ANU Economics Showcase

Here is my presentation for the ANU Economics Showcase - a two day event that presents the range of ANU research to potential students, members of the public service, other ANU economists, and the general public (i.e. anyone who wants to come along :)). The showcase is on 25th and 26th of November. I'm scheduled for 26th November in the session from 1:30-3:00pm.

Signals or Noise? What Does Meta-Analysis Tell Us About the Reliability of Individual Econometric Studies?

David I. Stern

Arndt-Corden Division of Economics
Environmental Economics Research Hub
Centre for Applied Macroeconomic Analysis

Econometric studies can appear to be well conducted by the usual standards of the economics profession but still not provide results that can be relied upon for theory or policy purposes. The technique of meta-analysis can combine the results of many individual studies to provide more reliable results. I illustrate these points using a meta-analysis of more than forty studies of inter-fuel elasticities of substitution – a measure of the difficulty of switching between different fuels and electricity in production. These studies show a very wide range of values for any given elasticity. This dispersion of values reduces as the sample size of the original studies increases. This shows that to get reliable results we either need a very large sample or conduct a meta-analysis of existing studies. The results also show that the type of data – time series, cross section, or panel data - and the type of regression model used have a very significant effect on the estimated elasticities. This shows that we also need to have a good understanding of econometric theory in order to select an appropriate estimator.

ANZSEE Presentation Slides

Here are the slides for my presentation at ANZSEE in Darwin on Wednesday. I only have 20 minutes to talk including questions so I'm going to have to cut something here. But thought I might as well put everything up for now. I'll be giving a longer version at the Fenner School at ANU on 12th November. Also coming up this month is a presentation at the ANU Economics Showcase 2009. I will be talking about the effect of sample size and estimator selection on what we think we know about economics - i.e how useful meta-analysis can be.

P.S. 11:45pm
I just cut a bunch of stuff out of my presentation for ANZSEE including all the early stuff about the EKC and put the shorter version up on the web.

Energy Intensity Again

There is a stronger relationship between energy intensity of GDP and GDP per capita when you plot both of them using ordinary exchange rates rather than purchasing power parity adjusted exchange rates:



I think that the relationship is mainly due to the tendency for currencies to overvalued relative to purchasing power parity in most wealthy countries and the reverse in poor countries rather than any real energy related behavior.

Levitt Hits Back

Steven Levitt hits back at his critics in this new post in the NY Times. The post is a bit revisionist I think as to what exactly is in the chapter in Superfreakonomics. The tone of that chapter is clearly that carbon taxes or cap and trade won't work (for unclear reasons) and, therefore, we need geoengineering. This post places geoengineering as a method for quickly cooling the Earth (which I agree could be a useful tool in our toolbox). And I found myself mostly being able to agree with what he wrote until we come to:

"But that is not the question that Al Gore and the climate scientists are trying to answer. The sorts of questions they tend to ask are “What is the ‘right’ amount of carbon to emit?” or “Is it moral for this generation to put carbon into the air when future generations will pay the price?” or “What are the responsibilities of humankind to the planet?”"

That may be true to some degree but the main question most of us are asking is "What is the best long-term solution to the global warming problem?" Geoengineering can only be a short term fix. It reduces the sunlight that plants need for growth and does nothing to address ocean acidification (I'm a bit skeptical that the latter is as bad as most people make out but it certainly isn't a good thing). But if the ice sheets melt too fast while we try to get carbon emissions down, geoengineering may well be an appropriate response...

World Values Map

I was visiting the World Values Survey website in the process of collecting more data for my EERH project.Thought I'd post this fascinating "map" from their homepage:



Not surprisingly, the English speaking countries (sorry Quebecois) are found grouped together. I found this was also the case for levels of sulfur abatement technology. Similarly the Germanic or Protestant countries occupy a common zone and Japan isn't far removed, ditto. Mediterranean Europe is also tightly grouped (with the exception of Portugal), ditto.

Israel isn't that different to Italy or Greece. That makes a lot of sense to me.

Quality of Economics Research Funded by the ARC

The ARC has carried out an evaluation of the citation impact of the publications derived from ARC funded research. The main finding (full report on ARC website) is that ARC funded publications receive more citations than other Australian publications and other global publications. That is good, but it is hard to have an intuitive sense I think of what the Australian or global averages are. So I looked at the data for economics to get a better idea. The ARC counted the number of publications and the number of citations received by them in the Web of Science from 2001-2005. This means that the average publication had two years in which to receive citations.

