"SuperFreakonomics" has some ideas for reëngineering the planet

A recent article in the New Yorker takes issues with the solutions for climate change proposed by the authors of a new book “SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance” by economics Professor Steven D. Levitt and journalist Stephen J. Dubner.

According to Levitt and Dubner, the story’s message is a simple one: if, at any particular moment, things look bleak, it’s because people are seeing them the wrong way. “When the solution to a given problem doesn’t lie right before our eyes, it is easy to assume that no solution exists,” they write. “But history has shown again and again that such assumptions are wrong.” As usual, they say, the anxiety is unwarranted.

First, the globalwarming threat has been exaggerated; there is uncertainty about how, exactly, the earth will respond to rising CO2 levels, and uncertainty has “a nasty way of making us conjure up the very worst possibilities.”

Second, solutions are bound to present themselves: “Technological fixes are often far simpler, and therefore cheaper, than the doomsayers could have imagined."

Levitt and Dubner, reports the New Yorker, have in mind a very particular kind of “technological fix.” One scheme that Levitt and Dubner endorse features a fleet of fibreglass boats equipped with machines that would increase the cloud cover over the oceans. Another calls for constructing a vast network of tubes for sucking cold water from the depths of the sea to the surface. Far and away their favorite plan involves mimicking volcanoes.

To which New Yorker journalist, Elizabeth Kolbert responds:

To be skeptical of climate models and credulous about things like carbon-eating trees and cloudmaking machinery and hoses that shoot sulfur into the sky is to replace a faith in science with a belief in science fiction. This is the turn that “SuperFreakonomics” takes, even as its authors repeatedly extoll their hard-headedness. All of which goes to show that, while some forms of horseshit are no longer a problem, others will always be with us.

If you want to read more, go here: The New Yorker by Elizabeth Kolbert, Nov. 15, 2009.

Paying b*nkers

A few days ago I wrote an opinion piece on bankers' bonuses for the Edinburgh-based student newspaper called the Journal. It's going to come out later this week, but here's the "preview" (the whole text without editing). By the way, I teach a related topic (compensation contracts) in my Industrial Organization course.

Why do "we" (need to) pay bankers so much?

Whether we wanted it or not, we taxpayers are now the de facto owners of some big banks in this country, because the government bought lots of their shares to rescue them from last year's financial crisis. Now many of us are angry: why on earth do "we" have to pay huge bonuses to those bank managers, who (at least partially) are responsible for the crisis in the first place? A lot of people find this unfair and immoral.

"Immoral" is perhaps too strong a word, but I do think paying them huge bonuses after the crisis they may well have caused is hardly moral, at least in the usual sense of the word. At the same time, however, I am inclined to think that the bonuses are inevitable, especially if we want to avoid further trouble in the financial sector and, much more importantly, the whole economy. Let me explain why.

It takes tremendous expertise to run contemporary financial institutions. We all know how complicated financial products are. Even as an academic economist, I get overwhelmed by the financial terminologies and technicalities involved in my little personal banking account. I have no idea how hard it would be to stay on top of the many big things a large bank does.

Some commentators and politicians say what banks should simplify what they offer, much like traditional high street banks. However, we should never forget that it is this major development in the financial sector over the last two decades that allowed the British economy to do better than many other developed economies. And needless to say, London and Edinburgh are the two British cities that benefited most from it. True, the bankers may not necessarily understand completely what they buy and sell (, which became apparent during the crisis), but still, there are very few people who have even the minimum knowledge and skills necessary to make sure things do not become worse than they were in 2008.

Here's the first dilemma: most or all genuine banking experts are people who were, at least to some extent, involved in the crisis. It may seem insane and immoral to hire those people again to run "our" banks. But moral issues aside, precisely because we are the de facto owners of these banks, we want the best people to do the job. In principle, we can install "clean" people from outwith the financial sector into the banks' managerial teams, but in practice, that is bound to be utterly disastrous. Again, because the expertise required to run banks is fairly peculiar and because there is so much at stake, we don't want novices in there.

But why pay them so much? Shouldn't they work hard for free, now that the government helped them out? Well, another dilemma is that competent bankers are still very expensive to hire. They may be in demand by other financial firms. Or, because they had already been very well paid, they could simply retire and live a quiet life if we offered them modest salaries (like mine). We are in a free society, so we cannot force good bankers to work for us (otherwise it's slavery). Instead, we have to induce them to want to work for us. That's why we need to pay them so well. The fact that bank managers get paid in large part by the bonuses is actually a good sign, because that means they get rewarded only when they have got things right.

It seems to me that we face an uncomfortable choice between being "moral" on bankers' pay and getting out of the current downturn as quickly as possible. Of course, it would be ideal if we could remain "moral" as we get out of this mess, but unfortunately, for the reasons I've discussed here, that seems rather unrealistic. It's really hard for us to agree on what's moral or fair, but insofar as most of us benefit from the recovery of the financial sector (especially in Edinburgh) and the whole economy, I'm not too bothered by how much the bankers get. The amount of the bonuses is tiny anyway, compared to what is at stake.

Mankiw on Obama's health care reform

My colleague Olga Gorbachev draws my attention to an interesting piece written for the New York Times by Greg Mankiw (yes, THAT Mankiw). After an assessment of the supply side ideas that plagued economic thinking during the Reagan Era (my personal favourites are the crazy and fascinating ones put forward by George Gilder), Mankiw argues that Obama's health care reform is going to reverse some of the achievements of that economic doctrine.

If progressive taxes pay for the health system and federal health subsidies are smaller for families with higher incomes, the reform is effectively imposing a higher marginal tax rate on middle classes. Earning more means higher health costs for families. And that may disincentivise working harder. Mankiw does not critice the reform itself, but just want to make the point that the hardworking ethics that characterize the US (as opposed to the allegedly laziness of the Europeans) may be in danger. Of course, the trade-off is not that simple. Better health care also means a healthier population and more productive too. There are all sorts of positive externalities from an improved health system that Mankiw does not seem to factor in.