Saturday, February 25, 2006

Poor Thinking on Population

According to

On Saturday, Feb. 25, at 7:16 p.m. Eastern Standard Time, the population here on this good Earth is projected to hit 6.5 billion people.
Many people see this as a landmark in mankind's pursuit to destroy itself. They argue, in standard Malthusian fashion, that an increasing population on Earth will lower standards of living and ultimately destroy the planet. See Paul Ehrlich's work for an example.

The increase in Earth's population is driven by, what many would consider to be, increases in the standard of living - namely, a dramatic increase in life expectancy. As one UN consultant put it, "It's not that people suddenly started breeding like rabbits; it's just that they stopped dying like flies." Should society be concerned that more people are living longer?

Is 6.5 billion people and the growth trend that it designates something to be concerned about? According to the U.S. Government's official data (as cited in The Skeptical Environmentalist), "the growth of the global population peaked in the early 1960's at just over 2% a year". In fact, UN scientists predict that the world's population will stabilize just short of 11 billion in the year 2200. It seems that concerns of eternal population growth are simply not worth worrying about.

But what is the sustainability of the predicted stabilized population size? Economist Julian Simon has researched the impact of populations on economic growth and finds that:

...more people and more wealth has correlated with more (rather than less) resources and a cleaner environment...The most important benefit of population size and growth is the increase it brings to the stock of useful knowledge. Minds matter economically as much as, or more than, hands or mouths. Progress is limited largely by the availability of trained workers.
As such, Simon deems people as the "ultimate resource" and welcomes their presence. More people is likely to make the world better off.

Considering that the growth of world population is slowing and will reach a steady state and that people are a valuable resource, I can't help wondering why there has been so much needless commotion about population growth.

Tuesday, February 21, 2006

Revealed Preferences

Economics has an advantage over the other social sciences because it recognizes that people reveal their preferences through their actions. If a person is confronted with two options, Option A and Option B, and the person chooses Option A, then we know that he prefers Option A to it's alternative.

This does not mean that Option A is the ideal choice in a world of no scarcity or even that it is an enjoyable choice. It may be the best from a set of bad options. Economics simply recognizes that given the individual's set of preferences (based on subjective valuation), he preferred one over the other.

While this may seem a rather trite topic for those immersed in economics, it is often completely overlooked by scholars in other disciplines. For example, Bruce Shelley writes in his book on church history about the changing fortunes of the workers during the Industrial Revolution:

The Industrial Revolution greatly increased the wealth of mankind, but it brought a host of evils for the workers massed together in the ever expanding factories of European and American cities.
Shelley goes on to list a variety of "social ills" such as dangerous working conditions, low pay, cramped living quarters, long hours, etc. I gladly grant that these are generally not preferable. Most people, including myself, don't want to work fifteen-hour days in a dirty, dangerous factory for a pittance. However, that doesn't automatically make such a situation an "evil" one.

There was, as Shelley notes, a great immigration into cities from the rural area during this time, and this should tell him something very important. That is, although factory work and city life was not ideal, it was better than the alternatives according to the preferences of the workers. They believed that they were better off in the city than if they had stayed in the country.

Seen from the individual's perspective, these "social evils" evaporate into thin air. In actuality, it was these social evils that were making the everyday worker better off.

Friday, February 17, 2006

The Man Without a Plan

In times of crisis, hysterical people are want to cry out "Somebody do something!" There is a feeling that action must be taken and that it must be taken decisively. This is the perspective that Amartya Sen offers in his scathing review of William Easterly newest book, The White Man's Burden (yet to be released).

Sen's perspective on development economics differs widely with Easterly's. On the one hand, Sen recognizes that Easterly has brought up important issues:

"[he] is also right to note that the failure of many grand schemes results from their disregard for the complexity of institutions and incentive systems and their neglect of individual initiative, which must be societally encouraged rather than bureaucratically stifled."

Greater attention to the formal and informal institutions is critical when considering aid to developing countries. If a blind eye is turned to theses, incentives are easily distorted and result in tragedy. The first half of Easterly's first book, The Elusive Quest for Growth, is an ample source of examples of such.

On the other hand, Sen feels that Easterly is overly exuberant in his castigation of planners and insufficient in argument. Sen believes that Easterly's greatest oversight is his failure to understand the distinctions between different types of economic problems. Sen argues that there is a fundamental differences between the market for Harry Potter books and the products that are needed to save the lives of poor populations. Easterly allegedly eschews this distinction in favor of supporting an entrepreneurial driven market solution.

