Tuesday, September 30, 2014

Energy-Efficient Appliances: Labels, not Subsidies

Consumer energy efficiency programs (often funded by utilities) now cost about $5 billion per year, and most of the money goes to subsidies for consumers to purchase energy-efficient appliances.  Of course, there are also subsidies for purchasing certain kinds of fuel-efficient cars. Are these subsidies for consumers a cost-effective way of encouraging the purchase of energy-efficient appliances?

A couple of recent papers from Resources for the Future tackle this question in different ways.  Sébastien Houde and Joseph E. Aldy argue that the subsidies for consumers to purchase energy-efficient appliances are not a very cost-effective approach to encouraging energy conservation in "Belt and Suspenders and More: The Incremental Impact of Energy Efficiency Subsidies in the
Presence of Existing Policy  (Discussion Paper 14-34, September 2014). A readable overview of their  results in the RFF blog is here.

However, in the most recent issue of Resources magazine from RFF, Richard Newell and Juha Siikamäki investigate, "Can Product Labels Nudge Energy Efficient Behavior?" The working paper offering the detailed analysis behind the article is available here. They find experimental evidence that what specific information is presented on the label of energy-efficient appliances can make a large difference in consumer perceptions. Let's take a quick look at these results.

The analysis of the cost-effectiveness of subsidies for energy-efficient appliances turns on dividing appliance purchasers into three categories: 1) some people are just going to buy the less efficient appliance, which often costs less up front; 2) some people are just going to buy the more energy-efficient appliances, either because of the longer-term cost savings from lower energy use or  because they want to do so; and 3) some people are "switchers," who would have bought the less energy-efficient appliance, but because of the subsidy, switch over to the more energy-efficient appliance.

Of course, those who would have bought an energy-efficient appliance even without a subsidy are likely to favor the subsidies. For them, it feels like free money and a reward for virtuous activity. But from an energy conservation point of view, subsidies going to this group are all cost and no benefit--because these people would have bought the energy-efficient appliance anyway. The only energy conservation benefit comes from those who actually switch as a result of the subsidy.

Houde and Aldy take a statistical look at data from the State Energy Efficient Appliance Rebate Program, which was part of the 2009 American Recovery and Reinvestment Act. Basically, the federal government provided money, and then states had lots of flexibility in how to create such programs--which means its possible to do comparisons when the program existed and when it didn't, and also to look at comparisons across states. They find:
We estimate that the ratio of “switchers” (individuals who switch from a non–Energy Star to an Energy Star–rated appliance as a result of the rebate) to “freeriders” (individuals claiming rebates who would have purchased an Energy Star-rated appliance even in the absence of the rebate program) is 1:10, 1:12, and 3:8, for refrigerators, clothes washers, and dishwashers, respectively. As a result, the cost per kilowatt-hour saved is on the order of about $0.25 to $1.50, depending on assumptions and appliance category. The low end of this range is four times the average cost-effectiveness of utility-sponsored energy efficiency programs. 
In short, giving consumers a rebate for purchasing energy-efficient appliances isn't a cost-effective way to reduce energy use, because too much of the money goes to those who would have bought the energy efficient appliance anyway.

Newell and Siikamäki look at the labels on energy efficiency labels on water heaters. Here's the current standard EnergyGuide label:

They they experiment with presenting less information, and presenting different information. They survey a group of about 1,200 households who were randomly offered different labels and prices for water heaters. For economists, the issue here is the extent to which people are willing to take long-term costs in energy savings into account when they think about purchasing an appliance. You can find specific details in the articles, but basically, the standard label did a pretty good job: on average, those who saw the label also perceived the long-run energy savings accurately.

Perhaps not surprisingly, of the various elements on the label, the basic information on yearly operating cost had the biggest effect. However, if the policy goal was to encourage even further energy conservation, Newell and Siikamäki offer a couple of options that make people pay greater attention to the energy savings: for example, one approach is to add the EnergyStar logo and label to the standard information. Another approach, commonly used in the European Union, is to offer a colorful label that shows a range of "grades" for energy efficiency, and where this appliance stands in the range.

