Empire of Carbon; and What?

I have seen the future, and it won't work.

No. The above line isn't plagiarized from Paul Krugman's article opener in the Empire of Carbon. It is the same line, but the meaning it carries in my post is very much different from Krugman's.

China is not a clean country. Every city you visit, you are almost always greeted with a foggy atmosphere, and you'd better clean your shoes everyday, because of the omnipresent dirt from all those construction sites. When I first came to Shanghai I was surprised to find the air conditions no better than that of Nanjing; isn't Shanghai closer to the sea and enjoys the natural sweep of the seaborne wind everyday? Nanjing, in comparison, is surrounded by hills and therefore is a natural trap for dirty air. 'But Shanghai's got many more cars.' My colleagues told me.

However, as Krugman has shrewly pointed out, the Chinese have their fair excuses for the pollution (a demerit good) they produce: that the development of the now developed countries was not put under such environmental-friendly restraints. Meanwhile, China's per-capita emission is still below that of the US. So after all, it is difficult to talk China down with moral rhetorics. And what can we do? It is very unlikely that China will do away with the problem of pollution all by herself--not nearly fast enough to satisfy everyone--because usually we do not expect the problem of negative externality to go away all by itself anyway.

This is where I started to get disappointed with Krugman. Much as he has been offering the correct insights into various economic matters, on this one his ideas are falling short:

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

What confrontation are we trying to build here? Maybe it's a matter of wording, but are we trying to say that we should 'beat China until she complies'? First of all, you don't beat a country into compliance--the US has learnt the lesson the hard way (or maybe it's not enough?). Secondly, you don't beat a country who has a fair excuse for what she does--this is all evil. Considering the target country is China, you cannot actually hope that she will remain docile while being beaten up; China has her claws, and many people out there are much more willing to believe this than I do. For goodness' sake, forget about confrontation. It's such an old word from the Cold War vocabulary.

The most desirable solution for China is that the international community gives her money enough to transform all production lines into cleaner ones. Yet will the indignant international community willing make this kind offer? I guess not.

So it all comes down to eclecticism. Investing more money into China's clean production will be a welcome gesture. China is already on her way to cleaner energy, but still not fast enough to cope with the problem of global warming and such. What the world can do is to invest in order to speed the process up. Do not face China with a cold look and threaten compliance. Help her with this good deed.

But confrontation might be such an easy word that everyone will pick it up sooner or later. And the future, perhaps, will no work...

Mark Thoma: "John Bogles: 'A Crisis of Ethic Proportions'"

Mark Thoma reposted part of John Bogles' 'A Crisis of Ethic Proportions', which puts ethics at the front of the current economic crisis. Bogles goes on to identify the corrupted as the agents of the big corporations who put their own interest before that of the ones they are supposed to represent.

All very nicely analyzed. If you are an economist, you would really appreciate this effort of pinning down the real culprits within our theoretical system. Yes. The agency problem is well understood by economists, therefore solving it will not be that hard, once it is identified.

This identification, however, has slipped from Bogles' original point of observation. He effectively transforms a problem of ethics into one of agency, in which process an external factor of economic models is quietly internalized. Fortunately Mark Thoma is clear-headed enough to point out that '[r]ules will never cover everything, so ethics is part of the problem.'

However, my quesiton is, 'What ethics?'

I do not like to predict the death of capitalism like a socialist of the past. Observation is much better than prediction. Yet I believe that we have observed that people are not able to withstand the possible gains from bigger leverages, so much so that they and the huge organizations they represent will inevitably fall. It is the Gresham's law applied to the financial domain, and we seem to have got the problem back into the economists' hand. Congratulations! But do we have a stock solution?

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We have generally given up on 'good money' in currency circulation, but it is not possible to give in to 'bad money' in finance yet. While people were quick to realize the debased value of the 'bad' silver coins, the financial instruments are just too hard for the mortals to understand, and the rating agencies are doing a really evil job in offering (at least to Lehman) unfairly high ratings. So, once the complexity of the 'bad money' gets out of the limit of common human sensibility, all economic laws based on rationality need to be remade.

