Proposal: Let’s stop calling them “Property Rights”

I think an alternative that is both clearer and more general is “Decision Rights”. When I teach Coase Theorem I use both terms, and (I think) students have an easier time grasping it when they realize that property rights are really just rights to make certain decisions. I can’t see a good reason to keep using the term property rights except that by historical accident it’s become entrenched jargon.

Property sounds like “stuff” to most people. And property rights sounds like “owning stuff”. This raises two points that need clarifying:

1. There is more to the world than just the physical, and there is more to property than just stuff.

I would argue that economic rights are human rights. (I would also argue that corporations are owned and staffed by humans but are not humans themselves.) And I would say that right to self-ownership is a particular type of economic/human right.

When we talk about environmental issues, the root problem is usually over some shared resource (e.g. we can’t neatly privatize the atmosphere and let now-private conflicts be resolved in court). It’s much easier to focus in on the relevant particulars when our language directs us to what’s really at stake (e.g. whether I can decide to put more than X amount of pollution into the atmosphere without legal consequences).

2. I own a bit of land and I can make many decisions about how to use it. But I can’t set up a nuclear reactor or burn a massive pile of debris. My ownership is not carte blanche, but a bundle of different rights. I have the right to use (for normal domestic purposes), to exclude, to sell, etc. By “I own” what I really mean is “I can make a particular set of decisions.

I hope my hard core libertarian friends will agree with me that the decisions I can make are not limited by what is explicitly legislated. I suspect my interventionist friends will disagree. But I also think interventionists can agree that it’s more reasonable for me to have a set of decision rights (how ever nebulous the extent of that set is) than some more magical sounding dominion/ownership over a particular fifth of an acre.

The notion of decision rights makes it clearer what political debates are over. If we want to pass a law saying you can’t put a pool in your yard because of spotted owls, “property rights” muddies the discussion. The law would take away a particular property right–which is to say, the right to make a particular decision. But the debate is going to devolve into “you’re taking our land” vs. “no we aren’t.” It’s close to the real issue, but not close enough.

tl;dr: When we talk about “property rights” or ownership what we really mean is a set of various decisions that one has a right to make. Those decisions might be over the use of what we traditionally call property (e.g. my yard), but it might also be over shared resources (e.g. the atmosphere), decisions with collective impacts (e.g. ecosystem management–or lack thereof), or socially constructed issues (e.g. intellectual property). The term “property rights” is not clear or obvious (particularly for people who aren’t already likely to read this blog). A better term would be “decision rights.”

Further thoughts on the carbon tax.

This post is in response to feedback from my previous post on this topic.


There are no panaceas.

But as abstract ideas go, pollution taxes are pretty appealing. Holding constant lots of things that we can’t really hold constant, it means replacing the inefficiency resulting from poorly defined/enforced property rights with a world where prices more accurately reflect the costs of one’s decisions.

Let me come back to the things we’re “holding” constant in a bit. Why do I want to throw my weight behind shifting public perceptions in favor of pollution taxes?

I think they’re underrated by the median voter. Climate change is just a subsidy paid in the form of worse conditions. But most people (including people who should know better) don’t have a good understanding of the problems caused by subsidies.

Which is not to say a carbon tax isn’t overrated by the median policy wonk. There are a ton of important caveats, but on balance, as a policy for use in the next 50 years, I think they’re a useful tool to enhance efficiency or replace worse tools.

Again, there are no panaceas. I’m also not a huge fan of the “Economists’ Statement on Carbon Dividends” as written (for reasons I’ve hopefully mostly addressed). I suspect the best case scenario for my preferred carbon tax policy would be a modest improvement. I think the bulk of the gain would be a cultural shift away from “let’s regulate our problems!” to “let’s leverage incentives to address our problems!” Not Earth shattering, but a step in the right direction.

So let me state my position, then we can dig into criticisms and caveats.

Let’s make marginal shifts away from taxing investment and towards taxing negative externalities. As we go, let’s spend a lot of effort trying to study the impacts and adjust accordingly. Let’s heavily agument that with abatement policies rather than trying to return to some pre-industrial climate target.

