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May 20, 2009

Economist's View - 4 new articles

"What Industrial Policy Should Be"

Fighting rather than facilitating structural change is counterproductive:

What Industrial Policy Should Be, by Robert Reich: ...Much of the industrial Midwest desperately needs new technologies and industries to take the place of the shrinking U.S. auto industry, and workers who have been (or are about to be) laid off need help transitioning to those new jobs. Could chunks of the old auto industry be adapted to producing high-speed rail or, more generally, highly-efficient people-moving systems of the future or, even more generally, green technologies that support such systems? Could some of the billions now slated to fund new non-carbon based energy sources be targeted to this?

I don't know the answers but I worry no one is asking these questions. Bailing out the auto companies while forcing them to lay off tens of thousands of their workers, imposing higher fuel-economy targets on them, and lending them billions more to meet those new targets seems oddly unrelated to the large structural transformation the economy must go through. We need a broader and more imaginative approach to industrial policy -- one that integrates all the different ways government influences industry, and achieves overarching public goals.

I find myself uncomfortable with all the talk of industrial policy recently, partly because I'm not always sure the degree to which people foresee the government actually directing industrial activity. The government should step in when there are significant market failures to overcome, and much of the work to combat climate change falls under this heading, including the research and development that is needed to set the stage for the needed transitions. To accomplish this, however, I prefer that the use of incentives to the use of government dictates about precisely how those goals should be attained and by whom. That is, I favor market-based interventions that use incentives to move behavior in the desired direction over the use of government dictates.

But in general - when there are no substantial market failures to worry about - the question is how best to facilitate structural change so as to minimize the cost of the transition without distorting the outcome. What makes it particularly hard this time is that the cyclical unemployment rate is extraordinarily high at the same time substantial structural change is occurring in some industries. That means that finding alternative jobs for workers displaced by the structural change - whether you move the workers to the jobs or the jobs to the workers - is much more difficult than it would be otherwise. I believe the government could do more than it has done in the past to insulate workers from the effects of structural change and to speed the transition, and that it shoul ddo more, but again I would be uncomfortable with the government intervening in a way that distorts the private sector outcome.

Social Norms as Taxes on Behavior

How do social norms form?:

Scholars Create Alliance to Foster Research on Sustainability, Strategy, and Management, University of Michigan: ...Researchers ... gathered at the Ross campus ... in the first Alliance for Research on Corporate Sustainability (ARCS) conference. ...

The increasingly interdisciplinary nature of the field makes the need for an annual gathering of leading scholars more relevant today than ever, says Andy Hoffman... "Researchers in economics, strategy, and public policy need to learn to speak each others' language," Hoffman says. ...

Hoffman cited one example of an Irish government policy that neatly ties together how different lenses can be useful in studying the policy and business effects of sustainability efforts. In 2002, the Irish government tacked a 15-cent fee on plastic grocery bags. Within a year, plastic grocery bag use dropped by 94 percent.

A straight economist's view could conclude that pricing works. But Hoffman says there are other things to consider. "A price is never socially inert," he says. "A social norm formed. One person said using a plastic grocery bag is on par with wearing a fur coat or not cleaning up after your dog. How does that norm form?"

A look at the culture of Ireland shows a relatively young population, which typically makes for a good innovation test bed. There were no domestic plastic bag manufacturers in Ireland, so there was little political risk of imposing the fee. ... But unintended consequences arose. Some consumers started buying plastic trash bags to carry groceries. And so the research continues. ...

I will have to admit that if I was asked how to discourage the use of some product, my response would be to find a way to increase its price, a tax or surcharge, something like that, but I'm not sure I would think about - or even know where to begin if I did - ways to change the social norm regarding the use of the product. That's just another way to raise the price and hence discourage the use of the product, it's a form of a tax, and it's an interesting one because no money changes hands in the process. We simply have to be programmed to care what other people think about us, even strangers, something that seems to be built into our behavior.

At first I thought that might mean that social norms are preferred to taxes since the desired result is achieved without any transfer of resources, and because taxes can distort economic outcomes. But social norms can also distort outcomes since they operate like taxes. For example, a social norm supporting discrimination would lead to a less than optimal allocation of resources in an economy and hence would be counterproductive. I can even imagine cases where taxes could be used to try to offset damaging social norms, though I can't think of any concrete examples.

But it would be useful to have a better understanding of how social norms and taxes/fines interact. For example, suppose you want to discourage kids riding in cars without seat belts. Legislators could pass a law - based upon research showing its clear benefits - that imposes a fine for anyone caught allowing their kids to ride in the car without being buckled in. That would certainly have some effect on behavior, but probably not as much as if it became viewed as unnecessary endangerment by society generally (perhaps abetted by a billboard campaign, etc.). The change in the social norm would likely have a much larger effect on people's behavior. Econometrically, it would look like the imposition of the fine had a huge effect on seat belt use, but was it the fine itself that generated the change in social norms, or would the social norms have changed anyway? If the behavior had never been made illegal in the first place, would attitudes have changed as fast? Was it the change in the norm that caused the tax? When you are looking at the effect of a tax on behavior, how do you sort all of this out?

Zipf's Law

Sizing up cities:

Math and the City, by Steven Strogatz: ...The mathematics of cities was launched in 1949 when George Zipf, a linguist working at Harvard,... noticed that if you tabulate the biggest cities in a given country and rank them according to their populations, the largest city is always about twice as big as the second largest, and three times as big as the third largest, and so on. In other words, the population of a city is, to a good approximation, inversely proportional to its rank. Why this should be true, no one knows. ...

Given the different social conditions from country to country, the different patterns of migration a century ago and many other variables that you'd think would make a difference, the generality of Zipf's law is astonishing.

Keep in mind that this pattern emerged on its own. ... Many inventive theorists working in disciplines ranging from economics to physics have taken a whack at explaining Zipf's law, but no one has completely solved it. Paul Krugman ... wryly noted that "the usual complaint about economic theory is that our models are oversimplified — that they offer excessively neat views of complex, messy reality. [In the case of Zipf's law] the reverse is true: we have complex, messy models, yet reality is startlingly neat and simple." ...

Around 2006, scientists started discovering new mathematical laws about cities that are nearly as stunning as Zipf's. ... For instance,... populous ... cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that ... bigger cities enjoy economies of scale. In this sense, bigger is greener.

The same pattern holds for other measures of infrastructure. Whether you measure miles of roadway or length of electrical cables, you find that all ... show an exponent between 0.7 and 0.9. Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.

For example, suppose you measure how many calories a mouse burns per day, compared to an elephant. ... The relevant law of metabolism, called Kleiber's law, states that the metabolic needs of a mammal grow in proportion to its body weight raised to the 0.74 power.

This 0.74 power is uncannily close to the 0.77 observed for the law governing gas stations in cities. Coincidence? Maybe, but probably not. There are theoretical grounds to expect a power close to 3/4. Geoffrey West of the Santa Fe Institute and his colleagues Jim Brown and Brian Enquist have argued that a 3/4-power law is exactly what you'd expect if natural selection has evolved a transport system for conveying energy and nutrients as efficiently and rapidly as possible to all points of a three-dimensional body, using a fractal network built from a series of branching tubes — precisely the architecture seen in the circulatory system and the airways of the lung, and not too different from the roads and cables and pipes that keep a city alive.

These numerical coincidences seem to be telling us something profound. It appears that Aristotle's metaphor of a city as a living thing is more than merely poetic. There may be deep laws of collective organization at work here, the same laws for aggregates of people and cells. ...

[For more on city size, see: Why Has Globalization Led to Bigger Cities?, by Edward Glaeser.]

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