"Reality used to be a friend of mine"

I have often thought that the relationship between academic economics and reality can appear tenuous not least when I am in sitting through another hard core theoretical economics seminar and the 23rd slide of complicated looking equations appears on the screen.

On a more trivial level I have always wanted to use "reality used to be a friend of mine" as a blog post title although I forget where this quote comes from now.

Harald Uhlig (Chicago) takes a look at this relationship in a non-technical way (phew). He looks at important issues not least whether economics is a "science" or an "art".

Economics and Reality

Harald Uhlig
University of Chicago - Department of Economics

September 2010

NBER Working Paper No. w16416

Abstract:
This paper is a non-technical and somewhat philosophical essay, that seeks to investigate the relationship between economics and reality. More precisely, it asks how reality in the form empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play? What is the current state of affairs, what are the successes and failures, what are the challenges? I shall tackle these questions moving from general to specific. For the general perspective, I examine the following four points of view. First, economics is a science. Second, economics is an art. Third, economics is a competition. Forth, economics politics. I then examine four specific cases for illustration and debate. First, is there a Phillips curve? Second, are prices sticky? Third, does contractionary monetary policy lead to a contraction in output? Forth, what causes business cycles? The general points as well as the specific cases each have their own implication for the central question at hand. Armed with this list of implications, I shall then attempt to draw a summary conclusion and provide an overall answer.

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New Book: "Foreign Firms, Investment, and Environmental Regulation in the People's Republic of China"

From the inbox:

An interesting new book has just been released by Phillip Stalley (Assistant Professor of Political Science at DePaul University in Chicago) looking at environmental regulations and industry location in China.

Without knowing the content I am unable to provide a full review but it should link in with a number of my recent papers looking at China and the environment. In my opinion China is where all the action is. I look forward to reading this book.















Some of my recent papers in this area include:

Cole, M.A., Elliott, R.J.R. and Zhang, J. (forthcoming). Growth, FDI and the Environment: Evidence from Chinese Cities. Journal of Regional Science.

Cole, M., Elliott, R.J.R. and Zhang, J. (2009), Corruption, Governance and FDI Location in China: A Province-level Analysis, Journal of Development Studies, Vol. 45, 9, 1494-1513.

Cole, M.A., Elliott, R.J.R. and Wu, S. (2008), Industrial Activity and the Environment in China: An Industry Level Analysis, China Economic Review, Vol. 19, 3, pp.393-408

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Trade, Environmental Regulations and Industrial Mobility

Here is a recent working paper from the nep-env working paper series. This just happens to one of my recent papers. Regulations matter for location.

The paper is forthcoming is the esteemed "Ecological Economics" (August 2010).

Trade, Environmental Regulations and Industrial Mobility:
An Industry-Level Study of Japan

Matthew A. Cole, Robert J.R. Elliott and Toshihiro Okubo

1 Department of Economics, University of Birmingham, UK
2 Research Institute for Economics and Business Administration, University of Kobe, Japan

Abstract
This paper contributes to the small but growing body of literature which tries to explain why, despite the predictions of some theoretical studies, empirical support for the pollution haven hypothesis remains limited. We break from the previous literature, which tends to concentrate on US trade patterns, and focus on Japan. In common with Ederington et al.’s (2005) US study, we show that pollution haven effects are stronger and more discernible when trade occurs with developing countries, in industries with the greatest environmental costs and when the geographical immobility of an industry is accounted for. We also go one step further and show that our findings relate not only to environmental regulations but also to industrial regulations more generally.

JEL: F18, L51, L60, Q56, R3
Keywords: Environmental regulations, trade, agglomeration, immobility, industry

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US -China Tianjin face off over climate change

Tianjin is a city I know well after a recent visit to Nankai University. It is a good venue for climate change talks especially given the air quality in Tianjin which was something to behold.

Let us hope that delegates can find the venue for the talks.

I gave a talk to future Chinese leaders on trade, development and climate change recently and it is very clear that whilst China is fully aware of its obligations to tackle climate change it still sees the onus being on developed countries to take the lead.

The 80:20 rule would satisfy the Chinese in my view. It will be difficult to move them off this percentage. The West may need to face up to that fact and just get on with making the 80%. To expect anything different would be foolish and waste everyone time (yet again). The problem with be the US (yet again).

When China say they will not budge it is worth listening.

Climate Talks Struggle As China, U.S. Face Off [PlanetArk]

The United States and EU said on Wednesday that U.N. climate talks were making less progress than hoped due to rifts over rising economies' emission goals, while China pushed back and put the onus on rich nations.

Negotiators from 177 governments are meeting this week in the northern Chinese city of Tianjin, trying to agree on the shape of the successor to the current phase of the Kyoto Protocol, the key U.N. treaty on fighting global warming, which expires in 2012.

Midway through the talks, however, initial hopes that they can deliver progress on trust-building goals have become snared in procedural skirmishing that boils down to feuding over how far rich and emerging nations should curb their greenhouse gas emissions and how they should check on each other's efforts.

