Stochastic Trend

Alejandro Puerto is a 20 year old who lives in Cuba. He has written: "Western Cycles: United Kingdom" a book that covers the economic and political history of the UK from 1945 onwards. He maintains a website of the same name that showcases his writing. You can also follow him on Twitter. He asked me whether I would I would do an interview for his blog. Here it is:

When did you became interested in the energy and the environment on economics?

I was interested in the environment from an early age and so I studied geography, biology (and chemistry) in the last 2 years of high school in England (1981-3) and then went on to study geography at university (in Israel). I had to pick another field and initially chose business as something practical but quickly switched to economics. I then realised that economics could explain a lot of geography and environmental trends. It was only when I went to do my PhD starting in 1990 that the faculty at Boston University at the Center for Energy and Environmental Studies which was linked to the Geography Department there were really focused on the role of energy in the economy and environmental trends that I became interested in understanding the role of energy. So I got a PhD in geography officially but had quite a lot of economics training and over time drifted closer to economics, so now I am even director of the economics program at the Crawford School of Public Policy at ANU.

I think that my generation is more informed on climate change because of the work of people like you. Do you think the same? Describe us some of your research.

Well, I think it has just become a much bigger and obvious issue as the global temperature has increased. The awareness of what is happening has been driven by people in the natural sciences. I have done some research applying time series models used in macroeconomics to modelling the climate system and though our first paper was published in Nature in 1997 and we have been cited on that in IPCC reports it has largely been on the fringes of climate science. My view of that research is that it takes an entirely different approach to modelling the system than most climate scientists use (mostly they use big simulation models called GCMs) and finds similar results which strengthens their conclusions. Most of my research has been on the role of energy in economic growth and the effect of economic growth on emissions and concentrations of pollutants. The effect of energy on growth is much more complicated than many people think – it seems that energy is more important as growth driver in the past in the developed world – adding energy when you have little has more effect than when you already have a lot. On pollution I’ve argued that the idea of the environmental Kuznets curve – that as countries get richer eventually growth will actually be good for the environment and reduce pollution is either outright wrong or too simplified. Instead in fast growing countries like China, growth overwhelms efforts to reduce pollution, while in slower growing developed economies clean up can happen faster than growth.

The Paris Summit filled your expectations as an environmental economist?

It was probably better than expected give the lack of success in getting agreement before then. Countries pledges are too little to reach the goal of limiting warming to 2C and we will probably have to remove carbon from the atmosphere in a big way later in this Century. The real question is whether countries will actually fulfil their voluntary pledges. OTOH low-carbon technology is developing fast and that is a positive that is making achieving the goals looking more possible.

How dangerous would be the environmental policy of the United States under the Trump administration on climate change?

It will delay action, unclear how much effect it will really have. Encouraging the development of new technology is important and having the largest and leading economy not focused on that is a negative. The US can’t actually leave till late 2020 and Trump has left the door open to submitting a weaker INDC in the interim and claiming victory. The US will still be involved in UNFCCC talks etc.

What do you think about the emissions of developing countries as they become industrious?

Developing country emissions are now larger than developed country emissions. But there is a big difference between China which now has higher per capita emissions than the European Union and say India which has still very low per capita emissions. China needs to take action and has made a moderately strong pledge. We should expect much less from India say. India is, though, strongly encouraging renewables development. Hopefully, technology is advancing fast enough that the poorest countries will end up going down a lower carbon path anyway as fossil fuel technologies gradually phase out.

Since 2006 China has become the greatest global polluter and emissions still growing continuously. China has no plans for decrease these emissions until 2030. What do you think about the attitude of this country?

They say they will peak emissions by 2030. In terms of reduction in emissions intensity per dollar of GDP their goal is quite strong. In the last 3 years Chinese CO2 emissions have been constant. Some argue they are already peaking now. I am a bit more skeptical. We need to see a few more years. There are several reasons why China is pursuing a fairly strong climate policy including energy security, encouraging innovation and reducing local air pollution as well as realising that they can benefit a lot from reducing their own emissions because they are such a large part of the problem.

In the long term, which kind of renewable energy would be the first to think about? Solar? Wind?

Solar – it has a greater potential total resource and looks like eventually prices will be below wind. Wind of course is strong in places without much sunshine like the Atlantic Ocean off NW Europe. I’m concerned though about the environmental impact of lots of wind power. In the long-run I’m still hoping for fusion to work out :)

Tell us about one of your favorite posts published by you on Stochastic Trend.

I’ve done less blogging recently as I now use Twitter for short things. Most of the posts are excerpts from papers or discussions of new papers. The most popular blogpost this year with visitors is:

http://stochastictrend.blogspot.com.au/2017/03/from-wood-to-coal-directed-technical.html

Where I discuss our working paper on the role of coal in the Industrial Revolution. The research and writing of this paper took a very long time and I was really happy to be able to announce to the world that it was ready.

Do you drive an electric car?

