Thursday, July 23, 2009

Economists and Binoculars

The Economist recently pointed the finger of blame for the financial crisis on economists. Many people, including Judge Richard Posner in A Failure of Capitalism, have blamed economists for the crisis, or at least for failing to predict it. Although some economists, such as Dean Baker, correctly foresaw the problem (according to the cited article, "Dr. Baker put his money where his mouth is by selling his downtown DC condominium in May of 2004"), few sounded the alarm, and even fewer economists listened to their associates who made dire predictions. According to The Economist:
There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it.

I have two things to add. First, not all economists are macroeconomists, yet all economists are similarly maligned. Richard Posner has recognized this, but few others have. I almost feel embarassed to introduce myself as an economist, even though the work I do is not related to the crisis. Second, a failure of economists to predict better the crisis does not mean that economic theory failed. Looking back, economic theory could have perfectly predicted what happened, it just seems that macroeconomists were asleep at the helm. In my view, it's not that the binoculars failed, rather economists failed to look through the binoculars properly.

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Wednesday, July 22, 2009

Heinzerling - Appointing an Atheist Dean of the Seminary

Although I disagree with a number of President Obama's policies, I appreciate many of his political appointment. I have a lot of respect for his future regulatory czar, Cass Sunstein, and I think Austen Goolsbee has been an excellent advisor. But Lisa Heinzerling's recent appointment as Associate Administrator for the Office of Policy, Economics, and Innovation in the Environmental Protection Agency is an odd and questionable move (HT: Volokh Conspiracy). (To be fair, I'm not sure whether President Obama or the Administrator of the EPA made this appointment.)

In her book Priceless (coauthored with Frank Ackerman) Heinzerling argues that EPA's reliance on cost-benefit analysis is dangerous because, among other things, the process of placing a monetary value on human life devalues it. Heinzerling therefore feels that economics should play a very limited role (if any) in EPA's policy making. She instead urges EPA to make decisions holistically, like the military. (Dean Revesz, a defender of cost-benefit analysis and author of Retaking Rationality, notes with a hint of irony that the decision-making process leading to the Iraq war is the one Heinzerling wants to apply to environmental decisions.)

Though I don't agree with Heinzerling's ideas, I respest her work on cost-benefit analysis. Her critique of CBA helped me to refine my personal views. Still, a few things bother me about this appointment:

First, her appointment seems to be at odds with the mission of Office of Policy, Economics, and Innovation. Thus appointing Heinzerling is the equivalent of choosing an atheist to be the dean of a seminary.

The second reason I feel that Heinzerling is a poor choice is that her views are at odds with regulatory czar Cass Sunstein, who will head the regulatory agency that has oversight over EPA's economic analyses.

It will be interesting to see what changes, if any, Heinzerling's appointment brings.

The Climate is Changing - Wanna Bet?

Over at FiveThirtyEight, whiz-kid statistician Nate Silver has issued a challenge to all climate change skeptics. Here's the first part of it:

For each day that the high temperature in your hometown is at least 1 degree Fahrenheit above average, as listed by Weather Underground, you owe me $25. For each day that it is at least 1 degree Fahrenheit below average, I owe you $25.

Although the challenge is interesting and has been getting a lot of blog coverage (see here, here, and here), there are two reasons I don't think the outcome is likely to prove anything. First, definitive global warming proof can be gathered only over long time periods (i.e., decades), and it seems unlikely that anyone will continue the challenge for decades. A few warm months does not climate change make.

The second reason this bet is inconsequential is that few people deny that global temperatures are rising. Anyone with the ability to interpret a simple graph can see that the earth is getting hotter (see the Wikipedia graph above). The debate for most climate change skeptics is whether humans are causing the warming, a question that Silver's bet does not address.

A bet that lasted decades, on the other hand - something like the Simon-Ehrlich wager - would be really interesting.