Observations on Anzac Day

Anzac day is when Australians and New Zealanders remember their casualties of the first World War and other conflicts. It has become a defining event for the sense of nationhood of the Australians and solemn commemorations are held all over the country. Sharing the same background (some ancestors on the English side of my family fought alongside the Anzacs on the Western front), I find it a great tradition to remember the horrors of that war. It is also an event that is fascinating as a social scientist. Some observations:

  1. A lot of the commemorations are state-sponsored via the Department of Veteran affairs. This department is running out of veterans to take care of, but has over the years increased its budget for commemorative services. It is actually quite hard to figure out just how many of the various ‘budget posts’ should be counted as commemorative, but at best guess we’re talking about half a billion dollars and rising. One of the reasons why Anzac day appears to become a bigger and bigger event as time goes by might quite simply be that it is a way for an existing ministry to spend surplus resources on its budget.
  2. The ‘message of Anzac day’ has changed within Australia over the decades to suit the morals of the day. I was at the Anzac celebration of the school of my kids, with military commanders giving the assembled quiet and disciplined kids the supposed reasons for why so many young men died in WWI. The story these kids were told was that the Anzacs died ‘for tolerance’, ‘mateship’, ‘standing up to bullies’, and more of those values we hold dear today. The kids were basically told to follow the social norms of current day Australia as a means of honouring the memory of the fallen of previous wars. I don’t have an inherent problem with this, but do note as a social scientist that such statements take liberties with the truth. At the time of WWI, appeals were made on the basis of ‘God, King, and Country’. In the intervening century, God and King have been axed from the moral appeal, but ‘the Country’ is still there. Also, tolerance and anti-bullying were not really a big thing in the 1910s when Australia was still a very ethnically ‘pure’ country and bullying was an institutionalised accepted reality in schools. Anzac day is hence a bit like going to church on a Sunday: the book of yesterday is reinterpreted to prop up the moral code of today.
  3. The ability of kids to imagine themselves part of a group that extends over the centuries but that they are not objectively part of is quite remarkable. At a guess, maybe 25% of the kids at the school commemoration will have had actual Australian ancestors involved in WWI, but they all somehow identified with ‘the Australians that went to war’, even if both parents were Chinese or African. It is simply an amazing thing how easily kids adopt stories of cultural continuity as their own even if that story has no real bearing on their actual personal histories. This imaginative capacity is not in any economic model I know, but clearly underlies our sense of identity and hence underlies important economic variables too, such as our willingness to pay taxes for ‘this country’.
  4. The ‘message of Anzac day’ is different in different countries. Where I grew up, i.e. Western Europe, a big message of similar commemorations was the pacifist spirit of ‘J’accuse!’, which was the historic quote from Emile Zola that was also the title of a French film in 1919. It means ‘I accuse’ and one of the characters in that film explains it to mean ‘accusing the war… accusing men… accusing universal stupidity’. We were told as kids that WWI was one of history’s most stupid mistakes started by leaders who get themselves into a mess because their pride wouldn’t allow them to back down, and fought by gullible enthousiastic populations who thought of war as something exciting. The message we were told was that people should not blindly follow their leaders, but should think for themselves and question the logic of going into conflicts just because the conflict exists. Interestingly, there is almost none of this pacifist message left in Australia, though perhaps it was there and has simply been lost over the decades. Indeed, the kids at the school I went to for Anzac day were told to be silent, obedient, and to take it on faith that Australian men lost their lives in droves for a good cause. There is hardly any mention in Australian commemorations that it lost the flower of its nation to a pointless mistake on the other side of the world, lead by foreign commanders (such as Winston Churchill) and not even by one of their own. I must say that I find it curious that Australians are not far more critical about the leaders they blindly followed into WWI (as well as later on) but make excuses to exonerate the mistakes of those leaders and allies, even when the populations of those allies themselves are far less forgiving.

I hence like the idea of Anzac day, but miss the pacifist message that WWI was one of the biggest f-ups of the last century and that we should think for ourselves and question the wisdom of following leaders blindly into battle.

The Kopenhagen circus.

Kopenhagen is currently witnessing two comic relief shows. One is regularly seen in the amusement area known as Tivoli, and the other is the climate change conference. The core element of pure humour in the second circus is that the actions of many governments are diametrically opposed to their words, mainly for the benefit of a watching population that wants tough words but no real action. It is like watching one clown after the other pretending to be sad whilst laughing if the rest of the clowns’ backs are turned.

