Jun 27, 2008

Know your CO2 footprints

As PL noted in a post a while ago, the debate over if and what to do about climate change is becoming increasingly more complicated. There is on one side the evidence of the Stern Report and on the other side the praise and criticism surrounding it. Both have generated a fair amount of confusion within the population as noted in the post. A always bigger proportion of people is becoming sceptical about climate change, both for good and bad reasons. The confusion is even more palpable since we are facing the problem of rising food prices: people are concerned that what and if we could do something about climate, is going to be ineffective or even damaging. If we buy the argument that doing nothing is better because either global warming does not exist, or because if I consume more of fossil fuels today it will lead to automatically more investment tomorrow in alternative, seems plausible, but it is incorrect. The words of wisdom I heard about the whole topic is that, since we do not know what is causing climate change, it is good to take the minimum effort to tackle it. It is then sound and correct to increase the price of what we think is the likely cause of global warming (via the imposition of a tax), since we know it will correct a market failure (pollution). The other problem I find with the argument is more philosophical. The benefits accruing to society from Climate Change discussion is exactly the impact on our lifestyle. The world has been living with the idea that everything man-made / man-based is fine. The main argument that policy makers should advance instead, is that we can do little to make a huge impact. Be environmentally concerned just reduces the excesses that we were used to, without this implying a drastic change in our lifestyle. Here though, the problem is how to improve the quality of the debate. We have been rightly hitting so far at SUV as a monstruosity that makes no sense. People are starting to think that Air Travels may be a problem as the true statistics about their impact are starting to emerge. While renouncing to a SUV is cheered, for Air Travel things are thornier. I advance here another element: What about food? Does food pollute? Of course it does. Here is an example. This guy has calculated that a cheesburger produces 4.5 Kg of CO2. To make things comparable, this is the amount of emission produced by a 2003 Toyota Yaris in a 30 Km ride. Some people I know find Cars outrageous because are polluting and prefer biking (or skating) instead. They would though never renounce to a Cheesburger. What would happen if people were aware of the Carbon Footprints of the food they consume? Well, they would probably know that, in order to be Carbon Neutral, they should go to their favourite Burgers' store by bike instead of taking the tram. This simple exercise would not only lead to a lower emission, but also a healtier lifestyle. What if they get tired? Won't they eat two burgers? Yes, but the ride by car has been offset by the bike ride. If you don't like biking, fine, here is an alternative: take a drive on a less polluting car (or an electric bus) and eat one instead of two burgers. The total footprint would be probably the same in the two situations, but the attitude toward the world we live in, and our concerns about the actions have changed: because what we are doing is just being more responsible for what we do vs ourselves and vs our planet. Peace

Jun 23, 2008

Gross Domestic Product

This map comes from some cool trade guy. US states have been replaced by countries with a similar level of GDP. Uzbekistan is Wyoming! Okay, his much talked about paper on how Chinese imports reduced inflation more for the poor than the rich in the US and hence reduced consumption (or real income) inequalities was a bit too conservative, as it omits the fact that if poor people consume different products (even though equivalent for economists) than the rich, it pisses them off.

Jun 21, 2008

Climate change economics

What (if anything) do you do now to fight global warming that you didn’t do two years ago?

Since I believe that global warming is largely natural, and not man made, I don’t do anything to “fight” global warming since that would be futile. But to the extent that we will need to eventually move away from carbon based fuels, I am helping to spur the investment in new energy technologies by consuming as much as possible today. Increased consumption builds wealth and that wealth will be needed to fund the R&D into alternative energy technologies. And the second thing I do? Encourage others to do the same.

It would be exceedingly difficult for me to go without: air conditioning in the summer, heating in the winter, a good filet of beef on occasion, gasoline to go wherever I want, and everything else that we use in life that requires energy … which, last I knew, includes everything. But since doing and using all of these things will encourage new investments in energy technology (see above), I’m happy to report that I don’t need to give up anything!

My question is is this argument valid? Should I reduce my carbon emissions or not, since, by consuming more of it, I increase its price and encourage others to reduce their consumption...

