FRIDAY GRAPH: A CLIMATE-CHANGE DOOMSAYER BET

 Don Boudreaux masterfully continues the Julian Simon tradition in his WSJ article “More Weather Deaths? Wanna Bet?”, according to Mark Perry in his blog Carpe Diem:

Writing recently in the Washington Post, environmental guru Bill McKibben asserted that the number and severity of recent weather events, such as the tornado in Joplin,Mo., are too great not to be the result of fossil-fuel induced climate change. He suggested that governments’ failure to reduce emissions of greenhouse gases will result in more violent weather and weather-related deaths in the future. And pointing to the tragedy in Joplin, Mr McKibben summarily dismissed the idea that, if climate change really is occurring, human beings can successfully adapt to it.

“There’s one problem with this global-warming chicken little-ism”, Perry writes.  “It has little to do with reality. National Weather Service data on weather-related fatalities since 1940 show that the risks of Americans being killed by violent weather have fallen significantly over the past 70 years.”

Perry notes that:

The annual number of deaths caused by tornadoes, floods and hurricanes, naturally, varies. For example, the number of persons killed by these weather events in 1972 was 703 while the number killed in 1988 was 72. But amid this variance is a clear trend: the number of weather-related fatalities, especially since 1980, has dropped dramatically.

For the 30-year span of 1980-2009, the average annual number of Americans killed by tornadoes, floods and hurricanes was 194 – fully one-third fewer deaths each year than during the 1940-1979 period. The average annual number of deaths for the years 1980-2009 falls even further, to 160 from 194, if we exclude the deaths attributed to Hurricane Katrina, most of which were caused by a levee that breached on the day after the storm struck land

This decline in the absolute number of deaths caused by tornadoes, floods and hurricanes is even more impressive considering that the population of the United States more than doubled over these years – to 308 million in 2010 from 132 million in 1940.

 

 This is Don Boudreaux’s bet:

“So confident am I that the number of deaths from violent storms will continue to decline that I challenge Mr. McKibben – or Al Gore, Paul Krugman, or any other climate-change doomsayer – to put his wealth where his words are. I’ll bet $10,000 that the average annual number of Americans killed by tornadoes, floods and hurricanes will fall over the next 20 years. Specifically, I’ll bet that the average annual number of Americans killed by these violent weather events from 2011 through 2030 will be lower than it was from 1991 through 2010.

“If environmentalists really are convinced that climate change inevitably makes life on Earth more lethal, this bet for them is a no-brainer. They can position themselves to earn a cool 10 grand while demonstrating to a still-skeptical American public the seriousness of their convictions. But if no one accepts my bet, what would that fact say about how seriously Americans should treat climate-change doomsaying? Do I have any takers?”

 

 

FRIDAY GRAPH: MANUFACTURING SHARE OF GDP

Another graph courtesy of University of Michigan professor of economics and finance Mark Perry and his blog Carpe Diem.

The chart above shows manufacturing output as a share of GDP for both the world and the United States using United Nations data for GDP and its components at current prices in US dollars from 1970 to 2009.

Perry notes:

We hear all the time from Donald Trump and others about the “decline of U.S. manufacturing,” about how nothing is made here any more, and how everything that used to be made here is now made in China …  In reality, the decline in U.S. manufacturing as a share of GDP is really a global phenomenon as the entire world becomes increasingly a services-intensive economy.

As a share of GDP, manufacturing has declined in most countries since the 1970s.  A few examples: Australia’s manufacturing/GDP ratio went from 21.3% in 1970 to  9% in 2009, Brazil’s ratio went from 24.6% to 13.3%, Canada’s from 21.7% to 11.3%, Germany’s from 35% to 19%, and Japan’s from 35% to 20% …

The standard of living around the world today, along with global wealth and prosperity, are all much, much higher today with manufacturing representing 16-17% of total world output compared to 1970, when it was almost twice as high at 26.7%.  And for that progress, we should applaud, not complain.

The same trend has occurred in agriculture in most countries over the last 100 years – there has been a dramatic decline in agricultural employment.  Would we really be better off if more people worked on farms?

Note also that the decline in the manufacturing share of GDP is to some extent a statistical artifact.  Many functions, such as accounting and IT, that were once performed in-house by manufacturing firms have been outsourced to service sector providers.