Okay, let’s dig into criticisms and caveats.

  1. Public choice considerations
  2. Geoengineering and other alternatives
  3. Cost
  4. Coordination
  5. Uncertainty

1-Public choice considerations

A Green New Deal will be a rent-seeking bonanza. Pollution taxes will face the same sorts of problems that plague the tax code in general. There will be intentional loop-holes and accidental screw ups.

We have to continue to push for reducing the complexity of tax codes in general. But I can’t deny that a carbon tax would be a step back on this margin.

Minus a hundred points for my position.

2-What about geoengineering?

Geoengineering sounds like a possible panacea. Maybe it is. But I’m not willing to flip a switch and find out the hard way all at once.

First off, geoengineering is scary. The climate is a complex system and complex systems are difficult-impossible to manage well. And that’s especially concerning if it means that anyone with a few million bucks can try to fiddle with Earth’s thermostat.

But it seems like a plausible tool that might be used to address climate change. Similar to my take on a carbon tax, I think the way to go is baby-steps plus research.

What about subsidizing “green _____”

Personally, I’m skeptical. Solar sounds appealing, and I (personally) think windmills are beautiful. But I don’t think the government will do a good job of picking winners and losers. Pollution taxes are appealing to me because they don’t require bureaucrats to choose. Again, I think the way to go is to use pollution taxes to offset other taxes–while continuing to advocate for reduced size/scope of government and a return to federalism.

Plus five points for my position.

3-Cost

We should also remember that GDP is an imperfect measure of well being. The current figures aren’t directly comparable to the figures we’d get in a post-carbon-tax world. A one-time fall in GDP doesn’t (necessarily) mean we’ve screwed things up.

A tax big enough to halt climate change would be incredibly costly. Too big a tax yields a negative net benefit.

Still, it’s worth remembering that a) we can go too far with a carbon tax, and b) we don’t have access to a silver-bullet solution. So let’s start small and gradually increase carbon taxes till we get close to (our best estimate of) the optimal level.

Plus epsilon points for my position.

4-Coordination

The basic idea of a carbon tax is that we’re dealing with a global-scale externality problem. But small scale taxes are unlikely to do much beyond shifting where pollution happens. A fully effective tax would require multi-lateral coordination. And, as a country, we aren’t very good at that.

Trying to create a tax on imported carbon-intensive goods that didn’t face a tax at home seems a) sensible at first blush, and b) a massive opportunity for public choice problems.

On the other hand, we could justify a tax commensurate with the local impacts (something like 10% of the global impact). This fits nicely with my idea of starting small and adjusting at the margin.

But even within the U.S. there are coordination issues. Long Island will likely face net costs from climate change, but other areas will benefit from a longer growing season.

Plus 10 points for my position, but also minus 10 points.

5-Uncertainty

Uncertainty cuts both ways: we’re currently accidentally manipulating the climate and that could turn out to be catastrophic. Trying to intentionally manipulate it in the other direction is also dangerous. Again, the appropriate focus is on marginal tinkering [much as it clashes with my non-interventionist priors] rather than ambitious global engineering [which grabs my priors by the lapels and knees them in the groin].

When I teach externalities, I draw a graph like this:

Negative externalities when we magically know their magnitude.

In this market, we end up with an equilibrium quantity defined by the point where Marginal Private Cost equals Marginal Social Benefit (MPC = MSB). But the Marginal Social Cost (MSC) is greater, so we get a deadweight loss equal to the triangle I’ve shaded in red and purple.

It’s important to note: we don’t actually know where the MSC curve is. It’s somewhere above MPC, but we’re basically in the position of trying to eliminate a subsidy we don’t know the size of.

The relevant models–climate models and economic models–are filled with uncertainty that we simply cannot resolve without real life experience.

What does the economic way of thinking tell us? Act on the margin. Setting a tax that pushes supply (MPC) up to the green line doesn’t fully address the problem (as I’ve assumed it to be in this graph), but it’s an improvement.

