• Recommendations for Further Reading
  • July 29, 2021

Electric power, pandemic policies, and human networks

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Smorgasbord

The UK government has published a 600-page report of an independent commission led by Partha Dasgupta, The Economics of Biodiversity: The Dasgupta Review.

Not so long ago, when the world was very different from what it is now, the economic questions that needed urgent response could be studied most productively by excluding Nature from economic models. At the end of the Second World War, absolute poverty was endemic in much of Africa, Asia, and Latin America; and Europe needed reconstruction. It was natural to focus on the accumulation of produced capital (roads, machines, buildings, factories, and ports) and what we today call human capital (health and education). To introduce Nature, or natural capital, into economic models would have been to add unnecessary luggage to the exercise. Nature entered macroeconomic models of growth and development in the 1970s, but in an inessential form. . . . We may have increasingly queried the absence of Nature from official conceptions of economic possibilities, but the worry has been left for Sundays. On week-days, our thinking has remained as usual.

[I]n recent decades eroding natural capital has been precisely the means the world economy has deployed for enjoying what is routinely celebrated as ‘economic growth’ . . . If, as is nearly certain, our global demand continues to increase for several decades, the biosphere is likely to be damaged sufficiently to make future economic prospects a lot dimmer than we like to imagine today. What intellectuals have interpreted as economic success over the past 70 years may thus have been a down payment for future failure. It would look as though we are living at the best of times and the worst of times.

HM Treasury (2021)

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A National Academies of Sciences report investigates High and Rising Mortality Rates Among Working-Age Adults:

The committee identified three categories of causes of death that were the predominant drivers of trends in working-age mortality over the period: (1) drug poisoning and alcohol-induced causes, a category that also includes mortality due to mental and behavioral disorders, most of which are drug- or alcohol-related; (2) suicide; and (3) cardiometabolic diseases. The first two of these categories comprise causes of death for which mortality increased, while the third encompasses some conditions (e.g., hypertensive disease) for which mortality increased and others (e.g., ischemic heart disease) for which the pace of declining mortality slowed. . . . [I]ncreasing mortality among U.S. working-age adults is not new. The committee’s analyses confirmed that a long-term trend of stagnation and reversal of declining mortality rates that initially was limited to younger White women and men (aged 25–44) living outside of large central metropolitan areas (seen in women in the 1990s and men in the 2000s), subsequently spread to encompass most racial/ethnic groups and most geographic areas of the country. As a result, by the most recent period of the committee’s analysis (2012–2017), mortality rates were either flat or increasing among most working-age populations. Although this increase began among Whites, Blacks consistently experienced much higher mortality.

National Academies of Sciences (2021)

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Another National Academy of Sciences report considers The Future of Electric Power in the United States.

[T]he committee identified a number of driving forces—social, technical, economic—that are likely to alter the landscape of the U.S. power system. These include the following: 1. Possible large growth in future demand for electricity. 2. Efforts to decarbonize the U.S. economy, and eliminate the emission of conventional pollutants, both by transitioning power generation to low or zero-emission sources and by making much greater use of decarbonized electricity as a substitute for fossil fuels in transportation, buildings and industry. 3. Developments at the edge of the grid such as distributed generation, storage, microgrids, energy management resources, and energy efficiency measures. 4. Grid stability challenges arising as a result of high penetrations of nondispatchable sources of generation such as wind and solar. 5. A desire to reduce social inequities. 6. Concerns about the impacts of the energy transition on employment. 7. A changing international environment including powerful market forces arising from globalization, shifts in the locus of electricity-relevant innovation, and growing concerns about state-sponsored competition and disruption.

National Academy of Sciences (2021)

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W. Brian Arthur offers a personal overview of the “Foundations of complexity economics.”

Complexity economics sees the economy—or the parts of it that interest us—as not necessarily in equilibrium, its decision makers (or agents) as not superrational, the problems they face as not necessarily well-defined and the economy not as a perfectly humming machine but as an ever-changing ecology of beliefs, organizing principles and behaviours. . . . A new theoretical framework in a science does not really prove itself unless it explains phenomena that the accepted framework cannot. Can complexity economics make this claim? I believe it can. Consider the Santa Fe artificial stock market model.

Arthur (2021)

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The 2021 World Development Report, an annual flagship reports of the World Bank, is focused on the theme of “Data for Better Lives."