Susan Hough: 'Confusing Patterns With Coincidences'

I've been quoting a lot recently, as I do not have enough web time for blogging. But for this one, I do have something to say.

The quote goes first:

The game goes like this: you look back at past recordings of X, where X is radon or whatever, and find that X had shown anomalies before large earthquakes. But the problem is that X is typically what we call a “noisy signal” — data that includes a lot of fluctuations, often for varied and not entirely understood reasons — so finding correlations looking backward is about as meaningful as finding animals in the clouds.

We do know that some earthquakes, including the L’Aquila event, have foreshocks, but we can’t sound alarm bells every time little earthquakes happen because the overwhelming majority — 95 percent or so — will not indicate a coming major quake.

And the full article is available here.

Does the story sounds remotely similar to the one happened in China last year? Or indeed to the current economic crisis centered around the Wall Street melt-down? The choice is ours to make: find a way to neutralize these high-stake risks, or live on like we do now and let issuance of one kind or another to clear up the aftermath. The strange thing is that we have so far opted unanimously for the latter option, which seems to be cheap in comparison. But is it? Clearing up the mess in L'Aquila might be cheap (no derogative use here), but for the other 2 cases, the consequences are all too severe.

I seriously suspect that the whole world nowadays is risk-loving, for my problem is your problem, but my profit is too often my profit alone--the negative externality problem is everywhere. In theory people would look to the government for solution, but governments are more concerned about social unrest than about the possible loss of lives... What other options have we got?

"Predicting the Present with Google Trends"?

I was very interested at the research co-authored by Hal Varian and Hyunyoung Choi titled: "Predicting the Present with Google Trends" until I found that the source is Google blog. Now I'm not sure if I'm still reading an unbiased research report or a piece of Google propaganda. Perhaps neither.

It has been said that if you put a million monkeys in front of a million computers, you would eventually produce an accurate economic forecast.

Got to love this quote. Let's wait and see the result.

"King Solomon's Dilemma and Behavioral Economics"

Can't help quoting this one. It shows how far economists are willing to go to challenge conventional 'wisdom'. Makes very good teaching material.

Let's think about this. The "mechanism" (game) designed by Solomon proposes to split the baby in two (sounds "fair" at least). One women screams out "No! Let the other have the whole baby instead." The other woman coldly agrees to the solution. The real mother is revealed in the obvious manner. What is not so obvious is why the false mother could not have anticipated this outcome; a more clever woman would have simply mimicked the behavior of the true mother. Instead, the false mother fails to make this calculation (and instead adopts a simple "behavioral" strategy; which is just a fancy label for irrational behavior).

Read the full article at MacroMania.

Where is the American Nanny?

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It is a modern fable in China: an American nanny bought a house for herself on mortgage, and paid off her debt when she died; a Chinese nanny, on the contrary, saved up all her life and bought a house when she died. The result? The American nanny worked all her life and enjoyed her housing, while the Chinese nanny worked all her life to buy a house that she had no chance to live in.

The wisdom is that one should borrow and consume, and worry about payments later. The Americans have done this all along, while the Chinese are gradually shaking off their saving habits. The assumption is that the ability to pay is guaranteed for life. And of course, we all assume that when we need to borrow money, we can always find a lender.

If I wrote this a year ago, I might still thought that the above assumptions were right, and I might wish to have an American life-style myself. But now? Where is the American nanny before she dies? We come to realize that the ability to pay is not guaranteed, and that if the Chinese nanny doesn't save in the first place, the American nanny may well find it hard to get a mortgage.

Mark Thoma asked "Who's the Villain in the Crisis?" Now what do you think? The American nanny who borrowed too much? The Chinese nanny who saved up too much for the American nanny to borrow? The broker who channeled the savings?