Let us over the fold once more review the core elements of the actions and the words in this debate, and let us start at home.

Continue reading “The Kopenhagen circus.”

How far are we in the science of geo-engineering?

Suppose you believed the world was getting warmer due to humanity’s greenhouse gas emissions and you worried about it but you can’t get yourself to believe that the 200-odd countries in the world are ever going to agree to drastically reduce their emissions via some joint scheme, partially because it is too hard to measure many emissions, partially because it might take a world dictatorship to actually enforce such a deal, and partially because some countries are most likely going to be much better off if the world warms up and hence are going to sabotage any joint plan. You would find yourself backed up in this opinion by a lot of auxiliary data on the difficulties of letting go of the growth fetish, ranging from the known miniscule effect that the ETS schemes currently on the table would have even if they were agreed upon, to the factoid that China is building two coal powered stations a week, to the factoid that in nearly every election politicians promise their electorate more economic growth (read: bigger cars, more holidays to far-away places, more gadgets running on energy, etc.), to the factoid that even the European countries who have been calling for reductions in emissions for over 2 decades have themselves been happily ‘burning the midnight oil’.
For people like this, which includes me, geo-engineering seems the only realistic way forward, i.e. some kind of technological fix that can be implemented by a single worried country or a sub-set of countries desperate enough to try unproven technology to cool the planet down. No world dictatorship or elusive coalition needed, hence much less of a free-rider problem. How serious are good scientists thinking about such technological fixes, what are the front runners, and are the front runners indeed things a sub-set of countries could implement?
It turns out that the possibility of geo-engineering is taken much more seriously in the academic community than you’d ever think from reading the newspapers. English scientists in particular seem to have adopted the idea that they should look for technical fixes, just in case the world coalition on CO2 emission reduction doesn’t quite live up to the dreams of its adherents. The Royal Society for instance advocated research in geo-engineering quite openly (see here) making it clear sensible people are thinking about this option seriously. Find over the fold a basic breakdown in basic options and their characteristics.

The geo-engineering options fall in two categories: trying to get the CO2 out of the air or reflecting more sunlight before it is absorbed (SRM: Solar Radiation Management).
On the first, the UK Institute for Mechanical Engineering put out a paper (here) where they look at several options. One of their favoured ‘absorption’ plans is artificial trees, where the trapped CO2 has to be buried underground. The tough thing about this option is partially the cost of these artificial trees (reportedly 20,000 pounds per unit of which you’d need 100,000 to only cover the UK transportation sector, meaning you’d be talking about hundreds to thousands of billions of dollars for the world as a whole) but also the problem of how to actually store the huge volume of CO2 (abandoned oil fields are touted, but this is not as easy as it sounds). Nevertheless, it can be done by a subgroup of countries if it has to be done, though we might end up digging an awful lot of big bunkers deep into the ground to get rid of all this CO2.
Another favoured solution by these mechanics is to capture CO2 in algae, either directly in coal-fired plants or as algae strips on the sides of buildings. The obvious problem is again that one would have to bury an awful lot of algae somewhere, but in principle it is a solution that can be implemented unilaterally at great cost. The suggestion to use the algae as fodder for animals is probably more cost-effective but has the obvious disadvantage that this doesn’t get the CO2 out of the whole system.
The last of the favoured absorption solutions is to try to get the oceans to absorb more CO2 via all manners of ‘Ocean fertilisation’, with the saturated algae drifting to the bottom of the ocean with all their CO2 trapped in them for a long time. So far this option has proven harder than hoped, with the well-known failed attempt to get sustained massive algae blooms via pouring some iron into the water. Apparently, some Australian scientists are involved in seeing whether nitrogen and phosphates would be a better idea to put into the water than iron, but the technology looks quite dicey at present. In particular, unlike the other ones so far talked about, there is much more risk of doing unintentional harm by adding massive amounts of chemical substances into the ocean as opposed to burying some CO2 captured in one way or another.