Today’s unprecedented growth of data and their ubiquity in our lives are signs that the data revolution is transforming the world. And yet much of the value of data remains untapped. Data collected for one purpose have the potential to generate economic and social value in applications far beyond those originally anticipated. But many barriers stand in the way, ranging from misaligned incentives and incompatible data systems to a fundamental lack of trust. World Development Report 2021: Data for Better Lives explores the tremendous potential of the changing data landscape to improve the lives of poor people, while also acknowledging its potential to open back doors that can harm individuals, businesses, and societies.

World Bank (2021)

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Luís Brandão-Marques, Marco Casiraghi, Gaston Gelos, Günes Kamber, and Roland Meeks discuss the experience of “Negative Interest Rates: Taking Stock of the Experience So Far.”

Overall, most of the theoretical negative side effects associated with NIRP [negative interest rate policies] have failed to materialize or have turned out to be less relevant than expected. Economists and policymakers have identified a number of potential drawbacks of NIRP, but none of them have emerged with such an intensity as to tilt the cost-benefit analysis in favor of removing this instrument from the central bank toolbox. . . . [O]verall, bank profitability has not significantly suffered so far . . . and banks do not appear to have engaged in excessive risk-taking. Of course, these side effects may still arise if NIRP remains in place for a long time or policy rates go even more negative . . . The literature so far has largely overlooked the impact of negative interest rates on financial intermediaries other than banks.

Brandão-Marques et al. (2021)

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Shawn Sprague dissects “The U.S. productivity slowdown: an economy-wide and industry-level analysis.”

The figure—$10.9 trillion—represents the cumulative loss in output in the U.S. nonfarm business sector due to the labor productivity slowdown since 2005, also corresponding to a loss of $95,000 in output per worker. . . . [N]ot only has the productivity slowdown been one of the most consequential economic phenomena of the last two decades, but it also represents the most profound economic mystery during this time, and though many economists have grappled with the issue for over a decade and even created some innovative research approaches to address the question, we still cannot fully explain what brought on this situation. . . . This article presents two approaches to address these questions . . . First, the economy-wide slowdown in labor productivity growth is analyzed by breaking out the series into its three component series: multifactor productivity (MFP) growth, the contribution of capital intensity, and the contribution of labor composition. Second, industry-level productivity data are used to identify the industries that made notable contributions to the economy-wide labor productivity slowdown.

Sprague (2021)

Symposia and Books

The April 2021 issue of the Southern Economic Journal begins with the Presidential Address of W. Kip Viscusi to the Southern Economic Association on “Economic lessons for COVID-19 pandemic policies.” Viscusi writes:

Given the tremendous benefits that could be derived by having more adequate medical resources, it is preferable from a benefit-cost standpoint to make provisions before health crises arise so that severe rationing is not required for the next pandemic. In anticipation of future pandemics, it is feasible to acquire high-quality ventilators at a cost from $25,000 to $50,000. Adding in the cost of medical support personnel would raise the annual cost to about $100,000. A reserve supply of ventilators could be a component of an anticipatory pandemic policy. Preparing for future pandemics remains a cost-effective strategy even for annual probabilities of a pandemic on the order of 1/100. However, survey evidence by Pike et al. (2020) suggests that support for protective efforts of this type is unlikely to emerge, as there is a lack of public concern with long-term pandemic risks. As a result, there is likely to be a continued shortfall in preparations for prospective risks, leading to future repetitions of the difficult rationing decisions posed by COVID-19. . . . If human life is accorded an appropriate monetized value, the application of VSL and efficient principles for controlling risks will lead to greater levels of protection than will result if medical personnel follow the guidance provided by many prominent medical ethicists.

Viscusi (2021)

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In the lead paper in the symposium that follows, Peter Boettke and Benjamin Powell describe “The political economy of the COVID‐19 pandemic."

[F]rom the perspective of promoting overall societal well‐being, we believe that governments in the United States and around the world made significant errors in their policy response to the COVID‐19 pandemic. . . . The activities of the young and healthy impose a negative health externality on the old and infirm. But it is equally true that if the activities of the young are restricted because of the presence of the old and infirm, this latter group has imposed a negative externality on the young and healthy. If transactions costs were low, the Coase theorem would dictate that it would not matter to which party the rights to activity or restriction were assigned, as bargaining would reach the efficient outcome. However, in the case of COVID‐19, and large populations, it is quite clear that transactions costs of bargaining would be prohibitive. Thus, the standard law and economics approach would recommend assigning rights such that the least cost mitigator bears the burden of adjusting to the externality. In the case of COVID‐19, it is clear that the low opportunity cost mitigators are the old and infirm. Thus, Coasean economics would recommend allowing the activities of the young and healthy to impose externalities on the old and infirm, not the other way around. Lockdowns and stay at home orders get the allocation of rights exactly backwards and result in large inefficiencies because costs are disproportionately borne by the high cost mitigators.

