The Unbroken Window

I strongly recommend reading Alex Tabarrok’s short e-Book Launching the Innovation Renaissance, which I will blog on shortly. Professor Tabarrok blogs it a little today, here is the entire thing:

We like to think of ourselves as an innovation nation but our government is a warfare-welfare state. To build an economy for the 21st century we need to increase the rate of innovation and to do that we need to put innovation at the center of our national vision. Innovation, however, is not a priority of our massive federal government.

Nearly two-thirds of the U.S. federal budget, $2.2 trillion annually, is spent on just the four biggest warfare and welfare programs, Medicaid, Medicare, Defense and Social Security. In contrast the National Institutes of Health, which funds medical research, spends $31 billion annually, and the National Science Foundation spends just $7 billion.

That’s me writing at The Atlantic drawing on Launching the Innovation Renaissance. Here is one more bit:

Our ancestors were bold and industrious–they built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build that system today. Could we build the Hoover Dam today? We have the technology but do we have the will? Unfortunately, we cannot rely on the infrastructure of our past to travel to our future. Airports, an electricity smart grid that doesn’t throw millions into the dark every few years, ubiquitous Wi-Fi — these are among the important infrastructures of the 21st century, and they are caught in the regulatory thicket.

Putting innovation at the center of the national vision is not simply about spending more, it’s about how we approach all problems. Read the whole thing for more discussion of regulation and other issues.

Here is the link to his book on Amazon. Now, if we are going to have a government, I certainly would advocate one that is more in line with what Tabarrok implies. I would strongly, and I mean strongly, caution everyone that the most likely scenario that will come out of the work of Tabarrok is that the big tall bars on the right side of that chart will remain the same, and political and interest group pressure will be to ramp up the bars on the left – with no true reforms of the tax code, welfare state, or the educational or health systems. I put my odds at any meaningful increase in innovation funding at 10%, and I put my odds at doing it right at 0.1%.

That’s my name for the theory that proponents of natural capital accounting use about how economics works. In a recent paper discussing the value of natural environmental amenities and how free-markets are totally predisposed to reducing these stocks to zero over time, the following argument come up twice. It is that when market priced goods have value, such as a tractor, a price is paid for them commensurate with the stream of benefits that they generate. As a result, there is no risk that we’ll deplete the supply of tractors any time soon, among other implications.

When it comes to so called “natural capital” the same is not true. God put honeybees on this earth. One reason they are on this earth is to pollinate the billions of dollars worth of crops that are grown world-wide and that are vital for our continued existence. But those bees are part of the natural capital stock. And they get paid squat. After all, it is said, that the bees never leave an invoice with the almond growers in California! Nor do countries in South America pay the Amazon rain forest each year for the water that it generates to sustain their agriculture.

Is this right? Do such valuable natural assets not receive payment for their services (and by extension are doomed to exploitation and demise)? Well, not exactly. Imagine a simple world where there are two states. In each state the weather conditions are identical, the climate is suitable for growing the same crops, the soil and landscapes are identical and the workforces are identical. The only thing different is that in one state there are huge swarms of honeybees in existence and in the other state honeybees are afraid to enter because of an abundance of kingbirds that like to eat them. Now, you are a farmer hoping to plant 500 acres of apple trees. In which place would you be likely to purchase your land? In the place where the natural capital stock exists or in the place where it does not? All else equal, you will of course purchase the land in the place with the bees. In equilibrium in this simple world you’d see the price of the bee-infested land be higher than the other property. So while the bees themselves are not sending you a bill, someone is surely sending it to you – and it was whomever was the rightful owner of that land before it was commonly known that the bees were useful.

That the marginal cost of accessing God’s bees is zero is not changed by this account, and thus there may be reasons to suspect that the bees themselves may not be treated well, but it is certainly not the case that when we have market forces operating in a relatively open economy that natural assets are not valued or priced in some way. And as for whether the bees are destined to be doomed (or the gold or tin or clean water, etc.) I’ll leave it to your imagination for now.

My former governor Deval Patrick, in comments in response to Bruins’ goalie Tim Thomas’ refusal to see President Obama, says that “”It just feels like we are losing in this country basic courtesy and grace.” Gee, how to respond to this … I think if Mr. Patrick revisited our history he might be astonished at how much courtesy and grace there actually is today. The election of 1800 was probably the nastiest ever. Federal armies used to be sent to quell we peasants’ frustrations about early taxes. And so it goes.

As far as what Patrick and Scott Brown say in the piece regarding following the “rules” by standing when the President enters and otherwise showing deference for the position, I’ll just say phooey. I’ll let Herbert Spencer cast some aspersions for me:

Of the political superstitions lately alluded to, none is so universally diffused as the notion that majorities are omnipotent. Under the impression that the preservation of order will ever require power to be wielded by some party, the moral sense of our time feels that such power cannot rightly be conferred on any but the largest moiety of society. It interprets literally the saying that “the voice of the people is the voice of God,” and transferring to the one the sacredness attached to the other, it concludes that from the will of the people, that is of the majority, there can be no appeal. Yet is this belief entirely erroneous.