There were 202 ARC funded publications which received 320 citations in the period. This is, therefore, an impact factor of roughly of 0.79 (i.e. 0.79 citations received per year). There were 1311 other publications from the university sector receiving 1569 citations for an impact factor of 0.60.

Referring to ISI's "Journal Citation Reports" economics journals with a two year impact factor of 0.79 were ranked 93rd out of 209 economics journals. Kyklos has the closest score. Economic Development and Cultural Change, Review of Income and Wealth, Quantitative Finance, Cambridge Journal of Economics, and Journal of Economic Dynamics and Control are examples of other journals with close scores.

An impact factor of 0.60 resulted in a rank of 133rd out of 209. Canadian Journal of Agricultural Economics is closest. Journal of Economic Issues, Journal of Macroeconomics, Geneva Risk and Insurance Review are some of the journals in this neighborhood.

I think this gives a more intuitive understanding of the quality of average Australian and ARC funded research in economics.

Pedigree Bias in Economics

At least anecdotally I think it is true that economics has a pedigree bias. Good departments tend to hire people from a limited subset of top schools. This is just as true in Australia as in the U.S. There are very few ANU economists who don't have a PhD from either a reasonably decent or even top U.S. school, a top British university (few if any less senior people) or ANU itself. The bias in geography, environmental science etc. certainly seems to be much less. When I went to grad school I wasn't aware of such biases at all. If I'd followed the advice of my masters' adviser (Department of Geography, London School of Economics) I would have applied to a top U.S. economics department. But as my undergrad alma mater wouldn't have accepted someone with as low a GPA as me in economics to do a masters' degree even (my third year undergrad GPA in econ was 90% or so but the first two years were a lot lower; my geography GPA was more than 90% in each year) I didn't think I stood a chance of getting a funded place. So I headed to geography. Again if I had been more aware of "pedigree" I probably would have headed to Ohio State (which made me an offer I didn't take up at the masters' level) for my PhD and wouldn't have been exposed to ecological economics at Boston University.

Climate Sensitivity and Expected Temperature Increase

My response to C S Norman questions' about yesterday's post was getting so long I decided to turn it into a blog post.

The climate sensitivity is the expected temperature increase for the equivalent of a doubling of carbon dioxide in the atmosphere from the pre-industrial level of 280ppm to 560ppm. My understanding is that the confidence interval (the expected range about which we can be 90% or 95% confident say that the actual temperature increase will fall within that range) is still very wide and research hasn't managed to narrow it signficantly. Mean or mode expected changes in temperature have edged up in recent research as more historical data is examined and more feedbacks incorporated in modeling.

This situation explains a couple of things:

1. The attention given to Martin Weitzman's research which focuses on the potentially catastrophic impacts of the upper tail of the distribution of temperature changes. The deterministic cost benefit approach of Nordhaus and other economists who hated the Stern Review doesn't really address the correct problem at all. See also my post on who should win the Nobel Prize for environmental economics.*

2. The new emphasis on lower concentration targets like 350ppm and 450ppm of carbon dioxide equivalent rather than the formerly popular 550ppm. Even if the mean climate sensitivity was 3C there is a 50:50 chance that temperature would rise more than that likely resulting in the melting of at least the Greenland Ice Sheet among other impacts.

How can we relate climate sensitivities to expected temperature changes at any point in time? You can't just halve the climate sensitivity for a 50% increase in CO2, because:

1. Radiative forcing - the direct effect of carbon dioxide on the heat balance of the planet - is logarithmic in the increase in CO2. So a 50% increase in CO2 has more than half the effect of a doubling. A quadrupling has double the effect of a doubling etc.

2. Temperature changes very slowly in response to changes in radiative forcing. This is mainly due to the need to heat up the oceans which can store far far more heat than the atmosphere. In my model, the equilibrium climate sensitivity was 8C but, in an experiment that increases the CO2 concentration until doubling is reached, the temperature at the point of doubling had increased by less than 2C (this is known as the transient climate response). This is one of the factors that makes estimating the climate sensitivity from historical data very difficult.

