The Wild West ... the outback ... The new world of the 1800s was a time of true liberty. People stood on their own merits. They won or they lost and they reaped the rewards or swallowed the consequences. There were no cubicle dwelling civil servants hell bent on saving you from yourself. No planning permits no licenses no permissions no heritage overlay no bylaw no regulators no inspectors. And guess what ... it worked

This site is set up to provide a forum for a number of like minded professional economists to post and comment on contemporary issues. There are a number of regular contributors whose bios are made available on the site. Most if not all of these contributors use a pseudonym for the simple reason that they are practicing economists who must take into consideration the commercial implications of posting their opinions.

While some may feel that this is a bit of a gutless approach it is the only way we can ensure free and open discussion without jeopardising our paycheques.

Saturday, January 9, 2010

My burning ring of fire (Roy Rodgers)

My apologies to anyone who has been following this blog ... we have been pretty quiet for the last couple of months. It's safe to assume that like myself the rest of the posse have been swamped with end of year real work and family commitments. So apologies for the lack of content but I’m sure you’ll understand. And I'm sure the new year will bring plenty of well informed insightful comment from the seditionists (as an aside I am laying it on a bit thick... other than the other contributors and my mum I am fairly sure no one is actually following the site).

That said, I now find myself on a job in regional Australia suffering through one of those sleepless (slightly itchy) nights in a lovely regional motor inn. The brown brick and crap Win TV programming are miles away from the comforts of home. The rattly air conditioner and the moldy $5 mars bar in the mini fridge are dismal compensation.

I must admit that the sheets are crisp, if not exactly pearly white, but the pillows cases were rather crumpled and I’m not convinced they were crumpled in the not ironed but washed sort of way. And can someone please explain why there is a spa big enough to accommodate 5 truck drivers sitting in the bathroom.

Enough whinging ... this blog is about the environment and man made global warming.

Where I currently stand

Rather than start preaching about the pros and cons of the global warming debate, I thought there may be value in declaring exactly where I stand on the issue straight up, just so that we clear that there is no hidden agenda or undeclared philosophical position behind the rest of the blog.

I am not a climatologist, I have no idea how the environment works in a physical sense, and I admit that I remain to date uncommitted one way or the other. By uncommitted I mean I am still open to the idea were it to be presented in a convincing manner. I am probably best characterised as an agnostic global warmist.

Our policy response

On the other hand I am quite clear about what I think our policy response should be. Regardless of the accuracy or validity of the underlying science Australia needs to adopt some form of emissions policy. The reasoning has absolutely nothing to do with the environment but quite alot to do with trade.

We are a small, incredibly open economy, our welfare is wholly dependent on our ability to trade openly and without restrain with the rest of the world. If we were not to implement some form of policy we would inevitably see a backlash from our trading partners in the form of foreign carbon taxes and quotas placed on our exports. A new form of protectionism dressed up as carbon neutralisation. The thing is that it doesn’t matter so much whether it's true or not but rather whether the rest of the world believes it, and if it does we need to make sure our windows are dressed accordingly.

It follows from this pragmatic view that we would be best served by pursuing policy that can be removed once it is recognised not to be of any further use. For example, were the world to continue to cool rather than warm we may at some point come to the conclusion that global warming as a hypothesis is invalid, in which case we would wish to discard those policy instruments we implemented to combat warming. Instruments like a carbon tax would be relatively easy to discard. All one has to do is simply cease collecting the tax. Regulation would also be relatively easy to discard ... we just abolish it or to use the right wording to reduce the regulatory burden.

The trick is to avoid implementing policy that can’t be readily discarded. For example, it won’t matter if we no longer believe in climate change, if we have implemented an emissions trading scheme you can bet your bottom dollar that we will never get rid of it. History shows that once you have granted people rights to property (in this case the right to emit) and those people have made significant investments in these rights, it is incredibly difficult for democratic government to roll back these rights or to abolish them.