If we then look at the SRM solutions, a couple of interesting ones have popped up in the UK reports. One of the mentioned solutions by the Mechanics is to paint all the buildings white so that they reflect more sunlight. This is clearly the kind of thing that might well capture the public imagination (‘save the planet: paint your roof white’), but it is much harder and expensive than it sounds. For one, we’d have to reflect something like the whole area of Australia back into space to reduce the temperature, which is far more than merely the surface of all the buildings in the world. Also, white roofs tend to get dirty over time and the paint may not itself be all that environmentally friendly either. Hence, we’re talking a high cost, high maintenance, solution that might well be more useful as a symbolic DIY policy rather than as a serious option. Yet, the potential downsides of this method seem smallish in the sense that no-one sensible is going to insist on the impossible pre-requisite of knowing with certainty that we wont be doing unintentional harm by reflecting some more sunlight via white buildings.
The Royal Society also reviewed a whole set of possible SRMs (see here). One of their most recommended options is to put ‘sulphate aerosols in the stratosphere above natural levels, causing an increase in planetary albedo and thereby reducing the incoming solar radiation’. The obvious problem with putting massive amounts of a chemical (SO4 and the like) into a particular region of our air is that there is the potential danger of unintended consequences. Yet, it is the kind of thing with which an individual country can experiment and something of which the consequences can be learned about by trial and error before implementing it on a massive scale.
A more outlandish option is to put reflectors in space so that less sunlight hits the earth. An ‘L1 point shield’ would be best placed at a particular point between the earth and the sun so that it is kept there by the combined gravitational pull of both bodies. An interesting sideline of this whole area (which has really generated the enthusiasm of a whole horde of engineers who have each come up with their own variant) is that they have figured out you only need to deflect sunlight by a tiny amount such that it misses the earth. My problem with this option is that it would seem fantastically expensive to put enough mirrors into space to reflect the equivalent of the total radiation hitting Australia without anything going wrong. These mirrors have to be in exactly the right spot, themselves deflected easily by the smallest of gravitational pulls from comets or what-have-you. It basically does not sound plausible at this point that we will be able to do this now or in the coming century or so.
Another interesting idea is to get the clouds to be whiter in order to reflect more sunlight. The way to get whiter clouds appears to be to generate better ‘mini water droplets’ and a whole host of options exist to attempt to do this, including ocean sprays and particular forms of coal dust that form the nucleus of these droplets. The potential disadvantages of trying it appear smallish of this option (whatever we put into the air will be quickly going back in the form of rain so it is hard to imagine permanent damage from putting something into the air of which there is already quite substantial amounts in the air), but whether it might work or not appears completely unknown.
Summarising, there are respectable scientists spending their time on geo-engineering solutions, with the above merely being the ‘front-runners’ of dozens of proposed schemes. None of the proposed solutions talked about above appear to be thought of as ‘proven and implementable at acceptable costs with minimal risks’ at this point, but as someone who basically views the whole global ETS carnaval with bemused incredulity I am heartened to see serious thought is put into what we might actually end up doing as a subset of desperate countries and that there appears to be some hopeful candidates on the table.
Of course, having said all this, my front-runner for what will actually happen is that the world as a whole will simply adapt to whatever climate change our energy-guzzling way of life condemns us to. Should geo-engineering really be implemented by a subset of desperate countries then the problem will be that the optimal climate for one country may not be the optimal one for another, i.e. those countries currently secretly happy with climate change may well move in the opposite direction with their own geo-engineering if the promised warming of the planet is thwarted by someone else. We may thus end up with ‘climate wars’ where, say, Russia does its best to pump as much CO2 into the air as it can and Canada paints all its buildings black whilst, say, Australia puts SO4 into the stratosphere and Japan fills the oceans around it with phosphate. Perhaps such climate wars in turn will lead to a ‘geo-engineering dis-armament UN body’. You can just imagine the UN inspectors checking that the buildings in Vancouver are not all black! All such humour aside, the possible political dynamics of geo-engineering are scary.

Suppose you believed the world was getting warmer due to humanity’s greenhouse gas emissions and you worried about it but you can’t get yourself to believe that the 200-odd countries in the world are ever going to agree to drastically reduce their emissions via some joint scheme, partially because it is too hard to measure many emissions, partially because it might take a world dictatorship to actually enforce such a deal, and partially because some countries are most likely going to be much better off if the world warms up and hence are going to sabotage any joint plan. You would find yourself backed up in this opinion by a lot of auxiliary data on the difficulties of letting go of the growth fetish, ranging from the known miniscule effect that the ETS schemes currently on the table would have even if they were agreed upon, to the factoid that China is building two coal powered stations a week, to the factoid that in nearly every election politicians promise their electorate more economic growth (read: bigger cars, more holidays to far-away places, more gadgets running on energy, etc.), to the factoid that even the European countries who have been calling for reductions  in emissions for over 2 decades have themselves been happily ‘burning the midnight oil’.
For people like this, which includes me, geo-engineering seems the only realistic way forward, i.e. some kind of technological fix that can be implemented by a single worried country or a sub-set of countries desperate enough to try unproven technology to cool the planet down. No world dictatorship or elusive coalition needed, hence much less of a free-rider problem. How serious are good scientists thinking about such technological fixes, what are the front runners, and are the front runners indeed things a sub-set of countries could implement?
It turns out that the possibility of geo-engineering is taken much more seriously in the academic community than you’d ever think from reading the newspapers. English scientists in particular seem to have adopted the idea that they should look for technical fixes, just in case the world coalition on CO2 emission reduction doesn’t  quite live up to the dreams of its adherents. The Royal Society for instance advocated research in geo-engineering quite openly (see here) making it clear sensible people are thinking about this option seriously. Find over the fold a basic breakdown in basic options and their characteristics.