It's important to remember that the Newell and Siikamäki results are based on surveys of consumers, not on actual purchase decisions, so some further research is needed here. Still, the existing evidence strongly suggests that if the goal is greater energy efficiency for consumer appliances, the useful policy tools are setting minimum standards for energy efficiency and requiring labeling about energy efficiency that will catch the eye of potential buyers, while paying rebates to buyers of such appliances is money that could be better spent in other ways.

Monday, September 29, 2014

Is Repeating a Grade a Useful Practice?

Across the high-income countries of the world, about one student in eight will have repeated a grade before reaching age 15. Does it do any good? The OECD assembles some of the evidence in "Are disadvantaged students more likely to repeat grades?" published in PISA in Focus (September 2014).
There's also a readable overview at the OECD blog here.

For starters, here are some basic statistics about the amount of grade repetition across countries for the OECD countries. Some European countries which stand out with especially high rates of grade repetion include Belgium, Netherland, Portugal and Spain. The U.S. is roughly at the average for OECD countries. A number of other countries including Korea, Sweden, and the United Kingdom hold back students at less than half the average rates.

The report also collects data on grade repetition for a number of other countries. What jumps out at me in particular is the prevalence of grade repetition in many Latin American countries, where the share of students who have repeated a grade is often over one-third.

Looking across these different national experiences, what is the evidence that holding students back is an effective approach? After all, there are  a number of other ways to assist students performing below grade level, including tutoring, remedial classes, working with families, and classed that are "tracked" according to academic performance. The OECD writes:

In practice, however, grade repetition has not shown clear benefits for the students who were held back or for school systems as a whole. And grade repetition is a costly way of handling underachievement: retained students are more likely to drop out, or to stay longer in the school system and spend less time in the labour force. As a result, some countries that had used grade repetition extensively have rejected that policy in favour of more intensive early support for struggling students. Among the 13 countries and economies that had grade repetition rates of more than 20% in 2003, these rates dropped by an average of 3.5 percentage points by 2012.
Moreover, the choice of which students are held back and which students get alternative forms of help seems to be heavily influences by socioeconomic factors about the family of the student. Here's a figure showing how often students in the bottom 20% of a measure of socioeconomic status are held back a grade--after adjusting for any differences in math, reading and science test scores. (The dark green bars mean that the difference is statistically significant.) The report notes: "In Portugal and Spain, for instance, when comparing a group of disadvantaged students to an equally proficient group of advantaged students, there are three times more repeaters for every non-repeater in the disadvantaged group than in the advantaged group. On average across OECD countries, disadvantaged students are 1.5 times more likely to repeat a grade than advantaged students who perform at the same level."

Of course, none of this rules out holding back a few students, some of the time. But every time a decision is made to hold back the student, that student will then be surrounded by peers who are younger, and when everyone else his or her age is leaving school, that held-back student will have completed less school than others of the same age. Holding back students should both be more of a last resort, and also a choice made on a more equitable basis, in many countries. The OECD sums up this way:

The bottom line: Grade repetition may not only be ineffective in helping low-achieving students overcome their difficulties at school, but may also reinforce socio-economic inequities. Providing extra teaching time for students who fall behind, adapting teaching to their needs so that they can catch up with their peers, and targeting these efforts where they are most needed is a much better way of supporting students with learning difficulties or behavioural problems.

Friday, September 26, 2014

Beyond Foreign Aid

About 1.2 billion people around the world have a consumption level of less than $1.25 per day, and 2.4 billion have a consumption level of less than $2 per day, according to the World Bank. One standard policy prescription has been to try improve the standard of living for this group through foreign aid. Indeed, the higher-income nations of the world gave $134.9 billion in official development assistance in 2013, according to the OECD.

One can argue that foreign aid should be higher. The OECD some years ago set a target that high-income countries should try to give 0,7% of GDP in foreign aid, but few countries meet that target, and the average (as a share of GDP) is about half that amount.

But a bigger problem for foreign aid is suggested by long division: Take $134.9 billion in aid and divide it by 2.4 billion people consuming less than $2 per day, and it works out to about $56 per person. Even if effectively administered and invested, that amount of aid isn't going to budge the needle on global poverty by very much.

Thus, it's natural to ask what high-income countries might do, other than tweaking their foreign aid budgets, to help the world's poor. A committee in the UK House of Commons is apparently seeking to compile a policy agenda along these lines. Owen Barder and Theodore Talbot of the Center for Global Development drew up a memo for the House of Commons committee. The memo is here; a blog post about the issue at the CGD website is here. Here's a sampling of their policy proposals to help the world's poor that go beyond the foreign aid budget (with many citations omitted for readability).

