Wednesday, March 4, 2015

Are California Droughts Caused By Global Warming? Maybe Not Because We Have Seen Temperature Spikes Before

See California Outliers by Patrick J. Michaels of Cato.
"Today’s Washington Post story by Darryl Fears on California drought frequency in a warming world compelled me to take a look at the Golden State’s temperature history. In my 2011 book Climate Coup,  I showed that the alarm over California warming was rather odd, as most of the changes had taken place thirty years previously.  
That was then, and this is now. But what about history?

Here are California temperatures, for the last 38 years, beginning in 1976.  That’s the year of “The Great Pacific Climate Shift,” a sudden and lasting change in both the surface and oceanic circulation patterns.  2014 is by far the warmest year in the California record, as is obvious:

Several things stand out. There’s obviously no warming through 2011 (when Climate Coup was published).  But the pop between 2013 and 2014 is pretty impressive, no?

Fast-backward to 1934. J.B. Kincer had just published the first systematic temperature analysis from locations around the planet, in the 1933 Monthly Weather Review paper titled “Is our Climate Changing?” The paper clearly demonstrated global warming, and people were starting to talk about the influence of increasing atmospheric carbon dioxide on surface temperature. The only thing that was different back then is that we didn’t have computers to simulate what should have been happening. But if we did, I suspect that Darryl Fears’ progenitors would have written a pretty similar story.

Why? Take a look at the 38-year period (the same length as in the above figure) 1896-1934:


What’s different here? Nothing. Also worth noting is the difference in mean temperature between the two periods, providing very strong evidence for the step-change in California temperature that occurred with the Great Pacific Climate Shift in 1976.

Armed with a computer model in 1935, one could probably have written the exact same story 80 years ago, prompted by the very similar outlier temperatures of 1934 and 2014."

Krugman's Priceless Economics (on the minimum wage)

From David Henderson of EconLog.
"As regular readers of my posts on Econlog know, although I am often critical of Paul Krugman, I defend him when he's doing good economics (here, for example). His New York Times column yesterday, though, "Walmart's Visible Hand," essentially throws out basic price theory. Thus the title of this post.

The context is that Walmart has announced that it will raise wages for 500,000 employees. He uses this fact to reach this conclusion, which he states up front:

Second, and arguably far more important, is what Walmart's move tells us -- namely, that low wages are a political choice, and we can and should choose differently.
Already, that's an interesting statement for an economist to make: the fact that a private employer raises wages tells us the "low wages are a political choice." No, it doesn't tell us that. It tells us simply that a private employer raised wages. To establish that Walmart raised wages for political reasons, Krugman would have to make that case. Instead he moves on because he has bigger fish to fry. 
Krugman challenges the idea that wages are set by supply and demand. After stating that conservatives believe this, he admits (he even uses the word "admit") that so do many economists.
But he doesn't think that's true. He writes:

Specifically, this view [that wages are set by supply and demand] implies that any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it's claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on. Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect. 
But labor economists have long questioned this view. Soylent Green -- I mean, the labor force -- is people. And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

Actually, this view not imply that "any attempt to push up wages will either fail or have bad consequences." We economists who believe that wages are set by supply and demand also believe that if the supply falls (shifts left on a graph of supply and demand) or if demand increases (shifts right on a graph of supply and demand), then an increase in wages will have good consequences. And that, after all, is the context for Krugman's article: not a government attempt to raise wages but an employer's decision to do so.

Also, wages are like the price of butter. This has nothing to do with the fact that the workers are people. Remember that the workers are selling their services--their hours--not themselves.
Then we get where he really wants to go: advocating higher minimum wages and more bargaining power (although he does not name the specific changes in law that he wants) for labor unions.
First, on minimum wages, Krugman, as is his wont, emphasizes only one part of the literature, the part that finds "little or no negative effect on employment" and treats that as an "overwhelming conclusion" of the so-called "natural experiments" with the minimum wage, rather than as the conclusion of one part of the natural experiment literature. 

Second, on unions, Krugman argues that the "sharp increase in unionization" after World War II reduced income disparities. But here's where he is most "priceless." The bottom line of the literature on the effects of unions and wages, most of the literature coming from the 1950s and 1960s, and much of it summarized by the "dean of labor economics," H. Gregg Lewis of the University of Chicago, was that unionization in the one quarter of the labor force that was unionized raised wages for those workers by about 10 to 15%. But, of course, with higher wages, the amount of labor demanded fell. Where did these workers go? They went to the non-union sector. That shifted out the supply of labor there. So wages for the 75% of workers who were not unionized were 3 to 4% lower. The only way this would reduce income inequality is if the 25% of the workers who were in unions would otherwise have had wages below the wages of the 75% not in unions. Unfortunately, many of the non-union workers had lower wages to begin with. So the effect of unions on income inequality was, at best, not clear.