Here is a chart from an IPCC report that illustrates this point:



For the doubling of CO2 scenario under a climate sensitivity of 3.5C, temperature had increased by 2C at the point of doubling. Even after 500 years the equilibrium increase hadn't been attained in the 3 layer GCM (global circulation model) simulation (red). The green curve is for a GCM with just a shallow ocean component and no transport of heat to the deep ocean.

This slow approach to equilibrium does have a positive implication - we can probably overshoot our desired long term concentration without too much damage if we can then bring concentrations back down again. For example, hitting 450 or 550ppm at 2050 and then bringing concentrations down to 350 or 450 by 2100. But this would probably require geoengineering of some sort.

* After Ostrom won the prize I wouldn't expect another one for environmental economics for a few years...

The Climate Sensitivity is Probably Really High

I'm not surprised by the trend for recent research to come up with higher values of the climate sensitivity - the change in temperature in the long-term for a doubling of atmospheric carbon dioxide. The piece I linked suggests that current levels of carbon dioxide are associated in the long-run with 25 to 50m higher sea levels, though we do need to be cautious in basing current predictions to paleodata for a world where the continents and oceans were configured slightly differently. My research found climate sensitivities in the range of 4-8C depending on model configuration. I gave up on publishing the second paper though in the climate literature and decided to focus on energy economics. It's hard to keep up to date in too many fields at once...

Freaking Out About Superfreakonomics

Around the blogosphere there seems to be quite a bit of freaking out about the about to be released book Superfreakonomics going on. Specifically, about Chapter 5 on climate change. Joshua Gans has a nice set of links to some of the comments and there is some response by Dubner here.

I'm not too surprised by this. I was never that impressed with Freakonomics. Reading through this chapter one of the problems is that they try to cram in way too many points without any or sufficient explanation. But mostly it is just a jumble of half-baked ideas the economics ones just as bad as the natural science ones. For example, the discussion of externalities and Pigovian taxes talks about compensating the victims with the revenue and rather a mixed up discussion conflating individual choices and the choices of countries... Maybe they could have done a better job on the latter with more space... And then they describe Mount Pinatubo as generating "positive externalities"! More appropriate terminology would be simply "economic benefits".

Given this I don't think anyone should be reading Superfreakonomics to learn anything about economics either.

Ostrom 12th Most Cited Book in Ecological Economics

According to the paper I coauthored with Bob Costanza (and Chunbo Ma, Brendan Fisher, and Lining He). One of her papers published in the journal also ranked in the list of the most cited papers published in the journal but was only ranked 52nd. Of course, our data end before 2004.

Looking for Academic Economics Jobs in Australia

In the past not many foreign institutions advertised on the American Economic Association's jobs website JOE. But this seems to have changed and now most leading Australian universities are advertising there. Not all these positions appear to be advertised on UniJobs, which I think is the leading Australian academic job site.

I've had a couple of recent discussions with people looking to do PhDs from around the world recently. I tried to convince them that if they want to work in Australia they need to either do a PhD in Australia (at a Go8 university) or do a PhD in the US. These are the two markets Australian universities are recruiting in. Not Britain or Sweden or anywhere else in Europe...

Rich Howarth Seminar at ANU: 4th November

Speaker: Richard Howarth, Pat and John Rosenwald Professor, Dartmouth College, Editor-in-Chief, Ecological Economics

Topic: Uncertainty, Ethics and the Economics of Climate Change

Abstract: Climate change is a long-term, complex problem that involves fundamental uncertainties. As such, the evaluation of climate change policies depends critically on the links between time preference, risk aversion, and the perceived rights of future generations. In economics, these issues are often addressed using models that assume high rates of time preference and low risk aversion. Such models support only modest reductions in greenhouse gas emissions. This presentation, in contrast, will argue that aggressive climate stabilization policies are justified on two separate grounds. First, people reveal high rates of risk aversion in real-world market decisions. Accordingly, reducing climate risks provides highly valuable economic benefits. Second, failing to stabilize climate would impose large, uncompensated costs on future generations. This violates the moral premise that future generations are entitled to protection against uncompensated, potentially catastrophic harms.

Time & Place: 4.30pm, Wed 4 Nov, Innovations Building, Eggleston Road.