Even better, it’s an improvement where the biggest returns are experienced up front. This modest tax fails to get rid of the red deadweight loss (DWL) area, but it eliminated 3/4 of the total DWL.

Plus X points for my position where X is a random variable with an unknown distribution, positive first derivative, and negative second derivative.

tl;dr:

At my friend’s behest I’ve been looking at Bob Murphy’s critique of carbon taxes. I find it’s shifted the magnitude of my prior opinion, but not the direction. I still think carbon/pollution taxes are a good idea, but I no longer think they’re a great idea. My take away from Murphy’s work is that the optimal carbon tax is fairly modest. My response is to advocate for getting a very modest carbon tax on the books, then gradually shift tax policy in that direction.

For climate change (and any other problem) we ought to be pluralists. A mix of approaches is ideal. Part of the appeal of Pigouvian taxes is that they allow and encourage a wide range of responses. The best pollution abatement scheme isn’t something we can look up in a binder. We have to discover it, and crowdsourcing is the appropriate way to do that.

But carbon taxes are only one part. We should also advocate for changes that will ameliorate harm. I am more bullish on these policies than I am on a carbon tax:

  • Make it easier for the world’s poorest people to move to rich countries that will be better able to cope with climate change.
  • Quit subsidizing flood insurance.
  • Quit subsidizing polluting industries (and other industries).

Even though geoengineering scares me, we should try to learn more. Ditto for any other possible tools that come along.

Government isn’t the only problem

Working in a college, I’m at the front lines of a significant problem: wasteful bullshit jobs. In fact, I am writing this post to procrastinate editing a bureaucratic report (that nobody cares about) that has been slowly grinding the joy out of my life for the past several months. I have to write this report for the benefit of regulatory oversight which, ironically, is supposed to ensure that I use my privileged position for the benefit of society instead of wasting my efforts on pointless or destructive outlets.

In my case, this bullshit aspect of my job is a predictable outcome of working in a state sponsored bureaucracy. But the same disease afflicts private industry too.

If I’m the head of a Fortune 500 company, I have incentive to increase profitability of my company, but I have competing interests too. Most importantly I have to maintain my position of power within the company. Bruce Bueno de Mesquita and coauthors have laid out the logic of the situation in The Dictator’s Handbook, and The Logic of Political Survival–in a nutshell, I have to worry about competition for positions of power within any hierarchy. This requires engaging in cooperative rent-seeking to keep the right people happy. If I don’t, I risk losing my position to a sycophant who will.

We shouldn’t be surprised to see Niskanenian logic show up in these situations. Corporate flunkies are like a private army that can help me keep my position of power even if they don’t contribute to the profitability of the firm. Even if I want to maximize profits, if I have to worry about keeping my position, I have to engage in some of this costly, inefficient rent-seeking.

In other words, “firms maximize profit” is an approximation that brushes aside methodological individualism. Don’t get me wrong, there’s evolutionary pressure on firms that will push in that direction. But within a firm there’s evolutionary pressure preventing the firm from fully maximizing. (In other other words, if I survive this report I’ll have to start reading up on corporate governance.)

This logic is a natural source of bullshit jobs, even in a free market. Regulatory capture should make it worse, but we’ll never completely eliminate it.

On a more speculative note, I think we also have to worry about culture. For one, our current culture drives the demand for increased regulation. For another, we prize work for work’s sake to the point that most people would rather see someone fritter away their brief experience as a sentient being than see them fail to live up to social expectations. Such notions, I think, are behind the surprising lack of riots in the street you might expect in a world where most people know we face this problem of bullshit jobs. But I’ll leave any further speculation for the comments.

tl;dr: Our economy is beset with bullshit jobs that sap our creative capacity and crush our souls. And pretty much everyone knows it. Government is part of the problem, partly because regulation creates demand for paper-pushing, and partly because anti-competitive regulation converts lively, profit-seeking firms into private bureaucracies in their own right. But there are deeper problems: our willingness to abide, and the fundamental logic of hierarchical organizations.

RE: Economists’ Statement on Carbon Dividends

I just got an email asking me to sign on to an open letter arguing for some carbon tax policies. I’m seeing some push back from (smart, economically literate) Facebook friends, but I think it’s a viable step in the right direction.