Suppose, for the sake of argument, that, struck by some Malthusian panic, a legislature duly representing public opinion were to enact that all children born during the next ten years should be drowned. Does any one think such an enactment would be warrantable? If not, there is evidently a limit to the power of a majority. Suppose, again, that of two races living together — Celts and Saxons, for example — the most numerous determined to make the others their slaves. Would the authority of the greatest number be in such case valid? If not, there is something to which its authority must be subordinate. Suppose, once more, that all men having incomes under 50 pounds a year were to resolve upon reducing every income above that amount to their own standard, and appropriating the excess for public purposes. Could their resolution be justified? If not, it must be a third time confessed that there is a law to which the popular voice must defer. What, then, is that law, if not the law of pure equity — the law of equal freedom? These restraints, which all would put to the will of the majority, are exactly the restraints set up by that law. We deny the right of a majority to murder, to enslave, or to rob, simply because murder, enslaving, and robbery are violations of that law — violations too gross to be overlooked. But if great violations of it are wrong, so also are smaller ones. If the will of the many cannot supersede the first principle of morality in these cases, neither can it in any. So that, however insignificant the minority, and however trifling the proposed trespass against their rights, no such trespass is permissible.

When we have made our constitution purely democratic, thinks to himself the earnest reformer, we shall have brought government into harmony with absolute justice. Such a faith, though perhaps needful for this age, is a very erroneous one. By no process can coercion be made equitable. The freest form of government is only the least objectional form. The rule of the many by the few we call tyranny: the rule of the few by the many is tyranny also; only of a less intense kind. “You shall do as we will, and not as you will,” is in either case the declaration: and if the hundred make it to the ninety-nine, instead of the ninety-nine to the hundred, it is only a fraction less immoral. Of two such parties, whichever fulfils this declaration necessarily breaks the law of equal freedom: the only difference being that by the one it is broken in the persons of ninety-nine, whilst by the other it is broken in the persons of a hundred. And the merit of the democratic form of government consists solely in this, that it trespasses against the smallest number.

The very existence of majorities and minorities is indicative of an immoral state. The man whose character harmonizes with the moral law, we found to be one who can obtain complete happiness without diminishing the happiness of his fellows. But the enactment of public arrangements by vote implies a society consisting of men otherwise constituted — implies that the desires of some cannot be satisfied without sacrificing the desires of others — implies that in the pursuit of their happiness the majority inflict a certain amount of unhappiness on the minority — implies, therefore, organic immorality. Thus, from another point of view, we again perceive that even in its most equitable form it is impossible for government to dissociate itself from evil; and further, that unless the right to ignore the state is recognized, its acts must be essentially criminal.

In case you were wondering, here are seven ways to poop in the woods.

I was recently pointed toward the following report on The Economics of Ecosystems and Biodiversity (TEEB). In the report I found that the authors claim that the amount of Natural Capital on the entire planet is somewhere between $2 trillion and $4 trillion. For a good description of natural capital from a good economist, see Nordhaus’s discussions of the topic. Roughly speaking you can think of natural capital as the stock of the earth’s resources (actually the services that flow from them) that can be used by human beings including obvious things like raw materials and less obvious ones like pollution sinks.

Once you put it in those terms, you should be utterly astounded by how small this stock seems to be. For example, the total net worth of households and nonprofits in the US is roughly $60 trillion.

Julian Simon famously called people the ultimate resource. Can we crudely estimate the value of this “natural capital stock” (which happily does not get depleted with additional “use”)? Sure. The US GDP is about $15 trillion right now. Based on the national income and product accounts, it appears that about two-thirds of this value is generated by labor (i.e. labor’s share of income). So, workers generate and receive about $10 trillion per year of income in the United States alone. In other words, American workers produce a flow of income that is 2.5 times the stock of the entire world’s natural ones. If you want to consider people in the US a permanently long-lived amorphous blob of an asset, and assume long term interest rates of around 3%, then the value of this human capital stock is about one-third of a quadrillion dollars. That’s for the US alone.

Is there a deeper lesson in the data? Perhaps not. It illustrates to us the point economists make regularly. A pile of dirt (which is nothing more than tightly packed chemicals) is just a pile of dirt. It takes a human mind to figure out it can turn itself into a soda can, pottery, or even the beginning of a new, truly innovative and green car engine.

OK, so I didn’t watch the SOTU last night, I listened to it in my car. Then I listened to Governor Daniels’ response. I promised not to comment, so I’ll outsource one part that I would have posted on – I almost punched a hole in my car window when I heard it. The second part is a fantastic rhetorical play by Daniels.

(1) President Obama made some pretty generous claims about how good for the energy economy he has been, particularly when it came to oil and gas production. I cannot believe he actually tried to take credit for this boom, and right on the heels of the Keystone fiasco. Here is the relevant detail. Note to my students: the IER will be coming to campus for an event in March.

