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February 2012
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Another economic misconception

The Denver Post’s Andy Vuong demonstrates a common misconception in his article “Tebow is money out of the pocket.

The misconception is that increased sales in one particular segment of the economy is a boost to the entire economy. For example, Vuong cites the case of

… 20-year-old part-time college student Hector Armendariz, [for whom] Tebow has meant an extra $25 a day for the past three weeks through sales of T-shirts and hoodies featuring his likeness.

That is certainly good news for Hector, but it is completely irrelevant to the overall status of the Denver economy. That extra $25 is money that would have been used elsewhere if not on Hector’s merchandise. For (an admittedly over-simplistic, but still valid) example, Joe Customer has decided to buy a $25 t-shirt. Joe can spend the $25 at Spencer Gifts on a Chuck Norris t-shirt or buy a Tebow t-shirt from Hector. Either way, $25 is spent on a t-shirt. Why should we be happier for one t-shirt vendor over another?

The same principle applies to larger figures, as well:

Tom Clark, executive vice president of the Metro Denver Economic Development Corp…  said a home playoff game could add $5 million in spending in Denver, with some of it coming from visitors from outside the metro area because of the team’s regional appeal.

At least Clark distinguishes money spent by locals from money spent by visitors. The local contribution toward that $5 million would be in the Denver economy whether or not the Broncos have a home playoff game. The balance would still be in the region, to be spent on movie tickets, symphony tickets or maybe even a book or two.

It all looks good if you only look at the credit side of the ledger

The headline story in today’s Denver Post (”Orion rockets back to life“) claims that the federally-funded Orion spacecraft project “produces about $300 million in annual revenue.”

It leaves out, of course, that the $300 million in annual revenue is taken from taxpayers, for a net effect on the economy of, roughly, say . . . about $0.

Greed has nothing to do with it

The Denver Post has a front page story today concerning housing foreclosures. It features a sad story about a man in the Vail Valley who is losing his house. (See “‘Big boy’ mess rolling downhill, hitting locals“).

The man, Harry Cessna, says
“I sat here — happy and content in my little home — and watched all these big boys play with money, and I saw how greedy everyone got, selling and going bigger and selling and going bigger. Now I’m getting punished along with the rest of them.”

I feel for Mr. Cessna. However, the “big boys” playing with money has nothing to do with his foreclosure. As the Post reports,
Harry Cessna admits he has struggled to make payments on the modular home he bought in Gypsum in 1989 with his soon-to-be wife.
He was late a couple of times as he helped his wife fight cancer for two years, a battle she lost in 2007. Without her salary, Cessna, a house painter, could barely make payments on the acre-lot home bought for $55,000.
The story is very sad and Mr. Cessna deserves our sympathy. But he is losing his house because he lost his wife’s income and he could no longer afford the payment on his mortgage. Evil fat cat greedy “big boys” in loud pinstriped suits lighting cigars with $100 bills did not have a thing to do with it.
Anecdotes and personal stories sell newspapers. They do very little to address the country’s economic problems, which stem from well-documented government intervention in, among other things, the housing market.

Keynes Versus Hayek, In Rap

This video is brilliant. I’m blown away. “I want to steer markets.” “I want them set free.”

Krugman Smears SuperFreakonomics

Steven Levitt and Stephen Dubner certainly don’t need my help defending their new book SuperFreakonomics. They’re doing a great job of it themselves. However, I do want to draw my readers’ attention to the debate surrounding the book and recommend the book itself.

The first thing to note about the book is that it contains five chapters plus an epilogue (about monkeys). The main text of the book runs through page 216 (while notes and such run through page 270). The fifth chapter mostly concerns climate change, though it also rambles into topics such as auto thefts and AIDS, and it runs from page 165 to 209. The book covers a wide range of topics from prostitution to hospital sanitation. But the part about climate change is what has the critics riled up.

Though the debate has since seen more developments, I want to focus on Paul Krugman’s attack on the book in his blog post, Superfreakonomics on climate, part 1, published October 17.

Krugman claims that “the first five pages” of the chapter on climate change “are enough to discredit the whole thing… [b]ecause they grossly misrepresent other peoples’ research, in both climate science and economics.”

The chapter opens with the “global cooling” story — the claim that 30 years ago there was a scientific consensus that the planet was cooling, comparable to the current consensus that it’s warming.