Negotiators said the contention could damage prospects for negotiations late this year in Cancun, Mexico, which are intended to lay the foundations for a new, legally-binding climate pact.

"There is less agreement than one might have hoped to find at this stage," said Jonathan Pershing, the United States' lead U.S. negotiator in Tianjin.

"It's going to require a lot of work to get to some significant outcome by the end of this week, which then leads us into a significant outcome in Cancun," he told reporters.

Fraught climate negotiations last year failed to agree on a binding treaty and climaxed in a bitter meeting in Copenhagen, which produced a vague and non-binding accord that later recorded the emissions pledges of participant countries.

Fearing deadlock in efforts to reach a binding pact by late next year, governments have been pushing in Tianjin for broad agreement on less contentious objectives: a fund for climate action, a scheme to protect carbon-absorbing rainforests, and policies to share clean energy technology with poorer nations.

Pershing said he still hoped that the makings of a deal can come together at Cancun, and warned that failure in Mexico could damage the whole U.N. climate negotiations.

Big developing nations -- such as China, India and Brazil -- should take on firmer emissions reduction obligations as part of a new treaty that would abandon a simple division between rich and developing countries, said Pershing.

The current Kyoto Protocol only commits nearly 40 industrialized nations to meet binding targets.

A European Union official at the Tianjin talks said they had made headway on some issues, but also voiced worry for Cancun.

"We are very concerned with the procedural blockages and we find it simply inexplicable that they keep on popping up on the issues that are of vital importance for the final deal," Jurgen Lefevere of the European Commission climate action office told reporters. "There is still hope," he added later.

CHINA PUSHES BACK

China is the world's top greenhouse gas emitter from human activity, with the United States second. China and India have pledged emissions reduction steps under the Copenhagen accord, but want Kyoto to be extended to lock in commitments by rich countries and to ensure their own emissions are not subject to binding international caps.

China's greenhouse gas emissions will keep rising for years yet, but its top climate change negotiator Xie Zhenhua said it was unfair to press the country on when its emissions would peak while rich nations failed to slash theirs.

He also told reporters at the talks that his government would not budge from demanding the Kyoto Protocol be the basis of any new climate deal. The United States is not a party to the Protocol and would have to come under a separate deal.

"When the world's emissions peak depends on developed countries leading with dramatic cuts in their emissions, making space for developing countries," said Xie.

China and other emerging nations will accept international "consultation and analysis" of their emissions, but not anything equal to the standards expected of rich economies, said Xie.

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"Exploding Children"

A video that graphically depicts a teaching blowing up her climate change denying pupils has been withdrawn from youtube.

This is a strange one to comment on given the obvious sensitivities. I will leave it to the BBC to explain.

As with all "humour" some will find this funny and others will not.

Environmental campaigners axe gory film [BBC]

Environmental campaigners 10:10 have withdrawn a film showing a teacher graphically exploding two of her students who refuse to reduce their carbon emissions, after complaints.

In a statement, the group apologised to anyone offended.

The film aimed to "bring this critical issue back into the headlines whilst making people laugh", the group said.

Starring Gillian Anderson it was scripted by Richard Curtis, whose films include Four Weddings and a Funeral.

It was directed by a leading commercials director.

In the film, which was subsequently posted to Youtube and which contains disturbing images, a teacher invites her class to take part in the environmental campaign. Two children, who do not want to, are asked why.

The teacher tells them: "Fine, it's absolutely fine. It's your own choice."

But moments later she presses a button and the children explode into a mess.

Similar scenes are played out in an office where four workers are blown up and a football training session where footballer David Ginola, who also says he does not want to do his bit to combat climate change, disappears in an explosion.

In the final scene, Gillian Anderson, who provides the voice- over is similarly dispatched after saying she thought doing the voice over was enough of a contribution to the campaign.

'This is dreadful'

Comments left on the Guardian website where the film was posted before being taken down on the 10:10 site, were split between those congratulating the team and others who thought it was in bad taste.

"I think this is dreadful," said one comment.

"To suggest that people who disagree with you deserve to die is incredibly stupid. Imagine if some Christian group in the US did that to gays, Muslims, or anyone else they disagree with. The outrage would be palpable. And deserved.

"It's like a parody of something that people mocking enviros would do."

Lizze Gillett, Global Campaign Director for 10:10, told the BBC: "As you can see from various comments and social media sites some people thought it was funny and a good tool to get people talking about climate change but others strongly disliked the mini-movie. We decided to take it off our website to avoid upsetting people. "

In the official campaign statement, the group said: "At 10:10 we're all about trying new and creative ways of getting people to take action on climate change. Unfortunately in this instance we missed the mark. Oh well, we live and learn."

However, 10:10 said they would not make any attempt "to censor or remove other versions currently in circulation on the internet."