Reducing trade barriers

"Laborde et al. (2013) study the possible impact of the on-going WTO Doha Round
negotiations and find real income gains to low- and lower middle- income countries
of between £28.5 billion to £37.6 billion a year just from lower tariff barriers in rich
countries. ... [The US] Congress signed the African Growth and Opportunity Act
(AGOA) into law in May 2000. Frazer and van Biesebroeck find a resulting increase
in exports from eligible African countries of around £299 million a year."

Facilitating private investment, especially for infrastructure

"Data from 2007 shows that twenty-five of the forty-four countries in sub-Saharan Africa were experiencing crippling power shortages. Power cuts reduce annual growth rates of the worst hit African economies by over 2%. Transport is also a serious problem. ... [T]he annual funding shortfall for low- and lower middle-income African countries is estimated at nearly £27 billion per year to overcome the current infrastructure gap within a 10-year period. For developing South Asia, Andrés et al. (2013) estimate a £1.4 trillion dollar infrastructure gap over the next decade. ... Tackling illicit financial flows (IFFs) could help governments in poor countries meet more of their own needs. These flows include tax evasion (like firms underreporting export values to lower their tax bills), theft of public assets and related corruption, the laundering of the proceeds of crime (like drug sales), and a range of market and regulatory abuses under cover of anonymity (like hidden connections between politicians regulating an industry and the industry itself). Illicit flows, by their nature, are difficult to measure, but all studies put total costs in the billions annually. According to one estimate, twenty Sub-Saharan African lost an estimated 10% or more of their cumulative GDP produced between 1980 and 2009 to these outflows.

"About 60% of global income inequality can be explained simply by which country people live in: one of the most effective ways to raise incomes of poor people would be to allow more people to choose what country to work or reside in (even temporarily). ...  Research on the US labour market by the Center for Global Development (CGD) shows that workers from Paraguay or Turkey, for example, could triple their monthly wages, while workers from poorer countries like Cambodia or Ghana could earn nine times more purely by working in the United States. By contrast, there is no aid-funded project that would raise a workers income from £60 to £540 per month. Furthermore, migration, unlike aid, directly adds value to rich countries’ economies."
Protecting global environmental public goods

"The fisheries sector of African countries was worth more than £10.6 billion in 2011, equivalent to over 6% of African agricultural GDP, and net fisheries exports from all developing countries reached £21.4 billion in 2012. However, two thirds of the North Atlantic fish stocks and 82% of Mediterranean stocks are overfished. Fisheries can be a renewable resource only if they are carefully managed. ... Despite the catastrophic risks to fish stocks of overfishing, the EU continues to subsidise engine replacement for vessels larger than 24 meters while half of the EU’s distant-water fleet makes its own arrangement with third countries. Weak government capacity in developing countries increases the chance of fishing past sustainable yields."

More research and development and technology transfer
"Tighter controls on intellectual property ... are part of the reason that developing countries have not been able to close the gap on industrialised countries. Facilitating private investment is an important piece of this puzzle. Foreign firms that operate overseas increase the productivity of their suppliers and customers, train workers who can then migrate to other firms in the same sector with new skills, and demonstrate models that other firms can copy. Rich countries can also make the global pool of knowledge available to poor countries by targeted improvements in their intellectual property rights (IPR) regimes for developing countries."

Reducing the chance of war

"Conflict and insecurity have appalling human costs. In addition they also have longer-run effects on economic growth by destroying productive capital and reducing the incentives for firms and households to invest. Collier (1999) estimates that countries in civil war experience a decline in growth of 2.2 percentage points, and other estimates are significantly higher. ...  The UK requires an approved export permit for arms sales or exports of technologies, like cryptographic equipment, that have a dual civilian and military use. Despite this safeguard, a report by the Committees on Arms Export Controls (2013) found 3,375 arms export licenses worth nearly £12 billion to countries on the Foreign and Commonwealth Office’s (FCO) list of countries of human rights concern, including Iran, Russia, Sri, Lanka, Belarus and Zimbabwe. In the same period, the government rejected 148 applications (1% of approvals). ...  Peacekeeping missions are a cost-effective contribution to promoting stability overseas."