Krugman concludes:

What this means, in turn, is that engineering a significant pay raise for tens of millions of Americans would almost surely be much easier than conventional wisdom suggests. Raise minimum wages by a substantial amount; make it easier for workers to organize, increasing their bargaining power; direct monetary and fiscal policy toward full employment, as opposed to keeping the economy depressed out of fear that we'll suddenly turn into Weimar Germany. It's not a hard list to implement -- and if we did these things we could make major strides back toward the kind of society most of us want to live in.

Tuesday, March 3, 2015

Some Research Supports School Vouchers

See Ignoring the Evidence Doesn’t Make It Disappear by Jason Bedrick of Cato. 
"If a study shows the benefits of school choice, but you don’t read it, does it really exist? 
Apparently not, at least according to Americans United for Separation of Church and State (AU), an organization ideologically committed to opposing school choice. In a blog post today, AU makes this demonstrably false claim:
For example, voucher boosters often assert that students who receive vouch­ers excel academically in private schools. In fact, no objective study has shown this to be the case. Several studies show that voucher students perform the same or worse academically as their peers in public schools.
In reality, there have been 13 randomized controlled gold standard studies of the effect of school choice policies, all but one of which found a statistically significant positive impact. One study found no discernible impact and none found any harm. For AU’s benefit, here is a sampling:
  • William G. Howell and Paul E. Peterson, The Education Gap: Vouchers and Urban Schools, Brookings Institution, 2002, revised 2006. – After two years, African-American voucher students had combined reading and math scores 6.5 percentile points higher than the control group.
  • Jay P. Greene, “Vouchers in Charlotte,” Education Next, Summer 2001. – After one year, voucher students had combined reading and math scores 6 percentile points higher than the control group.
  • Jay P. Greene, Paul E. Peterson, and Jiangtao Du, “School Choice in Milwaukee: A Randomized Experiment,” in Learning From School Choice, ed. Paul Peterson and Bryan Hassel, Brookings Institution, 1998, pp. 335-56. – After four years, voucher students had reading scores 6 Normal Curve Equivalent (NCE) points higher than the control group, and math scores 11 points higher. NCE points are similar to percentile points.
None of these findings are earth shattering, but each study found a statistically significant positive outcome overall or for certain subgroups, particularly low-income African-Americans who are currently the most choice-deprived. Moreover, these studies were conducted by experienced researchers at some of the most widely respected academic and research institutions in the world, including Harvard, Princeton, the University of Chicago, and the Brookings Institution.
In another blog post, AU does point to the one gold standard study that found a null result, a reexamination of the Peterson/Howell study of New York’s private scholarship program. However, AU never mentions that this reexamination employed unorthodox methods and classifications, or that a further reexamination of the data by other researchers at Harvard and the Cleveland Clinic Foundation confirmed the initial findings.

The AU staff can continue to close their eyes and stick their fingers in their ears, but they should stop making the false assertion that there is “no evidence” that students benefit from school choice."

1972 Chevy Vega vs. 2015 Toyota Corolla: How do they compare?

From Mark Perry.
"Don Boudreaux posted recently at Cafe Hayek about the first episode of “The Price is Right” in September of 1972 (watch full episode below). In that first episode, one of the prizes was a 1972 Chevy Vega (pictured above), which sold then for $2,746. At the average hourly wage in 1972 of $3.90, it would have taken the average American slightly more than 700 hours of work (or 17.60 weeks and about 4.4 months) to earn enough income (pre-tax) to buy a 1972 Chevy Vega. Don then calculates that a 2015 Toyota Corolla (pictured above), with a retail price today of $16,950, would require about 815 hours of work at today’s average hourly wage of $20.80. Based on that analysis, the “time cost” today of a 2015 Toyota Corolla is 15.75% more expensive than the 1972 Chevy Vega. Don then explains why he thinks most consumers would still select today’s Carolla over yesteryear’s Vega, even though the “time cost” of the Carolla is higher:
I’m confident that lots of people – I believe the great majority – would choose the 2015 Corolla, even though its work-time price is higher than that of the Vega. The reason is that the 2015 Corolla is a luxurious, marvel-filled vehicle compared to the 1972 Vega.  The 2015 Corolla is also much safer than was the 1972 Vega.
Here are some additional reasons that  would support choosing today’s Corolla over a 1972 Chevy Vega, based partly on a 2013 CD post “5 charts showing there’s never been a better time for average Americans to own, operate a car; the ‘good old days’ are now.”