Here’s the statement paraphrased:

We think global warming is an important and urgent issue and we recommend these five things:

1. A carbon tax is the best, most cost-efficient way to do as much about carbon as needs to be done. [For a given level of carbon reduction, I agree. How much carbon reduction should happen (and how much at government behest) I am deeply agnostic about.]

2. We think this should be phased in over time and should be revenue neutral. [Yes on both points, but the rest of the statement makes it seem like they’re talking about a pretty short time horizon. I’m not sure how fast is too fast, but I’m sure there’s such thing.]

3. A carbon tax is more efficient than a set of specific regulations. [Certainly!] It’s also less likely to be subject to changing political winds. [Is it though?]

4. We should also apply a carbon tax to imported goods. This would reward energy-efficient American firms and prod other countries to follow suit. [Hmmmm… I can’t really disagree with the general principle, but this sounds like it will require bureaucratic oversight that will be subject to regulatory capture. On the other hand, we’ve already got that.]

5. We should give the revenue collected back to U.S. citizens, to offset increases in energy prices. [Okay, but if it’s going to be revenue neutral and come with a transfer scheme, that’s going to take some detangling!]

I buy into the notion that carbon emissions create large scale externalities that will probably be more bad than good on balance. Not universally bad, mind you. And not something that humanity won’t ultimately adapt to. But I think the people who will face the brunt of the bad outcomes will be the world’s poor (who we should help migrate to better climates!).

I don’t think we can just impose “the right” carbon tax and have everything come out just right. Even though I routinely draw out the case with a supply and demand graph in class, the truth is that nobody has access to those curves in real life. But a small tax can serve to reduce the inefficiency of pollution even if we don’t get it exactly right.

The revenue neutral part is important–we’re currently taxing lots of things we actually want more of (like investment). So if we can cut those taxes by taxing things we want less of (pollution), we’re reducing two sources of inefficiency in the current setup. Of course you and I have bolder views about what policy should look like in 100 years, but restricted to a 10 year window, a revenue neutral carbon tax looks pretty good to me.

The letter dramatically over-simplifies things. Climate change is probably a problem, but probably not as big a problem as proffered by proponents of proposals to prepare for apocalypse. It’s not clear to me that we have a good idea of a) all of the effects (good and bad), b) how people will adapt, and c) how people will adapt to a changing policy regimen.

Figuring out how to handle the tax on imports will be difficult and rife with rent seeking. Unmentioned is the impact on exports. If all our trading partners follow a similar policy, there’s no problem, but in the mean time there’s a tension that will probably be resolved with some unfortunate bit of rent seeking.

I’m sure most reasonable people would agree that instantaneous change would probably be unduly costly, but it’s not clear what the right speed of implementation is.

There are some miscellaneous rhetorical points I have issue with, but I suspect those are in there to throw a bone to people who aren’t me.

I hope that 10 years from now this open letter looks a bit silly. But I also hope that 10 years from now pollution taxes start to replace more inefficient taxes. On balance, I’m happy to see the letter prodding us in that direction.

Is this patriotism?

I’ve always had a weird relationship with patriotism. As a Canadian kid I wondered if the thing I was supposed to be proud of was that Canadians weren’t so brashly patriotic. Later I moved to America and jumped on the “we’re #1” bandwagon. I got off after first realizing that politics is messy and there aren’t any leaders worth admiring, then realizing that that’s always been true (and may even have been worse in the past). My default position over the past few years (before and after getting citizenship) has been “America The world is a nice place, with nice people. And America has one of the better (deeply flawed) political systems.” But I’m not the sort of person who goes out of his way to say the pledge of allegiance.

But I might have stumbled on a secret patriotic feeling that swells in my heart nearly every time I read the news: a profound embarrassment.

Maybe bureaucratic reports have worn me thin, but I’m increasingly shouting “Get it together America! You’re embarrassing me!” any time I encounter news.