This answer is from Roy Spencer, author of Climate Confusion and the U.S. Science Team leader for the Advanced Microwave Scanning Radiometer flying on NASA’s Aqua satellite. It appears along other people on freakonomics who tell us what they think of climate change.

Long-haul flights and price discrimination strategy at Ryanair

Airline companies are the textbook example of price discrimination, the practice to charge different prices to different customers for the same products (for reasons unrelated to their costs). The low-cost airlines have very well understood this concept and have thus made huge profits out of it. Now, Michael O'Leary, CEO of Ryanair, has announced that "the company is considering launching a separate airline that would fly long-haul between Europe and the United States around the turn of the decade". The strategy is to charge very low prices for the economy class (let's say 15 CHF) and very high prices for the Business class (whatever price). Perfect, but how to convince people to fly business class? Here it is the press conference where he explains how:

Jun 20, 2008

Culture and Hedging

Why am I not too happy that Germany won against Portugal in the quarter final of the Euro-Championship

For those residents of the sleepy town of Geneva that live in the city centre, it may come as a salvation that Germany defeated Portugal yesterday; in what was one of Portugal’s not too brilliant matches. Since “public viewing zones” and so-called “fan zones” have mushroomed in Switzerland’s major towns, every match is followed by an “auto-corso” of supporters of the respective team sneaking with their cars slowly through the city centre and honking for various minutes or hours depending on which country won the match. Now, given the high amount of Portuguese living in Geneva I would have expected at least another two sleepless nights (assuming the Portuguese would have kept winning). Not only are Germans less inclined to celebrate their victories when abroad, but also are they much fewer then the Portuguese in Geneva. So apart from my nationality I had another reason to be happy about Germany winning the match yesterday.

My enthusiasm was abruptly stopped when I realized who the potential future opponents in the final might be (assuming Germany beats the Croatians this time or the Turkish): the Netherlands or Italy (I am sorry Russia and Spain).

Now, why does this matter? Well the “shame” of loosing against the Italians is only dwarfed by loosing against the Dutch and that only by loosing against the English. The fear of loosing against one of these teams explains the seemingly mischievous happiness of Germans when the Dutch were not qualified for the World Cup and the English for this year’s Euro Cup. The funny thing is that I can not explain at all why it is such an issue for me if Germany looses against the Dutch as opposed to loosing against the Spanish. Some might say history. For me it is just that each culture picks some preferred “foes”. Growing up with this stigma and the jokes about the Dutch and Englishmen you can not loosen yourself from it once you are out of age for these kinds of jokes.

Since a second place is worth nothing in these tournaments, I would prefer Germany to loose the Portuguese in the quarter final, if I knew that Germany will loose in the final against the Dutch (Lets assume I know that Germany will loose the Dutch because I use Cosimo and Salvatore’s analysis). But then again hope dies last.

How does it relate to economics? Well, any agent that behaves rational should always bet on their greatest enemy, which gets close to minimizing the cost in the worst case scenario. “Die hard soccer fans” might consider this unethical; but then again where does this ethical understanding come from if not from something related to that person’s culture. Strangely enough, I know a Swiss who is an enthusiastic supporter of the FC Basel, the number one team in Switzerland. He always bets against his team! I presume most Italians would never do this to there favourite club.

Hence, - and I will certainly make some points with Pierre-Louis for this sentence - the impact of culture for decision making should not be under-estimated.

P.S.: For those who do not know this one yet: there is another very interesting reason why economics has a say in soccer, which can be found here.

Jun 19, 2008

The wisdom of whores

A new post on Marginal Revolution confirms that, as Landsburg had advocated in his book, More sex is safer sex (now on sale for only 5.99$). The country in question is Thailand and the stroy is told in the The Wisdom of Whores. Here's a summary:

Thailand used to fit the the classic 'virtuous girls, philandering boys' model. At the start of the 1990s, 57 percent of twenty-one-year-old men in Northern Thailand trooped off to the brothel to do their philandering. More than half the sex workers who soaked up their excess energy were HIV-infected....

Then...the Thai economy boomed. Girls were getting better educations than ever before...Educated girls were waiting longer before getting married, but not before having sex. By the end of the 1990s, 45 percent of girls aged 15-21 in northern Thailand admitted to having sex with boyfriends before marriage, compared to less than a tenth of that in a nationwide survey in 1993....