Um, no. Real Climate has the takedown. What you had in the 70s was a few scientists advancing the cooling hypothesis, and a few popular media stories hyping their suggestions. To the extent that there was a consensus, it was that there wasn’t much evidence for anything, and more research was needed.

Krugman puts much more trust in the politically subsidized computer models projecting human-caused global warming than I do, but he legitimately points out that global warming now has much more scientific support than global cooling did decades ago. Uncle.

So where do Levitt and Dubner claim that global cooling was the consensus in the 1970s? They don’t say that. Krugman just made that up. Talk about grossly misrepresenting other people’s research.

What Levitt and Dubner do is quote two old articles about global cooling to begin their chapter. Through the course of their chapter, Levitt and Dubner make precisely the same point that so excites Krugman: global cooling soon lost support whereas global warming now has widespread scientific support.

On to the next point. On page 169, SuperFreakonomics states, “The economist Martin Weitzman analyzed the best available climate models and concluded that the future holds a 5 percent chance of a terrible-case scenario — a rise of more than 10 degrees Celsius.”

Krugman replies,

Yikes. I read Weitzman’s paper, and have corresponded with him on the subject — and it’s making exactly the opposite of the point they’re implying it makes. Weitzman’s argument is that uncertainty about the extent of global warming makes the case for drastic action stronger, not weaker. … Again, we’re not even getting into substance — just the basic issue of representing correctly what other people said.

So where do Levitt and Dubner imply that Weitzman’s paper urges weaker action on global warming? They don’t imply that. Krugman just made that up. Because it’s “just the basic issue of representing correctly what other people said.”

Indeed, just two paragraphs later, Levitt and Dubner quote another economist who favors spending over a trillion dollars per year to address the problem. Perhaps that’s not sufficiently “strong” action for Krugman, but it seems pretty strong to me.

Krugman more recently complains that Levitt and Dubner don’t include arguments from Weitzman’s paper that Krugman wishes they had included. But so what? Krugman is welcome to write his own book on climate change. Levitt and Dubner use the information from Weitzman fairly to set up their question, “So how should we place a value on this relatively small chance of worldwide catastrophe?”

Levitt and Dubner’s broader point is that it’s far cheaper and much faster-acting to geoengineer cooler temperatures than it is to dramatically curb carbon emissions. Read the book for details, or read Levitt’s post on the matter.

You might also want to check out replies from Levitt and Dubner to other environmentalist critics.

Our authors do raise an interesting question: given that geoengineering seems like it would solve potential problems of global warming much faster and much cheaper, why are most environmentalists so dismissive of the idea? I think my dad and I provide the answer in our recent op-ed: environmentalists “see untouched nature as intrinsically valuable. They have no problem with natural climate change, smoke, or chemicals. They just dislike anything that people do to alter nature.”

Environmentalists favor carbon reduction because that reduces human interaction with the rest of the environment. Environmentalists oppose geoengineering because it increases human interaction with the rest of the environment. And that preference has exactly no basis in science.

In the end, the mere fact that Paul Krugman blasts SuperFreakonomics should interest readers in buying and reading the book.

* * *

Which is not to say that the book is perfect. Apparently I’m the outlier in reading the book from the beginning, but my issue with it arose much earlier, in the introduction, pages 2 and 3.

Levitt and Dubner write that “1 of every 140 miles is driven drunk, or 21 billion miles each year.” The “total number of people killed in alcohol-related traffic accidents each year” is “about 13,000.”

Here comes the sketchy part: “The average American walks about a half-mile per day outside the home or workplace. … If we assume that 1 of every 140 of those miles are walked drunk — the same proportion of miles that are driven drunk — then 307 million miles are walked drunk each year.”

The upshot is that, given “more than 1,000 drunk pedestrians die in traffic accidents,” it’s more dangerous to walk drunk than it is to drive drunk.

But whey should we “assume that 1 of every 140 of those miles are walked drunk?” The notes offer no clue about this. Offhand it seems like a wildly implausible assumption.

First, a lot of people go on long walks every day, and typically people don’t get drunk before they exercise. So that skews the averages. Second, when people are rip-roaring drunk, it can seem very hard to walk down the street but very easy to turn the ignition key. So I suspect that the fraction of miles walked drunk is much lower than what our authors assume — which bolsters their point that drunk walking is dangerous.

Regardless of the exact risks, as someone who used to abuse alcohol, I can confirm the author’s broader point that getting drunk can be generally dangerous, and traffic fatalities hardly exhaust the list of potential harms.