Continue reading “How far are we in the science of geo-engineering?”

Random odd thoughts I: why is the informal economy so small?

Some things seem to need no explanation, but are not obvious at all on reflection and, if you wonder about them, suggest something of interest about the economic system. Consider the question of why the informal economy is so small, leading to the question of how much more productive the formal economy must be than the informal economy to make sense of how little informal economic activityy there is. See over the fold for the full argument.

Continue reading “Random odd thoughts I: why is the informal economy so small?”

Which production factor gets destroyed in major recessions, part II?

In a post a few weeks back, I raised the question of what additional production factor one would have to include into the current production function framework in order to have a plausible story about the recent crisis.

That post included a set of conditions any candidate would have to pass in order to fit the current crisis and be interpretable as a true factor of production. From the ensuing reactions, two main candidates emerged: a mystery factor that gives a role to lines of credit (suggested by James A); and input and output linkages (suggested by doctorpat, Ian King, and, implicitly, _Tel).
Let us now add more information to this question and see whether the proposed production factors have something to say about other major economic crises that we have known in relatively recent economic history.

The hope is that we need only one factor to generate a reasonable story for several major downturns. If  we’d need a very different new factor to explain each different major economic downturn, then the exercise of looking for new production factors becomes more futile because there is then less hope that having a good  explanation for each of the previous downturns will say anything of much use to inform us about what to do to prevent or cope with the next one.

Below is a graph that summarises the GDP movement of three other major economic downturns.

GDP movement during major recessions in the US, Russia and Indonesia
GDP movement during major recessions in the US, Russia and Indonesia

The blue line shows the Great Depression, in which case the 0 point on the X-axis denotes 1929; the red line shows the collapse of the Russian economy after the changes in 1990; and the green line shows the Indonesian collapse after the Asian Financial Crisis of 1997. In each case, GDP is normalised to be 100 at the start of the crisis and time is re-set to 0 at the start.
The first striking observation is that these three crises are far bigger in magnitude than the current crisis. Indeed, the Russian collapse was so spectacular that I have long wondered how it is possible that our macro-textbooks are not full of insights gained during such a spectacular macro-event. Stiglitz already noted in the 90s that the Russian collapse shouldn’t have occurred under the conditions we still teach as good descriptions of the aggregate economy, but it clearly hasn’t mattered for Western textbooks that a large economy on the periphery did something interesting.
The main question to briefly consider though, is whether the two candidate factors X are known to have been involved in these downturns too? Lines of credit were certainly important in the Russian case (as in the whole of the former USSR), where firms had large amounts of outstanding debt with other firms and the unwinding was a tricky business.

Lines of credit were also important in Indonesia and the Great Depression. Hence credit lines can at least potentially ‘fit’, though it should still be worked out via which actual production factor they affect sold production.

Linkages are clearly of relevance in the Russian case where the whole central coordination mechanism fell away and the ensuing ‘disorganisation’ (A phrase used by Blanchard and Kremer 1997) created many firms who had no suppliers and no clients. Campos and Coricelli in their 2002 Journal of Economic Literature article also point to within-sector reorganisation of links as a probable factor in the collapse.

Whilst linkages are probably relevant in the Asian Financial crisis, it is not well-documented how they might have played a role. We know many city labourers went back to the countryside, however exact numbers are unknown because most people who originally came from the country to find urban employment are unregistered and therefore not included in unemployment and migration data etc (explanation paraphrased from a paper by Tran Tho Dat).
We also know that the capital embedded in collapsing firms was not quickly re-used by others, but there’s no specific account I know of that  discusses the collapse in terms of broken linkages.

For the Great Depression, on which acres have been written, I also do not know of anyone looking at it through the lens of links. One might say it is implicitly there when people talk about the issue of bankruptcy, as bankruptcy to a perfect market economist merely means the freeing up of previously inefficiently used production factors. From a link point of view, the importance of bankrupcy is that people and capital are idle for quite a while before they are ‘re-linked’.