1. Better fuel economy. In 1972, the average fuel economy was only 13.1 miles per gallon; today’s it’s almost double that at 24.2 miles per gallon (MPG) based on EPA data available here. If you drive 12,000 miles per year, the average car today at 24.2 MPG would only use 496 gallons of gas annually, compared to the 916 gallons per year at 13.1 MPG for a 1972 model car. Over a year, that increased fuel economy of today’s cars would save 420 gallons of gas compared to a 1972 model like the Vega, which would translate into annual savings of more than $1,000 at today’s gas price of $2.44 per gallon.

Update: A commenter claims that the Chevy Vega’s fuel economy was better than the 13.1 MPG average for that era. But then so is the Toyota Corolla’s fuel economy (32 MPG) better than the average car today by 32%. The comparison above is for the average fuel economy of an average car in 1972 (13.1 MPG) vs. an average car today (24.2 MPG).

2. Longer life/Increased durability. In the early 1970s, the average age of the passenger cars owned by Americans was only about 5.2 years; today’s it’s 11.4 years, the highest in history. Today’s cars are more dependable, require fewer repairs, and last for many years longer than the cars of 40 years ago.
3. Cheaper financing. To finance the purchase of the 1972 Chevy Vega would have required a car loan with an interest rate of more than 10%. And that was low compared to the peak a decade later when the interest rate for auto financing topped 17% in 1981. In fact, during the entire 20-year period from the early 1970s to the early 1990s, the interest rate on car loans was in double-digits. In contrast, interest rates on car loans today are at the lowest level in at least 50 years, maybe the lowest ever at about 4% (with some banks offering rates as low as 2.5%). Over the life of a 4-year car loan to finance the purchase of today’s $17,000 Corolla with a 20% down payment, a loan at today’s interest rate of 4% would save a borrower more than $1,800 compared to the 10% interest rate that prevailed in 1972.

4. Increased safety. As Don pointed out, today’s cars are much safer than the cars in the early 1970s because of standard safety features today like air bags, high-strength steel in combination with the strategic use of lighter materials that dissipate and redirect crash forces, anti-lock brakes, electronic stability control, and tire pressure monitoring systems. One empirical measure of driving safety is the National Highway Traffic Safety Administration’s quarterly reporting of the “traffic fatality rate per 100 million vehicle miles of travel (VMT).” In the early 1970s, there were more than 4 traffic fatalities per 100 million VMT, and that figure has gradually decreased over time and reached an all-time historical low rate of only 1.02 deaths per 100 million VMT in 2014. By that measure, drivers of today’s cars are 4 times less likely to be involved in a fatal traffic accident than in the early 1970s.

5. More options. Today’s cars include options that are now often standard like power steering, air conditioning, power brakes, power windows, rear window defroster, power adjustable side view mirrors, remote key-less entry, CD players, Bluetooth, navigation systems, airbags, automatic transmission, etc. In 1972, many of those options either weren’t even available (CD players, navigation, airbags) or were available only at a very steep price as a non-standard option, like air conditioning for example.

Bottom Line: Adjusted for quality, durability, safety, features/options, fuel economy, and financing costs, today’s vehicles like a 2015 Toyota Corolla are far superior to cars from the early 1970s like the 1972 Chevy Vega featured in the first episode of The Price is Right in 1972 (watch it below). And relative to wages, today’s cars are much more affordable on average than models from the early 1970s, despite the difference in “time cost” between the Vega and Corolla.

One way to capture that increased affordability of new vehicles is displayed in the chart above which compares the increase in average hourly wages since 1972 (+428%) to the increase in the CPI for new vehicles (adjusted for quality improvements), which has increased by only 167% over the last 42 years, and has been flat for the last 20 years. As I concluded in my previous post, when it comes to owning and operating a vehicle, Americans, including the middle class and low-income groups, have never had it so good. The cars we buy today need fewer repairs and last longer than ever before, they’re more fuel efficient than ever before, our cars and highways are safer than ever before, the financing costs for cars are the lowest in at least 50 years, and the quality-adjusted cost of purchasing a new car has remained almost flat for 20 years while average wages have almost doubled. Despite a lower “time cost” for the 1972 Chevy Vega, I agree with Don that any rational consumer would select today’s Toyota Corolla – the increased fuel economy, lower financing costs, superior quality and durability, increased safety and comfort, superior features would all more than make up for a slightly higher “time cost.”"