Using Mark Perry’s numbers, the share of manufacturing in GDP for New Zealand has fallen from 21.6% in 1970 to 14.9% in 2009.  Manufacturing is still a major sector in the New Zealand economy and bigger as a share of GDP than in the United States and Australia.

FRIDAY GRAPH: TAX RATES AND TAX REVENUE

In a recent article Is ‘Tax the Rich’ Good Policy? (ODT 25 April 2011), I made the point that those in the top income brackets in New Zealand are already taxed relatively heavily by international standards.

I also noted that because cuts to high tax rates encourage economic growth and reduce tax avoidance, they may actually produce more government revenue.

And I quoted President John F Kennedy who said, when cutting US tax rates in the 1960s, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut rates now.”

This chart from Mark Perry’s blog Carpe Diem illustrates these points.

 

As Perry comments:

The chart above shows the relationship over time (from 1979 to 2007) between: a) the top marginal income tax rate, and b) the share of total income taxes paid by the top 1%). In 1979 the top marginal income tax rate was 70% and 18.3% of the total taxes paid were collected from the top 1% of taxpayers. By 2007 the top tax rate was 35% (half of the 1979 rate), and the tax share of the top 1% had more than doubled to 39.5% (from 18.3% in 1979).

The historical record shows an inverse relationship between the highest marginal income tax rate and the share of taxes collected from “the wealthy.” It’s a relationship to keep in mind during the current tax policy debate, where Obama wants to increase tax revenues by raising tax rates for “the rich,” and Rep. Ryan alternatively suggests a cut in the top marginal rate to stimulate economic growth, which would likely increase tax revenues from the wealthy, and increase overall tax revenue.

Note that this is not a Laffer curve argument that tax cuts are self-funding.  Normally they aren’t.  However, the loss of revenue over time from cutting inefficient taxes is less than the initial static loss because they encourage economic growth and expand the tax base.

Note also that higher income people pay more – a lot more – even with a flat or proportional tax.  Leaving aside the likelihood in practice of more favourable treatment for those at the bottom, a person on $25,000 pays $2,500 in tax under a simple flat 10% rate whereas someone on $250,000 pays $25,000.

THE CITY THAT OUTSOURCED EVERYTHING

Here’s a video (hat tip: Mark Perry) about innovative local government in the United States. Sandy Springs, Georgia, a town of around 100,000 (so comparable to Hamilton, Tauranga or Dunedin) has outsourced all of its functions except for fire and police.  Since incorporating in 2005, Sandy Springs has improved its services, invested tens of millions of dollars in infrastructure, has no long-term liabilities and has kept taxes flat. Why wouldn’t councils in New Zealand want to consider this option?

FRIDAY GRAPH: POVERTY RATES

Here is a graph (hat tip: Mark Perry) from a 2009 NBER working paper “Parametric Estimations of the World Distribution of Income,” by Maxim Pinkovskiy and Xavier Sala-i-Martin (Columbia University):

Abstract: We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006 (see chart above). The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions.

Mark Perry noted on his blog that if these estimates are accurate, the 80% reduction in poverty between 1970 and 2006 has to be the greatest reduction in world poverty in such a short time span in the history of the world, and the 97% reduction in East Asia has to be the most significant improvement in regional standard of living in history as well.  The reasons for the record reduction in world poverty might be globalisation, market-based reforms, liberalisation, information age technology, productivity gains in agriculture and the collapse of central planning in China and India.  Even the trend for Africa is encouraging.

FRIDAY GRAPH: MANUFACTURING

China has devastated manufacturing industry in America, right?  No, wrong. 

From Jeff Jacoby’s column in today’s Boston Globe “Made in the USA“:

Mark Perry writes:

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent (see chart above). China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent.

Perceptions also feed the gloom and doom. In its story on Americans’ economic anxiety, National Journal quotes a Florida teacher who says, “It seems like everything I pick up says ‘Made in China’ on it.’’ To someone shopping for toys, shoes, or sporting equipment, it often can seem that way. But that’s because Chinese factories tend to specialize in low-tech, labor-intensive goods — items that typically don’t require the more advanced and sophisticated manufacturing capabilities of modern American plants.

