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November 28, 2012

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Posted: 28 Oct 2012 12:06 AM PDT

Climate Change and 'Free Drivers'

Posted: 27 Oct 2012 11:08 AM PDT

Gernot Wagner and Martin Weitzman on the "allure of geoengineering" as a solution to global warming, and the temptation for individual countries to act on their own:

Playing God: ... All it takes is a single actor willing to focus on the purported benefits to his country or her region to pull the geoengineering trigger. The task with geoengineering is to coordinate international inaction while the international community considers what steps should be taken. The fate of the planet cannot be left in the hands of one leader, one nation, one billionaire.
Fortunately, we are still many years off from the full "free driver" effect taking hold. There's some time to engage in a serious global governance debate and careful research: building coalitions, guiding countries and perhaps even individuals lest they take global matters into their own hands. In fact, that is where the discussion stands at the moment, with a governance initiative convened by the British Royal Society, the Academy of Sciences for the Developing World, and the Environmental Defense Fund, among other deliberations guiding how geoengineering research should be pursued.
With time come the "free drivers"
The clock, however, is ticking. A single dramatic climate-related event anywhere in the world - think Hurricane Katrina on steroids - could trigger the "free driver" effect. That event need not be global and it need not even be conclusively linked to global warming. A nervous leader of a frightened nation might well race past the point of debate to deployment. The "free driver" effect will all but guarantee that we will face this choice at some point.
"Free riding" and "free driving" occupy opposite poles of the spectrum of climate action: One ensures that individuals won't supply enough of a public good. The other creates an incentive to engage in potentially reckless geoengineering and supply a global bad. It's tough to say which one is more dangerous. Together, these powerful forces could push the globe to the brink.

Inequality of Income and Consumption

Posted: 27 Oct 2012 08:53 AM PDT

Via an email from Lane Kenworthy, here's more research contradicting the claim made by Kevin Hassett and Aparna Mathur in the WSJ that consumption inequality has not increased (here's my response summarizing additional work contradicting their claim, a claim that is really an attempt to blunt the call to use taxation to address the growing inequality problem):

Inequality of Income and Consumption: Measuring the Trends in Inequality from 1985-2010 for the Same Individuals, by Jonathan Fisher, David S. Johnson, and Timothy M. Smeeding: I. Introduction: Income and Consumption The 2012 Economic Report of the President stated: "The confluence of rising inequality and low economic mobility over the past three decades poses a real threat to the United States as a land of opportunity." This view was also repeated in a speech by Council of Economics Advisors Chairman, Alan Krueger (2012). President Obama suggested that inequality was "…the defining issue of our time..." As suggested by Isabel Sawhill (2012), 2011 was the year of inequality.

While there has been an increased interest in inequality, and especially the differences in trends for the top 1 percent vs. the other 99 percent, this increase in inequality is not a new issue. Twenty years ago, Sylvia Nasar (1992) highlighted similar differences in referring to a report by the Congressional Budget Office (CBO) and Paul Krugman introduced the "staircase vs. picket fence" analogy (see Krugman (1992)). He showed that the change in income gains between 1973 and 1993 followed a staircase pattern with income growth rates increasing with income quintiles, a pattern that has been highlighted by many recent studies, including the latest CBO (2011) report. He also showed that the income growth rates were similar for all quintiles from 1947-1973, creating a picket fence pattern across the quintiles.

Recent research shows that income inequality has increased over the past three decades (Burkhauser, et al. (2012), Smeeding and Thompson (2011), CBO (2011), Atkinson, Piketty and Saez (2011)). And most research suggests that this increase is mainly due to the larger increase in income at the very top of the distribution (see CBO (2011) and Saez (2012)). Researchers, however, dispute the extent of the increase. The extent of the increase depends on the resource measure used (income or consumption), the definition of the resource measure (e.g., market income or after-tax income), and the population of interest.

This paper examines the distribution of income and consumption in the US using data that obtains measures of both income and consumption from the same set of individuals and this paper develops a set of inequality measures that show the increase in inequality during the past 25 years using the 1984-2010 Consumer Expenditure (CE) Survey.

The dispute over whether income or consumption should be preferred as a measure of economic well-being is discussed in the National Academy of Sciences (NAS) report on poverty measurement (Citro and Michael (1995), p. 36). The NAS report argues:

Conceptually, an income definition is more appropriate to the view that what matters is a family's ability to attain a living standard above the poverty level by means of its own resources…. In contrast to an income definition, an expenditure (or consumption) definition is more appropriate to the view that what matters is someone's actual standard of living, regardless of how it is attained. In practice the availability of high-quality data is often a prime determinant of whether an incomeor expenditure-based family resource definition is used.

We agree with this statement and we would extend it to inequality measurement.[1] In cases where both measures are available, both income and consumption are important indicators for the level of and trend in economic well-being. As argued by Attanasio, Battistin, and Padula (2010) "...the joint consideration of income and consumption can be particularly informative." Both resource measures provide useful information by themselves and in combination with one another. When measures of inequality and economic well-being show the same levels and trends using both income and consumption, then the conclusions on inequality are clear. When the levels and/or trends are different, the conclusions are less clear, but useful information and an avenue for future research can be provided.

We examine the trend in the distribution of these measures from 1985 to 2010. We show that while the level of and changes in inequality differ for each measure, inequality increases for all measures over this period and, as expected, consumption inequality is lower than income inequality. Differing from other recent research, we find that the trends in income and consumption inequality are similar between 1985 and 2006, and diverge during the first few years of the Great Recession (between 2006 and 2010). For the entire 25 year period we find that consumption inequality increases about two-thirds as much as income inequality. We show that the quality of the CE survey data is sufficient to examine both income and consumption inequality. Nevertheless, given the differences in the trends in inequality, using measures of both income and consumption provides useful information. In addition, we present the level of and trends in inequality of both the maximum and the minimum of income and consumption. The maximum and minimum are useful to adjust for life-cycle effects of income and consumption and for potential measurement error in income or consumption. The trends in the maximum and minimum are also useful when consumption and income alone provide different results concerning the measurement of economic well-being. ...

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