Of course, people will differ on which options are likely to be have the biggest effects for the world's poor and which options are politically feasible in high-income countries. But if you think that alleviating global poverty is a worthwhile policy goal, some combination of the items on this list can have an effect that is a hefty multiple of what foreign aid is able to achieve.

Thursday, September 25, 2014

How Does Bitcoin Work

In practical terms, Bitcoin is not all that important, at least not yet.  Sadat Karin and Nancy Condon offer some details in in "Making Change: What Bitcoin Could Mean to the Payments Industry," in the May-August 2014 issue of EconSouth, published by the Federal Reserve Bank of Atlanta. They write: Any discussion of bitcoin must begin with the disclaimer that it really is a very small player in the payments system. ... To put it in perspective, bitcoin averages about 60,000 transactions
a day, according to the consulting firm Deloitte. By comparison, Visa’s electronic payment processing network handles more than 150 million transactions a day from 2.1 billion credit cards and more than 2 million ATMs."

But Bitcoin has come to represent the possibility of an alternative way of thinking about money. In a conventional financial system, money is in bank accounts, and payments transfer money between accounts. To put it another way, the transaction relies on the fact that the bank can see what people have in their accounts. In a Bitcoin transaction, no third party can see what the buyer and seller have in their accounts; indeed, no third party can name the two parties that are making the transaction. People can buy and sell anonymously, without the interposition of a conventional currency or the control of a central bank. But through what magic of cryptography can such a system work? One of the best explanations I've seen of how Bitcoin actually works in a nuts and bolts way is by Robleh Ali, John Barrdear, Roger Clews, and James Southgate, who have two articles in the Quarterly Bulletin of the Bank of England (2014, Q3) that offer a nice overview: "Innovations in payment technologies and the emergence of digital currencies" and "The economics of digital currencies." Here's a step-by-step sense of how a Bitcoin transaction works, drawing from their essays.

Step 1: Two parties agree on a Bitcoin transaction. For simplicity, call the buyer Anne and the seller Bill.

Step 2: "Anne creates a message with three basic elements: a reference to the previous transaction through which she acquired the bitcoins, the addresses to pay (including Bill’s) and the amount
to pay each one." The message can also include other conditions: for example, Anne may specify that she is willing to pay a small amount to the party that verifies the transaction--a step to be discussed further in a moment.

Step 3: "Once the message has been created, Anne digitally signs it to prove that she controls the payer address." The concept of a "digital signature" gets deeper into theories of cryptography than I really understand. But at a basic level, Ann uses a "private key" to encode the transaction, and announces a "public key" that allows others to decode the transaction. But those who decode it cannot change the transaction, nor can they trace the transaction specifically to Anne. "Bitcoin addresses are a version of the public key, which can be made widely available and published. Addresses and their
private keys are random strings of alphanumeric characters. An address is typically 34 characters long (for example 1FfmbHfnpaZjKFvyi1okTjJJusN455paPH), while a private key is typically 51 characters long. Each Bitcoin address is paired with a corresponding private key, which is kept secret by the owner of the address, and needed to sign transactions from — and, hence, prove ownership of — the address."

Step 4: "Anne broadcasts the signed message to the network for verification." At this point, Anne has created an anonymous "buy" message, and the issue is  how to verify that the funds should indeed be transferred.

Stage 5: "Miners gather Anne’s new transaction and combine it with others into new candidate ‘blocks’. They then compete to verify them in a way that other miners will accept." Let us postpone for a moment the notion of "blocks" and how the miners compete to verify the transactions, and just say that Claire is the miner who succeeds in verifying Anne's transaction. The transaction is then completed in one more step.

Stage 6: "Clare is a miner and successful at verifying a block with Anne’s transaction in it, so she will receive both a reward of new bitcoins, as well as the transaction fee from Anne’s transaction. Clare broadcasts this result and other miners add the block to the end of their copies of the block chain and return to step 5. Bill receives the 1 bitcoin sent to him ..." Notice that Bill now has a Bitcoin in his account, which he could use to initiate a transaction of his own.

