Skeptonomics

The New York Times has a story today about John Dingell’s change of heart on climate policy. The auto industry’s point man in Congress now favors a stiff tax on carbon emissions. There has been an undercurrent of suspicion that he has rallied to the least popular approach to the problem in order to discredit it. The Times’ Leonhardt gives Dingell the benefit of the doubt.

What I didn’t like were Leonhardt’s claims that a carbon tax “is the climate solution that economists and environmentalists have long dreamed of” and that the only alternative is cap-and-trade, giving away emission permits to longstanding polluters. The third approach, and by far the best, is setting up a permit system and auctioning off each one of them.

There are two reasons why permits rule. (1) There is great uncertainty about the future relationship between carbon prices and pollution levels (long run elasticity of demand for fossil fuels). Taxes place the burden of this uncertainty on the environment (the amount of pollution); saleable permits place it on costs faced by energy users (fossil fuel prices). (2) Politically, if we go the tax route, we end up in a discussion about taxes. That’s why skeptics thought Dingell might be boring from within. If we center the policy on permits the debate is over how much greenhouse gas emissions we are willing to tolerate. That’s the discourse we need.

Folks, this is a very important issue at a very important time. In the next year the contours of the national debate over climate change policy will be set. Huge ecological consequences – and gobs of cash – are on the line. It is essential to start off in the right direction. I’d like to see enough clarity and truculence in the activist community that journalists are forced to take notice.

A recent discussion of industrial policy on Dani Rodrik’s blog got me thinking. When the phrase “industrial policy” comes up (as I’m sure it often does at the wild parties our readers get soused at), we think of government commissions that “pick the winners”, funneling credits and subsidies to the embryonic Industries of the Future, while showing the door to the enfeebled Industries of the Past.

My experience in Germany, however, showed me another model. A society can favor the development of certain types of industries via a mosaic of education and training institutions, stakeholder-oriented financial institutions, vibrant local and regional economic development initiatives and the like. In other words, IP can be bottom-up rather than top down. When Germans think IP they think France, where all decisions are made in Paris, but a foreigner can see that Germany has its own form of IP, one that probably works better and is more participatory.

The next step was to think again about John Dewey and his ideas for the extension of democracy (his strong democracy, not our current weak one) into the economy. Open up a system like Germany’s to even more participation and you would have something like what Dewey had in mind. (The old guy called it “socialism” but admitted it didn’t look much like what the rest of the world called socialism.) But Dewey’s concern was not only political but (ahem) pragmatic. It was essential that the system should really work and not just be politically agreeable. Most of his analytical juices went into that part of the problem, and I think much of his insight could be translated into IP-ish terms. He was also off base on some matters (such as an overly optimistic conception of the role of science), and we can learn from that too.

Kevin Q. can probably spin rings around this post – I’d be happy if he would.

Hmmmm. I guess I should say a word about myself, so as not to be too different from everyone else? (Q: What are you going to do when you grow up? A: Find some people, dress like them and follow them around. –Firesign Theater)

I am Peter Dorman, an economist and long-time political obsessive, not affiliated with any school, camp or fire ring. I teach at the Evergreen State College, known for its extraordinarily demanding brand of wanton indulgence. I do a little of this and that academically, never wanting to specialize to the point of accomplishment boredom. Some topics over the years: occupational safety and health, benefit-cost analysis, trade theory, international political economy, child labor, unemployment insurance, climate change, the precautionary principle.

Bloggers seem to be pronouncing themselves on free trade and liberty, so for my part I will say I have theoretical and political issues with the justification for unregulated trade, and I would like to reduce the role that hierarchy and authority (institutional not moral) plays in our world. What really irritates me is nationalism, the utopia of ages past that has now attained a gruesome hegemony.

I will mostly post on economics-related matters, since I figure the web is overrun with everything else, and because I think there is mostly a big hole where serious economic thinking ought to be in the discourse of the left.

Before the Crandall Canyon disaster recedes into media oblivion, it’s worth spending a moment to think about what economics does and doesn’t have to say about this grisly series of events.

The standard theory, which can be found in any labor economics textbook and even some principles texts, is that dangerous work is essentially a non-problem. Workers will only take a dangerous job if they get extra pay to compensate. This gives employers an incentive to make jobs safer up to the point when the cost of more safety exceeds the added wages they would have to pay. The result: the level of safety is efficient (marginal benefit of safety improvements equals marginal cost), workers with a taste for risk are efficiently matched with employers whose technologies make risk harder to reduce, and workers in dangerous jobs are no worse off than those in safe ones, since they have bigger bank accounts to keep them happy. There are two big regulatory implications: interference, like enforcing safety rules, is against the interest of both workers and employers, and the wage-safety tradeoff can be used to calculate a “value of statistical life”, which comes in handy whenever cost-benefit analyses need to be performed.

I kid you not.

The “consensus” view in the profession is that a wealth of empirical data validates this theory. The Environmental Protection Agency holds earnest discussions on whether the value of a life should be raised or lowered a bit, or perhaps set at a higher level for some groups (like the rich) compared to others.

There’s no point getting into a full-scale disquisition on this topic; my book from 11 years ago says it all. (Except for everything I’ve been saying since then….) One pertinent question we might ask, however, is this: what, if anything, does conventional economic theory tell us about a disaster like Crandall Canyon? Is this a theory for large data sets only, or can it be applied to a particular incident? My view: if it doesn’t make sense in any particular case, it doesn’t make sense in 60,000 cases.

So what do we have?

1. Efficiency: no, with the practice of retreat mining.

2. Risk-loving workers: we don’t know the psychological profile of the miners, but it would be outrageous to claim that the courageous rescuers, three of whom died on the job, simply had a higher tolerance for risk. Not knowing the difference between getting a kick out of risk and putting it on the line for others is typical of utility theory.

3. Fair distribution of risk: dubious. The tipoff is that three of the six miners now buried in the mountain were Mexican nationals; my guess is that they were not being offered whatever plum jobs were available in rural Utah.

Would it be too much to ask for an economics that, instead of spinning fantasies, asked practical questions like, what kind of labor market structures lead to this devaluing of human life? How can competition be prevented from leading to a race to the bottom (OK, not the best metaphor for coal mining) in safety practices? What forms of regulation can most effectively achieve the essential goals of public health and social justice?