So at the end of the decade, we have a lot more premarital sex and not all that much condom use with girlfriends. But now that these young, cash-strapped guys can have sex without paying, they've stopped handing over cash for sex. By the end of the 1990s, only 7 percent of young men were paying for sex, and HIV prevalence in sex workers had come down too.

The very cool economist Micheal Kremer has also done some good research on this back in 1996. Freakonomics is not always irrevelant. Some professors should take note.

Jun 17, 2008

Ranking and policy reforms

Rigotnomics is the 255th most famous economics blog in the world. Not bad, but not good enough. I hope we can become more influential.

Now one of the cool things about econometrics is interaction terms that capture such things as how the effect of education on wage depends on skin colour, how the effect of natural resources on growth depends on corruption, how aid effectiveness depends on the rule of law etc...Now these can help you identify not only linear relationships, but also more complicated things.

In a new NBER working paper, Acemoglu and company show that the impact of Central Bank independance (CBI) on inflation depends on the constraints on the government (checks and balances). Not linearly, however. At low and high levels of constraints, there is no effect. It is only at intermediate levels of constraints that CBI reduces inflation.

So everytime you think something might explain something but depend on something else. Just divide that last something in many categories, make some dummies and interact them. Then, invent a story that fits with your statitical significances!

Jun 12, 2008

A preliminary analysis of the Euro results

The Euro UEFA Cup 2008 currently jointly hosted by Austria and Switzerland, has already emitted its first verdict. At the time of writing, one of the host countries, having lost both the first and the second game, is out of the tournament...sad but true, but the other will probably follow soon the same faith.

In terms of results from the first wave of games, they have also been in some cases surprising, confirming once again that the tournament is really competitive and unpredictable. Take the example of Italy (guess why??). The latest World Cup Champion, has badly lost against Netherlands with a striking 3-0: in one game, Italy has conceded more goals than the ones conceded in the whole World Cup in 2006! A little worried by this event, me and Cosimo had a look at the data of the results in the Euro cup since 1980, to answer the following question: does it matter if you lose the first game? Can you still pass the round? The answer is, yes and no. It does not matter overall, but it matters if you have lost badly, with a big margin of difference in goals. For those of you interested in the methodology and the exact results of the exercise, they are described here. It's quite intuitive to understand that a bad start may be psychologically costly, but, if you are able to score 4 points, depending on the level of the group, may be sufficient to pass the round.
What about the probability of winning the tournament? Do those who qualify as first have more chances to win the cup? Well, apparently not. It does not give you better chances. It may sound strange, but actually, it gives you slightly more chances if you arrive second! How can you interpret this strange result? If you think harder, it is actually not so strange. Being as competitive as it is, there is really not so much of a difference between the winner of a group and the runner up of another. If you have poorly performed in your group, while the other teams have had supreme performance, the psychologic effect may work in reverse, favoring those who had a worse start. We are not giving advice on betting. The intention is not to forecast anything. We just wanted to see what has historically happened in the Euro so far. Then, let's wait and see what happens on the field, and enjoy this wonderful show!

I just saw that Germany, one of the favourite team for the final victory quite unanimously across bookmakers has just thirty minutes ago incredibly lost against Croatia for 2-1. May my Germans friends be scaramantic as much as I am, but maybe they should not worry that much...

Jun 6, 2008

Economics Light: A Book for Your Spare Time

It does not happen too often that I put my hands on “non-specialist” books that deal with economics in the broadest sense. Three notable exceptions are the following books

The amazing thing is that I bought the last of the three books first (more than a year ago), but I still did not finish reading it, while having finished the second one and being half through the third. The last I had less than a week. This slow advance in reading my first purchase is partly to be blamed on my laziness: I bought the book in French to improve my skills, which makes the reading comparatively harder than if I had bought the book in English. However, it is mainly due to the fact that the book turns out to be a critique of the IMF rather than discussing the points that the “discontents” have in critiquing globalization. Though there is clearly a point in discussing the role of the IMF, it gets rather boring after the 100th page being devoted to this. Furthermore, the author may have wanted to give a more balanced picture of other institutions like the World Bank, which the author puts unsurprisingly in a much better light (at least up to the point that I read). This critique has been formulated recently nearly excessively here by Easterly and generated an interesting debate ranging from comments by Dingle to Martin Wolf.

