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Ryan Avent at Free Exchange criticizes University of Chicago economists Gary Becker, Kevin Murphy, and Steven Davis, for arguing in a WSJ op-ed that potential government action is causing uncertainty in the energy sector, which is in turn potentially causing a decrease in investment. Ryan argues that:

“…if American businesses are confident enough in their beliefs about a high carbon price to reduce investment in fossil fuels, then certainly they are also confident enough to increase their investment in alternative energies, are they not? Indeed, this is the entire point of a carbon price, passed or merely expected—that it will shift views about relative costs, thereby using market mechanisms to channel investments into lower emission sectors. In the authors’s view, by contrast, markets are simply dumb: able to see the downside to expected policy changes, but too stupid to go looking for the opportunities created by the shift.”

On the one hand, Free Exchange is right that the Chicago boys are ignoring the increase in alternative energy investment that will likely occur. However, if this increase will be far outweighed by the decrease in investment in fossil fuels, then the admission is not so conspicuous as Ryan has made it out to be.

My guess is that Ryan probably agrees with that, but he also thinks the increase in investments in alternative energies will be significant; at least significant enough that not mentioning it is a serious omission. So the real question is what will the net effect on investment be?

One important determinant is the level uncertainty about the increase in demand for particular alternative energies. The appetite for risk right now is not great, and if alternative energies are highly risky investments relative to fossil fuels, then total investment may drop substantially.

So if the government announced they were going to pass a cap and trade bill in 3 months, for sure, how certain would we be about what alternative energies were good investments? I don’t know. But one thing that would likely cause high uncertainty in estimating this is unreliable government subsidies or other policies that are greatly distorting the market, and the fact that the next “winner” in alternative energy might be whomever the Department of Energy decides. Wind energy, in particular, has been known to have boom and bust cycles based on government policy. Given the degree to which our and other governments have decided they will be picking winners and losers in the alternative energy market thus far, including the $163 billion globally that will be spent on green stimulus, I think it’s likely that marginal alternative energy investments are much riskier than marginal fossil fuel investments.

Of course there are others factors the will contribute to the net investment impact of cap and trade, some of which tilt the scales in favor of positive net investment. But the simple issue of uncertainty that I mentioned shows, I hope, that even if businesses are confident enough in their beliefs that a high carbon price will reduce investment in fossil fuels, it is far from certain that they should be confident enough to increase their investment in alternative energies by a substantial amount.

“People who have moved to Chicago, Dallas and London get to fewer local landmarks during their entire first year than the typical tourist visits during a two-week stay…”

according to a recent study. Furthermore, John Tierney reports,

[t]he Chicagoans in the study had visited more landmarks in other cities than in their own, and even their relatively small amount of local sightseeing was done mainly in the course of entertaining out-of-towners. Otherwise, the only time Chicagoans rushed to see the local landmarks was just before they were about to move to another city…

Tierny goes on to discuss a series of interesting observations on procrastination from behavioral economists. For instance, researchers have found is that people systematically overestimate the amount of free time that they will have in the future, and so we are prone to make future commitments for which we don’t have enough time; something researchers call the “Yes!…Damn” effect.

Sometimes I wonder if the whole point of behavioral economics is to prove that, contrary to rational choice theory, humanity’s flaws actually exist.

You know your level of confidence in the government has reached the point of lunacy when you can in sincerity propose such an obviously terrible, horrible, worthless idea as this:

“That’s why the Obama administration — while it still holds the keys to the big automakers — ought to put some style fascists into the mix: the genius of Marc Newson … Steve Jobs and Jonny Ive from Apple … Frank Gehry, the architect, and Jeff Koons, the artist. Put the great industrial designers in the front seat, right along with sound financial stewardship … the greener, the cleaner, the meaner on fossil fuels, the sexier for me. Check out the Tesla or the Fisker Karma car, designed by the same team that gave the world the Aston Martin.”

No, it’s not master of terrible ideas Tom Friedman, but Bono, writing an unsurprisingly awful op-ed I did not have the stomach to finish.  He actually had the audacity to write that very paragraph appealing for the government to become even more involved in the automotive industry on the same page where he said this about why today’s cars are family sedans are poorly designed:

“It hurts me to say this about democracy (and I know because my band is one), but rarely does majority rule produce something of beauty.”

I can’t imagine it hurt him as much to say it as it hurts me to read it. The cognitive dissonance it takes to write that democracy does not produce beautiful cars and then several sentences later appeal for the government to become more involved in the automotive design process is, quite frankly, astounding. This kind of idiocy is exactly why people fretted about government takeover of the G.M. and Chevy; individuals with too much confidence in the government are more than happy to see companies forced by regulation, mandate, or other policies to produce goods that appeal more to their personal aesthetics and preferences, green or otherwise.

Robin Hanson point out an example of media bias that is hiding in plain sight; the media loves to report negative articles about China. This strikes me as obviously true, and very troubling.

It also reminded me of the Niall Ferguson vs James Fallows debate, where Ferguson took the China bashing position, and Fallows laid the smack down.