Monday, March 2, 2015

The Delusions of Venezuela and Argentina

From Megan McArdle.
"For about a decade, Venezuela under Hugo Chavez and, to a lesser extent, Argentina under the Kirchners were popular models for leftists seeking an alternative to the neoliberal consensus. The Chavez program of dramatically expanding social spending and the Kirchner refusal to kowtow to foreign investors finally offered alternatives you could point to when the neoliberals started chattering about market confidence and budget balances.

Those neoliberals frequently pointed out the problems with those policies. Chavez and his successor, Nicolas Maduro, diverted oil-investment funds into social spending, causing Venezuela's oil production to fall; the only thing propping up the economy was the rapidly rising price of oil.

Argentina cut itself off from world capital markets, and over the years it had to resort to increasingly desperate fiscal strategies; the only thing propping up its economy was a big commodities boom, driven by the same Chinese demand that was causing oil prices to soar. But these arguments failed to convince those who were gaga for Chavismo; all that free-market cant was just theory, and the Chavez acolytes could point to real, tangible advances in reducing poverty and boosting economic growth.

All that ended a few years ago, of course. Both countries are in recession and suffering import shortages, including tampons in Argentina and condoms in Venezuela. Latin America's social progress has stopped, thanks partly to a sharp uptick in Venezuelan poverty. The question of whether government redistribution or a commodities boom was responsible for Venezuela’s advances against poverty now seems to be resolved in favor of the commodities boom. If oil prices don't recover, Venezuela's government is headed for fiscal crisis very soon.

That's not to say that government transfers played no role in addressing poverty. But such transfers do not cause economic growth, at least not in a short enough time frame to cover their costs. And if you want to make people at the bottom better off, there is simply no substitute for economic growth. Policies that undercut the sources of that growth -- such as investment capital or oil production -- will ultimately make the people you are trying to help worse off. And while it's bad enough to be losing ground in the war on poverty, it's even worse that Venezuela has tried to shore up its regime against the resulting popular discontent with such anti-democratic measures as curtailing freedom of the press.

There's a good lesson here for people on both sides of the policy aisle -- I mean, beyond "don't eat your seed corn." That lesson is "never forget that you are not in control of everything." The global economy is far bigger and more powerful than the policy levers you have at your control -- which means that broader trends can fool you into thinking that what you've done must be "working." Unfortunately, when things start moving in the other direction, you're apt to return to reality with a pretty harsh bump."

Commercially successful innovations usually enrich more than just the innovator

From Cafe Hayek.
"Quotation of the Day… by Don Boudreaux

… is from page 269 of Amar Bhidé’s excellent 2008 book, The Venturesome Economy (original emphasis; footnote excluded; link added):
[C]ommercially successful innovations usually enrich more than just the innovator.  For instance, new products and services also generate a consumer surplus – value to their users in excess of the price.  If they didn’t, why would a consumer ever take a chance on a new product or service?  The distribution of value between innovators and users also is noteworthy.  Successful innovators (and their investors) can secure extraordinary wealth, whereas the total dollar value of an innovation secured by a user is often quite small; therefore, it is tempting to think that innovators are the main beneficiaries.  But users outnumber innovators by a wide margin.  Moreover, according to [William] Baumol’s analysis, a competitive, free market system provides a positive but small share of the gains to the innovator, whereas the users get the rest.
People who fret over economic inequality are especially encouraged to keep also in mind that many innovations, even those that make the spread of monetary incomes wider (that is, less equal), make the spread of access to goods ands services smaller (that is, more equal).

For example, the innovation by Fred Smith of FedEx that made overnight letter and package delivery affordable to middle-class Americans also made Fred Smith a hugely wealthy man.  And this innovation likely increased monetary-income (and monetary-wealth) inequality in America (and in the world).  Yet not only did this innovation improve ordinary people’s living standards, it made ordinary people more equal to the superrich in terms of access to speedy delivery and receipt of letters and packages.  Before affordable overnight delivery, the superrich and the politically powerful could afford to ship, and to receive, letters and packages delivered overnight.  If in, say, 1970 Howard Hughes just had to send a love-letter or a box of chocolates ASAP to woman a thousand miles away from him, he could afford to pay for a plane and a pilot to perform the delivery.  Likewise, the President of the United States no doubt had no difficulty sending letters and packages across the country or the globe for overnight delivery.  But no ordinary American could afford such a luxury.  Today, in vivid contrast, speedy delivery is within the reach of nearly every American.