The Economic Hit Man is a very different book. Though the author claims everything to be true, some of the assertions are for my taste too unfounded to be considered as describing the whole picture. Nevertheless, it is an entertaining book that gives some food for thought.

The third book fell in my hands in our library while searching for a very different book. “The Economist’s Tale” is a somewhat less provocative book than the former and also gives good economic insights into real world policy trade-offs. Describing the food problem in Sierre Leone from the point of view of an “independent” consultant, the author gives a more balanced impression of the various actors in managing the arising crisis.

So if you do not have the right book for you summer vacation yet, here three reasons for my pick between the alternatives:

  • Stiglitz’s comparative advantage is rather in academic contributions
  • Today’s economic situation with respect to food
  • “The Eocnomist’s Tale” strikes the right balance between interesting and light reading without being too shallow on the economic reasoning

Disclaimer: The fact that all of these books criticize either IMF, World Bank or other governmental organizations is pure coincidence. As stated before I expected the book by Stiglitz to talk about very different things, the “Economic Hitman” was close to the only book in an Italian bookstore that was in English, when I was in desperate need for a vacation-book. And the third, well, it just fell in my hands in the library while searching for an economics book by an author from the IMF!

Jun 4, 2008

43,836 SFR: An Update on the Non-Smoking Front

43,836 SFR is the life-time present discounted value I saved by deciding not to smoke anymore! The underlying data for the computation is a yearly inflation rate of 2%, the assumption that in 40 years my doctor will forbid me to smoke, a constant consumption of roughly 10 cigarettes a day and a cigarette price that linearly increases from its current price of 6 Swiss Francs to 12 Francs in 40 years. Those are all rather moderate assumptions. So actually, I could buy now a nice Volkswagen car since I basically got it for free!
Alternatively, if I would invest the money I save each year and earn an average rate of 6% per annum which I reinvest, I would have 231,913 SFR in the year 2048, which is equivalent to a present value of slightly above 100,000 SFR. My Volkswagen just became a BMW, but I have to wait until 2048 to buy it.
Some other intersting posts on the subject besides my old and older post: VOX and Freakonimcs I and Freakonomics II.

Jun 3, 2008

Food for Arms: A Short Comment on the FAO Summit

The gathering of the United Nations Food Agency, FAO, attracted a quite controversial crowd this year: From this one here to this one. (You may guess a third one that I did not mention)

Besides these rather political considerations, there is another trouble I associate with these conferences in times of turmoil. Human beings and in particular their more or less elected political “leaders” have the tendency to paint things black and white. Too quickly are old policies regarded as misguided and totally wrong and too quickly are new policies been praised as the solution.

Nevertheless, did the FAO Director-General, Jacques Diouf, made in his speech various interesting points one of them being this one here:

But above all, nobody understands how: [… ] in a single country food wastage can amount to 100 billion dollars annually; that the excess consumption by the world’s obese costs 20 billion dollars annually, to which must be added indirect costs of 100 billion dollars resulting from premature death and related diseases; and finally that in 2006 the world spent 1 200 billion dollars on the purchase of arms.”

Though this is bunching together quite diverse topics, it should be troublesome that the world spends so much on machines to kill while people are already starving not having the machines to produce enough food…an economist may call this type of spending by the least public waste; more adequate would be public cruelty. Where can I make my vote against excessive military spending?

Jun 1, 2008

Better than the Big Mac index

The price of a pint will not only make you write a good PPP paper (co-authors interested? (me and Salvi are on it, among our 55 on-going papers)...but will also help you decide where to go on holiday next...The 10 most affordable countries to drink a beer. You are on the right track to a great holiday or short break, just book your ticket and get on your way...

Country Price

Ethiopia £0.15
Djibouti £0.24
Myanmar £0.31
Korea N £0.32
Rwanda £0.32
Byelorussia £0.32
Bhutan £0.36
Madagascar £0.38
Ghana £0.40
Paraguay £0.43