In short, Easterly believes that property rights and markets will allows "searchers", i.e. entrepreneurs, to bring prosperity to countries that are mired in penury. Sen interprets this "hands off" approach as actually being no plan at all. He suggests that minor tweaking of current organizations and projects will in fact deliver the desired results.

Monday, February 13, 2006

Indiana's road to freedom

In a surprising move by the Indiana state government to make their principality more efficient, the State seems poised to sell the 157-mile Indiana Toll Roll to a Spanish/Australian partnership. Under the proposed deal, Cintra (Madrid) and the Macquarie Infrastructure Group (Sydney) would pay $3.85 billion for the rights to maintain, operate, and profit from the highway. Senate approval awaits; the House has already given the go-ahead.

Indiana, by the way, is rated at number 10 in Fraser's Economic Freedom of North America, a ranking of American states and Canadian provinces.

The privatization of the roads is starting to gain steam. Here's a list of non-interstate toll roads in the U.S.; a handful of them are privately held.

Since we here at TPS believe in the vitality of a wide spectrum of ideas, here's an enjoyable post that does not support the Indiana toll road proposal. A personal favorite: "...the very fact that the privatization of state roads in on the table is a troubling development that only encourages other enclosures of the commons." It is unclear whether the author believes that roads should be provided by those according to ability to those according to need. Nonetheless, objections to toll roads are usually along these lines.

Governments have no incentive to maintain roads to any level of respectability because they will receive payment (in the form of taxes) regardless of their actions. A state-run toll road is no solution either. Government-run toll roads simply impose an additional cost on top of taxes proportionate to those who use the road; while the matching of use with payment is a step in the right direction, the government can ultimately use the power of taxation in order to support any road, toll or otherwise, it so chooses. The government just doesn't have the incentive to run a road well.

The important aspect of privatizing roads is that the new owners become residual claimants on their recently acquired asset. Cintra and Macquarie have every incentive to make sure that their road runs flawlessly; after all, they can not resort to John Q. Public to compensate for their mistakes. The road will be better maintained. Improvements will be done in a more expeditious manner. Those that do not derive benefit from the road will not be coerced into paying for it.

There is no doubt that privatizing the Indiana Toll Road is a move away from the red tape of state road management and a move towards a better, more efficient roadway system. Congratulations to the Indiana State Legislature for seeing the road from the potholes.

Friday, February 03, 2006

How much more regulation is left in the tank?

There's a been quite a bit of hubbub over Exxon's record profits for the fiscal 2005 year-- $36 billion at final count. (For a sense of scale, that puts them right above the 2004 GDP of Croatia, and ahead of Luxembourg, Iceland, and Estonia.) Some choice quotes:

- Senator Barbara Boxer (D-CA): "Working people struggle with high gas prices and [oil companies'] sacrifices appear to be nothing."

- House Speaker Dennis Hastert's spokesman Ron Bonjean: "The message is basically that while it's not the American way to punish success...what are [oil companies] doing to bring down the costs?"

- Senator Arlen Specter (R-PA): "We intend to do something about [rising prices to consumers]...It just may be time to legislate in this field."

Moreover, those ciritical of Exxon's profit level have called for an excess profits tax, and the FTC is looking into whether the oil companies varied production levels and manipulated prices.

Excess profits tax? Economics aside-- even if there were justification for imposing such a tax, how could you ever impose it in a non-arbitrary manner? At what level to profits become "excess?" (My cousin made a killing selling lemonade for $3 a glass last summer-- isn't that a bit "excess?") Is it on a percentage basis, or do we all just get intimidated by big companies that generate a lot of revenue simply because of their size and draw the line at, say $10 billion? Taxes don't help anyone outside of the people that levy them-- that much is easy to see. But they are a part of everyday life, so I think that all you can hope for is that they apply to everyone equally. With this excess profits tax, not only will it not apply to big companies in the same way it applies to small companies, but all large companies won't even be treated the same. I've heard plenty of talk about hammering the oil companies; the Wal-Marts of the world seem to have been spared the crosshairs (at least on this issue). Interest group politics, indeed.

One figure that shouldn't be overlooked: Industry profit on gasoloine is an "excess" amount of 9 pennies per gallon. In light of the prices at the All-Star Express in Morgantown this morning, that amounts to a 3.9% take on the sale. 3.9% is excess? What does that make the 35% that the IRS imposes on the top income bracket?

The message that Congress wants to send to oil companies is to maximize the volume of their activities, not the profitability. I might be wrong, but didn't the Soviet Union try that with all of their companies for about 70 years?