To borrow a phrase from the environmental lobby ... we should take a precautionary approach to policy.

Economics and the warming sceptic?

One of the most confusing and to be honest, confronting things about global warming is the manner in which very well educated people approach the theory of man made global warming as if it were a matter of faith (faith defined as belief not based on evidence). The reason that this is so surprising is that most of the people I know are economists and are by definition sceptical of just about everything.

Climatology and economics may seem to be a world apart, but both disciplines share a number of similar traits. Neither science is a lab coat science. Both attempt to model complex systems (granted the climate is much more complex than the economy). Both base future expectations on a collection of a wide range of historical data which is inevitably cobbled together from a variety of sources.

Both are intimately concerned with human behaviour. While economics deals directly and almost exclusively with the modelling of human behaviour, its pretty safe to assume that any long term modelling of human induced warming must also have at its core a model of human behaviour. If it doesn't then we are in real trouble.

While there are alot of similarities we should also note that Economics has been around longer, has better data and has developed its own advanced from of statistical analysis. So while economics may be somewhat less ambitious as climatology, it's reasonable to assume it's more mature as a science in what it does.

If you presented most economists (such as my mates) with 100 year forecasts generated by an extremely complex economic models , they would immediately assume the results were at best totally unreliable and at worst absolutely totally unreliable. The thing is that economists are incredibly sceptical about their own science and its ability to generate long term reliable forecasts, and especially so in the macroeconomic field. There are even quite well established branches of economics (such as the Austrians) that hold such modelling in complete disregard. We know intuitively just how fragile forecasts can be.

By way of example, its worth considering the forecasts of Paul Samuelson (a celebrated Nobel prize winning Keynesian Economist) who in the 1961 edition of his famous textbook of economic principles, wrote that GNP in the Soviet Union was about half that in the United States but the Soviet Union was growing faster. As a result, Samuelson contended that one could comfortably forecast that Soviet GNP would exceed that of the United States by as early as 1984 or perhaps by as late as 1997 and in any event Soviet GNP would greatly catch-up to U.S. GNP. The following graph is lifted from the textbook.

As your probably aware ... to call this a poor forecast is like calling Bob Ellis an intellect --but it gets worse because in subsequent editions Samuelson presented the same analysis again and again except the overtaking time was always pushed further into the future so by 1980 the dates were 2002 to 2012. How wrong we he ... and he was one of the smart ones (thanks Marginal Revolution).

The confronting bit is that if you present these very same sceptical economists who don't trust their own analysis with a 100 year forecast from a climate model that predict significant and material change (no less than the end of life as we know it), they will all drop their calculators in a state of abject panic and start hoarding tins of baked beans for the forthcoming Armageddon. This seeming unquestioning acceptance is despite the fact that climate models are by definition trying to model something infinitely more complex than any single economy, and that the data the models are being fed is nowhere near as clean as economic data.

Ask yourself this simple question, as an economist, what would you say to your friend if he she came to you one day and said ...

Friend: ....hey Roy, I've developed a model of the global economy that can predict macroeconomic outcomes over the next 100 years... and guess what, my model says were all going to die. Say why don’t we start implementing massive policy change based on the outcomes of my model.

Roy: on your bike buddy

Granted economics as a science has been around allot longer than climatology. It has more runs on the board and more embarrassments to contend with (hopefully this translates into lessons learnt). Maybe that is why we are much more modest about the reliability of our models than our fellow scientists the climatologists. We know from bitter experience that 9 times out of 10 you will inevitably be wrong. ... just like the joke says ... Economists have successfully predicted 9 of the last 3 recessions.

Maybe it's time climatologists learned a little bit about intellectual humility.

Maybe the joke will go something like ... Climatologists have successfully forecast the warming associated with the last ice age (or something equally as lame) ... the inconvenient joke?

I'm not saying climate change is wrong ... I simply don't know ... all I am saying is next time someone comes knocking on your door telling tales of doom PLEASE PLEASE be a little bit sceptical.


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