Do not give carbon credits away!

Slowly, the idea of carbon credits is making its way into the minds of legislators. Market based solutions to pollution control are much better than regulation. However, there appears to be a risk than the initial allocation of carbon credits would simply be given to current polluters. This must be resisted.

Indeed, this has several adverse consequences: 1) it rewards polluters, 2) it gives incentives to pollute more ahead of the implementation, in order to obtain more credits, 3) the revenue from credit sales would be lost. The Southern Alliance for Clean Energy is currently inviting economists to sign a statement along those lines. I signed it.

Where are the Brazilian economists?

It has always struck me how large the diaspora of Argentinian economists is, especially in Macroeconomics. Speaking to them, I learned that a lot of them where motivated to study Economics by observing and living the chronic problems of Argentina. But then, why do they not return to fix this country? The typical answer is that the economy is beyond repair, and thus they stay in North America or Europe.

What about the Brazilians, then? Brazil also suffers from chronic problems, it is even larger, so it has the potential to provide many motivated economists. Yet, I rarely meet one, and it is not becasue they would all return home after graduation: there are very few Brazilian students in graduate programs.

So, where are they?

The Frankenstein Veto is as bad as is sounds

Local laws have sometimes original quirks that make the study of institutions interesting, at times even funny. But not all are cute, and I recently came across a particularly vicious one, the aptly called Frankenstein Veto in Wisconsin.

This allows the State Governor to veto "in whole or in part" appropriation bills passed by the local legislature. It turns out that "in whole or in part" is not interpreted like elsewhere as a line-item veto (which has its own disadvantages), rather it allows the governor to strike out words and numbers selectively, effectively enabling him to completely change the meaning of a bill. For example, the last budget was modified from:

[...] the secretary of administration shall lapse or transfer from the general fund to the unencumbered balances of appropriations of executive branch state agencies, other than sum sufficient appropriations and appropriations of federal revenues, an amount equal to $69,000,000 during the 2007-09 fiscal biennium and $69,000,000 during the 2009-11 fiscal biennium [...]

through selective deletions to:

[...] the secretary of administration shall lapse or transfer from the general fund to the unencumbered balances of appropriations of executive branch state agencies, other than sum sufficient appropriations and appropriations of federal revenues, an amount equal to $270,000,000 [...]

So, essentially, the Governor converted a $69,000,000 cut in the State budget, which was negotiated in the legislature, into a $270,000,000 cut by cutting words and using selected digits from 2007-09 to carve a new number. Had we lived in a different millenum, or where we following a different calendar, the cut would have been different. This is complete nonsense, as clearly the governor's decision do not follow an economic arguments.

Apparently, it was even worse before a recent amendment to the constitution, as the governor could form new words out of parts of old ones, and even perform modifications across sentences. My introductory sentence could therefore be modified into:

Local laws have sometimes original quirs that make the study of institutions interesting, at times even funny. But not all are cute, and I recently came across a particularly vicious one, the aptly called Frankenstein Veto in Wisconsin.

Visibly, I am not as well trained as Wisconsin governors.

On the optimal size of town government

How big should a town be? Should it merge with its suburbs? Should neighboring villages agglomerate? What is the best outcome for inhabitants?

Large towns may count on some economies of scale, say in policing and in task that require a substantial fix cost (administration, sports facilities, schools). However, they are more likely to have bloated bureaucracies, as voters have less influence to keep them in check.

Small towns often have the tendency to free ride on larger neighbors for facilities. This is especially true for suburbs, leading to the problematic situations of the core city providing services but be sucked dry of people moving for lower taxes or better taxes. This situation thus calls for a forced merger of suburbs with the core city. How much to merge needs to take into account the administrative inefficiencies mentioned above.

Instead of mergers, a two layered systems can be put in place, where towns remain largely independent but a still forced to participate in some regional structure for some tasks, like public transportation, police, environment and zoning. This avoids the free riding, allows to exploit economies of scale where they are and still leaves local control of most of the budgets.

Why do I write about this? Observing the huge income and service disparities within metropolitan areas in the United States, one has to wonder how such ghettoization could happen. People vote with their feet, and in most cases they did this by fleeing to the suburbs, where lower taxes and better demographics reinforced each other and attracted the good risks. This is only possible if the remaining poor city core is small enough. By agglomeration, the city core becomes less poor, and the attraction towards the periphery lessens. Merging is the only chance for the American city to become attractive again.

Argentina: How not to handle food price increases

Argentina is blessed with a very rich agriculture. A century ago, its standard of living was among the highest of the world thanks to this sector. Nowadays, the fiscal health of the country relies crucially on export taxes levied on agricultural products, and we all know how the fiscal health of this country is important. All of this is getting undone right now, with a poor handling by the government of food price increases.

First some context. Soya prices have, much like other food prices, increased significantly over the last years, in a large part due large demand for cattle feed in Europe and Asia. What would any sane grower do in such a situation? Grow more soya. Within a few years, the land dedicated to soya in Argentina went fron 5 million to 15 million acres, bringing a lot of income to growers and to the state, which levies a 35% export tax. The substitution means, however, that other food staples are now much less grown, and the price of, say, tomatoes and potatoes has significantly increased.