Boettke and Powell (2021)

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Monica de Bolle, Maurice Obstfeld, and Adam S. Posen have edited a 12-chapter e-book titled Economic Policy for a Pandemic Age: How the World Must Prepare. As one example, Martin Chorzempa and Tianlei Huang describe “Lessons from East Asia and Pacific on taming the pandemic”:

Bloomberg News’ COVID Resilience Rankings evaluate success in handling the pandemic while minimizing the impact on business and society. An astounding ten of the top 15 countries and territories are in East Asia and Pacific. Top performers vary enormously in size, wealth, and political institutions, from small, wealthy, democratic islands like Taiwan and New Zealand to large, middle-income countries under one-party rule like mainland China and Vietnam. Core to their exemplary performance was the use of targeted and less costly mitigation measures that do not require an economic freeze. . . . The experience in East Asia and Pacific varies among countries with diverse cultures, geographies, and political systems, but one thing is clear: rigorous masking requirements, testing, contact tracing, selective quarantines, border closings, and clear public health communication all helped to avoid the overwhelming economic dislocations that occurred in the West. . . . One of the most crucial advantages in the early days of a pandemic is testing capacity, which helps identify both individuals to quarantine and where to focus further testing.

Chorzempa and Huang (2021)

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Donald J. Boudreaux and Randall G. Holcombe have written The Essential James Buchanan.

Buchanan called such aggregative thinking the ‘organismic’ notion of collectives—that is, the collective as organism. From the very start, nearly all of Buchanan’s lifetime work was devoted to replacing the organismic approach with the individualistic one—a way of doing economics and political science that insists that choices are made, and costs and benefits are experienced, only by individuals. . . . The point is that exchange possibilities are not confined to the simple bilateral exchanges on which economists traditionally focus nearly all of their attention. When this truth is recognized, many familiar features of the real world are seen in a more revealing light. Clubs, homeowners’ associations, business firms, churches, philanthropic organizations—these and other voluntary associations are arrangements in which individuals choose to interact and exchange with each other in ways more complex than simple, one-off, arm’s length, bilateral exchanges. These ‘complex’ exchange relationships are an important reality for economists to study. But they are more than mere subject matter for research. They are also evidence that human beings who are free to creatively devise and experiment with alternative organizational and contractual arrangements have great capacity to do so. Where the conventional economist sees ‘market failure,’ humans on the spot often see opportunities for mutually advantageous exchange.

Boudreaux and Holcombe (2021)

Interviews

Douglas Clement provides an “Esther Duflo interview: Deciding how to share.”

On the a tradeoff between growth and inequality: “I think the whole notion of a trade-off is likely a fallacy, for various reasons. First of all, there is no clear link either on theoretical grounds or empirically between higher inequality and more growth. There is no reason why inequality is necessary for growth. And there is no law of economics that says that growth increases inequality either. So I think there is no causality necessarily going in either direction; therefore, there is not necessarily a trade-off. Just as a matter of accounting, growth is equality-enhancing if most of the benefits of growth are going toward the poor. And growth is inequality-enhancing if most of the advantages are going toward the rich. Both are possible. I don’t think there is a systematic pattern either way. . . . In fact, we don’t seem to have much of a handle on what causes growth anyway, although we might have interesting theoretical narratives on growth. If there is a consensus among macroeconomists, it’s on what should be avoided at all costs, like hyperinflation. But there is not a set of recipes that guarantees growth, and it’s not that these recipes therefore lead to a trade-off.

Clement (2021)

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Michael Chui and Anna Bernasek of the McKinsey Global Institute interview Christopher Pissarides “about how he developed the matching theory of unemployment, how COVID-19 affected his research, and what might be in store for labor markets after the pandemic.”