It is a popular idea amongst economists, at least relevant to the non-economist population, that the purpose of higher education is simply to signal to employers the innate skills and qualities of the individuals. Contrary to the popular conception of the purpose of college as a  place to learn necessary skills and and knowledge, the signaling theory purports that college is nothing more than a long test that tells potential employers something about your inherent intelligence and abilities.

One way to test this theory is to ask employers what they want colleges that their future employees may come from to focus on. If they want to those colleges to focus on teaching specific subject matter knowledge then that would be evidence against the signaling theory of education. If they want colleges to focus on testing students in things which in general are innate, like thing similar to I.Q. tests, then that would be evidence in favor of signaling theories; they only want colleges to be more accurate signals.

A recent article on how colleges are striving to be more “revelent” to future careers shines a little light on this issue. Employers are apparently telling colleges that they do not want students to be specializing, but rather learning broad skills. According to a  survey conducted of employers by the American Association of Colleges and Universities,

89 percent said they wanted more emphasis on “the ability to effectively communicate orally and in writing,” 81 percent asked for better “critical thinking and analytical reasoning skills” and 70 percent were looking for “the ability to innovate and be creative.”

Communicating effectively and critical and analytical thinking are skills that can be strengthened and learned in college. On the other hand, are those things that are better learned in school or on the job? I think you can at least make the case that these are skills that are better learned in school, and so this is potentially evidence in favor of non-signaling theories of education, but I could be convinced otherwise.

Innovation and creativity, on the other hand, don’t strike me as the kinds of things colleges would be effective at teaching. If you’re not a creative or innovative person by the time you reach college, can anything they can teach you there really do anything about that? This is evidence in favor of the signaling theory.

Also notable is the absence of any desire of employers for specific subject matter knowledge. This does not bode well for non-signaling theories, since so much of what colleges currently do is teach subject matter.

The results of this survey are slightly suggestive of signaling theories, but they don’t appear completely damning or one sided. In either case, what employers want colleges to teach is probably the best battleground for these theories of education to compete. I would be interested to see how defenders and critics of the signaling theory of education interpret these results.

David Brooks worries about peoples’ need to believe that all-knowing technocrats are keeping us safe from terror:

Many people seem to be in the middle of a religious crisis of faith. All the gods they believe in — technology, technocracy, centralized government control — have failed them in this instance.

In a mature nation, President Obama could go on TV and say, “Listen, we’re doing the best we can, but some terrorists are bound to get through.” But this is apparently a country that must be spoken to in childish ways. The original line out of the White House was that the system worked. Don’t worry, little Johnny.

I see this belief as an example of rational irrationality, a concept from Bryan Caplan that people have preferences over beliefs, and when those preferences come at no cost, they will believe the things they like to believe. It’s obviously comforting to believe that the government has things under control and they are, or at least are capable of, keeping us completely safe, and so people would like to believe that.

Of course a sense of false safety could be costly since a better appreciation of the risks might lead to actions to mitigate that risk, and so the belief the government is actually keeping us safe would not be rationally irrational. But believing that the government could keep us safe but are failing to do so because of incompetence, ideology, or some other curable failure, does not have costs if the actual risk level is still known. Thus a belief in the that the government could keep us safe from terrorism but are failing to do so is a natural example of rational irrationality; we should not be surprised that it is widespread.

Caplan’s remedies for voter irrationality do not offer a single clean-cut solution to this problem, but rather two potential and contradictory policies the government could take to mitigate risks despite voters’ rational irrationality.

The first possible policy would be for politicians to use their political “wiggle room” to deviate from voter preferences towards better policies that popular opinion would actually be against. This would mean Obama acting like he is using his full technocratic, centralized, prowess to stop the terrorists, but on the margin doing what he can to mitigate risks using decentralized risk mitigation policies (I have no idea what these policies would be.. terrorism futures markets?).

The other Caplanesque solution would be for Obama to challenge the public’s misperceptions about the government’s ability to mitigate terrorism risks. This is the advice Brian gives to experts;

“When experts and those who heed them address a broader audience — in the media, in their writings, or in a classroom — they need to focus on the questions where experts and the public disagree, and clearly explain why the experts are right and the public is wrong.”

If Obama came out and loudly declared that the government cannot keep us safe from terrorism, and that much of what they have been doing is in fact “security theater”, it would be politically expensive, and would probably reduce Obama’s security policy “wiggle room”. I can see the headline on the front page of The National Review right now: “Obama Says Terrorism Is Your Responsibility: How The White House And The ACLU Are Putting America At Risk”.

Thus the two possible Caplanesque solutions work against each other. So which should Obama choose? This is a general struggle I have had understanding exactly what “The Myth of The Rational Voter says that politicians should be doing. Should they say one thing and do another, maximizing their “wiggle room” and using it to mitigate voter irrationality? Or should they challenge the voters’ rationally irrational beliefs, likely reducing their “wiggle room”? To the extent that either are done by politicians, I see the former as more common, although Obama seems more able and comfortable taking the latter route than most politicians. It seems David Brooks would prefer the latter.

P.S. Also note that almost everything I’ve written here could be altered slightly to apply to financial system risk.

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