Drinks and nibbles afterwards, 6.00-6.45pm

Paul Romer on Elinor Ostrom and Crucial Assumptions

Paul Romer makes some interesting comments on Elinor Ostrom's Nobel Prize win. He points out that many or most economic theories depend on what he calls "skyhooks" - what I called "crucial assumptions". According to Romer assuming that people follow rules is a typical "skyhook". Rather than assuming that people would follow rules, Ostrom tried to understand where the rules came from and why they worked or didn't work. Well, I think you must have some assumptions in your research. But they should be as innocuous and reasonable as possible.

Rather a contrast to Steven Levitt's comments for example. Let alone these guys :). Of course I've heard of Ostrom. My "Ostrom number" is 2.*

Peter Martin, who supplied the link to Romer, also has a more humorous take.

* She has coauthored papers with Bob Costanza.

Ostrom and Williamson Win Nobel Prize

After much speculation:

"The 2009 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel goes to Elinor Ostrom "for her analysis of economic governance, especially the commons" and Oliver E. Williamson "for his analysis of economic governance, especially the boundaries of the firm."

Williamson was mentioned but Ostrom is a surprise. At 1:04 European Central Time someone had already updated Wikipedia to mention that she had won the Nobel Prize!

Of course, Ostrom is the first woman to win the Nobel Prize in Economics. Ostrom's most cited book has around 7,300 citations on Google Scholar and her h-index is around 73 or so. So she easily meets my criteria for predicting winners.

A Statement of Your Most Significant Contributions to this Research Field

I have to write this for the grant applications I'm planning on filing early next year. Usually, in job applications you have to write about your current and planned research. But this is different and a bit weird. It feels a bit like I'm writing my own obituary :)

For U.S. grants you just send them your (condensed) CV. Australia is much more into giving money to individuals than for specific topics. I once had to write a "scientific autobiography" for a job I applied for in Israel. That was the same idea more or less.

Omitted Variables Bias in Estimating the Rate of Global Warming

There has been a lot of discussion in the media and blogosphere of a supposed cooling of the global climate since 1998 that is being pounced upon by climate change sceptics. This supposed trend is almost certainly not a statistically significant break in the warming trend. Real Climate points out that whether you see a cooling effect or not depends on which data series you use. Apparently the Hadley data series is missing data from the parts of the Arctic where the most warming has been occuring:



The image shows the difference between the average temperatures in 1999-2003 and 2004-2008.

But the atmosphere is only a small part of the total heat budget of the planet. An excellent blog post from Climate Progress explaining the importance of the increase in ocean heat content in understanding global warming. These charts show the increase in heat content of the oceans till 2003 and from 2003-2008:





Climate Progress dramatizes this data nicely by pointing out that the ocean is warming at the rate of 190,000 GW... If you try to estimate the trend in atmospheric temperature while ignoring this massive storage of heat in the ocean you may fall victim to the classic econometric problem "omitted variables bias". When you estimate a regression model omitting some important variables that are correlated with those that you include in the regression your estimates of the effects of the included variables will be biased.

I wrote two papers on this topic. In the papers, I showed that taking into account the build up of heat in the ocean resulted in much higher estimates of the sensitivity of global temperatures to increases in greenhouse gases than when you just use atmospheric temperature to produce an estimate. Also, that just looking at the atmosphere you will estimate that temperature responds very fast to increases in greenhouse gases and that after just a few years the adjustment to a new equilibrium temperature is complete. These are symptoms of omitted variables bias.

Nobel Prediction Market

Here is a prediction market for who will win the Nobel Prize in Economics. My original pick, Robert Barro, is marginally leading, and all the other suspects are on the list.

I'd really like William Baumol to win it. My friend and colleague Astrid Kander wrote an interesting paper related to one of Baumol's ideas. Baumol gave her some good comments on it. Actually it was a chapter in her dissertation which I encouraged her to submit to Ecological Economics. She argues that the shift to a service economy is something of an illusion. The prices of services rise relative to those of manufactures over time and so the share of manufacturing in GDP falls over time. But this doesn't mean that material production as a share of GDP is falling when we use constant prices instead. Also, just as productivity growth in manufacturing is more rapid than in services the rate of increase in energy and environmental efficiency is more rapid in manufacturing. Therefore, it seems that emissions fall due to a shift to services but to some degree this too is an illusion.