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"Climatopolis" - we are not all doomed after all (or are we)

The new Matt Khan book is out. Climatopolis. I enjoyed his previous books on Green cities and the American Civil War.

It is always impressive when academics can publish well and also write accessible books for a general audience.

I can't provide a full review as I have not bought the book yet although there are a number of obvious questions. I agree that it is pretty much too late to stop significant climate change and that adaption will be crucial. Luckily for him and many Americans, the US will suffer a lot less than many countries. Those on subsistence wages and the poor in developing countries will find it harder to move anywhere - that is where the real suffering will take place.

Arguing that "economic development" will solve the problem misses the endogeneity issue. Environmental degradation will impact on growth making development even harder and the suffering all the greater.



You can read a Grist interview with Matt Khan HERE.

His new book, Climatopolis: How Our Cities Will Thrive in the Hotter Future, argues that while it's too late to avoid the major effects of global warming, that's OK because most people will simply move to places that are effectively adapting to the changes. And here we'd been so worried! Kahn, a University of Chicago graduate, takes the school's free-market tradition to an extreme, arguing that rational agents in a market economy will simply "vote with their feet" and make winners out of the cities that are most able to innovate and attract new residents. It's a provocative argument, to say the least.

This question gets to the heart of the issue:

Q. You seem to see this all as a market problem. To me, 10 million Bangladeshis who can't feed themselves anymore and are crossing the border into India where they're not wanted -- that's a humanitarian and political problem. How does an entrepreneur innovate for that?

A. In India, many households benefit from access to cheap labor. Migrants to India will move to those cities where they will have the greatest opportunities. One could imagine a win-win, where the growing Indian middle class is actually happy to see many of these Bangladeshis if they need help with household chores.

But I agree with your point that adaptation in the developing world is the trickiest. My magic bullet is economic development. The Nobel laureate Tom Schelling contrasts malaria in Singapore and Malaysia. These countries are very close and have the same geographic conditions. Yet one [Malaysia] has much more malaria than the other. Schelling argues that economic development helps to mitigate environmental challenges through things like better diets and better access to medical care.

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Economist - special report on "Forests"

The always excellent economist has a great "special report" on forests. It is a fact filled and well written report.

The implications are serious and it is about time this was highlighted. The dynamic and feedback loops are crucial and deforestation is one reasons why climate change could speed up far beyond that by which we could do anything to further increases.

Think "tipping points". This is an impressively gloomy report and well timed.

What is interesting is the issue of paying forest owners not to deforest. Is this a good use of money? Should the West be paying developing countries not to deforest?

I have picked out just a few of the more choice quotes to provide a taster.

Seeing the wood [Economist]

This is the latest reason—and it is a big one—why destroying forests is a bad idea. Roughly half the dry weight of a tree is made up of stored carbon, most of which is released when the tree rots or is burned. For at least the past 10,000 years man has been contributing to this process by hacking and burning forests to make way for agriculture. About half the Earth’s original forest area has been cleared. Until the 1960s, by one estimate, changes in land use, which mostly means deforestation, accounted for most historic man-made emissions. And its contribution to emissions is still large: say 15-17% of the total, more than the share of all the world’s ships, cars, trains and planes.

Stopping deforestation would appear easier that weening us off oil and cars.

The outlook for the Amazon is also grave. Recent modelling suggests that the mutually reinforcing effects of increasing temperatures and aridity, forest fires and deforestation could bring the rainforest far closer than previously thought to “tipping points” at which it becomes ecologically unviable. So far 18% of the rainforest has been cleared. The loss of another 2%, according to a World Bank study last year, could start to trigger dieback in the forest’s relatively dry southern and south-eastern parts. A global temperature increase of 3.5%, comfortably within the current range of estimates for the end of this century, would put paid to half the rainforest. This would release much of the 50 gigatonnes of carbon it is estimated to contain—equivalent to ten years of global emissions from burning fossil fuels.

Only 2% to go until we reach the point of no return. We may get there a lot sooner that you think and then it will be too late.

The Earth’s need for forests to soak up carbon emissions is almost limitless. Saving the forest that is left should therefore be considered a modest aim. But even that will require huge improvements in forest management, such as reforming land registries and tightening up law enforcement. Above all, it will require governments to prize forest very much more highly than they do now. Otherwise there will be no chance of the many reforms required outside the forestry sector: in land-use planning and rural development, in agriculture, energy and infrastructure policies, and much else. It will also require politicians to get serious about climate change. All that amounts to a revolution, which is a lot to hope for. But if anything can help bring it about, forests might.

They are crucial in all sorts of ways because of the manifold services they provide. Western taxpayers need the Amazon rainforest to control their climate. Brazil needs it to help feed its rivers and generate hydro-power. Amazonian soya farmers need it to guarantee them decent rainfall. Yet policies at every level conspire to wreak its destruction. Changing them, in Brazil and across the tropical world, is a daunting task. But it is not impossible—and it must be done. The cost of failure would simply be too great.

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