Clearly, the activities of these "miners" are at the center of how Bitcom works. The basic idea of Bitcoin is that if it is to function, "all users agree on which transactions have actually happened and in which order." The block chain is the description of past transactions, built up one block of transactions at a time. But how can miners reach a consensus over what should be added to the block chain? Ali, Barrdear, Clews, and Southgate explain:
"Establishing consensus is purposefully more difficult and requires each miner to demonstrate the investment of computing resources known as a ‘proof of work’. ...  The proof of work scheme used by Bitcoin means that the time taken for a miner to successfully verify a block of transactions is random. But as new miners join the network, or existing miners invest in faster computers, the time taken for a successful verification can fall. In order to allow time for news of each success to pass across the entire network, the difficulty of the proof of work problem is periodically adjusted so that the average time between blocks remains broadly constant at ten minutes for Bitcoin, meaning that payments are not instantaneous.  ...
The chain of blocks representing the greatest sum of work done is the accepted truth within the Bitcoin network (sometimes referred to as the ‘longest chain’). Whichever branch is received by the majority of the network will initially be selected. However the branch with the most computation resources should ultimately take the lead. This branch will be most likely to have a subsequent block built on top of it and is therefore more likely to eventually ‘win’ the race. Miners that were working off blocks in the ‘shorter’ branch (that is, the branch with less demonstrated work done) then have a significant incentive to switch to the longer branch, as any work they contribute to the shorter branch will never be accepted by the majority of the network. ...
The rule that the chain with the greatest sum of work done wins is an important element in combating fraud in the Bitcoin network. Any attacker attempting to modify earlier blocks (so that bitcoins could be spent twice) would have to control enough computing power for them to both catch up with and then overtake the genuine block chain as the ‘longest’. ... It therefore makes more sense for anyone capable of assembling the necessary computing power to contribute to the continuation of the system, rather than attacking it.
 This seems more-or-less clear, and the point that Bitcoin transactions are not instantaneous strikes me as especially interesting in our credit-card economy. But there are two big holes remaining in the explanation. What exactly is the work done by the miners? And how are the miners rewarded for doing it?

Here is how Ali, Barrdear, Clews, and Southgate describe the "proof of work" done by the miners:

The proof of work scheme used by Bitcoin makes use of a special algorithm called a ‘cryptographic hash function’, which takes any amount of information as an input and creates an output of a standard length (the ‘hash value’). The function is cryptographic because the hash value produced is different for any change in the input (even of a single character), and it is almost impossible to know in advance what hash value will be produced for a given input. For example, the hash function used by Bitcoin (called ‘SHA-256’) generates the following:
The Bitcoin protocol requires that miners combine three inputs and feed them into a SHA-256 hash function:
• A reference to the previous block.
• Details of their candidate block of transactions.
• A special number called a ‘nonce’.
If the hash value produced is below a certain threshold, the proof of work is complete. If it is not, the miner must try again with another value for the nonce. Because there is no way to tell what value of the nonce, when combined with the other two inputs, will produce a satisfactory hash value, miners are forced to simply cycle through nonce values in trial and error.
Outsiders can verify how much work it takes to get an acceptable hash value: that is, how many values of the nonce must be tried. Again, the one that took the most work is accepted as the basis for the block chain on which others will build.

Why do miners compete to do this calculation? They are rewarded by a combination of receiving a transaction payment specified by the original buyer, and also because the producer of the accepted block chain is directly paid by the issuance of new Bitcoins. "The first blocks created 50 new bitcoins per block and the Bitcoin protocol calls for this reward to be halved every 210,000 blocks (roughly every four years). The current reward is 25 bitcoins per block, and this is likely to be reduced
to 12.5 bitcoins per block in 2017. The planned eventual total number of bitcoins is therefore 21 million, which will be mostly reached by 2040. There are currently a little over thirteen million bitcoins in circulation, distributed over perhaps one or two million users worldwide. ... The Bitcoin protocol seeks to maintain a roughly constant time of ten minutes between each successfully verified block."

These incentives are powerful enough that the Bitcoin miners are continually updating the speed of their computers, to make it more likely that they will win more block chain competitions. Karin and Condon write: "As the work to mine bitcoins has increased, so has the cost. No one seems
to have precisely pegged the cost of the electricity to run—and cool—the computers that solve the algorithms, but estimates run up to $15 million a day."