(2) Governor Daniels used a term I am mad at myself for not adopting years ago: “trickle-down government.” I couldn’t imagine a more apt ridicule.

A student came to me the other day and mentioned, sort of out of the blue, that private agencies should not deliver water to cities, and that rural and suburban water ought not be priced because it would cause the poor to suffer. I did not push the issue. But this person, if asked what model of the world he was operating under, would very likely not have been able to offer one. And that is a problem, as we’ll elaborate on in the future. But he certainly was operating under a model – and I wonder how he’d defend it. The simple model? That the elasticity of demand for water is zero. If that were indeed true, then when private agencies charged market prices for water that reflected its true social cost, we’d only see transfers from customers to firms – and no economizing on water use at all. But we know that perfectly inelastic demand curves cannot exist, and we can also ask our student what conditions would have to prevail in order to generate such a curve in the water market. And he’d have seen that those conditions are extraordinarily unlikely.

So, while I am not a huge fan of fancy, technocractic model building, that does not mean I am not a strong supporter of logical and systematic explanations of behavior. To say that you can dispassionately look at facts, examine history or understand the social, political and cultural influences on people and that means you do not need an economic model to describe behavior is implausible. The point is, when making such judgments you are still using an economic model, it’s just that you are not articulating what it is. I have taken this to heart lately. It doesn’t make sense trying to reason with people, so what I do is simply ask questions about how they came to the positions they are taking.

First the Obama Administration kills the Keystone pipeline. No need to comment on it here – if environmentalists think that preventing this pipeline from being built has any impact on carbon emissions or pollution, or somehow “saves” the midwestern water reservoirs they are badly mistaken. Now, I just learned that the Obama Justice Department is insanely challenging a recent appeals court ruling that would have allowed bone marrow donors (now really just blood donors) to be compensated. The “no money” quote:

The donor registry said its experience is that “a donor system that relies on the human desire to help others is far superior to one that focuses on self-gain.”

Of course, some of us disagree on what the term “superior” means.

Here’s a decent research topic for interested students: find out how large the take-up rates for various welfare programs are by different demographic groups. Why do I ask? My sense is that a decent (apx 20%) share of the users of food-stamps, Medicaid and other public welfare programs are not from the class of needy folks that many of us would imagine draw on these programs.

Ask yourselves – when you learn that something like 1/3 of our students will graduate into full-time permanent jobs, while the rest volunteer, attend graduate school, work in low-paying non-profits, do Teach for America and other similar endeavors, do you think that none take advantage of these public programs. How do you think the voting public would respond to finding out that after enrolling in an elite college which spends $70,000 per year to educate students, that a non-negligible number of graduates end up doing this? How would the voting public feel if they knew this was a regularity for students who were obtaining generous financial aid from state and federal sources too?

I speak from having some pretty good inside information on usage. Would any readers view this as a problem? I ask because I find that I get seriously serious opposition to negative income tax-like proposals that I would prefer to see replace the entire welfare state.

That’s really what green energy religion has become. And now the Wall Street Journal is peddling it:

For instance, the Production Tax Credit, first passed in 1992, has generated massive amounts of new growth in the wind industry, a sector employing 85,000 Americans. But each time Congress allows this credit to expire after a mere two years, investment grinds to a halt, giving our global competitors the advantage in innovation, manufacturing and installation. The Production Tax Credit is set to expire again this year.

Now, anyone, and I mean anyone, who has taken basic economics should have their BS meter going insane. So, what these guys are telling is that after 20 years of subsidies and credits the industry can still not stand on its own? That it will grind to a halt if the subsidies stop? And by the way, I propose a new constitutional amendment: if someone wants to demagogue the income tax deductions and credits that we all get as “tax expenditures” (e.g. the government allowing us to keep some of our money, even if part of a nutty tax system is now considered an expenditure by the intelligentsia) then it should be required that all such items be called tax expenditures. So, what Congress is considering is reducing these brutal and costly tax expenditures by letting the credit expire.

A little earlier in the piece we read this:

Expanding these clean-energy investments is good economics. Several technologies, such as solar power, are already cost-competitive with fossil fuels, even without considering the health and other costs of pollution.

We have a phrase for that too. If it ain’t holy sh*t it is certainly of the escalating stock market variety. I have studied and seen dozens and dozens and dozens of papers on the cost of renewables, and solar ain’t anywhere cost competitive. Wind ain’t. None of it ain’t. And yes, I’m using ain’t on purpose. Seems kinda fitting to me.

OK, rant over, now back to our regularly scheduled boring programming.

Update #1:Yes, I know the State of the Union is being delivered tomorrow. I am NOT going to allow myself to watch it, comment on it, comment on anyone else’s comments on it. Nothing. Nada.

Update #2: I agree with Bret Stephens but even moreso. The Republican party should be embarrassed by what they are fielding. If I cared about the Republicans, I still think I might hope for an Obama victory in the fall anyway – maybe that is their strategy.