A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality. They may have “closed down the textile mill across the railroad tracks.’’ But America’s manufacturing glory is far from a thing of the past.”

Manufacturing is still a large industry in New Zealand.  Moreover, the statistical categories these days can be misleading.  Whether service activities are performed within an industrial company or outsourced can lead to different classifications.  When does a processed agricultural or forestry product get classified as a manufactured product?  The statistical classifications have little meaning from an economic point of view.  Our manufacturing sector is far more efficient and competitive than when it operated behind high protective walls.  It will be alive and well for a long time yet.

Economic Wagers and the ‘Ultimate Resource’

A recent article in the New York Times by John Tierney about a current ‘energy cornucopia’ and his winning of a bet on energy resources has brought back to light the famous Simon-Ehrlich wager of 1980 – and sparked a mini-furore in the economic blogosphere and a possible third bet of a similar vein.

Bet 1

Convinced claims made by environmental doom-monger Paul Ehrlich that population growth would quickly outrun the supply of food and natural resources were false, Julian Simon had Ehrlich choose five commodity metals: Simon bet that their prices would go down in real terms, Ehrlich bet they would go up.

The chosen commodities, collectively costing $1,000 in 1980, fell in price by over 57% over the following decade. In October 1990 Ehrlich mailed Simon a cheque for $576.07.

Bet 2

Then in 2005, following in the footsteps of his friend and mentor Julian Simon, John Tierney accepted a bet for $5000 with Matthew Simmons (a former member of the US Council of Foreign Relations and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy) that the average price of oil for the year 2010 would be less than $200 per barrel.

Tierney and Julian Simon’s widow Rita (who was so happy to see her husband’s tradition carried on that she shared half the bet) were sent their winnings on January 1 this year.

Bet 3?

Since Tierney’s article was published, economist Donald Boudreaux has been trying to organise terms for a third bet in a similar vein with Brad DeLong after DeLong foolishly nominated Tierney, Boudreaux and Mark Perry for the ‘stupidest man alive’ following Boudreaux and Perry’s support of the Tierney article.

No bet

In a comment on a blog I wrote titled Has the ‘Peak Oil’ Drama Peaked?, Steve W wrote that he had challenged Jeannette Fitzsimons to a bet along the Simon-Ehrlich lines during a debate… and that she refused.

The ‘ultimate resource’

Amusing and instructive as it may be, if you put all the gambling to one side it is the ‘ultimate resource’ principle that Julian Simon himself developed in his 1981 book of the same name that is the key to these arguments.

It is a principle that I subscribe to – that humans’ capacity to invent and adapt will overcome scarcity of natural resources.

One way of looking at the basic economics behind the principle is that as a resource becomes scarce, its price will rise. This creates an incentive for people to exercise intelligence and creativity to discover more of the resource, economise on its use and develop substitutes.

In a broader context, it is the ultimate resource because it is limitless – we are constantly discovering solutions to problems once thought insurmountable – and it will never run out.

Mark Perry puts it well:

…the “ultimate resource,” i.e. the human mind, human capital, human ingenuity, and human innovation, are infinitely abundant, and will meet, address and overcome any scarcity in natural resources. The bottom line as I understand Julian Simon is this: we’ll never run out of the ultimate resource. And that is why limited or finite supplies of natural resources have never, and will never, result in any significant binding constraints or limits on human progress, economic growth, or the continual increases in our standard of living, wealth and abundance.

It is also a positive way to think. We live in an age (or perhaps it has always been this way) where people lurch from one fearful impending doomsday scenario to another. If it’s not the ‘silent spring’ or the Y2K catastrophe, it’s ‘peak oil’, ‘acid rain’ or ‘global warming’.

It is reassuring that the historical record shows that humans can and do overcome the obstacles we face.

And of course the ‘ultimate resource’ has countless applications beyond oil and metals.

Consider the amazing work of the American genetic scientist and Nobel Laureate Dr Norman Borlaug who created a high-yield dwarf variety of disease-resistant wheat which, when coupled with modern agricultural techniques, solved the India-Pakistan food crisis of the mid-1960s; turned Mexico into a major wheat exporter; dramatically improved the lot of many other developing nations; and was eventually credited with saving over 1 billion people from dying of starvation.

This was a triumph of the ‘ultimate resource’.