The discussions in these articles tackle many other issues. What are some pros and cons of anonymous money? What would happen if someone started a Bitcoin bank? Might some small country set up its own currency in a Bitcoin style, and seek to attract those who desire such a currency?  If law enforcement and governments wanted, could they find ways of tracking the flow of Bitcoins? What are the risks for fraud? What would competition between different Bitcoin-like currencies look like? If Bitcoin becomes more important, so will these kinds of questions.

But here's one final thought. The price of Bitcoins spiked in early 2013 and then even more in late 2013, and has since then fallen by about half. Watching this process casually, it seemed to me like evidence of grievous instability in this currency. Here's the pattern.

But it turns out that this is an interesting example where having the vertical axipresented as linear, rather than logarithmic, alters ones perceptions considerably. (A logarithmic graph rises in percentage terms. Thus, a continual percentage increase over time looks like a curved line on a linear graph, but like a straight line on a log graph.) Here's the price of Bitcoin on a log graph. It's still bumpy, but it now looks a lot more like a reasonably steady (if volatile) upward movement, not at crazy cycle of boom and bust.

Right now, people are experimenting with Bitcoin for a lot of reasons: pure novelty, anonymous transactions, getting some experience with this kind of transaction, and so on. But given that the ultimate supply of Bitcoins is fixed, their value will ultimately be determined by the demand for their use in transactions.

Wednesday, September 24, 2014

Hungry Children in America

AOne child in five in the United States lives in a "food insecure" household. Craig Gundersen and James P. Ziliak lay out the evidence in "Childhood Food Insecurity in the U.S.: Trends, Causes, and Policy Options,"  a Fall 2014 Research Report written for The Future of Children. They begin (footnotes omitted):

In 2012, nearly 16 million U.S. children, or over one in five, lived in households that were food-insecure, which the U.S. Department of Agriculture defines as “a household-level economic and social condition of limited access to food.” Even when we control for the effects of other factors correlated with poverty, these children are more likely than others to face a host of health problems, including but not limited to anemia, lower nutrient intake, cognitive problems, higher levels of aggression and anxiety, poorer general health, poorer oral health, and a higher risk of being hospitalized, having asthma, having some birth defects, or experiencing behavioral problems.
The underlying data here comes from survey answers to the Current Population Survey, a nationally representative survey done each month by the U.S. Census Bureau. The survey includes a module about food and hunger in households.

Examples of questions include: “Did you or the other adults in your household ever cut the size of your meals or skip meals because there wasn’t enough money for food?”; “Did you ever cut the size of any of the children’s meals because there wasn’t enough money for food?”; and, the most severe item for households with children, “Did any of the children ever not eat for a whole day because there wasn’t enough money for food?” ....  Children are experiencing food insecurity if at least two of the eight child-centered questions are answered in the affirmative, and very low food security if five or more such questions are answered positively.
Unsurprisingly, families that are poor are more likely to experience food insecurity. But perhaps more surprisingly, the connection from poverty to food insecurity is by no means ironclad. After all, the U.S. spends over $100 billion on food-related programs for the poor, including food stamps, school lunches and breakfasts and others.  As the authors write:
 Clearly, the risk for child food insecurity drops quickly with income. But even at incomes two and three times the poverty level, food insecurity is quite high. Moreover, almost 60 percent of children in households close to the poverty line are in foodsecure
households. This suggests that income is only part of the story and that other factors also contribute to children’s food security.
As the authors dig into the data on children living in food-insecure households, the theme that keeps emerging is the quality of parenting the children receive. Here are snippets from the report, taken from a number of different studies.