Consumers obviously complain when prices go up, so the government tries to find a way to increase the supply of food for local consumption. How? By increasing the export tax to 44%. As everything is already planted, this changes nothing to production, increases further world soya prices, leads growers to demonstrate and shut down roads, to the point of generating serious supply problems across Argentina and increasing prices further.

If the price of tomatoes is high, let the market do its job and adjust the production for next season. Fluctuations in prices may be higher than optimal (à la cobweb model), but with good information, growers can predict them and plan accordingly (that is what agricultural economics departments are for, right?).

Where are the female economists?

The RePEc blog laments how few women register for its services. I would like to take this opportunity to ask where the women are disappearing in the profession. According to the quoted CSWEP report, 34.5% of graduating female students are female, but only 8.1% of full professors are women. There is considerable leakage.

These numbers need some qualifications, though. First, they pertain to PhD granting institutions in the US. Thus, the missing women may have moved to non-PhD granting universities along their careers, but they are visibly doing this more than men. The figures for liberal arts colleges are slightly better, with 20.5%. Second, these numbers do not reflect a steady state, as full professors are from a generation where women were less numerous in graduate programs.

But there is still no doubt that the ranks of women are thinning faster than for men throughout careers. Why? I doubt expectations are higher for women, but it is true that many have ambitions more tilted towards family than men. For example, a female graduate student once volunteered to me that her career goal was to teach for a few years, then take care of her family. You would not hear that from a male student.

There may also be some truth to the Larry Summers conjecture: men and women have the same mean ability, but the variance is larger for men. Thus there is a larger proportion of them as you move to the top (or the bottom). This would certainly be consistent with the data, but this does not necessarily prove the conjecture.

Finally, many departments are under a lot of pressure to hire women. The average quality of a female hire has to be lower under such circumstances, and it should not surprise fewer reach tenure and promotion.

The new (Canadian) Liberal tax plan

The Liberal Party of Canada, official opposition, just presented its new tax reform, entitled the Green Shift. It is a very pleasant read, not the least because there is a lot of sound Economics in it. It also addresses a lot of the issues discussed on this blog.

Here is a summary of the executive summary: to address environmental issues and improve incentives to work, the tax system is shifted away from income towards pollution. Carbon emissions are taxed, at increasing rates over four years, and tax rates on household and corporate income are reduced in parallel to render this reform tax neutral. As we advocated before, we need to truly tax "sins" at the appropriate level so that user take correctly into account the externalities they exert on others. The revenue can then be used to remove taxation on activities that are good, like earning an income, hiring people, etc.

A very good read, with only little political pandering. Too bad the Liberals are currently in the opposition.

Becoming President of the US: a good face is enough

It is well known that in a political with two candidates, they become indistinguishable. Irrelevant matters then become important. Thus, good teeth and big hair are thought to be essential for a presidential run in the US. It turns out there is more truth to this statement then one would think.

Armstrong, Green, Jones and Wright perform an interesting experiment. Looking for a population that would not recognize candidates, they went to Australia, New Zealand and ... Oklahoma. Students were asked to rank candidates by competence from photographs, discarding those they recognized. The winners were Clinton and Obama for the Democrats, and McCain for the Republicans. Not bad for an experiments conducted in the early Summer 2007, when McCain was just #4 in the polls...

So much for the usefulness of the platforms and endless debates.

No real estate tax breaks for seniors

Many US towns have programs that give tax breaks to seniors when they pay their real estate tax. Many seniors have little income, and those taxes make a substantial portion of their income. However, in most circumstances, they should not be taking these breaks.

Indeed, they mostly likely own a mortgage free home. In other words, they are sitting on a substantial amount of equity, something that younger households do not have. They need not pay down their mortgage. And they typically do not have to put children in college.

The problem seniors have is a problem is lack of liquidity, not lack of funds. Instead of forgiving part of the tax, towns should be putting a lien on the property to the amount of the forgiven tax. Seniors should also explore reverse mortgages, which allow to cash in on the savings they have made through their house. Why die leaving an unexploited fortune?

Syndicating this blog?

I just receive a message, also sent to 50 other bloggers, from Nouriel Roubini to become a contributor to RGE Monitor. His team would pick my post from this blog, vet them, and publish them on his blog, with attribution.

What is in it for me? A link back to my blog, a free subscription to the fee-based part of the RGE Monitor (valued at a whooping US$5000 a year), publicizing Economic Logic on the blog, and a "bio page" with a picture.

Note that there are already plenty of blog agregators out there, and anybody is free to create a blogroll like the one I have in the sidebar... I do not particularly value a subscription to something I was never tempted to read. A blog is to a great extend done for the readers, so I'll let my readers decide whether I should participate. I have added a poll in the side bar to that effect.

Energy policy: taxing or subsidizing?

How should one encourage to use of alternative energy sources? There are essentially two market based means: subsidizing the good sources, and taxing the bad ones. So what would be optimal to do?

Essentially, the goal is to create a price wedge between good and bad, so that consumers are encouraged to choose more frequently good energy sources. So at first sight, taxing or subsidizing does not make a difference. However, subsidizing has several drawbacks. First, as the average price of energy decreases, the overall use of energy increases, which may be an unintended consequence. Second, the subsidy must be financed with some other revenue, which is typically through some distortionary taxation that generates a deadweight loss.

Thus: tax fossil fuels, do not subsidize renewable energies. Use the revenue to offset distortionary taxes.