[B]efore we did that work, people were thinking of unemployment as a kind of stock of workers, as a number of workers if you like, who could not get a job. They would start from the top end of the market and say, ‘This is how much output this economy needs, that’s how much is demanded. Then how many people do you need to produce that output?’ Then you would come up with a number. And then they would say, ‘Well, how many workers want jobs?’ If there are more workers that want jobs, you call the difference unemployment. . . . What we did was to start from below, saying the outcomes in the labor market are the result of workers looking for jobs, companies looking for workers. The two need to come together. . . . [T]he time that it takes to find that job depends on how many jobs are being offered in the labor market, what types of skills firms want, what incentives the worker has to accept the jobs, what’s the structure of production, the profit that the firm expects to make, conditions overall in the market. All those things influence the duration of unemployment. Therefore you could study there—how long does the worker remain unemployed? What could influence that duration? What could make it shorter? What would make it longer if you did certain things? On that basis, you derive good policies towards unemployment, and they are still the policies that governments use, in fact widely, to work out how long people remain unemployed and what the implications of their unemployment are.

Chui and Bernasek (2021)

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David A. Price carries out an “Interview” with Matthew Jackson, with the subheading “On human networks, the friendship paradox, and the information economics of protest movements.”

[O]ne key network phenomenon is known among sociologists and economists as homophily. It’s the fact that friendships are overwhelmingly composed of people who are similar to each other. This is a natural phenomenon, but it’s one that tends to fragment our society. When you put this together with other facts about social networks—for instance, their importance in finding jobs—it means many people end up in the same professions as their friends and most people end up in the communities they grew up in. From an economic perspective, this is very important, because it not only leads to inequality, where getting into certain professions means you almost have to be born into that part of society, it also means that then there’s immobility, because this transfers from one generation to another. It also leads to missed opportunities, so people’s talents aren’t best matched to jobs.

This concerns another network phenomenon, which is known as the friendship paradox. It refers to the fact that a person’s friends are more popular, on average, than that person. That’s because the people in a network who have the most friends are seen by more people than the people with the fewest friends. On one level, this is obvious, but it’s something that people tend to overlook. We often think of our friends as sort of a representative sample from the population, but we’re oversampling the people who are really well connected and undersampling the people who are poorly connected. And the more popular people are not necessarily representative of the rest of the population. . . . There have been instances where universities have been more successful in combating alcohol abuse by simply educating the students on what the actual consumption rates are at the university rather than trying to get them to realize the dangers of alcohol abuse. It’s powerful to tell them, ‘Look, this is what normal behavior is, and your perceptions are actually distorted. You perceive more of a behavior than is actually going on.’

Price (2021)

Discussion Starters

Michael Giberson considers “Texas Power Failures: What Happened in February 2021 and What Can be Done.

The temperature in Dallas dipped to –2° F, the coldest it had been in Dallas for 70 years. Snow fell on the beaches on the Gulf Coast at Galveston, south of Houston. Temperatures in Austin remained below freezing for six days at a time of when temperatures usually average in the mid-50s. At Brownsville, near the most southern tip of Texas, February weather typically averages 65° F. High temperatures in Brownsville were in the mid-80s just days before the cold. . . . For the first time in history all 254 counties in Texas were under a winter storm warning at the same time. The cold was not unprecedented at any particular location, but it was extreme, widespread, and long lasting in February 2021. . . . Natural gas production and distribution froze up. Municipal water mains froze in cities across the South. Ranchers in the Panhandle lost cattle to the cold. Citrus growers in South Texas saw damage to trees that may last for years. Roads were closed due to ice and storms. Failures were not solely an electric power industry concern or a natural gas failure. The cold was simply worse than almost anyone in Texas was prepared for. . . . Clearly, it was not negligent on ERCOT’s part—and maybe anyone’s part—to fail to anticipate such anomalous temperatures.

Giberson (2021)

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Rachel Soloveichik discusses “Including Illegal Market Activity in the U.S. National Economic Accounts.” 

[E]xpenditure shares for all three broad categories of illegal drugs grew rapidly after 1965 and peaked around 1980. In total, this analysis calculates that illegal drugs accounted for more than 5 percent of total personal consumption expenditures in 1980. This high expenditure share is consistent with contemporaneous news articles and may explain why BEA chose to study the underground economy in the early 1980s . . . [A]lso . . . illegal alcohol during Prohibition accounted for almost as large a share of consumer spending as illegal drugs in 1980 and changed faster. Measured nominal growth in 1934, the first year after Prohibition ended, is badly overestimated when illegal alcohol is excluded from consumer spending.

Soloveichik (2021)