Lord Stern on Climate Change

Anthropogenic climate change is one of the major problems facing the planet. It also raises a host of interesting and challenging economic issues, from the selection of policy instruments (command and control regulation, carbon taxes, cap-and-trade, and hybrid schemes), through the analysis of risk, uncertainty and irreversabilities, to the global political economy of reaching an effective international environmental agreement which adequately addresses equity and development issues. The scale and potential impact of climate change on global well-being puts the current, but temporary in nature, financial crisis in perspective. Lord Nick Stern, whose 2007 Review of the Economics of Climate Change (link) did much to raise awareness of the urgency of the problem, has recently published a new book updating his views - A Blueprint for a Safer Planet. An audio file of the informative and very accessible LSE lecture by Nick Stern, to launch his book, can be downloaded at: link). It is well worth listening to both as an economist and as a responsible citizen.

Irrationality, salad and chips - failure of the independence axiom

One of the basic tenets of our approach in economics is that the mere presence of an extra possible choice in the options available to a rational consumer should not affect the decision taken, as long as the consumer does not choose the extra choice itself. This is a version of the "independence of irrelevant alternatives" assumption that crops up in pretty much all rationalchoice theories. However, it seems that the mere presence of a salad on a menu, even if not chosen, makes diners more likely to opt for chips. See this article.

"Investigators asked college students to choose foods from menus that differed in only one feature; one menu offered a salad and the other did not. The point? To find out whether the presence of a salad on the menu influenced what else the students ate. It did. The students choose French fries more often from the menu with the salad."

Why do people like trams so much?

Tyler Cowan in Marginal Revolution asks "why do people like streetcars so much?" Actually I have yet to meet anyone who is enthusiastic about the Edinburgh tram project (other than TIE's supremo), although admittedly many of my conversations on this topic were with taxi drivers, who may have vested interests in the matter. One of my colleagues argues that buses simply dominate trams - they are much cheaper and more maneuverable. But it is a mystery why they apparently remain so popular with many people.

According to Eichengreen and O'Rourke: "globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations." Krugman calls this "half a Great Depression" becuase the fall in manufacturing output in the US is not as bad as it was in 1929. But they point out that looking at global data, things don't look so good. On the bright side, the policy response (monetary and fiscal) looks a lot better now, so there is still hope...

Inflation not falling as fast as expected

The latest (February 2009) inflation figures were a bit of a surprise in that the CPI rate actually increased from 3.0 to 3.2% while the RPI rate which includes mortgage interest didn't go below zero--it fell from 0.1 to 0.0%. The CPI means the Governor of the Bank of England may have a write another letter explaining why inflation is too high. A bit ironic given that everyone is terrified about deflation. The graphic from the BBC shows what's going up and what's going down (click to enlarge).

More on the American bank plan to get rid of toxic assets

For anyone interested, the debate still rumbles on. Here is a summary of the different sides, and here is Krugman's response. The gist of what he says is that the plan, to allow the toxic assets to be bought up with most funding coming from the government, by driving prices of these assets up, will benefit not only those banks who are in trouble, but also many others, so it is basically a waste of a lot of money. He favours a much more targeted approach. This is a well argued counter view by a fund manager.