[E]ven when income and other risk factors are accounted for, adult caregivers’ mental and physical health play a central role in children’s food security. ... [M]others in food-secure poor households are in better physical and mental health and are less likely to report intimate-partner violence and substance use compared with mothers in food-insecure poor households. When the sample is restricted to those with incomes twice the poverty line and lower, food-insecure families are more likely to be headed by poorly educated single mothers and more likely to report maternal depression and substance abuse than are food-secure families with similar incomes. ... [W]hen mothers are moderately to severely depressed, the risk of child and household food insecurity rises by 50 to 80 percent, ... [D]rug use in the last 30 days—and heroin use in particular—is strongly associated with food insecurity among children. ...
[A]fter controlling for economic and household characteristics, children living with a single parent or living with an unmarried parent in a more complex family (for example, one that includes a cohabiting partner or another adult such as a grandparent) have a greater risk of food insecurity than do children living in families where the parents are married. ... [C]ompared with children cared for exclusively by their parents, low income preschoolers attending a child-care center had lower odds of both food insecurity in general and very low food security ... [C]hildren of foreign-born mothers were three times as likely to experience very low food security as werechildren of U.S.-born mothers, even after controlling for other risk factors.  Children in households with an incarcerated parent constitute another vulnerable group. ... 
The takeaway lesson, at least for me, is that food stamps and school lunches do help to reduce food insecurity, as do programs that provide income support to those with low incomes. But when the adults in a household are having trouble managing their own lives, children end up suffering. The answers here are straightforward to name, if not always easy to do, like finding ways to get food to children directly (perhaps by expanding school food programs to the summers and weekends) and to help parents in low-income households learn how to stretch their limited resources.  As I have argued before on this website, for many children, the parenting gap they experience may be limiting their development even from a very young age.

Monday, September 22, 2014

Short-Term Benefits of Climate Change Policy

If you're trying to get someone to start a project with long-run payoff, it's can be useful to point out that the project also offers clear short run gains. In that spirit, there is a strong case that the world's leading emitters of carbon should be looking for ways to reduce their use of carbon-based fuel solely for the short term benefits--even before taking the risks of climate change into account. Ian Parry, Chandara Veung, and Dirk Heine make this case in "How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits,"  just published as IMF Working Paper WP/14/174. Parry also offers a short and readable write-up of the results  at the IMF blog.

The main insight here is that burning fossil fuels has a variety of more immediate health costs: for example, it typically evolves emissions of sulfur oxides, nitrogen oxides, and particulate matter. In addition, there are a variety of social costs of fossil fuel use in the transportation sector, including costs of traffic congestion and accidents.

Parry, Veung, and Heine readily admit that estimates of these kinds of costs are squishy. They write: "Given the uncertainties and controversies involved in quantification (e.g., how to value health risks in different countries) these estimates are best viewed as a starting point for discussion though they are based on conservative assumptions ..." For example, these estimated additional costs of using carbon-based fuels may well be on the conservative side. As the authors point out, they do not include adjustments for the environmental costs of extracting, storing, and transporting such fuels, nor for costs of the heightened vulnerability to economic disruption that comes from reliance on these fuels. Here's a quick sketch of some of the main points in their argument.

First, here's an overview of carbon dioxide emissions for the 20 countries that are the largest emitters of carbon. The solid blue bars show total emissions: thus, China leads the way, followed by the U.S., Russia, India, and then Japan. The red diamonds show "intensity" of emissions, which is the carbon emissions relative to GDP. Here, emerging market economies where manufacturing is a bigger part of the economy and emissions standards are typically lower often look worse that higher-income countries.

Here's a related figure showing for each country how much the main fossil fuels contribute to carbon emissions. For example, notice the very large role played by coal in China and India, the larger role for natural gas in Russia, and the relatively larger role for gasoline and diesel in the United States. Clearly, efforts to reduce carbon emissions would have different effects on fuel sources across countries.

Parry, Veung, and Heine then look at the existing taxes on various carbon-based fuels, and compare them with the cost. They find that just to counterbalance with the domestic effects of the use of these fossil fuels--in economic terms, to assure that those using these fuels are paying for the true social costs imposed by these fuels--the taxes on these fuels expressed in US dollars per tons of carbon would need to be raised in the following way. (Notice that Brazil is the one country, by this measure, which already taxes fossil fuels at a level  higher than needed to offset these other social costs.)

By their calculations, raising carbon taxes in this way would reduce carbon emissions as follows across countries:

Of course, as the authors note, these kinds of estimates should not be taken as precise. But I sometimes worry that with all the attention paid to climate change issues, pro and con, the old-fashioned problem of reducing conventional air pollutants gets too little attention. I'll add that carbon is not the only greenhouse gas, nor is it the only emission where the argument based on co-benefits is worth attention. For example, soot and methane are also air pollution problems that are implicated in climate change, but where reducing them would have also have immediate health effects. Other studies have shown that the costs of air pollution in the U.S. are high even without taking long-term climate change issues into account. The costs of air pollution and other environmental hazards in China are very large. The World Health Organization reports that air pollution is overall the world's biggest health hazard, although only  part of this is related to the energy sources that raise the risks of climate change.