No, I don’t have a driving licence. My wife drives and we have a car but it is a large petrol-engined car that is not very efficient. We don’t drive it much though. We’ve driven less than 30,000 km since buying it in 2007.

Have you ever visited Cuba? Are you interested? There are a lot of 1950s cars, but there are places with tropical nature.

No, I haven’t been to Cuba. The only place I’ve been in Latin America is Tijuana, Mexico. I’m not travelling that much recently as we now have a 1 1/2 year old child. But Cuba probably wouldn’t be high on my agenda. I travel mostly to either visit family or go to academic conferences and work with other researchers. The only time I flew somewhere outside the country I was living in just to go on vacation was when I flew from Ethiopia to Kenya. I was at an IPCC meeting in Ethiopia.

I think that robots/artificial intelligence and the future of work is a hugely important topic. This is a very active research field but it seems to me that people (some informed by this research but most without referring to the research) are rushing to one of two conclusions. The first of these conclusions is that up till now economic growth has resulted in rising wages and full employment and so it surely will in the future too. The other is that robots must mean structural unemployment and so the solution is to introduce universal basic income or some similar redistributive policy.

I don't think either is necessarily true. In the past, the elasticity of substitution between labor and capital seems to have been less than one - both inputs were essential in production. Also, the two inputs are q-complements - an increase in capital per worker results in an increase in the marginal product and, therefore, wage of a worker. But it's possible that now, or in the future, that the elasticity of substitution between labor and capital is or will be greater than unity so that labor is not an essential input. Or that there are techniques that are designed just to use machines. Acemoglu and Restrepo (2016) assume that as some low-skilled tasks become automated other new high-skilled tasks are introduced. But there may be limits to people's cognitive ability. Most people aren't intelligent enough to be engineers and scientists. And the people that are intelligent enough now, might be worse than artificial intelligences in the future.

The other premature conclusion is that, definitely things are different now, and robots will result in structural unemployment or immiserizing growth, so that government intervention is needed. Usually, universal basic income is mentioned. Sachs et al. (2015) argue immiserizing growth is possible. This is one of the better papers out there I think, but still the framework is quite limited. as technological change is exogenous. It is possible that there is some self-correcting mechanism similar to that in Acemoglu's (2003) paper on capital- and labor-augmenting technical change. In that model, capital-augmenting technical change is possible for a while, but it introduces forces that return the economy to a pure labor-augmenting technical change path. Another important question is whether people have a preference to have at least some of the goods and services they consume produced by humans. Sachs et al. assume that utility is a Cobb-Douglas function of automatable and non-automatable goods. That means that consumption of human made goods could become infinitesimally small in theory.

I think we need to consider a range of models as well as empirical evidence before we can say what kind of policy, if any, is needed.

I wanted to do research on this and started doing some research on this but concluded that it is not realistic given my limited time for research because of my administrative - I am still director of our International and Development Economics Program - and parenting roles and my existing research commitments. Twitter isn't the only reason that I haven't updated this blog in 2 1/2 months. Comparative advantage suggests to me that I remain focused on energy economics. However, I think that the Crawford School of Public Policy should be looking at these kind of issues, and I am trying to encourage that. This is going to be one of the key policy questions going forward I think.

I don't like looking at my published papers because I hate finding mistakes. Today I saw that there is a missing coefficient in Table 2 of my recent paper with Donglan Zha "Economic growth and particulate pollution concentrations in China". In the column for Equation (2) for PM 2.5 the coefficient for the interaction between growth and the level of GDP per capita is missing. The table should look like this:


I checked my correspondence with the journal production team. They made lots of mistakes in rendering the tables and I went through more than one round of trying to get them to fix them. But the version I eventually OK-ed had this missing coefficient. At least the working paper version has the correct table.

Three and a half years ago, I wrote a post about PhD applications. Since then, I have received a huge number of enquiries from prospective students. I now have two PhD students (Alrick Campbell and Panittra Ninpanit) and am on the committee/panel of two others (Anil Kavuri and Rohan Best). There are a couple of other good students who have applied but haven't come here because either their English test scores didn't meet our requirement or they couldn't get funding. We don't offer any new internal Crawford School scholarships at this point and I don't have any grant funds for PhD students. So, it is quite unlike applying for a PhD in the US where most students are funded by university sourced money in social sciences like economics. Here it is most likely that you will be funded by the Australian government one way or another, by your own government, or by an intergovernmental organization like the Asian Development Bank.*

As I mentioned in my previous post, also, unlike North America, applying to do a PhD in the social sciences and humanities here in Australia requires lining up a supervisor (=advisor) up front. Therefore, it is more like applying to do a PhD in the natural sciences and engineering in the US. Our formal process here also requires that potential students submit a research proposal, despite the fact that at ANU there is up to a year of coursework required in the economics program, which makes it seem more like a US PhD than most Australian PhD programs where you start doing research more or less straight away.

