frontal cortex insisting on perfect harmony with the amygdala.

References:
https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.99.3.937

https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.99.5.1925.