Any ideas on how we should think of disruptions in lines of credit and its impact on the real economy via a production factor in these three crises or the current one? Any anecdotes on links?

Which production factor gets destroyed in major recessions, part I?

(This is my first post at Core economics, cross-posted with ClubTroppo)

There has been much talk in the last 12 months about the relationship between macro-economic theory and explanations of the current recession. Krugman essentially dismissed most current macro theory as being delusional about the workings of major recessions. His major argument (which goes back at least to Stiglitz in the mid 1990s) is that, within Real Business Cycle theories, major recessions are at their core viewed as mass holidays.

The ‘holiday’ view of recessions essentially arises from the fact that most macro-models take a perfect-market view of the aggregate economy and boil down the complicated machinery of GDP creation into a smooth production function which usually only includes Labour, Human capital, Physical capital, and Technology. As soon as you realise that the factories have not been bombed, that no-one has shot the workers or de-educated them and that people haven’t forgotten how to use the internet, then you are by necessity forced to say that any large reduction in production must have been because workers decided to go on holiday. Of course, you can redefine any of these ‘basic’ production factors to mean ‘the rest’ in which case you can tautologically say changes in it explain everything, but that kind of window dressing is ultimately useless.

In this blog I simply want to pose the question of which additional production factor we would have to think of to augment our models with, such that we get a more palatable story of what happens in major recessions, whilst still remaining within the confines of a production function view of the economy. Let’s look at what must roughly be true of this mystery production factor X:

–          It must be easy to destroy X and hard to build up. If it wasn’t true that X was easy to destroy, then one couldn’t have a major reduction in GDP because the other production factors don’t really take a hit during recessions. If it was easy to build up again, then recessions should be over very quickly and one should be able to return the aggregate economy back to the path it was on previously. We know this is not true and that it has, for instance, been argued that the Great Recession of the 1930s really only ended in the Second World War (see here for support and here for a paper with a contrary view).

–          X must have something to do with the utilisation of labour. This is because we know that the utilisation of labour quite closely follows the downturn and subsequent upturn, just as in this recession the GDP downturn was very quickly translated into losses of jobs and losses in labour participation. In the latest recession for instance, the US Department of Labor estimated the gross job losses totalled 7.4 million in the first quarter of 2008, whilst the US Department of Labor figures showed a loss of 533 000 jobs in the month following October 2008, the biggest drop since December 1974. For more, see here.

–          X must have an element of a negative externality about it. If this weren’t true, then one would be forced to arrive at the absurd conclusion that people knowingly destroyed their own X and accepted the huge loss of income stream associated with it. There is no believable story that would make individuals inflict the kind of income loss that we see in recessions on themselves.  Hence, to some degree, the reduction in X must be due to the actions of others and the destruction of the X of others might well be due to our actions. X must therefore be two-sided in that it is not something that would arise in a Robinson Crusoe economy.

–          If we take the stylised story of this financial crisis at face value and accept that things like banks can be ‘too big and integrated to be allowed to fail’, then X has to have something to do with the other production factors being ‘integrated’. It must also be relatively easy to make up stories that tie the making or destructing of X to what happens in the financial sector.

–          X must make internal sense as a production factor. This means it must cost resources to build up, that investments into it are in some sense visible (even if they are not yet measured by statistical agencies), and it must actually be associated with production. Hence things like ‘trust’ or ‘confidence’ do not qualify because they don’t actually directly involve the production and sale of goods. A lack of trust makes it hard to organise production and sales, but is not itself a production factor. Trust might be involved in the cost of building X, but it doesn’t make sense to call it a direct production factor in itself. In a pure command-and-control economy for instance one, in principle, needs no trust between people at all to have a reasonably high GDP. This of course does not preclude the possibility that the start of a recession is a dramatic change in things like trust which might affect the costs of making or breaking X.

Is it worth saving the production function approach at all, you might ask? Shouldnt we simply give it up as a bad job? I think it is worth saving, because the production function approach is the most obvious way to interpret GDP and growth regressions, and forms a logical basis for expanding the set of economic macro-variables the statistical agencies look for. It is also the easiest way to teach students about the macro-economy because it is nice and compact. What is hence wanted are reasonable candidates for ‘X’ and a model that convinces the profession it forms a palatable answer. We need an X to ‘save’ the production function approach to macro. Any ideas?