This is where I have been a bit frustrated by potential students submitting proposals that aren't at all related to the kind of research I do (despite this blog and my research webpage), proposals that are not very good, or being surprised that they need to submit a proposal because that isn't required to apply for a PhD in the US. Some of the latter seem like potentially good students. When I ask them for a proposal, the usual reaction is to write something rather quickly. I can't blame these students - when many programs around the world don't require a proposal, why should they invest a lot in writing one. One of the main reasons I did my PhD in the US rather than Britain was that I didn't know what to write a proposal about at the time. Another downside of a student submitting an upfront proposal is that they might then feel somewhat locked into that subject despite having written the proposal being a sunk cost. Alrick and Panittra were exceptions, having a pretty good proposal up front that was related to my research, which is why I agreed to supervise them.**

So, after receiving another off-the-wall topic from a prospective student this morning, I'm thinking of taking a radically new approach. Maybe, I should require students to submit a completed research paper (like we did when I was at RPI) instead of a  proposal for future research and then discuss this paper with the student to see how they think etc. I would require students to work on one of the broad areas I work on ("economic growth", "meta-analysis" etc.) and develop an actual proposal with them after they arrive here.

Or maybe the process is working exactly as it should? After all, I have had a few good applications and probably as many students as I should have. Any thoughts?

* Australian students can get an APA. Foreign students main option is the Australia Awards program. There are very few scholarships for students not from developing countries that Australia is interested in giving aid to. According to the government's Innovation Package, this will change dramatically.

** Students only need to line up the primary supervisor ahead of time. The other panel members usually join after the student has finished their coursework.

What I mean is, why do we need a new government network in urban areas? We just got a "set top box" for streaming Chinese TV channels. My mother-in-law is going to be visiting :) It operates via wifi from our Telstra "modem". TV is better than reception of free Australian channels so far. Of course, there are lots of such services from Netflix etc. which seem to work in Australia without major problems. Maybe an RBN (Rural Broadband Network) is what the government should be focusing on?

I started writing this on Twitter but it got too long :) Peter Martin proposes taxing superannuation contributions at ordinary income tax rates and then not taxing earnings or payouts of superannuation funds. This would greatly simplify the superannuation system and is the logical progression of Costello's introduction of tax free superannuation pensions and the recent move to increase the contributions tax people earning more than $300k p.a. It is equivalent to the U.S. Roth IRA. It could, in theory make running a self-managed super fund as simple as having an ordinary brokerage account (as it is in the U.S.) as the funds wouldn't owe tax.

There is one drawback, though. Taxing up front, leaves less capital to accumulate and so super payouts and the tax collected will be smaller than if instead we followed the U.S. 401k model. This is where payouts are taxed at regular income tax rates and contributions and earnings are tax free.* But, at this point, this would be a more radical change than the Roth IRA route. Existing superannuants would have to be grandfathered or they would complain about double taxation compared to current contributors. So, it's more likely we go down the Roth IRA route.

Most likely, of course, is a relatively minor change that complicates the system further or doesn't reduce the complication such as reducing the contributions tax concession to 15% across the board. Or eliminates the up-front concession but doesn't eliminate taxing superannuation earnings.

* There are probably some equilibrium effects that reduce the difference between the two....

It seems that the Grattan Institute argues in its submission to the National Reform Summit that because Australia's government is relatively small by the standards of other developed countries we can or should increase its size. This argument makes no sense to me, though it seems to be often made. Perhaps other countries spend inefficiently or perhaps Australians are not interested in spending on some of the things that those countries spend on. We should look first at the outcomes we have as a country and, if there are poor outcomes that Australians would like improved, we then need to ask whether government can make a difference. Only then does it make sense to ask whether spending or taxes should be higher. I don't think this is really a political statement, as I leave open the final choice on whether to increase the size of government or not. But it makes no sense to talk about increasing the size of government simply to be nearer OECD means.

As for whether we should change the taxation arrangements for superannuation the simplest, fairest, and possibly relatively efficient  approach is to use the same approach as US 401k and 403b funds and tax payouts at normal income tax rates but not tax contributions or earnings in the accumulation stage. It's simple to show that under reasonable assumptions that this approach generates higher retirement incomes than the current Australian approach. It also has the huge advantage of reducing bureaucracy. Self managed superannuation funds are costly to run in Australia because of the need for accounting and auditing to make sure that they are paying the correct taxes. In the US, an IRA is just like another brokerage account except for the rules on contributions and withdrawals, which can be managed by the broker.

I get a huge amount of spam from something called "Inayah Group". Most of it is in Arabic or has no content but I noticed this item while deleting the daily influx (I check quickly through my spam folder before deleting because I wouldn't want to delete legit e-mail from some grad student in a developing country etc.): Timur Kuran calls Islamic finance a scam in an interview in the Financial Times. I found this interesting because I had assumed that Islamic finance was based on equity investing rather than debt-based investing but here he says that interest is disguised as fees etc. Of course, Judaism also prohibits the charging of interest  to other Jews (as did Christianity in the past at least). This was got around using the heter iska (permit for business), which it seems is not that far from what Islamic finance does in practice. Another trick is to pay the interest to a third party rather than the lender.