The Stern Report's Other Number

Ever since the Stern report came out last month the focus of discussion has been on choosing an appropriate discount rate and how Stern's choice of a low discount rate inflates the costs of climate change. Stern's estimate that climate change under the BAU business as usual scenario will cost us between 5-20% of future GDP is probably way out of line and many people have already pointed this out (Whitehead, Nordhaus, Tol, Mankiw) to name a few. But I think we are all focused on the wrong number. The other side of the Stern report talks about how much it will cost us to change our behavior and begin to address climate change and that number is 1% of GDP - that's right 1 freakin dollar out of every one hundred dollars of imcome. Why aren't people fired up about this? Forget the 5-20% cost estimate. Just for fun - let's assume the future costs are only 1.1% - then what do you know the CBA crowd can rest assured its worth the change. Or better yet - what if we all go back and look at our Principles of Macroeconomics book and see what GDP measures. It is nothing other than the size of the economy. Who's to say the economy couldn't shrink one percent and everyone would be better off. Krugman pointed this out over a decade ago in the context of the connection between climate policy and improving local and regional air quality. I could go on and on - but I think you get the point. If it is going to cost us one percent of GDP to avoid the risks, or should I say uncertainties for all you Knightians out there, associated with increasing CO2 levels then why not do it? One percent is the number we should be obsessing over NOT 5-20.

Gotta Love John Whitehead

Check out the post over at Env-Econ
Where John points out that almost 2/3 of us want to legalize it - mon! Perhaps more importantly is that many economists believe in environmental policy.

The Minimum Wage Debate

Greg Mankiw wants to know the answer to the following question - Can 600 economists all be wrong?

What do you think?

Intelligent Trade policy

Sub-title: Another reason I think conservative pundits are stupid.

Ever since the election results came in last week, we have been bombarded with the notion that the newly elected Dems are going to put in protectionist trade policies. If anyone even refers to the fact that inequality is growing and trade policy might have something to do with it - they are immediately labeled Protectionists.


Here's an idea - just because you want to help people in the lower end of the income distribution does not mean you do not believe in the benefits of more open trade policy. I am one who is concerned about our current income distribution and here are three ways of conducting trade policy in the future. (1) put up protectionist trade barriers - this is a really BAD idea!! (2) continue with our current trade policy - NOT a GOOD idea!! or (3) implement more open trade policies and redistribute some of the gains to those who lose in the process. Yes - you read it correctly - REDISTRIBUTE!!! Not to the point where all the gains from trade are redistributed, but SOME of them.

Here is the story I told my class yesterday. Suppose a firm packs up and leaves the US for China. Here are some of the benefits: (1) People in China get jobs, (2) prices in the US fall, (3) the firm increases its profits, (4) shareholders in the firm make money, (4) eventually workers in China start to demand US goods and services.

The primary cost is the resultant unemployment in the US. So - should we stop this firm from moving to China - NO!!! Should we let this firm move to China and then implement domestic policy to lower the marginal tax rate for corporate income and capital gains - NO!! By the way, this is what the Republicans have done. Should we let the firm move to China and raise the corporate taxes and capital gains taxes in order to help those who lost their jobs in the US - YES!!

Since the Republicans have been using option 2 and they want you to vote for republicans the next time around they will spend the next two years trying to convince you that the only other option is number 1 and this is just an out and out lie!!!

We can have more free trade and we can also have sensible policies to help those who lose in the process.

Carbon Reduction Strategies

Using incentives to reduce carbon emissions is the preferable strategy for most if not all economists. But, we don't agree on whether to use price or quantity controls. I usually favor tradable permit approaches, but I am also open to other ideas. So here is another idea.

More From Stiglitz on Climate Change

Here is a link to Mark Thoma's site.

My contribtution to the Pigou Club

Here is a short piece I wrote for the Economists' Voice.

Greg Mankiw's Blog: Real World Pigovians

Greg Mankiw's Blog: Real World Pigovians

More on gas taxes - does anyone think we might actually see a national increase?

Chicken Hawks or Chicken Doves?

Here is what John Kerry meant to say, as written by a Princeton Economist.

Hello from the Green General

Hi - My name is Jim Casey. I am a Professor at Washington and Lee University. I teach Development and Environmental Economics. I have been a guest author at Environmental Economics.

I decided to start my own blog just to see how it goes. More to come......