IEA Lowers Projected Carbon Emissions

A New York Times article about an IEA report on future carbon emissions. They are lowering projections due to slower growth worldwide and Chinese efforts to reduce energy intensity. I've been thinking the same thing myself. I didn't buy into the Garnaut Review's idea that business as usual emissions would rise faster than the IPCC previously expected. Though the problem now is distinguishing between business as usual and "business unusual". Is China going for renewable and nuclear energy to reduce imports of fossil fuels and local air pollution or because it expects to eventually to be subject to binding restrictions on greenhouse gas emissions? Or because it wants to be a leader in selling the technology to the rest of the world? All of the above, I think.

Who Will Win the Nobel Prize in Economics? Update

Back in August I discussed who might win the Nobel Prize in Economics to be awarded on Monday. My pick then was Robert Barro as the most cited and not so controversial economist who had not won it yet. Others are now weighing in. Here are my comments on these suggestions:

Ernst Fehr Possible, though Kahnemann won the prize not that long ago.

Matthew Rabin Too young.

William Nordhaus Possible, though I don't consider his climate change economics work to be very deep.

Martin Weitzman I prefer him to Nordhaus, though on citations he is marginal as a Nobel Prize winner but could happen.

I also heard Nicholas Stern mentioned at lunch today. Until his recent work on climate change his citation record hasn't been at Nobel Prize level. And he only got into environmental economics in this recent period.

My pick for an environmental economics winner is Partha Dasgupta. Maybe Weitzman and Dasgupta?

All the macroeconomists mentioned are potential winners. But Gali (PhD 1989) seems too young. Gertler or Taylor is possible. Robert Shiller or even Nouriel Roubini are outside chances.

Marginal Revolution suggests Williamson and Tirole. They're possibilities too. This could be a pick if the committee decides against being topical. So this is my shortlist: Barro, Gertler, Dasgupta, Taylor, Tirole, Weitzman, Williamson.

P.S.
Note that the Fehr and Rabin, or Nordhaus and Weitzman, or Taylor, Gali, and Gertler prediction is from Thomson Reuters. They didn't get the Physics or Chemistry prizes right but they did guess the Physiology/Medicine Prize.

Environmental Economics Research Hub Research Reports Monthly Report

As I previously blogged, the Environmental Economics Research Hub Research Reports are now included in RePEc. Each month RePEc calculate how many abstract reviews and downloads each paper, author, and series got. You can track the downloads for EERH here. We got 157 downloads in our first month. Some caveats:

1. It's only a partial month.

2. All our papers were featured in NEP Reports and so had heightened visibility this month. NEP, New Economics Papers, is one of the RePEc services that helps get your paper seen in the research community.

3. We certainly had more downloads than this. Only downloads through RePEc services are counted and many of those are filtered out to circumvent the effects of web indexing robots and cheating.

To see how often individual papers in the series were downloaded check the ranking page.

Energy/Capital Ratio

There doesn't seem to be much of relation between energy intensity and GDP per capita. But this chart shows that there is a relationship between energy per dollar of (estimated) capital and GDP per capita:



The points off to the top right are mostly oil producers. Apart from those points there seems to be a clear downward trend. High income countries use less energy per dollar of capital than poor countries do. Some poorer oil producers (e.g. Libya and Algeria) also have very low energy/capital ratios. These countries have invested a huge proportion of GDP each year and so supposedly have a large capital stock but have little to show for it in terms of increased output.

In a so-called "putty-clay" model, improvements in energy efficiency can only be implemented by investing in new, more energy efficient, capital goods. Once that equipment and infrastructure is in place, energy use is pretty much predetermined. So in countries with less energy efficient installed capital energy use per dollar of capital will be higher and vice versa. Intuitively we'd expect high income countries, ceteris paribus, to have higher quality capital installed and, therefore, lower energy use per dollar of capital.

Technical stuff :): It is also attractive to try to estimate a model for the energy capital ratio rather than energy intensity for econometric reasons. Given the putty-clay theory, capital per capita and the level of energy efficiency technology are highly correlated. If we run a regression where energy intensity (energy per $ GDP) is on the LHS explained by RHS variables that include capital, the unobserved state of technology will be correlated with the capital variable on the RHS leading to biased estimates of the parameters. Shifting capital to the LHS of the equation gets rid of this potential (and actually very problematic) source of bias. The challenge is now to come up with a theoretically rigorous model of the E/K ratio...