And so a germane question is suggested: even if Fred Smith’s innovation unambiguously increased monetary-income (or monetary-wealth) inequality in America, did this innovation increase economic inequality (properly reckoned)?  My answer is ‘no’; this innovation decreased economic inequality by making consumption possibilities more equal."

Sunday, March 1, 2015

Free trade's benefits

From Matt Ridley.
"But the point about free trade is and always should be that it is good for consumers. “Consumption is the sole end and purpose of all production”, said Adam Smith. The genius of the Corn Law radicals was to turn the debate upside down and give the consumers a voice. Between 1660 and 1846, the British government passed 127 Corn Laws, imposing tariffs as well as rules about the storage, sale, import, export and quality of grain and bread. The justification was much like today’s opposition to TTIP: maintaining our supposedly high standards against foreign, cheapskate corner-cutters.

In 1815, Parliament banned the import of all grain if the price fell below 80 shillings a quarter — to protect landowners. Rioters vandalised the house of Lord Castlereagh and other supporters. David Ricardo wrote a pamphlet against the laws, but in vain. It was not until the 1840s that the railways and the penny post enabled Richard Cobden and John Bright to stir up a successful mass campaign against the laws on behalf of the working class’s right to buy cheap bread from abroad if they wished.
Cobden did not stop there. Elected to parliament but refusing office and honours, this pacifist radical was as responsible as anybody for accelerating global economic growth. He persuaded Gladstone to abolish many tariffs unilaterally, and personally negotiated the first international free trade treaty in 1860, the so-called Cobden-Chevalier treaty with France, which established the unconditional “most-favoured nation” principle, leading to the dismantling of tariffs all over Europe. “Peace will come to earth when the people have more to do with each other and governments less,” he said.

Only when Bismarck began rebuilding tariffs in 1879 did the tide begin to turn, and competitive protectionism slowly throttled free trade, eventually contributing to half a century of war. Britain held out longest, enacting a general tariff only in 1932 under Neville Chamberlain as chancellor. Trade barriers undoubtedly helped precipitate war: they shut the Japanese out of resource markets that they then decided to seize by force instead, while Germany’s Lebensraum argument would have carried less force in a free-trading world.

The argument for free trade is paradoxical and much misunderstood. Free trade benefits consumers because it is the scourge of expensive or monopolistic national suppliers. It benefits both sides: yet it works unilaterally. Your citizens benefit if you let them buy cheap goods from abroad, while foreigners are punished if their government does not reciprocate. This creates more demand for local services and hence more growth and jobs in the importing country.

Contrary to what most people think, therefore, it is imports that bring the greatest benefit, not exports — which are the price we have to pay to get the imports. At the centre of the debate lies David Ricardo’s beautiful yet counterintuitive idea of comparative advantage — that it will always pay a country (or a person) to import some goods from another, even if the first country or person is better at making everything. Truly free trade cannot be a predatory phenomenon.

But surely all these Cobdenite arguments are old-fashioned and irrelevant in a world of labour standards, environmental protections, the internet and so forth? Not so. They are as true today as ever, and thank goodness we have at least one political party prepared to make them. The Liberal party used to champion free trade, as did the Manchester Guardian, but these days both spout the fearful mercantilism of the pre-Peel Tories.

The trade barriers in the Atlantic cost consumers on both sides. Mr Shapps pointed out last week that every American pair of jeans costs you 12 per cent more than it should; every British pint of beer costs Americans 157 per cent more than it should. Americans are forbidden by law from buying British lamb or venison. TTIP is set to tackle some of these absurdities, to reduce non-tariff barriers, harmonise standards and give people more freedom to buy from whomever they choose.

TTIP’s opponents are particularly horrified that it includes a provision to let large and small businesses sue foreign governments for shutting them out of investment in their countries. My worry is that this provision may not go far enough — to enable consumers to have redress against governments.
As a book called A Time for Choosing from the Free Enterprise Group of MPs will argue, if there is one country that should be able to benefit from freer trade it is Britain with its widely spoken language, financial services, management and business services, software and creative industries, not to mention its Premiership football, Scotch whisky and boy wizards, all of which we can sell to the world in exchange for movies, fruits and gadgets that others are good at producing.

In an ideal world, every citizen of Planet Earth would have the freedom to buy and sell from every other, without regard to nationality, and free trade agreements like TTIP would not even be necessary."