Those who are most deeply concerned about climate change may raise concerns that focusing on domestic gains from reducing air pollution will not ultimately be enough, and that efforts to reduce carbon emissions to address climate change must go further. But the immediate issue is not what air pollution policies may need to be adopted in 2030 or 2060. If the case for reducing the use of carbon-based energy can be made right now, in terms of immediate health benefits, then that seems a useful starting point for discussion.

Friday, September 19, 2014

Michael Woodford on Targetting Nominal GDP and Other Issues

Douglas Clement has a lively interview with Michael Woodford, appearing in the September 2014 issue of The Region, which is published by the Federal Reserve Bank of Minneapolis. Here are some comments from Woodford.

Arguing for the advantages of having the central bank target the growth rate of nominal GDP
I had specifically suggested that announcing a target path for nominal GDP would be a desirable way to make an advance statement about the criteria that you would be looking at later. Now, I wasn’t saying that to suggest that that’s the only formula that would be valuable, but I thought it was useful to give a concrete example showing how the thing that I was talking about could be undertaken in practice. ... A nominal GDP target path would have the advantage of being a single criterion, yet one that conveyed concern both about the real economy and about the price level and nominal variables at the same time. It would have given an explanation for which substantial stimulus would have continued to be appropriate for some time to come. But it was also a criterion that was intended to reassure people that what looked like very aggressive monetary policy wasnot going to allow inflation to get out of hand. If inflation picked up very much, the FOMC would quickly have reached the nominal GDP target and then would have to restrain nominal demand growth in order not to shoot past the target path. The public wouldn’t have to be worried that we were pushing so hard on stimulating the economy that maybe we were going to let demand get totally out of control, and we were just not thinking about that because it wasn’t the fire that had to be put out this year.

How the Fed is likely to use interest rates on excess reserves as its main policy tool when it comes time to raise short-term interest rates 

I am not worried that the Fed is not going to have effective tools for implementing its interest rate policies. We have yet to reach the point where they do want to raise interest rates, but assuming that things evolve as everyone is currently anticipating, we are likely to reach it within the coming year. At that point, I think, there will be tools that allow them to do it. It will be an interesting experiment in monetary economics because the Fed will be attempting to control short-term interest rates in a situation where almost certainly its balance sheet is going to be unusually large. That means that there are going to be extraordinary quantities of excess reserves in existence, and this means that Fed control of short-term interest rates will not be achievable in the way that it always was in the past: through rationing the supply of reserves. ...
I think the fact that interest rates can be and are currently being paid on excess reserves is very important. Of course, the Fed asked for that authority from Congress back in 2008 before embarking on the large expansion in the size of its balance sheet. The reason, I think, is that it was preparing for this question that we are going to face within the next year or so: When you have this big balance sheet, have you given up control over short-term interest rates? The FOMC wanted to be sure the answer to that question was “no,” and it could do that by having the ability to pay whatever interest rate it deemed appropriate on those reserves. So that’s a very important tool, and probably the most important tool that they are going to have when the moment arises.

Should the Federal Reserve have a mandate to pursue financial stability, along with full employment and a stable price level? 

The question whether there should also be a financial stability mandate is a more reasonable one to take up. Though I have to say that I find it a little surprising that people would think that there isn’t one. It’s true that the Federal Reserve Act mentions price stability, it mentions maximum employment and it doesn’t, in a similarly direct way, talk about the responsibility for financial stability. But, historically, if we ask why the Federal Reserve Act was passed at all, we know that Congress established the Fed in response to a financial crisis. From the legislative history, it’s clear that the whole point of the Federal Reserve Act was to have an institution that would act to ensure financial stability.
It’s true that when the current language of the Federal Reserve Act was drafted in the 1970s, financial stability had become a less central concern, and instead inflation and unemployment were both big problems. Still, the idea that anyone would have thought that it was somehow not the Fed’s concern is strange. I find it hard to imagine that if the Fed thinks it should do something out of a concern for financial stability, anyone would actually be able to object that this was overstepping the bounds of what Congress ever wanted it to be concerned with. ... I don’t see anything wrong with making it more explicit. It’s just that it seems to me that an amendment of the act to do this would be fixing something that isn’t really a problem.