When crazy people do crazy stuff I’m not inclined to feel embarrassed, because I don’t know that angry lady who doesn’t understand traffic lights! But family can embarrass you. Embarrassment is an expression of your fear that you’re more like Uncle Joe than you feel comfortable with.

If this is what patriotism feels like, I don’t get it.

The Incomplete Counterfactual Fallacy

Mariana Mazzucato has some interesting ideas, but her basic thesis (which I’m guessing based only on her recent Freakonomics interview) forgets a simple fact: had the government not made GPS, not only would we not have GPS, resources would have been allocated somewhere else.

In other words, she’s right that without government involvement we’d miss all sorts of valuable things like the basic research it turns out government has financed, physical infrastructure (no matter how neglected), GPS, the specific form the Internet we got, etc., etc.

But that’s only half the story. What happens if DARPA closes shop just before starting on GPS? Those engineers end up somewhere else, the money for the project goes somewhere else, the steel and titanium for the satellites they would have built end up in some other shop.

If we could know that nothing else would have happened at that point, then GPS is a free lunch–some bold committee scooped up a handful of clay, handed it to brilliant engineers, and created something from nothing.

More likely some of those engineers would have made dozens of other projects a little bit better, and one or two of them might even have, through some series of unpredictable events, ended up creating some totally different innovation that would have put us on to an entirely different path.

Which is the better path? There’s no way to know. The people on that other path exist in a completely different paradigm from our own. It’s comparing meta-apples with meta-oranges. We are where we are and we ought to appreciate all the costs and benefits of the system we’ve inherited. I think Mazzucato is right that many of us have underrated the government. (Certainly 23-year-old-Rick was guilty of the over-complete counterfactual fallacy.)

She makes a compelling argument that Solyndra doesn’t look like such a boondoggle when you take the wider view we would expect of the smallest venture capital investor. But if it’s true that pointing at government failures is invalid, then so is pointing at government success.

What’s important is improving the future performance of our current institutional mess. To do that, I think we’re better off backing away from her broad claims and focusing on her more sensible (and jarring) arguments about how the current system encourages destructive rent seeking through intellectual property protection of basic research that might be better left in the public domain.

We have seen the algorithm and it is us.

The core assumption of economics is that people tend to do the thing that makes sense from their own perspective. Whatever utility function people are maximizing, it’s reasonable to assume (absent compelling arguments to the contrary) that a) they’re trying to get what they want, and b) they’re trying their best given what they know.

Which is to say: what people do is a function of their preferences and priors.

Politicians (and other marketers) know this; the political battle for hearts and minds is older than history. Where it gets timely is the role algorithms play in the Facebookification of politics.

The engineering decisions made by Facebook, Google, et al. shape the digital bubbles we form for ourselves. We’ve got access to infinite content online and it has to be sorted somehow. What we’ve been learning is that these decisions aren’t neutral because they implicitly decide how our priors will be updated.

This is a problem, but it’s not the root problem. Even worse, there’s no solution.

Consider one option: put you and me in charge of regulating social media algorithms. What will be the result? First we’ll have to find a way to avoid being corrupted by this power. Then we’ll have to figure out just what it is we’re doing. Then we’ll have to stay on top of all the people trying to game the system.

If we could perfectly regulate these algorithms we might do some genuine good. But we still won’t have eliminated the fundamental issue: free will.

Let’s think of this through an evolutionary lens. The algorithms that survive are those that are most consistent with users’ preferences (out of acceptable alternatives). Clickbait will (by definition) always have an edge. Confirmation bias isn’t going away any time soon. Thinking is hard and people don’t like it.

People will continue to chose news options they find compelling and trustworthy. Their preferences and priors are not the same as ours and they never will be. Highly educated people have been trying to make everyone else highly educated for generations and they haven’t succeeded yet.

A better approach is to quit this “Rock the Vote” nonsense and encourage more people to opt for benign neglect. Our problem isn’t that the algorithms make people into political hooligans, it’s that we keep trying to get them involved under the faulty assumption that people are unnaturally Vulcan-like. Yes, regular people ought to be sensible and civically engaged, but ought does not imply can.